Change in the Course of Construction

During projects, the phrase “yesterday is history, tomorrow is a mystery” is the only constant, and this has major implications for Insurers, Brokers & Advisors.

Construction projects never run according to plan. In fact when most projects are completed, what ends up being handed over to the owner bares little resemblance to the original concept, delivery timeline or budget. The IHS Market Global Projects Database reports that;

  • 98% of construction projects incur cost overruns of at least 30%.
  • The average cost overrun is 80% of the original budget.
  • Over three-quarters of projects are delivered 40% late.

And hidden beneath these astonishing statistics there are some very important risk elements.

If you are a construction underwriter with CAR/EAR policies in force then you won’t need any introduction to the concept of last-minute policy extensions, often in the multiple. If you are an property underwriter reviewing a submission for a project which is about to go operational, you will have often found yourself with an only partially complete property by the time you are on risk. And if you are a broker, you will know what it feels like to be in the market with a submission that is out of date the moment you send it out.

Virtual i Engineers have seen plenty of material changes to projects during risk surveys, with the following observations just a sample of what we have seen in the past four months alone;

  • At a hydroelectric power station in Bhutan, the project documents used for both the EAR and AAR policies were from the initial design phase. Five years into operation a remote survey was conducted and found that the electrical rooms had no inert gas fire suppression, the transformers had no deluge protection and the turbine-generator bearings had no automatic foam protection – despite all these being quoted in black and white in the project documentation. The main construction contractor was also the joint venture partner in the long-term operation of the station, and it would seem that they had unilaterally taken the decision to remove such protections without notifying their local partner (who was responsible for insurance matters) or their insurers.
  • An existing water supply reservoir in East Africa was being enlarged in order to be capture more water during the wet season. This was being achieved by raising the height of the embankment dam by 6m in height. Construction underwriters reviewed the project and considered it to be relatively low risk, given that the new height could be accommodated within the reservoir without any additional civil works, aside from increasing the crest height and installing a new spillway. A pre-operational survey performed towards the end of the project revealed something different. At two locations along the new rim of the reservoir it had been determined that there would be a risk that the ground could become waterlogged, grow unstable, and slip. And that slippage would not be into the reservoir itself; instead it would slip the opposite way, down a hillside where there were multiple residential homes below the reservoir level. Reinforcing works were done to address this issue at the two locations, but this represented a liability exposure that the construction underwriters had no knowledge of, and which the prospective operational underwriters had no appetite for.
  • A large artificial island development in Seychelles was originally planned to have an elevation above mean sea level of 1.5m. Once the reclamation operations had established a level of 1m then the key utility system networks – water piping, electricity cables, fibre optic cables for internet and sewerage lines – were laid out across the new island and buried. But not long after a major change was made to the project; it was decided that the elevation would be increased to 2.5m at the centre and 3.5m at the coastal edges. What was not recognised at the time was that this would significantly increase the static load on those buried utility systems. For the polyethylene water piping it was all too much. On a weekly basis there are at least five bursts which require excavation and repair, with the bill being picked up by the direct insurer.
  • A set of eight new warehouse buildings in the United Arab Emirates (UAE), with a covered area of 27,200m2, were constructed with a building enclosure comprising composite sandwich panels with expanded polyurethane (PUR) cores. Whilst better than other sandwich panel types, PUR is considered to be combustible. Underwriters for the forthcoming All Risks policy had factored this into their technical assessment and were satisfied that the ignition risk at these particular warehouses was low. Just prior to policy inception a survey was commissioned, and our engineer went to site. Everything about the new facility looked in-line with the project documentation until the engineer reached an outdoor storage area just beyond the final warehouse building where he found hundreds of crates of solar photovoltaic (PV) cells. When it was asked what were these for, the Facility Manager was proud to say that all eight buildings would be fitted with PV systems mounted on the roof, in-line a recent initiative by the company management to improve the energy efficiency of the new buildings. The combination of miles of wiring carrying DC electric current and combustible roof panels with thousands of small openings in the exterior covering (to accommodate the solar cell mountings) created a fire exposure which simply had not occurred to anyone at this facility.

Of course not all changes are bad, far from it. Some of the recent construction update surveys and construction-to-operations surveys which we at Virtual i Technologies executed revealed some project changes which had actually improved the overall risk profile, such as;

  • A 5* hotel resort on a small island in the Indian Ocean which had originally specified wooden shingles on the 115 different villas and small buildings throughout the resort, but which had changed this for stone-coated metal tiles during the early stages of the project. This was especially important as the resort is the only one on the island and there is no possibility of a fire brigade mobilising to this location, so this reduction in fire risk had a huge impact on how Underwriters viewed this property.
  • A hydroelectric power station in Nepal had modified it’s tailrace (the channel which takes water from the turbine outlet back into the river) significantly, introducing a large protective wall which reached out into the river flowpath. The reason? During the project construction phase there had been a severe river flood event which had deposited large rocks into the area which would eventually become the tailrace. This was of concern to the project developer, as a similar future event could block the tailrace or even push rocks into the turbine impellers. The protective wall eliminated this risk.
  • The architectural plan for a new shopping mall in Mauritius had originally specified combustible external cladding across the entire exterior. This was mainly for aesthetic reasons rather than for thermal insulation, and prior to placing the order for the cladding, both the design and the specification was revisited. The result was that only one of the four sides of the building would be clad (the other sides being painted concrete), and the cladding would be specified with a fire retardant additive, thus radically reducing the combustible load on the building exterior. But no one had thought to inform the broker or the primary insurer, meaning that no credit had been taken for this improvement until we flagged it.

What unites both the positive and negative discoveries is the fact that they were unseen – and therefore not known – by the brokers, insurers and reinsurers involved in those placements. It took a risk survey, either remote or on-the-ground, to uncover this vital information.

By leveraging on the power of remote surveys via our platform [VRS]TM Virtual Risk Space, our clients are getting these insights in a timely and cost effective manner. Last minute notification that the Provisional Acceptance Certificate (PAC) has been issued, but you’re concerned about outstanding punch list items? The project time frame is being extended because of “discovery items” or “scope growth”? Underwriters decline to quote based on your submission, citing a lack of substantive information? A remote survey using [VRS]TM will put you in the position for success.

Change is the only constant in construction. Make sure that you are making risk decisions with the type of up-to-date knowledge and expert insight that Virtual i Technologies can provide.

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