Contractors face tough time covering construction delaysReprints
HOUSTON — Delays in construction projects can cause huge increases in costs, but identifying insurance policies to cover the costs is complex and varies significantly depending on policy wordings, construction insurance experts say.
While traditional construction insurance coverages may apply or specific delay in startup insurance may be triggered, there’s rarely a straightforward solution to covering the construction delays, they say.
Most construction projects run late, and a significant proportion of projects run over budget, said Tony Rastall, divisional director, energy, at Ed Broking Group Ltd. in London.
The top cause for delays is weather, but other frequent causes include excessive change orders, design errors, approval delays and errors in documents, he said on Monday during a session at the IRMI Construction Risk Conference in Houston.
Two main issues result when a project overruns: time, or schedule, and money, Mr. Rastall said.
“There’s a lot of misunderstanding about who bears the schedule risks and costs risks when projects are delayed,” he said, but it usually depends on the circumstances.
Contractors are liable for liquidated damage events, which are events stipulated in a contract where a contractor is usually held liable under a specified cost formula, and force majeure, or act of God, events, which are outside a contractor’s control.
“The definitions of LD and FM are definitely not universal,” Mr. Rastall said. “There can be a particular risk which in one set of contracts would be an LD risk and in another set of contracts would be an FM risk.”
In addition, “most delays are not physical damage delays,” said Paul Aird, London-based risk manager at Bechtel Corp. Most insurance coverages for project delays, however, are triggered by physical damage losses, he said.
Delays can be significant and cannot be made up for by running extra shifts, Mr. Aird said. For example, faults with complex equipment can lead to delays that last months due to long replacement lead times, he said. “There’s nothing that you can do.”
Insurance coverage that might respond to delay costs claims include builders risk coverage, said Mr. Rastall. Physical damage must occur for builders risk coverage to be triggered, however, exclusions are included, and the policies are not designed to directly cover delay costs, he said.
Delay in startup coverage directly covers delay costs but typically only covers an owner’s delay costs after a physical damage event that’s covered by an associated builders risk policy, said Mr. Aird.
In addition, insurers may pay for delays but seek compensation from contractors if their actions caused the delay, he said.
Professional liability coverage may also apply to some delay costs if defective professional services cause a delay, but exclusions may apply, Mr. Aird said.
An emerging coverage that could apply to delay costs is parametric coverage, which pays out if a specified event, such as a sustained increase in temperature, occurs in the area where a project is based, but such coverage is “a work in progress,” Mr. Rastall said.