As new project delivery methods gain popularity in the construction industry, we look at three current trends—building information modeling, public-private partnerships, and integrated project delivery—and the risk management issues they raise.
Building Information Modeling (BIM)
Compared to breakthroughs in many other industries, breakthrough developments in the construction industry are often overlooked. However, the increasing rate of adoption of the practice known as building information modeling, or BIM, certainly marks it as a game changer worthy of attention from insurers and risk management professionals.
BIM software lets project teams take part in the virtual design, construction, and operation of an office building, stadium, highway, municipal water system, or other structure. Architects and engineers have used computer-aided design and 3-D design programs for years, but with BIM, project participants can evaluate a simulated model of a project at various stages in its life cycle, from design to breaking ground and right through to commissioning.
“BIM provides designers, contractors, and owners with a digital model of the project before the first shovel of earth is turned,” says John Rabovsky, underwriting consultant for Liberty Mutual Insurance’s Construction Unit. “The technique helps reduce risk by letting everyone see how project parts will fit together, from building materials to HVAC systems to landscaping.”
Another key way BIM reduces risk, Rabovsky notes, is by requiring the collaboration and cooperation of the project team from the earliest stages. But it’s that collaborative process that also creates concerns about contractual relationships, forcing each party to reexamine its role and insurance obligations relative to those of its project peers. “When everyone is contributing to a design model,” Rabovsky says, “questions are raised about issues such as ownership of the model, reliability of data transferred to another party, and responsibility for design errors. And once construction begins, there are questions related to workers compensation and general liability that need to be answered as well.”
Contractors and other BIM project participants would be wise to carefully review their contracts for BIM-specific provisions and discuss these clauses with their carrier, broker, and/or attorney. The use of BIM should not change traditional construction roles, but as with any new technology, it’s important to identify the potential risks and properly allocate these risks among the parties.
Public-Private Partnerships (PPP)
Any contractor that’s been involved in public infrastructure projects knows how painful it can be waiting for the funding to come through. That’s just one reason why public-private partnerships, or PPPs, are growing in popularity.
In a PPP, one or more of the private-sector participants, such as a contractor, contributes a portion of the financing, helping get the project off the ground much sooner than if it were 100 percent publicly funded. To recoup its investment, the contractor may take over the operation and/or maintenance of the finished project for a period that can be as long as 50 years. An example of a PPP is a toll-road project in which the investing party maintains the road and collects a portion of the toll revenue.
While PPPs share many of the same risks as traditionally financed projects, the heavy scrutiny they receive from lenders and credit agencies during the planning stage often results in projects with better risk. Also, the improved collaboration among owners, contractors, and designers that is common to PPPs leads to fewer disputes and claims.
Government agencies are under more pressure than ever to deliver projects that not only stay within budget but also deliver maximum value in return for taxpayer dollars. As a result, an agency may be receptive to awarding a long-term contract that assures the design, construction, operations, and maintenance of a finished project. However, as Kevin Coen, Liberty Mutual construction underwriting project leader, cautions, “Contractors should realize that taking on such responsibilities as permitting, operations, and maintenance carries with it much more risk than in traditional projects that usually end at delivery.” Coen says contractors should consider adding professional liability coverage for design and consulting work.
Another area of insurance coverage to consider, Coen says, is a form of property coverage known as delay in start-up. “When the contractor has a financial stake in the project,” he says, “any delays in the project’s ability to produce revenue—for example, tolls, office leases, parking fees—will likewise delay the contractor’s ability to recoup its investment.”
Integrated Project Delivery (IPD)
In the construction industry, integrated project delivery, or IPD, is helping produce successful projects by ensuring the collaboration of all participants, from design through delivery. The result is a project that reduces waste and has a much better chance of ending on time and on budget.
According to Jim Conroy, chief underwriting officer for Liberty Mutual Insurance, new types of insurance arrangements are needed to address the unique aspects of IPD projects. “While traditional project insurance aims to protect each participant against the claims of others,” he says, “IPD takes a ‘no fault’ approach to risk.” IPD contracts use liability waivers and other provisions to spread risk and reward among the participants.
Conroy says what appears to be working best for IPD is the project-specific approach used for wrap-ups, in which multiple parties are underwritten and serviced by a single carrier. “Under this arrangement,” he says, “we’re able to reduce the number of separate and potentially competing interests, thereby aligning with the goals of IPD, which are to increase efficiency and improve outcomes through collaboration.”
Conroy advises IPD participants to work with their brokers to determine the best approach to protecting their interests. While the single-carrier, project-specific approach may be popular now, “your broker’s experience working on other projects may uncover potential pitfalls you need to be aware of,” he says.