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Institute of Risk Management Construction Special Interest Group

Institute of Risk Management Construction Special Interest Group. “Aligning interests and controlling risk with Integrated Project Insurance” by Martin Davis Member of Strategic Forum Integration Task Group, and consultant to the Office of Government Commerce.

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Institute of Risk Management Construction Special Interest Group

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  1. Institute of Risk ManagementConstruction Special Interest Group “Aligning interests and controlling risk with Integrated Project Insurance” by Martin Davis Member of Strategic Forum Integration Task Group, and consultant to the Office of Government Commerce

  2. Construction Risks (NEDO) excluding for overseas projects Technical • Incomplete design • Inadequate site investigation • Uncertainty over the source and availability of materials • Appropriateness of specifications Logistical • Availability of resources – particularly … labour Construction • Uncertain productivity of resources • Weather and seasonal implications • Industrial relations pressures Financial • Inflation • Delay in payment Political • Insistence on use of local firms From a NEDO study

  3. Prioritised supply chain risks (EIU/ACE)excluding for overseas and non-construction projects • Unfavourable exchange rate movements • Input price increases • Energy price increases • Declining customer confidence • Insolvency of suppliers • Pandemic • Labour shortages • Labour disputes From “managing supply-chain risk for reward (Dec 09)

  4. Construction Risks (NEDO) excluding for overseas projects Technical • Incomplete design • Inadequate site investigation • Uncertainty over the source and availability of materials • Appropriateness of specifications Logistical • Availability of resources – particularly … labour Construction • Uncertain productivity of resources • Weather and seasonal implications • Industrial relations pressures Financial • Inflation • Delay in payment Political • Insistence on use of local firms KEY Totally outside control Partly within control Totally within control

  5. Prioritised supply chain risks (EIU/ACE)excluding for overseas non-construction projects • Unfavourable exchange rate movements • Input price increases • Energy price increases • Declining customer confidence • Insolvency of suppliers • Pandemic • Labour shortages • Labour disputes KEY Totally outside control Partly within control Totally within control

  6. Comments to EIU about actions in last 12 months • Unsurprisingly, suppliers have taken the brunt of companies’ efforts to cut costs, rather than customers • 57% of respondents negotiated lower prices from suppliers • In fact, 47% of respondents say that cost-reduction programmes may actually have reduced their supply chain’s resilience • Nearly 50% feel their company underestimates the potential impact of supply chain risk, and that it lacks expertise in knowing how to deal with it • 50% of the respondents say they are working to improve collaboration with their partners and suppliers • Over 66% say that they are effective at managing supplier selection, and are looking to conduct risk audits of key suppliers

  7. The FLAWS in traditional construction procurement Fragmentation of design and construction, coupled with; • lowest price tendering • liability culture and risk-dumping Traditional procurement is the enemy of Risk Management!

  8. There are vested interests to be handled • The buyers are incentivised to reduce supply chain prices - regardless of how that is achieved • The lawyers are instructed to impose contracts that will ensure redress in the event of failure - rather than rewarding success

  9. “Never waste a Good Crisis”- a review of progress since Rethinking Construction, and thoughts for Our Future • “Even when the first tier of clients, lead consultants and main contractor develop long-term relationships based on collaborative teams, there is usually a failure to involve specialist contractors and manufacturers early enough in the process, which effectively closes off the tap of innovation and frequently results in unnecessary costs further down the line” (page 20) • “In the wider industry, procurement practice is not as professional as it could be. Tender processes focus on price, which destabilises the supply chain, rather than highest value with lowest waste and cost, which has a stabilising effect. Furthermore, the inability to assess non-compliant bids has stifled innovation. It has also made procurement more expensive as the client team needs to see a developed design before it can pick the winning bid” (page 21)

