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Time for Insurance to rebalance the risk in construction?

19 December 2019
Whilst it is recognised the transfer of risk to construction contractors has become excessive, in the absence of any unified sector initiatives will it require the insurance market to drive the change?

The last three decades have seen the risk in the construction industry transferring from employers to contractors under design and construct/build arrangements (D&C). This has resulted in construction contractors, through competition, being compelled to accept risks beyond their competency. The ultimate example was the foray into energy from waste projects evidencing disastrous examples of contractors accepting the risk for the energy output from burning waste. 

Just take time to think about this. How have contractors, who in the 90’s tendered on Bills of Quantities with the maximum risk of contractor designed portions of the works, now ending up taking responsibility for the power output of major waste energy projects?

For insurers of D&C this has not been a happy experience. However are things about to change?

Some contractors are starting to refuse an onerous acceptance of risk. The proposed Birmingham HS2 station is thankfully a prime example of where the employer is having to revert to the procurement drawing board due to common lack of interest from contractors accepting the risks.

Additionally it is being recognised the tier 1 main contractor model has had its day. The short term CEO’s 'new clothes' have fallen off revealing a chase for turnover, no margins, no cash, no investment, no innovation and a number of insolvencies for the construction supply chain. Remember Carillion went bust owing £1.5 billion. That’s £1,500,000,000. 

So what is the State doing to help the construction industry? A big clue is the fact there have been 17 construction ministers since 2001. How can nearly one minister a year drive any consistent strategy? 

Remember the State still has not legislated to correct the industry agreed need for solutions to late payments and withholding of retentions.

As an aside on the subject of the State, why does it retain control of planning permissions but has relaxed control for building regulation though approved inspectors (who are now struggling to obtain insurance cover)? 

If not the State, then perhaps construction industry institutions and trade bodies can step forward.

How many are there? 50-100? 100-200? 200-300? Higher! There are over 300 separate bodies representing the industry. How can there be a recognised voice that will be heard given this?

Insurers are recognising the unbalanced and fragmented nature of the construction industry. It will therefore come as no surprise to employers should their days of transferring unacceptable risk to contractors be no longer being underwritten by the insurance market. 

There is a real opportunity for the insurance market to step into the void created by the State and industry bodies and rebalance the risk. The beneficial result would be a focus on the innovative delivery of safe, enjoyable and climate friendly space for society.