You have just broken ground on a large-scale commercial property. Your equipment, materials, and build team are all in place. You have secured your financing, completed all site inspections, and gotten sign-off on your budget and schedule. But have you prepared for the unexpected?
When a natural disaster strikes during a construction project, everyone involved will no doubt be forced to contend with the ensuing damage, delays, and financial consequences. However, effective planning can go a long way to reducing a contractor’s potential exposure and protecting its anticipated revenue stream.
This two-part blog series provides construction industry professionals with practical steps for assessing and managing potential exposures to catastrophic events and dealing with the aftermath. In this part, we will delve into pre-event planning.
Determine all project costs
Don’t wait until a major storm is approaching or has already hit your construction site to put your insurance to the test. Remember, in the aftermath of a disaster construction values represent only part of a contractor’s risk exposure. Consequential damages, such as delays, soft costs, extra expenses, and indirect costs, may be uninsured or underinsured. When evaluating potential soft costs and additional expenses related to a major disaster consider the following:
· Are there legal or accounting fees associated with revising contracts or restructuring financing?
· Will you incur additional architectural/engineering fees?
· What are the costs of realty taxes, ground rents or other assessments?
· Will there be additional costs to extend or renew insurance coverage if a project is delayed?
· Will there be additional project administration expenses, such as temporary office space, or clerical work?
· Will you have advertising and promotional expenses beyond what were initially budgeted?
· What are the potential costs associated with renegotiating pre-leases, including additional commissions incurred?
Quantify potential exposures. Consider the downtime associated with specific types of events or site damage, including lead times to obtain critical replacement materials and daily costs associated with delays, including:
· Overhead
· Extra expenses for site preservation
· Protection, security, safety, and loss mitigation
· Sub-contractor costs
· Potential profit
Use these calculations to estimate different potential outcomes such as maximum foreseeable delay, which is absolutely the worst-case scenario for downtime; probable maximum delay, which accounts for the potential impacts of mitigation efforts; and the net expected delay, or the most likely outcome given probability of a major incident will occur and affect the project.
Consult with your insurance advisor to calculate and review these options carefully and determine the appropriate levels of protection needed.
Meet with first responders and emergency authorities. Communicate critical aspects of the jobsite to first responders and authorities, including:
· Roadway access points
· Project blueprints
· Storage locations
· Hazards, such as electrical wiring, fuel tanks, gas pipelines, power generation equipment, and at-risk temporary structures.
Assess and reassess jobsite for areas of potential loss. From the start of the project, begin developing a comprehensive list of materials, scaffolding and equipment most vulnerable to loss from a major weather event. Include a complete inventory of all materials and equipment to be secured or stored onsite as well as offsite. Update the list frequently as the project progresses. When a major weather event is forecasted or imminent, do a walk-though to verify inventory and correct any deficiencies.
Develop a coordinated crisis plan. Develop a site-wide crisis management plan. Create a list of actions, timing, worker roles and responsibilities and communicate to all supervisors and workers engaged at the jobsite. Include contact information of specialty contractors for remediation work and alternatives. If practical, conduct run-throughs to ensure everyone understands individual roles and responsibilities.
Contractors who take the time to assess current coverage, quantify worst-case exposures, and develop a crisis plan, will be better positioned to create a more efficient and reliable insurance program before it’s too late.