  10. The Challenge: Early Involvement for All Designs for tendering Source: CCG Survey

  11. Summary of data • Consultants and Main Contractors are most commonly brought into the project team at Project Inception whereas Specialist Contractors and Product Suppliers are most commonly brought into the project team at the Design stage • Early involvement is seen as the key factor to success regarding working with Consultants and Main Contractors whereas Selection on Best Value is seen as the key success criteria for working with Specialist Contractors and Product Suppliers Survey Report for Construction Clients’ Group by Constructing Excellence

  12. Traditional procurement – selection and outcomes A Consultants “best value” ? B Contractors/ supply chain “best value” ? Black hole Conservative Conflict Cut supply Not innovative chain costs Protective Waste ofEnhance accounts Maximise supply - resourcesAvoid grey areas chain liability - timeBlame to defend Claim extra fees - moneyPut profit first Failures in performance; extras over budget

  13. Profit Lowest price tendering –how does the game get played? Loss Tendered Price Time

  14. Modern procurement – selection and outcomes (1) PSCP’s + consultants + specialists/supply chain + FM “Most economically advantageous” - “Selecting the Team” (2) Design solution and cost plan • risk assured (technically and financially) • checked against “world-class” benchmarks • “virtual company” ownership and incentivisation • insurable (performance and cost plan) Behaviours: • Collaboration and mutual support (no blame/no claim except fraud) • Confidence to innovate, based on risk assurance and insurance • Common interest in cutting “silo” costs; common costs • Motivation to maximise performance and so profit Improved performance and efficiency; reductions in cost

  15. Directive 2004/18/EC of the European Parliament and CouncilArticle 53 – Contract award criteria Either most economically advantageous tender from the point of view of the contracting authority – criteria such as • quality, • price, • technical merit, • aesthetic and functional characteristics, • running costs, • cost-effectiveness, • after-sales service and technical assistance, • delivery date and delivery period or period for completion, or • the lowest price only.

  16. Selecting the Team(published by the CIC – see www.strategicforum.org.uk reports)) Client forms advisory team: should include end user, and experts in integration, risk control and insurance • Client with advisory team decides the “functional brief” • This brief drives the “selection criteria” (including collaboration record) and weightings • Selection questionnaires go to prequalified lists • Responses are reviewed and scored • Shortlists are interviewed; offices and sites visited • The “integrated project team” is appointed • Audit trail is available if required

  17. Strategic Forum for Construction “Business Case for Integrated Collaborative Working” - demonstrates with 14 case studies that: “The more integrated and collaborative your team is, the more successful your projects will be and the more benefits they will deliver for you all”

  18. Highlights from two of the highest performing projects Glaxo Wellcome FUSION projects: • Delivery 25% – 40% faster • 11% – 30% less capital cost DLO Andover North Site project: • Whole life value a primary consideration from design stage • 44% (£1/2 million since completion) saved, compared with target whole life costs

  19. Performance Measurement “Key performance indicators” DLO Andover Best demonstration project

  20. The 6 attributes of Integration and Collaboration • Early involvement ) “Selecting the Team” under • Selection by Value ) “Modern Procurement” methods • Common Processes - “Integration Toolkit” www.strategicforum.org.uk • Long Term Relationships – Collaborative frameworks and alliances • Performance Measurement – Measurable “Success Criteria” • Modern Commercial Arrangements –Integration Agreement (IPT 3.2) Project Bank Account Gain-share/pain-share Integrated Project Insurance

  21. A “Virtual Company” – full integration of the project team Client Financial alignment to Client’s success criteria Integrated Project Team Principal Supply Chain Partner + Consultants, Specialists and Suppliers + FM

  22. Sequential Consultants “design”: Concept drawings Specifications Scheme drawings ? Coordinated drawings Specialist contractors do “detailed”: ?Coordinated drawings Working drawings Equipment submittals Builder’s work drawings As fitted drawings and manuals Integrated Consultants and specialists together: Analyse performance requirements and “success criteria” (e.g. WLC ) Short-list possible system solutions Select equipment to meet performance requirements Decide routes etc. compatible with building structure and architecture Cost options and select solution that best meets “success criteria” Share drawing work as appropriate Progressively sign off H & S compliance From the “sequential” to the “integrated” design processe.g. mechanical and electrical services

