How Integrated Project Insurance is Changing Construction Project Risk
The dominance—and disadvantages—of traditional design and build procurement are being challenged by a new generation of advanced insurance-backed alliancing contracts.
Dudley College of Technology, in the heart of the Black Country, is an institution forged at the height of the industrial revolution, in 1862. More than a century and a half later, it’s again at the centre of a modern-day revolution: this time in the way construction projects are procured and delivered.
Two of the college's multi-million pound facilities are among the first UK construction projects to have been procured using advanced insurance-backed alliancing (IBA). Advanced IBA is a form of contract that helps to eliminate many of the negative elements endemic to the design and build procurement process. These include lowest cost tendering, cost-cutting to maximise profit, and the fragmentation and pushing of risk down the supply chain to those least capable of handling it, resulting in disputes, where the legal and forensic costs debilitate the winner as well as the loser.
An advanced IBA helps construction companies and other stakeholders to pool their expertise, manage their costs, and weather tough construction insurance markets.
Crucially, for an industry operating within tight margins, these contracts incorporate cost overrun cover, a type of construction insurance that has not generally been available for some 15 years. And, although it's only available in a limited form, this cover could be the game-changer for UK project procurement and delivery.
How does an advanced IBA contract work?
An advanced IBA contract is an incentive-based arrangement between the owner of a project and the stakeholders who deliver it, including the contractor(s), architect, engineer, and subcontractors. It aims to optimise the capabilities of all of the stakeholders involved in a project, remove conflicts, and encourage efficiencies through transparency and collaborative working.
The alliance members sign up to a single contract, with conditions that stipulate and incentivise shared responsibility. The 'pain' is shared, and so is the gain: in other words, all parties enjoy the opportunities – and manage the responsibilities and risks – associated with delivering the project. Both gain and pain are linked with overall performance and not individual parties' performance.
Construction insurance is a key element in the success of advanced alliancing contracts. Generally, no claims are allowed between parties, apart from in limited cases, such as wilful misconduct or statutory breach, which is designed to minimise each party’s potential legal exposure, and hence their professional indemnity (PI) insurance costs.
Why hasn't advanced IBA contracting replaced design and build?
Openness and trust is required between the parties in this type of contract. Stakeholders depend on each other for success and this approach requires changes in culture, attitude, and ways of working throughout the supply chain.
The need for these changes has hampered take-up in the UK due to the construction industry's traditional wariness of new processes and procedures. Adoption has also been hindered by an incompatibility between alliance contracts and traditional forms of construction insurance.
Alliancing is used in only an estimated 1% of projects in the UK. However, the fact that advanced alliancing is government-backed, the introduction of appropriate insurance (and cost overrun cover), and the success of the Dudley College projects could make it an attractive prospect for project owners and developers.
How does advanced IBA interplay with construction insurance, including cost overrun cover?
The advanced IBA approach dispenses with separate insurance products for the construction phase. The project is protected by a single integrated insurance policy, which covers the client's investment and the teams’ potential liabilities. Integrated project insurance (IPI) removes conventional mind-sets about protecting each firm's interests and deflecting future claims, and concentrates on the success of the project as a whole. Providing reassurance to the insurers, the team is supported by an alliance manager, a technical independent risk assurer (TIRA), and a financial independent risk assurer (FIRA).
Construction cost overrun insurance has not been available since the early to mid-2000s, following a clutch of high profile, multi-million pound claims in the UK and abroad. In its new iteration, as part of IPI, the team is given a target price for the project. Participants are incentivised to work together to come in below the target price and share the savings. However, they must also share in the cost of going over the target up to a capped sum, beyond which the IPI cost overrun insurance comes into play.
As an ancillary benefit, IPI is designed to preclude the need for expensive PI cover, a bonus for firms in the current challenging market. In an advanced alliance contract, liability-driven professional indemnity insurance (which requires proof of fault before responding) makes way for project financial loss cover, where outturn costs above the target cost plus pain-share is insured.