A new way for insurers to handle construction delays and cost overruns

Since 2016, the federal government’s slated nearly $100 billion to support development of transit extensions, shipping port improvements, affordable housing and more.

When private-sector construction slowed in March 2020, federal infrastructure building quickly filled the gap. And, throughout 2021, both private and public construction picked up. The sector is now humming along.

This has created an interesting situation for property development insurers, who understand liability risks are highest during a development’s construction phase, and that longer timelines mean more risk for all parties.

Risks are magnified in large infrastructure construction projects due to their scale and locations.

Add in the pandemic-sparked supply chain disruptions and labour shortages, and it’s no surprise we’re seeing a sharp increase in contractual disputes associated with construction delays and cost overruns. In fact, the Arcadis 2021 Global Construction Disputes Report estimated the average value of a construction dispute in North America more than doubled over the past year, to $37.9 million.

Construction delays are the most common cause of project disputes. But establishing and proving a delay claim is complicated. And disputes even arise when projects are completed on time, particularly if additional costs are incurred for extra labour and equipment needed to finish a disrupted project on schedule.

Fortunately, property owners and insurers can proactively mitigate and manage risk on large, complex projects. One way is to hire a forensic critical path method (CPM) claims and delay expert to measure, report and forecast information from CPM schedules.

Understanding a CPM schedule’s key elements gives owners and insurers a clear perspective of the planned, actual and remaining progress on a given project. It also helps determine the impacts of unscheduled events.

And, by performing monthly schedule reviews that highlight variances in a traffic-light dashboard report, they can give the insurer insights to protect them during any delay and disruption disputes during construction or after a project’s complete.

Here’s a recent example. A prime contractor had a disagreement with a developer over conditions at a building site. A forensic scheduler was hired to create, implement, and maintain a claims schedule and documentation system for the prime contractor.

The specialist compiled labour and equipment rates that lent support to an eventual dispute claim with the owner over various site and soil conditions. And the contractor documented equipment and labour actuals in the field, which were compared to the initial baseline activities using time-impact windows analysis to establish a time delay and cost impact.

This let the contractor prove the initial labour and equipment bid for the project was insufficient due to a conglomerate limestone soil condition that wasn’t represented in the initial soils report.

The forensic scheduler also provided a delay and cost report demonstrating the time impact to complete each remedial activity, along with the cost of bringing in equipment and labour to finish the job correctly, and on time.

Having a forensic scheduling process and report in place at the outset of development can be a huge advantage for all parties, and help avoid or resolve issues before they become disruptive. And, if an issue does escalate into a full-fledged dispute, the forensic scheduling report can often reduce resolution time.

Jonathan E. McNatty, PSP, is Sr. Construction Claims (Delay) Expert at Haag Canada.

This article is excerpted from the Feb.-Mar. issue of Canadian Underwriter.