Global Vantage: Risk Transfer on Construction Projects in the wake of the Coronavirus PandemicJune 2020
Construction projects carry inherent risks, and the allocation and management of these risks is often a key area of contention when negotiating international construction contracts. With Covid-19 only serving to accelerate the hardening of the global insurance market, proper risk management is more important than ever. Many construction companies now face the unenviable prospect of less cover and higher excesses, which may tempt some to shoulder an increased level of risk themselves without the backing of an insurer.
As the on-going pandemic presents the possibility of delays to project programmes, shortages in labour and materials, potentially less QA and numerous new health and safety requirements for the construction industry, choosing to accept more risk in the current environment is a potentially dangerous prospect. Adopting appropriate contractual terms will be crucial in ensuring that the risk carried by construction businesses is mitigated and limited to an acceptable level. Contractors and consultants must avoid circumstances in which they are burdened with risks that are unpredictable or too difficult to manage.
Both client and contractor and those across the supply chain should be aware that onerous contracting, and in particular imbalanced risk allocation, is rarely in the interests of any party. Clients that adopt such an approach often suffer from a less competitive tendering process, as contractors are forced either to ‘price in’ the increased risks, or avoid tendering for the project altogether. Insisting on particularly strenuous or unusual obligations in contracts is also more likely to result in disputes which could cause delays to ongoing projects and protracted dispute processes with all the legal costs and other commercial ramifications inherent in those processes.
Instead, parties should adopt a collaborative approach to contracting and, by extension, risk management. Working together to mitigate / avoid risks on international projects, rather than arguing over the technicalities of risk allocation, is the approach that the parties should aspire to pursue. On a practical level, this could include delaying negotiations on the allocation of particularly contentious risks to allow the parties to approach the market to determine a fair value for the risk or seeking access to the broader insurance market to find those willing to engage.
In the wake of the Coronavirus pandemic and its impact on the global insurance market, whilst we aspire to collaboration and better contracting behaviours, we anticipate an increase in the level of risk that contractors and consultants will be prepared to accept on construction projects. It’s inevitable in some senses but with proper foresight and awareness and a diligent approach to contracting and delivery, risk can be properly managed. Just as is done every day on projects around the world in the process of design, engineering and construction. Take the same approach to your contracts to protect against the high risk, mitigate the medium risk and manage the low risk.