  23. Normal processes Days Client to Contractor 30 Risk of abuse Contractor to subcontractor 30 Risk of abuse Subcontractor to sub-subcontractor or supplier 30 90 Project bank account Days Client to Client + Contractor PBA 30 Operated by Bank of Scotland or Barclays Contractor + subcontractors 5 35 NB Lord Mandelson’s promise: Client 10 days + 5 = 15 days Potential cost saving: 2½% Details: brian.kilgallon@uk.rib.com 30 day payment – a problem or an opportunity?

  24. Professional Indemnity Was risk caused by design of Consultants/Specialists or product design/manufacture? Was risk due to Consultant’s design or caused by Specialists? Product Liability Contract All Risks/ 3rd Party Was risk due to product design/ manufacture or installation? The Insurance Industry’s Silos Issues e.g. Rights of subrogation Who done it? X ? per Project

  25. A move from families of individual Risk Insurancesto one “Integrated Project Insurance”, alsocovering Financial Loss over the agreed Cost Plan To cover allmembers of the Integrated Project Team including Client, and also the funders Contract All Risks/ 3rd Party Professional Indemnity Product Liability No blame: Rights of subrogation waived Demonstrate loss, not culprit Latent Defects

  26. A “Virtual Company” + an Insurance Panel - a partnership in Risk Management Client Independent Risk Assurance (Technical + Financial) Financial alignment to Client’s success criteria Integrated Project Team Principal Supply Chain Partner + Consultants, Specialists and Suppliers + FM Insurance Panel Lead Underwriter + supporting insurers A new “partnership”

  27. Integrated Project Insurance (“IPI”) • The team must be integrated, and show its commitment to collaboration by a “no blame/no claim” agreement (except for fraud) • Independent risk assurance (technical and financial) from start to finish • Team gain-share (profit) is geared to how successfully the project objectives are delivered; shares are pre-determined • Team pain-share equals the excess under the financial loss insurance; therefore each party’s loss is limited to its similarly pre-determined share • Insurers waive rights of subrogation against all insured under the policy

  28. Technical “Technical control”, as operated collaboratively in Belgium by SECO, underpins the performance of Integrated Teams Safety is addressed integrally with the critical design and planning stages Latent defects premiums can typically reduce by 30% Financial This is similar to the “due diligence” carried out by Cost Advisers for banks intending to lend Insurers must know that the cost plan has adequate allowance for the risks involved Under an “integration agreement” all parties undertake transparency Independent Risk Assurance (for IPI)

  29. Alternative outcomes with IPI Cap IPI Pain Share Target Risk Fund Gain Share Cost Cost Cost Overheads Overheads Overheads Profit Profit Profit Agreed Target +ve Outcome -ve Outcome

  30. Key IPI Policy terms • Coverage post-completion • Latent defects (excluding wear/tear, poor maintenance) • Public liability • Coverage pre-completion • Material damage * • Other financial loss • Public liability* low excess • EXCLUSIONS • Changes in functional brief, made without agreed changes to the cost plan • The Excess, which equates to the pain-share (except for material damage) • Exclusion notices (technical or financial) – if not resolved by the client • War, Terrorism, and ? global cost hikes • Nuclear and foreseeable contamination • Fraud

  31. Benefits of IPI – behavioural and legal • Liberates the whole team from the need for protective behaviours • The “Joint and Several Liability” problem is avoided. • Collateral Warranties – a huge aggravation for little advantage – become redundant • IPI cover survives the insolvency of any member of the team, and any resultant financial loss will be covered [NB this should facilitate partnering with local SMEs] • Legal, forensic and management costs in re-living projects embroiled in “whodunnit?” litigation should be avoided • Limits each partner’s potential loss to their share of the pain-share • Expected to cost no more than the 2½% cost of traditional insurances throughout the supply chain (no longer required)

  32. Performance, risk and efficiency Modern procurement of integrated collaborative teams: • gets the projects underway at least 6 months faster than traditional procurement • delivers superior performance – in the selected criteria • improves efficiency – in design, on site and “soft landings” • facilitates the management and control of risk ……. • opens the door to dramatic cutting of waste ……. Applying Latham’s 30% to the supply chain (80%) gives 24% !

