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Risk in Context

Are You Covered for Financial Loss from Project Delays?

Posted by Rahul Sharma 03 May 2016

Are you covered for financial loss from project delays?

Construction projects carry significant risk and uncertainties. There are therefore a number of questions you should ask yourself before and during the lifecycle of a development, including:

  • Will the project be finished on time?
  • Will the build cost escalate as construction materials and sub-contractor labour become more expensive?
  • What’s our contingency in the event of contractor liquidation?

In addition to the above, you may ask whether your organisation has considered its own financial loss as a result of a major delay. An incident such as a large fire and/or escape of water has the potential to lead to a one- or two-year interruption.

Who will indemnify you for your financial loss?

Following damage such as this, the construction works cost of reinstatement should be met by the insurers of those works. However, the contractor is unlikely to have to meet a claim for liquidated damages following a major event. So who will indemnify you for your financial loss?

Take the following example: A university is constructing a 350-bed student accommodation block and it anticipates charging GBP150 per room in weekly rent over an approximate 40-week academic year. Therefore, the total yearly income for the block would be GBP2.1 million.

If, on the day before practical completion, there was a major fire, which resulted in a two-year re-build, the university could potentially sustain a financial loss in excess of GBP4 million, plus any additional costs incurred for alternative accommodation for the students who have already signed tenancy agreements.

As highlighted above, delay risk can amount to a significant sum of money. With the increased demand for quality student accommodation, these schemes are getting larger and more complex, resulting in higher financial risks in the event of a delay.

Standard contractor-arranged insurance programmes do not provide insureds with protection against such scenarios. There is, however, a solution – an owner-controlled insurance programme (OCIP).

An OCIP is project insurance purchased by the employer, which provides cover for material damage to the contract works and can insure the financial loss as a result of a delay in completion.

The OCIP approach provides insureds with the comfort of knowing that, in the event of a major delay in completion, the consequential financial loss (and alternative accommodation in the example above) can be insured, providing balance sheet protection for this risk exposure.

Related to:  Construction

Rahul Sharma