Slump in construction industry leaves little room for error
Construction companies will struggle to maintain their profit levels of the last few years as projects linked to the 2010 soccer World Cup taper off and the global financial crisis continues to spread to SA.
As the demand for construction work falls, competition increases and companies have to cut prices more aggressively to win contracts. This combined with price volatility from suppliers leaves no margin for risk.
“In this economic environment it is more necessary than ever to protect your balance sheet from unforeseen events and expenses that could arise during construction,” says Seelan Naidoo, of AIG Africa’s EnergyDivision – which includes the Construction Sector practice.
Construction tendering activity for the building industry in the 1st quarter of 2009 fell by 24,8% year on year, with a 21,6% drop reported in activity in non-residential developments. According to Stats SA, the value of recorded building plans passed by larger municipalities during the first quarter of 2009 decreased by 34,6% (-R7 million) compared to the first quarter of 2008.
Vast sums are normally involved in construction projects, and in recent years, the size and cost of construction contracts have escalated to such an extent that few employers, owners or financiers can absorb the financial implications of failure.
“Construction companies, in the drive to be price-competitive, need to make sure they are not cutting essential costs like insurance,” says Naidoo.
A building under construction is exposed to a much higher level of risk than the finished product and significant parts of the project are often in a fragile state during assembly. Open excavations and foundations are at risk of flooding and structures without windows and roofs are exposed to windstorms and rain damage.
According to Naidoo, contractors need to be diligent in their assessment of a construction zone and implement appropriate measures to ensure successful completion of the project. Construction of buildings near bodies of water requires a study of floodlines in that area. Research on the subsoil conditions should be undertaken as these impact on ground water level conditions, and where ground conditions are poor, geological and soil analyses reports are necessary.
There should also be research on meteorological conditions detailing rainfall measurements during the rainy season and storm hazards to ascertain whether the construction can sustain these conditions.
In light of the risks involved during construction, contractors should have a comprehensive all risks insurance policy.
“Insuring construction risks grows in complexity every year,” says Naidoo. “Increasing loss potential and volatile litigation trends mean that traditional exposures as well as new and emerging risks must be accounted for.”
Any party who assumes risk from their participation in the contract work should be covered by an insurance policy prior to inception of the works, including the client, contractors and sub contractors, lenders, manufacturers, suppliers, architects, engineers, and consultants.
Specialty construction insurance provides material damage cover for the whole project against a range of weather risks, theft, negligence, human error or malicious acts. It protects the full contract value, all parties involved in the construction as well as protecting the insured against employee negligence.
It also indemnifies the insured against damages arising from the accidental death or injury to any person and accidental loss of or damage to property.
Generally excluded from these policies are disruptions like war, strikes and riots. Also, loss or damage from normal wear and tear, defective workmanship, material or design is not covered.
Ideally, an All Risk policy should be coupled with a Loss Control programme. Loss Control programmes, offered by certain insurance companies, provide independent monitoring of risk and often provide useful recommendations geared towards preventing loss and aiding the successful completion of the project.
AIG SA offers the following guidelines for minimising risk and what to take into account when undertaking construction:
- Ensure that the contractor engaged is suitably qualified to undertake the scope of works envisaged
- Ensure safety of workers at all times and adequate fire protection on site
- Ensure compliance and adherence to all municipal and building regulations and public authority requirements
- On larger projects a dedicated Project Manager should be appointed to facilitate the various work undertaken
- Ensure the building methodology utilised is proven
- Ensure continued risk mitigation strategies are in place in the event of a contract being curtailed (i.e. due lack of funds)
