Construction Risks
and Insurance
By Dr. Muhwezi lawrence
[email protected]
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
Introduction
• Risk and uncertainty can potentially have damaging
consequences for construction projects (Flanagan et al.,
2006; Millis, A. 2001).
• Risk analysis and management continue to be a major
feature in the management of construction projects in an
attempt to deal effectively with uncertainty and
unexpected events and to achieve project success.
• It is advisable for each participant to address risks that
may arise in the circumstances of each particular project
with a view to minimizing their impact.
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
Introduction Cont’d
• Managing risks in construction projects has been
recognized as a very important process in order to
achieve project objectives in terms of time, cost,
quality, safety and environmental sustainability (Zou
et al., 2007).
• Risks and uncertainties, involved in construction
projects cause cost overrun, schedule delay and lack of
quality during the progression of projects (Wang and
Chou, 2003).
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
What is a Project Risk?
A project risk is an uncertain event that, if it occurs, has a
positive or negative effect on the prospects of achieving project
objectives
Three aspects of the definition are especially important:
• Uncertain event: something may or may not happen, e.g.
somebody becomes ill or the temperature drops below a certain
point making a chemical process impossible.
• Positive or negative effect: project risk is not necessarily
always negative (increased costs, decreased quality etc.); It can
also be positive (new valuable product features due to the use of
new technology or opening up a new market segment due to some
project adjustments).
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
What is a Risk? Unknown
Endeavor Unexpected
Risk Action
Undesirable
Unpredictable
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
Project objectives: the project goals are at stake if a risk
occurs. Severe negative risks can lead to the cancellation of a
project whereas minor risks may slightly increase the
completion time of a project.
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
Risks on a Construction Project
The following are common risks incurred by the primary
parties to a construction project. Some of the risks may
be common/overlap to multiple parties.
A. Owner Risks
• Inability to obtain financing;
• Default of the financier;
• Unforeseen conditions;
• Defective design;
• Defective construction;
• Delayed construction;
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
Owner Risks Cont’d
• Cost overrun;
• Destruction of project by unpredicted elements(Acts of
God - fire, wind, floods, earthquake etc.);
• Construction site injuries to construction personnel and
third parties;
• Misappropriation of contract funds by contractor or
subcontractors;
• Insolvency of contractor’s surety.
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
B. Architect Risks
• Misunderstanding/misconception of owner’s intent
for the project;
• Defective design;
• Underestimating cost;
• Negligent inspection/observation;
• Unforeseen conditions;
• Nonpayment.
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
C. Prime Contractor Risks
Underestimating costs (fixed price contract);
Non-performance by its subcontractors and
suppliers;
Unforeseen conditions;
Destruction of components during construction;
Insufficient/defective plans and specifications;
Performance being delayed: by owner’s notice to
proceed, by architect’s plans, by materials from
suppliers, and by owner deficiencies, obstacles and
problems;
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
Prime Contractor Risks Cont’d
Nonpayment;
Strikes or labor shortages;
Injuries to construction personnel and to third
parties;
Materials shortages;
Unusually adverse weather conditions;
Performance specifications
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
D. Subcontractor Risks
• Defective plans and specifications;
• Late receipt of plans and specifications, materials,
equipment;
• Interference;
• Lack of access;
• Defective performance;
• Nonpayment;
• Strikes.
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
E. Supplier Risks
• Incorrect specifications;
• Nonpayment;
• Late delivery;
• Defective goods.
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
Categories of Construction Risks
The construction risks can be broadly grouped under the
following categories (Xenidis and Angelides, 2005)
A. Financial Risks: A financial risk is related to a project’s
failure due to a financial or economic cause. A cause of this
nature is related to the funding of the project and the
commercial, competition, loan and demand issues, etc.
Examples:
• Cost overruns; taxation;
• Availability and fluctuation in foreign exchange;
• Delay in Payments;
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
B. Technical Risks
A technical risk is related to a project’s failure due to a
technical cause. Failure is considered as a shortfall in
succeeding to meet the project’s requirements. Technical
cause is anything associated with the process of the
project’s development and operation.
Therefore, the category of technical risks comprises all
the aspects that may endanger project’s success (e.g.
material and equipment failure, deviations from designs
and schedule, limited expertise of labour and personnel,
etc.)
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
Technical Risks Cont’d
• Incomplete design;
• Inadequate site investigation;
• Uncertainty over the source and availability of materials;
• Appropriateness of specifications.
