October 14, 2016 by David Bowcott
I have spent a lot of time mining and developing data recently. It seems the insurance sector has the richest repository of failure data in the world, and given the growing demand for failure data quants, I had no choice but to get involved. Thus, I’ve been mining the claims information from all policies related to construction and asset management, looking to organize it in a manner that identifies the most common and impactful risks. It has been a lot of fun – so far.
So, what have I discovered? Well, I can’t share everything, but I can tell you one of the most common and impactful risks facing the construction sector is design failure. Design failure is a leading cause of insurance claims and shows no sign of slowing. I’m sure this isn’t a big surprise for most, but to actually see the root cause of design failures is very enlightening. A granular understanding of these failures provides deeper insight into true root cause, and through this deeper insight, one might find tangible solutions to prevent and mitigate this very significant construction risk.
Based on the design failure data that I’ve observed, a viable solution to preventing or mitigating this risk is simply the act of creating more awareness. Much of the root cause of design failure is related to key stakeholders not taking a greater responsibility for this risk. When design failure occurs, it is often on projects where the owner and/or the contractor simply threw the risk over to the design consultant with little prequalification on the design consultant and little monitoring of the design consultant’s progress. Had the owner and/or contractor been more keenly aware that one of them (or both of them) ultimately owned the risk, they would have been better prepared to manage it.
So how does one create more design failure risk awareness on their projects? There are a number of ways to do this, but two common ways are:
Creating Awareness Contractually – More and more contracts are being developed that share design risk – for instance, take a look at some of the integrated project delivery (IPD) contract wordings in the market, and you will see an attempt to create a framework that has all parties focus on each other’s risks in order to drive the project to a successful conclusion.
Creating Awareness Through Insurance Design – New insurance solutions are being designed that have the contractor share in the risk of design failure – thus creating “skin in the game,” and that drives awareness. There are some concepts out there that allow owners to share in the design risk as well, thus driving even greater awareness.
Far too often contractors rely on contractual responsibility for risk, and, once transferred, we feel our responsibility to manage the transferred risk has disappeared. This is a fatal error. The firms that have the best track records of managing design risks are often the ones that are most keenly aware. They demand the design firm be capable of managing design failure risk, then ensure they have the necessary resources to manage potential failure, and, perhaps most importantly, they monitor the progress of design, ready to implement solutions in the event design failure risk starts to manifest on their project. The best firms are risk aware, and risk aware means they imagine they own risk in spite of the risk being contractually transferred to another.
David Bowcott is senior vice-president and national director of Large/Strategic Accounts at AON Reed Stenhouse Inc. Send comments to firstname.lastname@example.org.