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3 considerations for stakeholders embarking on infrastructure projects

Construction project stakeholders, owners, and contractors should consider new industry challenges before embarking on infrastructure projects.

11/15/2023 · 5 minute read

Construction firms and other stakeholders have started preparations to participate in projects utilizing the $1.25 trillion approved by the US government to rebuild roads, bridges, airports, ports, public transit, rail, and other dated infrastructure.

The funding — considered to be the largest investment in infrastructure since the 1950s — is expected to provide the construction industry with new project and job creation opportunities. However, project stakeholders — including owners and contractors — need to be aware of new challenges they may face given the significant changes the industry has undergone in the past several years.

This is especially true considering the volume and scale of the projects anticipated, many of which will require front-end investments running into the hundreds of millions, or even billions, of dollars. Obtaining the necessary financing for these mega-projects could be a challenge as it is anticipated that the financing will be distributed in many ways.

Additionally, planning these major projects and securing the skilled professionals required will be a complex process in an industry already experiencing significant staffing challenges.

Finally, owners and contractors will need to consider ways they can mitigate both evolving and emerging risks as part of an enterprise-level strategy designed to enable them to obtain adequate insurance coverage to protect their balance sheet.

As they embark on these major infrastructure projects, stakeholders should consider the following three elements.

1. Establish a comprehensive risk management and insurance strategy early on

Major infrastructure projects tend to be complex with multiple entities involved on the financing and construction side. They also may fall under multiple jurisdictional authorities, each of which may set distinct contractual obligation terms with regards to how risk should be managed.

Early in the project lifecycle, establish a project risk strategy that specifies your organization’s risk tolerance and allocation strategy, which can help you meet your enterprise-level risk management goals. This also can provide your organization with the framework needed to align the upstream and downstream contracts and agreements related to the project’s financing.

The numerous challenges that the construction industry is facing — including stretched supply chains, escalating bid costs, logistical challenges, and difficulties securing adequate skilled labor — are likely to impact your project. These anticipated difficulties underscore the importance of thoughtful planning as early as possible.

Case study: Navigating risks during the construction of an international airport

While developing an international airport project in Latin America, partly financed by non-recourse international lending, a project owner needed to establish a bankable risk transfer program. This large and complex project was being built close to the existing airport in a major city amidst an uncertain political, economic, and judicial climate. Given the area’s exposure to natural catastrophes, only a small pool of contractors could take on this complex build. These and other challenges required a sound risk management and insurance strategy early on.

After gaining an understanding of the status of the project, key milestones leading to financial close, and potential challenges that could impact the build, Marsh’s team of construction specialists helped the client develop a timeline for the implementation of a robust risk transfer program and a detailed insurance procurement plan.

Defining the insurance plan early on allowed the client to:

  • Identify insurable and uninsurable risks at an early stage
  • Establish and manage the insurance timeline
  • Draft insurance and indemnity clauses in the various contracts that aligned with the insurance plan
  • Demonstrate good control and handling of the project's risks to international lenders, insurance markets, and other stakeholders
  • Prepare an insurance budget based on the project fundamentals

Establishing a risk management and insurance strategy early on enabled the client to achieve financial close on time and on budget, comply with the contractual matrix, and obtain a better insurance program over the project lifecycle.

2. Set up a robust risk engineering process

Infrastructure projects are inherently dynamic with risks that can evolve and emerge unexpectedly throughout their lifecycle. It is important to have a focused team of multi-disciplinary risk engineers, experienced in infrastructure projects, who can rapidly identify potential problems and devise a strategy to address them. This team can help project owners and contractors focus on risk control and mitigation efforts that can also help develop a culture that fosters cost and quality control, schedule efficiency, and safety.

Early intervention can also help protect your brand and reputation and reduce operational exposures, in addition to protecting risk capital.

As project sites become more sophisticated, advanced technology can help you to identify and mitigate risks. Internet of Things (IoT) sensors, for example, can help identify potential problems such as intruders or water leaks. Further, the data captured from such tech devices could be instrumental in  helping you and your project stakeholders map out risks on a dynamic and ever-changing site.

Case study: Managing risk exposures following a digital transformation

A construction company embarked on a strategic and sweeping digital transformation across its business, operating models, and construction techniques. The company’s senior leaders wanted to understand the implications of the project on their risk exposures, its potential impact on their insurance strategy, and how they could present the new project to insurers.

A team of Marsh’s Advisory specialists carried out a strategic risk assessment to understand the potential implications of the project. The forward-looking analysis examined the company’s insurance programs and its risk and compliance structures. These specialists also spoke to leaders from across the organization to gain a cross-functional understanding of the changing risk profile.

The insights allowed the organization to develop a multi-year insurance strategy that fit its updated risk profile. Further, the risk team was able to use the insights to better position itself with the business and help support key decisions and buy-in from the C-suite.

3. Involve your insurance team early

Certain applications for financing that infrastructure owners and developers will need to utilize require applicants to clearly define their project risk management plan early in the planning process. This includes demonstrating strategic plans to secure adequate coverage.

Note that the increased costs of projects are likely to lead to higher insurance prices, presenting new challenges for owners, developers, and contractors that do not have robust experience bidding on large-scale infrastructure projects. These added complications can be especially problematic for stakeholders that do not have the support of a large, sophisticated, risk management team.

An insurance advisor or broker with experience placing coverage for projects of a similar scale can provide an indication of what an insurance structure would look like. That determination can be helpful in securing the necessary financing, especially if you are seeking third-party investors.

The high value of these projects makes it paramount to consider all potential risk transfer and insurance options, and seamlessly tap into other sources of capital to build the most effective insurance program that aligns with your needs. This may include accessing global sources of insurance capital to achieve the necessary scale for the project or looking into alternative risk transfer solutions.

Case study: Risk assessment helps contractor make an informed decision

A North American general contractor was invited to bid on a design to build a healthcare project owned by a government agency. The COVID-19 pandemic led to a delayed bid acceptance process. By the time bidders were asked to revisit the project, construction material costs had shot up, while supply chain and logistical challenges made securing needed building materials more challenging. Further, the scope of the project had been expanded significantly, making it a multi-billion-dollar undertaking. Considering the changes in the owners protective professional indemnity (OPPI) insurance market, the general contractor wanted to conduct a more rigorous analysis of the potential risks before submitting a bid.

A team of Marsh’s Advisory specialists carried out a risk assessment to help identify and quantify the most significant risks, providing the general contractor with insights to aid the decision on whether to opt in or out of the bidding process. The team analyzed high-risk processes that would be included in the project and estimated the potential cost of the project’s OPPI risks, supporting the data by benchmarking the potential risks against past industry loss experience. The final report provided the general contractor with insights on where to focus risk controls to minimize the potential for catastrophic losses.

Based on the in-depth analysis, the general contractor decided that the project no longer fit within its risk appetite and against moving forward with the bid.

As contractors and project owners embark on major infrastructure bids and builds, it is important to consider early on the numerous potential challenges and take early action to mitigate risks, allowing you to maximize the financial and schedule success of these critical projects.

For more information on how Marsh can help you to identify and address risks associated with infrastructure projects, contact your Marsh representative.

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