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Will material shortages and delays impact your insurance?

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COVID 19 Coronavirus

By Bill Callan | December 10, 2021

Material shortages are now biting the construction industry hard with cost blow outs and project delays. How does this impact your insurance and what should you do?

COVID-19 has thrown construction more than its fair share of curve balls, with limitations on the number of people on site, additional compliance costs, and a two-speed construction market – commercial/high-rise has stalled while residential has seen significant growth.

But material shortages are now biting hard. Over the past six months, the impact of COVID on suppliers, extended lockdowns increasing pressure on transport networks, less air freight capacity and shipping disruptions have meant timber, fixtures & fittings and structural steel are in short supply – and there is no relief in the immediate term.

Cost blow outs and project delays

Builders have seen a significant increase in costs with timber and steel close to doubling in the past 12 months, while lead times have also blown out. Where timber was usually delivered in two to four weeks, it is now up to six months. This has resulted in project delays with programs extended up to six months. If you are a contractor on such a project, you need to address these issues to ensure the project is not excluded under your current insurance arrangements.

What does the Contract Works policy cover?

Two significant aspects of any Contract Works Insurance policy are contract value and construction period.

Although most Contract Works policies provide a level of contingency regarding both, they will generally only accommodate small fluctuations. You could find your Contract Works insurance (and potentially other Project Specific Policies) expire before project completion, or the final contract value exceeds the allowable escalation provision - typically a figure between 10% and 20%.

What should you do?

  • Re-assess your project program to see if it is still on track to reach practical completion on time
  • Re-calculate the final contract price
  • Review your current insurance arrangements to ensure that they accommodate any changes in either of the above
  • Where the insurance is taken out by the principal, ensure that they do the same. As an insured party, you have an insurable interest in the policies they have obtained on your behalf
  • If either the contract value or the insurance expiry date is inadequate, seek an amendment to the policies.

Underwriters are exercising greater scrutiny over requested cover extensions during this time, therefore we recommend you adequately detail any delays and cost escalations to ensure you receive the most favourable outcome from your insurer. Insurers do not like surprises, and any last-minute changes could result in both significant premium loadings and adverse changes to policy terms and conditions. These could impact not only your contractual requirements with the principal, but also your margin.

Willis Towers Watson works closely with our construction clients to “check in” on their insurance arrangements on a regular basis. We can help you manage any insurance changes within your own business, and keep your client informed at an earlier stage of any changes to coverage and/or cost.

Disclaimer

Willis Towers Watson offers insurance-related services through its appropriately licensed and authorised companies in each country in which Willis Towers Watson operates. For further authorisation and regulatory details about our Willis Towers Watson legal entities, operating in your country, please refer to our Willis Towers Watson website. It is a regulatory requirement for us to consider our local licensing requirements.

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Victorian State Manager – Construction risks

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Managing Director – Profit Center Management

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