Although the long-term forecast for the construction industry is robust, it is experiencing malaise as it recovers from the recession. Week after week, positive reports from the government are offset by negative industry news reports, only to be followed by yet another optimistic outlook. So goes the rollercoaster recovery.
The continuing uncertainty of the economic recovery makes strategic risk management more important than ever for contractors. Insurance and risk management — which are major expenses — can be a source of competitive advantage or disadvantage for construction firms.
Insurance is an important product, and its purchase should never be considered as a commodity. The value of having the right insurance coverage (by means of policy, endorsement or extension) and limits cannot be overstated. There are direct, indirect and opportunity costs, all of which can affect your bottom line. The intelligent buyer knows there is a difference between price and value.
Insurance is also an important service. The existing trends and emerging opportunities in the construction industry are driving specialized and customized insurance, surety and risk management solutions. The discipline of strategic risk management is one such development. It is recommended that your company partner with your insurance adviser to conduct a strategic risk analysis and to evaluate your company’sresilience and risk accountability culture.
It is important to embed a risk management mindset into strategic business planning processes. As a strategic discipline, risk management serves several important purposes, including decision making, risk and cost allocation and business-process improvement.
Contractors need to be mindful of two important concurrent developments:
1. Pressures in the construction insurance market
2. Changing nature, scope and complexity of risk in the construction industry
Pressures in the construction insurance market
The construction insurance market is experiencing pressure from various disruptive forces. Some of these occurred independent of the recession while others were made worse by the recession. In either case, these trends will continue to be disruptive:
• Growing severity of workers' compensation losses
• Escalating alternatives to traditional insurance including captives, owner- or contractor-controlled insurance programs (OCIPs/CCIPs) and subcontractor default insurance
• Increasing number of owner insolvencies and subcontractor defaults
• Increasing challenges on property and builders risk placements with coastal wind and other catastrophic loss exposures
• Rising threat of increasing general liability premiums
• Growing pressure on professional liability because of increasing frequency and severity of large design-related liability losses
• Increasing regulatory and administrative requirements for employee health benefits under the Affordable Care Act
Expanding risks in the construction industry
To further complicate matters, the level of risk in the construction industry continues to expand. A number of industry developments are continuing to change the risk profile at the individual company level and for the industry as a whole. The following representative eight industry trends illustrate the growing nature, scope and complexity of risk to be managed by contractors:
1. Expanding use of alternative construction delivery methods, including design/build and integrated project delivery
2. Growing number of accelerated fast-track projects
3. Changing project finance methods, including public/private partnerships
4. Expanding number of joint ventures to meet project capitalization and surety obligations
5. Reemerging skilled workforce shortage
6. Growing reliance on technology, and vulnerability to disruptions of business systems and networks
7. Expanding use of building information modeling (BIM) and online collaboration on construction design
8. Continuing migration of construction defect claims and litigation from residential to commercial construction
A word of caution: This list of risk trends and developments is not exhaustive. Other risk exposures and issues may be important for your company depending on your scope of work, industry sector and geographic region.
Risk is inherent to the construction industry. Risk management is the bedrock of the construction industry. There is opportunity in risk. Strategic risk management is not about saying no to opportunity. Rather, strategic risk management is focused on protecting your business from being blindsided by hidden risks and cascading costs.
Strategic risk management will help you remain calm and composed during the rollercoaster economic recovery. More importantly, strategic risk management helps contractors identify factors and make decisions that improve their competitiveness, growth, profitability and reputation.