C. Logistical Risks
• Lack of resources - particularly construction equipment,
spare parts, fuel and labor.
• Insufficient transportation facilities.
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
C. Political Risks
• Constraints on the availability and employment of
expatriate staff;
• Requirement for permits;
• Customs and import restrictions and procedures;
• Insistence on use of local firms and agents;
• Changes in laws and regulations.
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
D. Legal Risks
A legal risk is related to a project’s failure due to
deficiencies in the legal and institutional framework.
Examples:
• Prejudiced and unfairness of awarding contracts;
• Host country’s interference in choosing
subcontractors;
• Disapproval of guarantees by the government;
• Lack of political support by government.
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
Employer’s and Contractor’s Risks
The Employer carries Employer’s risks and the Contractor
carries Contractor’s risks as stated by Contract.
a) Employer’s Risks
PPDA documents define the following as Employer’s Risks
[PPDA, General Conditions of Contract for the
Procurement of Works [June 2003], Clause 11]: From the
Start Date until the Defects Correction Certificate has
been issued, the following are Employer’s risks:
i. The risk of personal injury, death, or loss of or damage
to property [excluding the Works, Plant, Materials, and
Equipment], which are due to:
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
Employer’s Risks Cont’d
Use or occupation of the Site by the Works or for the
purpose of the Works, which is the unavoidable result of
the Works; or
Negligence, breach of statutory duty, or interference with
any legal right by the Employer or by any person employed
by or contracted to him except the Contractor.
ii) The risk of damage to the Works, Plant, Materials, and
Equipment to the extent that it is due to a fault of the
Employer or in the Employer’s design, or due to war or
radioactive contamination directly affecting the country
where the Works are to be executed.
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
b) Contractor’s Risks
PPDA documents define the following as Contractor’s
Risks [PPDA, GCC for the Procurement of Works [June
2003], Clause 12]:
From the Starting Date until the Defects Correction
Certificate has been issued, the risks of personal
injury, death, and loss of or damage to property
[including, without limitation, the Works, Plant,
Materials, and Equipment] which are not the Employer’s
risks are the Contractor’s risks.
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
C. Engineer’s Risks
The Engineer is not normally a party to a construction
contract; the engineer usually has a separate contract
with the owner.
In the construction contract, the employer is
responsible for the actions of the engineer, where the
engineer acts as his agent.
D. Third Party (Local Authority, Public Utilities) Risks
Third party risks are neither contractor nor employer
risks. Most contracts, however, lump these risks to the
employer.
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
RISK MANAGEMENT
Risk Management
“The systematic application of management
policies, procedures and practises to the tasks of
identifying, analysing, evaluating, responding
and monitoring risk to mitigate its effects for
project success”.
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
Risk Management Life Cycle
Five stages involved:
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
Risk Analysis
Purpose: Estimating the potential impacts of risk to
decide what risks to retain and what risks to transfer
to other parties
Risk Analysis
Techniques
Quantitative Qualitative
Probability analysis Ranking options
Sensitivity analysis Comparing options
Simulation techniques Descriptive analysis
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
Risk Response
Risk Response Methods
Elimination Transfer Retention Reduction
Risk Elimination Practices
Tendering a very high bid;
Placing conditions on the bid;
Pre-contract negotiations as to which party takes
certain risks;
Not biding on the high risk portion of the contract.
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
Risk Response
Risk Response Methods
Elimination Transfer Retention Reduction
Risk transfer means the shift of risk responsibility to
another party either by insurance or by contract.
Wang and Chou (2003) reported that contractors usually
use three methods to transfer risk in construction projects:
through insurance to insurance companies;
through subcontracting to subcontractor;
through modifying the contract terms and conditions to
client or other parties.
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
Risk Response
Risk Response Methods
Elimination Transfer Retention Reduction
Risk Retention
Self financing, handling risks by the company which is
undertaking the project.
Two retention methods, active and passive:
Active retention is a deliberate management strategy
after a conscious evaluation of the possible losses and
costs of alternative ways of handling risks.
Passive retention occurs through negligence,
ignorance or absence of decision.
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
Risk Response
Risk Response Methods
Elimination Transfer Retention Reduction
Risk Reduction
Continuous effort;
Related with improvements of a company’s physical, procedural,
educational, and training devices;
Improving housekeeping, maintenance, first aid procedures and
security;
Education and training within every department .
