Top tips on managing construction delay risks

Expanding populations and globalisation is placing the construction industry under pressure. New houses, roads, high-speed railways, tunnels, airport extensions, and power stations, for example, are being built across the world to cater for the growing population.

At the same time, construction projects are becoming increasingly complex, with new architecture, designs and construction methodologies, extending the number of steps towards project completion. In this environment, infrastructure projects are more vulnerable to costly delays.

Even the shortest of delays can mount up to affect the critical paths of a project, leading to more prolonged setbacks.

This is because construction projects are non-linear: they are complex, with several interacting and interdependent tasks along the critical path. A fire causing damage to a portion of the project could have a knock-on effect to other areas such as the supply of materials or labour, potentially extending a five-day delay to two or three months.

Two main parties serve to be affected by these delays:

The contractor

The contractor may incur the additional costs, and be liable to pay for the liquidated damages. Delays could also lead to reputational risk. Requests for a time extension, may also not be granted by the owner.

The owner

Owners could face financial and cash flow issues due to the loss of income. This could be offset to some extent by liquidated damages.

There are many risks that can cause delays but mitigating strategies can lessen the impact. Four strategies to consider include:

PROJECT MANAGEMENT SOFTWARE

Scheduling software can provide essential information, which can enhance efficiency, productivity and communication by giving easy access to workflow information.

Schedules enable all parties to track the status of the project.

ADEQUATE TIME ALLOWANCE

One of the main challenges is in schedule planning and ensuring project completion to the agreed schedule. Building in time contingency or a buffer into the project schedule, at the time of tendering, could help mitigate the impact of delays. It is important that owners assess the likelihood of optimism bias during the procurement process when presented with contractor’s proposed schedules.

RISK TRANSFER

Delay in start-up insures project owners for actual financial loss arising from project delays covered under the policy. This can include loss in gross profits, gross revenue, debt servicing and fixed costs. Claims are paid after the actual loss has been sustained, following the start of commercial operations. The policy covers some of the most prevalent physical risks that can cause project delays, including fire, windstorm damage and flood.

PROJECT MONITORING

With complex construction projects, it is vital to understand the critical path of a project and the impact delays can cause to the schedule. Critical to speedy claims assessment and settlement is effective project monitoring.

This provides essential information such as: workflow status along the critical path, impact analysis of delayed tasks; and potential risks. Insurers can use this information to determine, in advance of a loss, how a policy will respond to a potential delay, with the aim of settling a claim more quickly.

Project monitoring enables all parties – insurers, brokers, project owners, contractors – to make informed decisions about future mitigation. At Allied World, we are innovating and enhancing our delay in start-up solutions, with optimised project monitoring. We have in-house capabilities and a team of risk engineers who can assist in this area.

As construction techniques develop, we want to work closely with our brokers and clients to continuously enhance our solutions to meet the industry’s changing needs.

Clifford Scott, vice president, head of construction & engineering, Asia-Pacific

Jacob Hewitt, vice president, head of construction & engineering, North Asia