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Managing risks in energy construction

Construction losses in the energy industry impact all parties involved in the project.
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The construction phase of energy projects introduces unique risks and challenges that, if not properly managed, can lead to substantial financial losses for project owners, contractors, and insurers alike. This article explores some common risks, and prevention measures to mitigate losses and improve overall project outcomes.

Relevance of construction losses

Construction losses in the energy industry impact all parties involved in the project. From delays and cost overruns to accidents and equipment failures, construction losses can significantly affect project timelines, budgets, and ultimately, operational success. By analysing these losses, the construction, energy, and risk industries gain invaluable insights to strengthen risk management practices, enhance safety protocols, and improve project planning and execution.

Valuable insights and lessons are everywhere

Every project is another opportunity to learn, evolve, and improve. But for that to happen, project stakeholders must be prepared to constructively evaluate and share the learnings across the industry. Here are the four common themes that energy operators and their construction contractors should focus on to improve the likelihood of project success.

Risk assessment

Risk assessment and management practices during the planning, design, and construction stages are constantly evolving. While insurers and risk engineers have a tendency to focus on the worst case scenarios, sharing learnings about the practical elements of a build may aid decision making for construction contractors. For example, if construction is in a location that’s susceptible to both windstorm and flood, should items be tethered down to prevent them being blown away or is it more beneficial for them to be portable? If they aren’t tethered, are they more prone to theft? Timing can alter loss scenarios dramatically, and every action has a consequence.

Project management

Construction losses often result from inadequate supervision, poor coordination, or communication gaps among various stakeholders. Implementing robust project management practices, employing experienced personnel, and fostering a culture of collaboration can minimise the occurrence of losses. A recent hydroelectric project in South America provides a good example of the importance of stakeholder management and the need to be agile. The project was divided into several work sites and contractual portions. At the start of work, the project manager of one portion spent a significant, unbudgeted amount on aggregate to improve the site roads within his remit. The decision and overspend were initially criticised by senior management but that work parcel was completed on time and on budget. Without sharing of information between the various contractual portions, lessons were unable to be learnt across the entirety of the project. Other portions of the project experienced significant delays and cost overruns because laden trucks couldn’t manoeuvre around their sites.

Equipment failure

Critical equipment failures during construction could jeopardise the whole project, causing significant delays and cost overruns. While these types of incidents may happen without warning, they highlight the importance for contractors to have rigorous quality control protocols in place and complete thorough testing on all equipment. Implementing strict adherence to industry standards, regular inspections, and comprehensive maintenance programs can help prevent similar equipment failures and subsequent claims resulting from physical damage and loss of revenue due to the inevitable project delays.

Construction accidents

A primary cause of major accidents is the failure to implement or adhere to critical safety protocols such as hot works permits or lifting of heavy equipment. Poor safety practices can result in injuries to workers, damage to the project and surrounding site, and potential damage to the environment. These incidents emphasise the need for robust safety training, adherence to regulatory guidelines, and continuous monitoring of safety practices throughout the construction phase. Implementing a strong safety culture, regular audits, and comprehensive emergency response plans can significantly reduce the likelihood and severity of construction accidents and associated losses.

Construction related losses can impact the operational success of projects as well as insurer perception and confidence. Learning from past incidents, recognising common themes, and implementing preventive measures, are pivotal in addressing potential risks and improving project outcomes.

Loss prevention measures

  • Comprehensive risk assessment: Conduct thorough risk assessments prior to project inception as well as during the construction phase, identify and evaluate potential risks throughout and deploy mitigation measures.
  • Effective project management: Employ experienced project managers and ensure proper coordination, communication, and oversight across all stakeholders.
  • Quality control: Implement stringent quality control measures, adhere to industry standards, conduct regular inspections and rigorous testing of equipment and materials.
  • Safety protocols: Establish and enforce robust safety protocols, provide comprehensive training to workers, and follow regulatory and industry guidelines.
  • Continuous monitoring: Regularly monitor and re-evaluate safety practices, equipment performance, and project progress to proactively identify and address potential issues.

100 Largest Losses in the Hydrocarbon Industry

1974 – 2023

This report reflects on the last two years and provides insight to energy industry professionals on the range of losses that can occur, the diversity of potential root causes, and the risk management and mitigation practices that can improve operations.

This publication is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. The information contained herein is based on sources we believe reliable, but we make no representation or warranty as to its accuracy. Marsh shall have no obligation to update this publication and shall have no liability to you or any other party arising out of this publication or any matter contained herein. LCPA 23/049

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