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
Insurance in Construction
Contracts
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
Introduction
The definition of insurance is that one party(the
insurer) undertakes to make payments to or for the
benefit of the other party (the assured) upon the
occurrence of certain specified events-risks.
The majority of risks on construction projects are
usually assumed (and priced) by the contractor during
the construction phase, who typically covers this
exposure by taking out various insurance policies.
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
Introduction Cont’d
The insurance contract between parties is generally
contained in a document called an insurance policy.
The consideration, which is necessary to make such a
contract binding, is provided by the assured in the way
of a premium.
An insurance contract is said to be “uberrimae fideli”-
based upon good faith between parties i.e. the assured
MUST make FULL DISCLOSURE of every material fact
that is known.
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
Types of Insurance
The most common forms of insurance under a
construction contract include:
i)All Risks Insurance – This insures against physical
loss or damage to the works (and usually materials on
site).
oAll risks insurance typically covers the full
reinstatement value of the works plus a mark up for
any ancillary costs (such as consultancy and
professional fees) that are incurred.
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
Types of Insurance Cont’d
Professionals have a duty of care under the contract to
their clients and to others under the tort of negligence
that stipulates that a person is guilty of negligence when
he fails to live up to the standard of care required by
law of him and so injures another.
ii) Professional Indemnity Insurance
oThis insures contractors with design responsibility (i.e.
under design and build contracts) against liability
arising out of professional negligence and will respond
if, for example, designs do not comply with the
requirements of the underlying construction contract;
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
Types of Insurance Cont’d
oMost important insurance policy that design consultants
(such as architects and engineers) are required to have
in place.
oProfessional indemnity insurance is made on “a claims
made basis” (rather than when the breach of
professional duty actually occurs). This means that
professional indemnity insurance is generally required
to remain in place until a specified period ends;
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
Types of Insurance Cont’d
The Premium(Ins. Cover) the contractor is required to have in
place is generally determined on a case by case basis,
depending on:
Extent and the complexity of the design works in question;
Experience of the engineer(s);
Number of staff;
Income.
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
Types of Insurance Cont’d
iii)Public Liability Insurance – This provides cover
for liability arising out of death or personal injury
to third parties or damage to property belonging to
third parties (but not the works, which is covered
by the all risks insurance) prior to the works being
taken over.
iv)Workers’ Compensation Insurance - This insures
the contractor against liability for the death or
personal injury to its employees (usually on site)
when performing the works.
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
Workers Compensation
Workers' Compensation is a form of insurance providing
wage replacement and medical benefits to employees
injured in the course of employment in exchange for
mandatory relinquishment of the employee's right to sue
his or her employer for the tort of negligence.
Workers Compensation Act 2000 - Provides for
compensation to employees for work related injuries and
diseases contracted in the course of employment.
This Act forces the employer on one hand to take all
possible safety measures and on the other hand it forces
the workers to work carefully and with full responsibility.
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
Arrangement of Sections of the 2000 Act
Part I—Preliminary.
1. Interpretation.
2. Application.
Part II—Compensation for injury.
3. Employer’s liability.
4. Fatal injuries.
5. Permanent total incapacity.
6. Permanent partial incapacity.
7. Temporary incapacity.
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
8. Calculation of earnings.
9. Notification of accident.
10. Notification by employer to labour officer.
11. Medical examination and treatment.
12. Agreement as to compensation.
13. Computed assessment of disability.
14. Determination of claims.
15. Power of court to submit question of law.
16. Appeals.
17. Effect of receipt of damages.
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
18. Insurance.
19. Powers of Minister regarding insurance.
20. Bankruptcy of employer.
21. Contracting out.
22. Liability in case of contract of work.
23. Compensation not to be assigned, etc.
24. Medical aid.
25. Decisions of the court concerning treatment and medical
reports.
Part III—Medical aid.
26. Procedures relating to claims.
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
Part IV—Occupational diseases.
27. Compensation payable in respect of diseases.
28. Employer’s duty to report scheduled diseases.
29. Liability to pay compensation.
30. Fixing of dates.
31. Presumption as to cause of disease.
32. Power of Minister to amend the Third Schedule.
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
Part V—General.
33. Regulations.
34. Offence by bodies of persons.
35. Rules of court.
36. Workers and dependents outside Uganda.
37. Power of Minister to amend the First Schedule.
Schedules
• First Schedule Currency point.
• Second Schedule Percentages for permanent incapacities.
• Third Schedule Scheduled diseases.
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
END
2/12/2022 TCBE 4202 Construction Law Sem II 2021/2022
