The power of project monitoring in preventing and mitigating risk
By David BowcottFinancing Risk Management
Your construction project is made up of several sources of capital that turn concepts dreamt up on paper into tangible structures. Without these sources of capital, and the people behind that capital who believe in your project’s success, your project would not be built.
These sources of capital have internal and external gatekeepers that review all aspects of your project and render a decision on the terms you will be required to meet in order to gain access to their reality-making capital. Further, once that capital is committed, the sources will sometimes monitor the progress of your project to ensure things are progressing as per the plan.
This monitoring is what I’d like to focus on in this article as it can hold tremendous value for all project stakeholders and can be used to more effectively prevent and/or mitigate risks from manifesting that can ultimately take a project off-track.
The three primary sources of capital include:
- Project equity—The initial funds utilized to cover the costs associated with designing and constructing the asset prior to the asset generating revenue. In the capital structure, often made up of both equity and debt, the equity portion is often more at risk in comparison to the debt and thus would require a higher return on their investment.
- Debt—Often issued in conjunction with equity to provide full funding for the capital expenses required to build the asset. Debt has a priority position over assets involved in the project and balance sheets of key parties responsible for building the asset.
- Risk capital—The insurance and performance security being supplied primarily from the insurance sector. This source provides capital in the event specific risks manifest on the project that result in additional direct and indirect costs. Examples of such insurance and performance security include: builders risk insurance, wrap-up/general liability insurance, professional liability insurance, environmental liability insurance, subcontractor default insurance and surety bonds.
As mentioned above, each source of capital has gatekeepers that approve the deployment of their capital (underwriting) and, further, will sometimes oversee the execution of the project to ensure that all aspects of the project related to their commitments remain on-track. For the purposes of this article I want to focus on this project monitoring process. Specifically, who does this monitoring and how can this monitoring be utilized to prevent and mitigate risks?
These players perform the monitoring roles for most projects:
- Equity monitoring—Often project monitoring is done directly by the equity. The equity will have employees versed in designing and building assets and these folks will require frequent meetings and updates with key project stakeholders like the design firm, the prime contractor and key subcontractors. Sometimes the equity does hire third parties to complement their own monitoring. With design-bid-build projects, for instance, the equity may contract a design firm and include monitoring services as part of their role.
- Debt/lender technical advisory—Often referred to as the LTA, this group is usually a third party that provides frequent updates to the debt on the project. The debt often does not have the expertise to monitor the project and hires third parties to monitor the project through documentation, updates and meetings.
- Debt/lender insurance advisor—In some cases the debt hires a third party insurance advisor to ensure the necessary insurance solutions are in place and to assist in claims processing.
- Insurance and performance security monitor—Though currently less frequently utilized on projects, there is growing interest by insurers to utilize monitors that allow the insurers to prevent and mitigate claims by seeing potential claims manifest through monitoring activities.
All of these monitors tap into progress documentation related to the project. Often these monitors are given direct access to a project enterprise technology that provides varying levels of transparency into the project’s progress. These project platform technologies also manage documentation flow and communication amongst all key stakeholders. Project monitoring services provided by the above sources include: general consultancy services, milestone monitoring, budget monitoring, quantity surveying, schedule monitoring, audit, quality assurance/quality control, testing and commissioning monitoring, material testing, general documentation and photo reporting services.
Transparency can be intimidating to design and construction stakeholders, but it can also be very helpful as some of these sources of capital will gladly mitigate their risk through early commitments to solve problems. Couple the monitoring sources referenced above with new technology that stakeholders can access and you have the ability to see the train coming from a mile away and thus take the necessary steps to avoid catastrophic impacts.
David Bowcott is Global Director—Growth, Innovation & Insight, Global Construction and Infrastructure Group at Aon Risk
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