Integrated project insurance brings many benefits, so let’s use it, says Stephen Bamforth.
A key element of the Government Construction Strategy 2011 is the need to move away from traditional, adversarial, lowest cost tendering towards an environment of collaborative working. The laudable aims are to avoid the silo culture of liability, blame and defensive attitudes and move to a more open way of working through integrated teams operating in an atmosphere absent of blame driving out waste and delivering better, more cost-effective and sustainable client solutions. Or to use the catchphrase of these times of austerity – “delivering more for less”.
One of the three alternative procurement methods that the Cabinet Office committed to trial is integrated project insurance (IPI). Griffiths & Armour has been closely involved in the development of IPI for a number of years. Below is a brief overview as to exactly what IPI is and its radical approach to derisking construction for the client.
How IPI can change construction for the better
- Integrated collaborative working in a blame-free environment becomes the norm.
- The industry becomes leaner and fitter, driving out needless waste and producing better outcomes for clients.
- Wasteful defensive contract documentation fades away.
- Contentious contractual negotiations around duty of care, fitness for purpose, indemnities, retentions and bonds no longer feature.
- Construction is effectively derisked, attracting more investments from pension funds looking for guaranteed rates of return.
- SMEs are empowered as clients are free to choose the most appropriate team for the job and not the contractor with the biggest balance sheet or consultants with high levels of PI cover.
- Full BIM support – including to Level 3.
- Construction’s reputation improves as dispute numbers reduce.
IPI is an insurance product that supports truly collaborative working in an open honest – and importantly – blame-free environment. The key is the procurement mechanism that IPI supports. We need to put the procurement horse in front of the insurance cart. IPI will only be available on projects where there is an informed, intelligent client with either a business or societal need and a pot of money.
Rather than appointing consultants to create detailed designs which are then put out to lowest cost tender, the client appoints a small team of experts most appropriate to the project’s needs. That advisory team – which could include contractors, consultants, specialist suppliers and contractors – then develops a detailed brief, collaboratively, and a robust cost plan with a necessary and appropriate level of risk.
At this stage the client lets a single, multi-party contract with an agreed target cost, open book accounting, project bank accounts and, crucially, a genuinely blame-free environment. Apart from in the event of fraud, the client waives all and any rights to sue their integrated project team.
So what if the project or its finances go awry? That’s where IPI comes in by insuring the client’s exposure to loss rather relying on the expensive, time-consuming and uncertain medium of liability.
To summarise, IPI covers:
- the risk of physical damage during construction and any associated financial losses such as any additional costs of construction;
- claims from third parties that arise out of the works;
- “pure cost overruns” ie circumstances where the project’s finances overrun, absent damage;
- latent defects insurance (including key components) post completion.
- the client and all members of the integrated project team – the interests of funders can also be noted. There are no rights of subrogation.
IPI also comes with independent assurance that the cost plan is robust and achievable, that the design is sound and capable of being constructed and that the project team are working in a truly collaborative manner.
All of this is required not only to provide a sanity check as to the merits or otherwise of proceeding with the project at all, but also to give insurers the confidence to underwrite the risk – particularly in relation to the pure cost overrun element of cover.
And the cost? We estimate that the total cost of IPI – that is, risk transfer plus risk assurance – will not exceed the aggregate cost of all of the hidden, and often uncertain, individual annual covers that cascade down the supply chain.
How does IPI differ from other innovative procurement methods?
IPI ensures that the project team remains collaborative even when projects or their finances go wrong – interests remain co-aligned in acting together to get the project back on track. All other forms of procurement mitigate against that, reliant as they are on traditional blame-based insurance products. That is the difference.
Where are we with insurers?
The history of cost overrun insurance has not been great for underwriters. Contractors in particular have often seen them as simply an additional source of funds, with some notable eye-watering examples.
So the approach from the market to IPI is one of caution. We do have support, in principle, from major UK insurers but the concept needs to be trialled before being rolled out, potentially, as a viable commercial product available to both the public and private sectors and on projects of all sizes.
It is perhaps understandable that IPI has experienced the most significant challenges in moving ahead with real live demonstration projects. It really is a radically different approach and needs a sea change in culture – from both the client and all of the integrated team to make it work.
I believe the construction and insurance industries are at a tipping point – we need the government to be brave and deliver exactly the kind of demonstration projects needed to take us past the point of no return.
Stephen Bamforth is group chief executive of insurance broker Griffiths & Armour