Construction Risks Overview
Insufficient planning may have a material impact on both costs and deadlines during the construction process. For example, investors fear the uncertainty that naturally comes with the numerous risks involved in construction projects. According to global studies, the range of unplanned increases of construction costs is in the order of 20% to 30% of the project building cost.
Risk transparency, risk mitigation and risk transfer are key elements in achieving a high degree of cost certainty for investments. Munich Re can offer protection against certain risks that had long been considered uninsurable. Building owners, developers and investors can thus profit from risk transfer through corresponding policies.
The challenges of infrastructure projects
Circumstances such as geology and location, as well as the materials and technical processes used, make every construction project unique. The risks involved lack the typical features required for insurability. For example, although empirical values on losses incurred in bridge construction do exist, the unique nature of each project makes it impossible to determine the probability of occurrence using conventional means.
Many infrastructure projects, such as the world’s longest combined suspension and cable-stayed bridge in Turkey, are executed as public-private partnerships. They are mainly financed through bank loans, which are only possible with an adequate transfer of the risks. This creates business opportunities for insurers. Losses due to natural hazards (limited cover for earthquakes), bad workmanship, fire, defective design and statutory liability can be covered through all-risk policies.
Building owner, developer and insurer liability
Some developers try to burden the construction company with as many risks as possible. This becomes particularly problematic whenever a fixed-price contract is concluded and the ground risk is accepted by the construction company. If unforeseen soil conditions are encountered, as often is the case in tunnel construction, for example, this frequently results in additional costs and delays. The “project management triangle” then comes into play: if even one of the three most important factors time, budget and quality gets out of hand, the other two are usually affected as well.
Risk management means that all risks, whether of a technical, financial or political nature, are identified and mitigated as far as possible. A responsible person must also be appointed for each risk identified. This personal assignment is important, as experience has shown that many losses, for example in tunnel construction, occur because no one feels responsible in critical situations, and so no countermeasures are taken as a result. Most developers and companies have meanwhile recognised the benefits of a professional risk management concept, and are consequently factoring in the requisite resources during project planning.
Insured construction risks – an example
A bridge building project in Turkey provides a textbook case of how construction risks can be covered: liability was extended for a period of two years following completion. Losses due to acts of war and terrorism, as well as costs incurred as a result of delayed commissioning, were excluded. When reinsuring the risks, Munich Re took the leading role, assuming a share of 40%. Experts from our engineering department were not only responsible for negotiating the essential terms and conditions in the underwriting process, but also for monitoring the project’s progress and advising on risk management.