Effective risk management has always been critical to the profitability and sustainability of contractors, but today these are more important than ever as companies face added challenges imposed by COVID-19. The pandemic is one of several significant key issues currently driving risk and challenging growth in the construction industry. This article will explore tips and best practices to help contractors address and mitigate these risks through effective risk management.
The U.S. construction industry first felt the impact of COVID-19 when China’s Hubei province went into lockdown, and manufacturing facilities were forced to halt production of construction materials for the U.S.
Contractors soon faced even greater supply chain challenges as the virus spread globally and U.S. state governments imposed varying degrees of shutdowns. These measures resulted in some U.S. construction projects being completely halted, while other projects deemed essential continued with the added challenges of social distancing and use of personal protective equipment (PPE).
As states begin to reopen their economies, construction projects across the U.S. are beginning again with the jobsite changes necessitated by the new reality of COVID-19.
Best Practices to Mitigate COVID-19
Contractors can help mitigate COVID-19 risks by following these best practices:
For contractors to effectively manage and mitigate risk, it is critical to seek professional guidance from insurance brokers, surety agents, licensed construction attorneys, and other key stakeholders in the local jurisdictions in which they operate. These partners can help contractors understand and respond to the challenges imposed by COVID-19, from guidance on maintaining social distancing on a jobsite to potential changes in contracts and supporting documents.
Monitor Announcements & Changes
Monitor federal, state, and local government announcements regarding the status of construction projects in light of the evolving pandemic and requirements for social distancing, PPE, and limits on the number of people allowed on a jobsite.
Contractors should keep employees, project owners, insurers, surety providers, and others aware of their response to COVID-19, from jobsite requirements for subcontractors to enhanced quality assurance programs for new suppliers.
Strengthen business continuity plans by answering questions such as: Are there new sources for essential supplies? How can I add skilled labor if my subcontractors cannot complete the job on time? Can certain employees work from home?
Review future contracts and identify opportunities to add contingencies that address a pandemic’s potential impact on pricing and schedules.
Another key risk facing contractors is construction defect claims, which are some of the most common – and costly – types of disputes brought against GCs. In fact, 75% of construction industry players reported experiencing a claim or dispute in the past five years, with the most common being defect claims.1
Construction defect claims involve multiple parties, can happen on projects of all types and sizes, and arise from complaints over failure to design or construct a build in a manner considered reasonable by the owner.
The best advice for mitigating and managing the risk of construction defect claims (and other types of claims) is to actively
prevent them. To help do this, contractors can proactively take two key steps.
Step One: Understand Existing Coverage
First, contractors should understand the scope of existing coverage and contractual protections. To do this, they should partner with their insurer, broker, and others before starting a new project to:
Review & Improve Construction Contracts
Investing time upfront to develop solid contracts may save a significant amount of time and resources by preventing future claims and disputes. Clarify legal and financial responsibilities within the contract. For example, some states may limit a contractor’s ability to transfer certain liabilities and risks to subcontractors.
Review General Liability Policy
Scrutinize their general liability policy to review limits, exclusions, and exceptions. Higher limits may be required in certain states. In addition, take note that some policies may cover faulty workmanship only if completed by subcontractors.
Identify & Address Coverage Gaps
Identify coverage gaps and address them by considering excess, professional, and pollution liability in addition to property policies. These coverages can be key safeguards in the event of a large claim or if an incident isn’t covered by your general liability policy. Careful consideration helps ensure comprehensive coverage, which is especially important if your company is involved with design-build projects or integrated project delivery (IPD) via Contractor Controlled Insurance Programs (CCIP) or Owner Controlled Insurance Programs (OCIP).
Confirm Coverage & Responsibility
Confirm that all stakeholders are contractually responsible for their own work. Review each party’s certificate of insurance and
additional insured endorsements for adequate coverage levels. Also, check if there are any endorsements such as residential
construction exclusions or state anti-indemnity provisions that might affect coverage.