Financing and Weather Among Top Delay Issues
Keeping a construction project on track and on schedule is a big job. Many different pieces need to be in place at the right time. One big issue that often arises is the problem of delays. Whether they’re caused by bad weather, financing that dries up or other problems, delays can derail a project. Being prepared gives owners and contractors the ability to navigate delays and keep a project on track.
Insurance and risk management are two of the most important tools for managing delays. When put in place upfront, they can help reduce serious problems down the road. The foundation for any insurance program is builders risk coverage, which is designed to cover projects in the course of construction. Each policy is tailored to the unique needs of a particular project. Builders risk is fundamentally different from standard property insurance.
Builders risk also offers critical extensions and endorsements that address specific construction issues, such as delay in start-up (DSU) coverage, which triggers if an insured loss delays the completion of the project. Builders risk policies also provide clauses to address policy extensions that are needed if a project fails to meet its scheduled completion date in the absence of an insured loss. DSU insurance and policy extensions are sometimes overlooked by insurance buyers.
Properly insuring a construction project can be challenging. Experienced brokers and insurers can help owners and contractors avoid pitfalls, and skilled underwriters can ensure that the policy accurately reflects the project’s scope, value and risks. The policyholder also should be confident that the insurer is willing to adapt coverage if the project changes. If not, the owner could confront multiple problems, including failure to meet a lender’s requirements, higher premiums, and uncertainty about whether an extension will even be granted.
In one Miami project, for instance, the schedule was delayed because the project ran into hurricane season, altering the cost and availability of coverage.
Insurance buyers also should consider the quality of claims administration. Quick claims payment is critical when the owner or contractor encounters time-sensitive issues or needs to make up for lost time. Properly managed claims help mitigate losses.
For their part, insurance buyers can keep their carrier up-to-date on project developments. The insurer needs to know that the project is delayed and the reason. The insurer may also send a risk engineer or other professional to the site to monitor risks and mitigation. In the event of a claim, the adjuster will want to review the schedule to identify the project’s status immediately prior to the loss.
On a dormitory project in Southern California, for instance, the contractor had installed electrical panels but there was no roof on the building. The contractor had assumed that since the weather was usually sunny, it was unlikely to rain. That was unacceptable to the risk engineer. The risk engineer provided the insured and the underwriter with specific written recommendations to improve the risk and help prevent a water damage loss.
Keeping in mind the fundamental guidelines, following are two potential delay issues and steps that can prevent them from undermining a project’s success.
The 2008 financial crash caused financing disruptions for many construction projects. Some owners couldn’t get funding. Others found funding pulled or lines of credit cut off or drastically reduced.
Some projects had everything necessary to get started — land, contractor, engineering and design plans, and permits — but expected financing didn’t materialize.
The situation has improved. Brokers, insurers, owners and contractors are seeing more re-starts, and new projects are being financed. Still, lending hasn’t returned to its pre-crash level, and financing disruptions are possible.
It is difficult to plan for major financial upheavals, which will impact insurance coverage. For example, the lender may cut off financing. The owner may find a new funding source. If the owner has to close out the deal, the cash flow ends and the contractor stops working. The site shifts from active to inactive and security becomes a priority. The insurance policy may not align with the new focus, and will need to be re-negotiated or replaced. In some cases, insurers may require a change in the deductible that applies at the same premium rate. Or, the policy may be canceled and a new policy must be found. Often, a well-secured, well-protected, idle property may be rolled into the owner’s property insurance policy for coverage, until construction resumes.
On a $400 million project, for example, the builders risk policy may cover $20 million worth of materials stored offsite in a secure location. But once the project stops either temporarily or permanently, because materials were procured in advance, with delivery planned on a just-in-time basis, that $20 million in stored materials could rise to a $60 million replacement cost exposure. If the insurance coverage is not adjusted the stored material could be significantly underinsured.
In another scenario, the owner may choose to keep the contractor onsite but slow down the schedule until more financing becomes available. This could be a concern to insurers, who may see it as stretching out the risk over a longer period. This is much easier to manage than the zero cash flow scenario.
In a third possibility, the project could change ownership partway through. The new owner could keep things the same or make wholesale changes.
Some insurers may have the desire and flexibility to underwrite a significantly different project. Others may not have the interest or the ability to continue under their underwriting guidelines. A new builders risk underwriter, coming on midway through, will want to take a fresh look at the project scope, schedule and values, and may find underwriting to be challenging. The owner should expect a different and possibly better policy and terms than they had previously.
Weather delays are among the most common issues and ones that contractors, agents, brokers and insurers should be prepared for. It’s an area where taking precautions can really pay-off.
It’s important to start with a realistic schedule that has time built in for weather disruptions, such as hurricanes, tornadoes or major snowstorms. Delay in startup coverage and renewable extensions also should be written into the policy, where appropriate.
Delays are an inevitable fact of the construction business. While experienced advisors, advance planning, insurance and risk management can help reduce the number and impact of delays, they can’t be entirely eliminated. What these tools can do, however, is help make delays a manageable obstacle, not a project-killer.