April 29, 2024 7 mins
Managing Construction Risks: 7 Risk Advisory Steps
Risk advisory services can help construction stakeholders navigate uncertainties, optimize performance and drive growth in their projects.
Key Takeaways
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Construction risk can be managed more effectively with customized solutions offered by risk advisory professionals to complement standard insurance products.
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A step-by-step risk advisory process integrates risk management seamlessly into project objectives and budgets, ensuring a more balanced approach to risk mitigation throughout the project life cycle.
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Most importantly, risk advisory experts can conduct a thorough risk evaluation to help understand the project owner's risk requirements, find the best insurance options available, set up guarantees and improve risk capital.
A strong broker risk advisory service can help construction business owners and contractors gain a holistic view of existing risks and face them head on. These risks include evolving weather conditions, supply chain disruptions and regulatory complexities.
Construction project risk management can be more complex due to a variety of factors including, but not limited to, the influence of geopolitical factors, interest rate fluctuation and lack of skilled labor. Projects are also becoming larger and longer in duration, adding difficulties in obtaining adequate limits and qualified participants. Each can contribute to delays and cost overruns, posing significant threats to balance sheets. They can also lead to major project failures — one of the top 10 risk concerns for contractors and business owners, according to Aon’s Global Risk Management Survey.
The Value of Risk Advisory
Amid these challenges, risk advisory services, with insights that focus on meticulous risk analysis and strategic guidance, offer support and guidance to help businesses make better risk decisions. Risk advisory professionals can help risk managers in the construction industry to take a holistic view of their entire risk profile so that risks that could prove to be detrimental are properly assessed and mitigated.
“Instead of buying an insurance product to manage your risks, you are now provided with a solutions-based approach for the project,” says Cormac O’Connor, Aon’s head of casualty for construction and infrastructure in the U.S.
By identifying pitfalls and proposing tailored solutions, risk advisory professionals evaluate potential uncertainties and mitigate those exposures, enabling construction owners and risk managers to confidently navigate challenges and capitalize on opportunities.
Through a comprehensive risk assessment, risk advisory professionals can help:
- Identify appropriate coverage options and negotiate favorable terms with insurers and reinsurers rather than opting for standard coverage.
- Establish if warranties are in place because these could pay out first, ahead of an insurance policy.
- Make better decisions around the use of risk capital. For example, how to best use risk capital in the risk transfer market. This also includes the use of alternative risk transfer programs, such as parametric and captives.
- Gain better insights into a project owner’s risk needs, allowing them to develop the right risk program, resulting in a more efficient risk transfer process.
#7
Major project failure is the 7th top risk for the construction industry
Source: Aon’s Ninth Edition Global Risk Management Survey
As a broker, it is crucial to delve deep into our clients' risks — not just their surface-level exposures. This allows us to tailor solutions that truly mitigate their specific risks.
Case study: Risk Analysis Helps Airport Construction Projects Take off as Scheduled
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What’s the Story?
A U.S. airport authority had plans to remodel its airport and add additional buildings. The airport suffered a flood loss several years ago, posing a major risk concern for the airport’s insurers. Without a builders risk insurance policy, the project could have been in jeopardy.
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Why it Matters
The airport authority worked in advance with its broker to enhance the airport’s flood resilience, reducing the risk of loss and ensuring potential coverage issues were minimized. At the broker’s suggestion, extensive post-flood restoration and rehabilitation work was done to mitigate future flood risk. Aon kept the insurance market engaged throughout the process, communicating the additional preventative work completed to ensure a smooth inception of cover.
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Outcomes
Success came in the form of $800 million in builders risk coverage, along with $5 million in soft cost coverage, allowing the construction work to begin.
The 7-Step Project Advisory Process
This seven-step process focuses on effectiveness and practicality. Beginning with a meticulous project risk assessment, the process identifies key risk mitigation strategies. It integrates risk management seamlessly into project objectives and budgets, ensuring a more balanced approach to risk mitigation throughout the project life cycle.
- Project risk assessment: Review risk register, draft contract versions and commentary on risk allocation, insurability, extent of cover and mitigation.
- Probable maximum loss study: Conduct PML analysis through engagement with leading insurers and reinsurers.
- Loss adjuster tender: Nominate your preferred partner, matching expertise to project needs. Agree on claims protocols and conduct pre-loss preparation workshops.
- Construction phase support: Coordinate site visits, execute loss mitigation, support major claims and deploy strategic negotiation to achieve target outcomes.
- Seamless transition to operational phase: Provide full policy documentation with suitable lenders’ endorsements. Bring to resolution outstanding claims and optimize cashflow.
- Operational phase support: Leverage project claims experience and lessons learned in reviewing loss adjuster nominations and claims protocols. Continue support of major claims towards expeditious resolution.
- Divestiture/decommissioning support: Provide warranty and indemnity solutions for a clean exit.
Adapting Risk Advisory Processes in Different Regions
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Asia
- With diverse cultural, economic, political and regulatory issues to consider across Asia, risk advisory experts must be experienced in country and local policies throughout the region.
- Risk advisory processes should tailor risk accordingly and consider how clients and in-house agencies operate specifically within those constraints.
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Latin America
- Many foreign infrastructure investments in Latin America encompass specific regional regulatory requirements that are different compared to other markets, such as the U.S., Canada and Europe.
- The insurance market here is somewhat restrictive compared to others. Lenders insurance program requirements may not be achieved in full, potentially impacting the financial closure.
- A progressive design build strategy is required, as parties have more knowledge around existing risks and who should take them at the appropriate time.
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United Kingdom
- Design and Build procurement is still a model used in the UK. Other models, such as Construction Management or Build Contract, are also prevalent.
- No matter the form of contract used, it is important to identify risks and create an efficient plan for risk mitigation and cost-effective risk solutions.
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United States
- A variety of procurement models are utilized in the U.S. for large construction projects — each with its own unique means of shifting risk between the construction participants. Understanding who bears those risks and how to effectively address those risks and efficiently transfer a portion of those risks is critical.
- It is crucial for risk managers to recognize the risks associated with each unique project and adopt a variety of solutions that can adapt to the ever-changing construction field and associated risks.
“A strategic risk advisory process talks through looking at the various contracts and exposures, designing a suitable program and providing advice in the contractual risk allocation,” says Tariq Taherbhai, Global CCO for Construction and Infrastructure. “All this helps risk managers make better decisions about their construction and infrastructure risks.”
General Disclaimer
This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.
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