  33. Risks Incomplete design Inadequate surveys Inappropriate specifications Availability of resources Uncertain productivity Industrial relations pressures Use of local firms Unfavourable exchange rate movements Input price increases Delays in payment Insolvency of suppliers Measures Team ownership of solutions and outcomes ensures “self-policing” and resolution Selection processes weigh the risks appropriately Specialists, appointed early, source and book supplies Transparency, project bank accounts, and insurance How integration and collaboration facilitate the management and control of risk

  34. More value, for less cost Low carbon and sustainability are now firmly on the political agenda – we must invest We must cut, not margins, but waste throughout the supply chain: counter-productive estimating and procurement silo protectionism the redundant system of prices, variations and claims - cost plans should be managed, and team profit should be geared to performance

  35. Traditional Procurement – fragmentationFees and prices (cost + profit) Consultants Main Contractor Key Productive Procurement Specialist subcontractors (with suppliers) Silo protection Negotiation/ confrontation Consultants Contractor

  36. Modern Procurement – integrationCutting out the waste Consultants Main Contractor Key Productive Integrate Specialist subcontractors (with suppliers) Consultants Contractor

  37. Modern Procurement – integrationCollated “lean” cost + low carbon investment Construction Manager Key Consultants Facilities Manager Seconded Provision for low carbon/ sustainability Investment Specialist subcontractors (with suppliers) Consultants

  38. Modern Procurement – integrationCommon cost + Team Profit (set shares) Construction Manager Key Consultants Facilities Manager Seconded Provision for low carbon/ sustainability Investment Specialist subcontractors (with suppliers) Consultants Integrated Team Profit Sustainable Buildings need integrated teams www.secgroup.org.uk see “activities”

  39. In summary: “more for less” Targets Design solution and cost plan: • Cut out waste and improve efficiency (20%) • Invest in superior design performance, low carbon solutions and sustainability ? say 10% Target net saving (before revenue savings) (10%) Insurance solution and single premium: • Cut out risks of blame culture and legal costs (1.75%) • Invest in independent risk assurance and latent defects insurance 1.50% Target net saving (excluding on excesses) (0.25%)

  40. The names ready to drive integrated pilot projects The Specialist Engineering Alliance: • CIBSE, BEAMA, ACE, BSRIA, SEC Group and FETA with construction managers/contractors, design and cost consultants, suppliers and manufacturers from the rest of the industry The Project Managers for the 3 top performing case studies: • FUSION, Andover, and Bristol Blood Centre Insurers: • Aviva, and Royal & Sun Alliance (lead) • Zurich, ACE and AXA (in principle) Independent Risk Assurance: • Technical – SECO • Financial – Davis Langdon IPI Insurance Brokers: • Griffiths & Armour and Tyser & Co Ltd Lawyers: • K & L Gates

  41. The Specialist Engineering Alliance’s proposition to the public and private sector clients • Facilitate the supply side in doing 3 pilot “low carbon” projects, each in the range of about £10m - £20m, using modern procurement and collaborative principles, and led by project managers of the most successful collaborative projects • At “Gateway 3”, the integrated project team will put forward a design solution whose (a) compliance and performance and (b) cost plan are risk-assured and insured; do not approve unless these criteria aremet • Then watch the transformation in performance and efficiency – to be independently monitored and measured.

  42. It’s time to exercise your influence! • Clients cannot do without insurance – - indeed they call for excessive levels (e.g. PI) • The majority of the risks in UK construction are caused by misguided procurement • Procurement, the “Trojan Horse” in our industry, must come into line! • Risk managers should support insurers in giving preference to integrated collaborative projects

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