Construction Risk Insights: Managing Project Delays and Stoppages
Construction projects may be delayed or temporarily halted for a range of reasons, including adverse weather conditions, permit problems, labor shortages, supply chain disruptions and financing challenges. These issues can pose numerous risks for construction companies. In particular, delays and stoppages can significantly extend the period during which the project site, equipment, materials and structure being worked on remain exposed to loss.
As a result, these issues often change the overall risk profile of a project and create exposures that existing insurance policies, mitigation strategies and contracts may not properly address. If construction companies fail to respond to these exposures, they could be increasingly susceptible to large-scale losses and out-of-pocket costs. This article outlines key exposures stemming from project delays and stoppages and offers tips to help construction companies manage related risks.
Builders Risk Considerations
Builders risk insurance is a specialized type of property coverage that is intended to provide protection for structures that are under construction and related materials and supplies. These policies can help safeguard project owners and contractors against financial losses caused by physical damage (e.g., fire, wind, hail, theft and vandalism) to covered property.
However, builders risk insurance is a temporary form of coverage. These policies are generally written for a defined construction period, meaning coverage will likely lapse if a project extends past its original completion date. In these instances, coverage extensions are not guaranteed, leaving policyholders at risk of denied claims if they experience property-related losses following lengthy project delays or stoppages. While some builders risk policies offer delay in completion coverage, this typically applies only to time-element losses (i.e., lost revenue and rental income) due to physical property damage, not due to schedule slippage from permit delays, labor disputes, supply chain breakdowns or financing struggles (unless explicitly endorsed).
Coverage capabilities will also vary based on policy conditions. For example, many builders risk policies restrict coverage for various soft costs resulting from project delays or stoppages, such as loan interest, taxes, lease renegotiations, and additional permit fees and insurance premiums. In these cases, a separate endorsement is generally required for such coverage. The named insured and additional named insured designations on these policies can also affect which parties qualify for delay in completion coverage, making it vital to review coverage terms rather than assume equal treatment.
When extensive project delays or stoppages occur, local building codes or ordinances may change before construction resumes. This may increase rebuilding costs due to compliance concerns, generating additional project losses. Although standard builders risk policies don’t apply to such incidents, a separate endorsement is available for this exposure, as long as the project delays or stoppages are caused by covered losses.
Considering these factors, it’s crucial for builders risk policyholders to notify their insurers as soon as a project delay or stoppage appears likely, as putting off this communication could limit policy extension options and lead to more restrictive coverage terms or denied claims. Even when a project is temporarily halted due to a covered loss, insurers generally expect policyholders to take reasonable steps to protect their property from further damage, such as implementing enhanced security solutions and leveraging weather safeguards. Failure to take these steps amid a delay or stoppage could diminish coverage options. Finally, it’s worth noting that considerable project delays or stoppages may prompt additional underwriting reviews and worksite inspections before insurers agree to extend coverage.
Idle Worksite Considerations
When a worksite is left idle due to project delays or stoppages, it may be more vulnerable to the following losses:
Fires—Any combustible debris, temporary utilities and unattended electrical systems have the potential to ignite fires at an idle worksite. Combined with a lack of site supervision and ample detection tools, these fires could spread rapidly and cause substantial damage before suppression efforts begin.
Property deterioration—If partially completed structures at an idle worksite are exposed to outdoor elements and adverse weather for prolonged periods, they could be damaged by water infiltration, frost and mold, ultimately resulting in larger structural degradation.
Theft and vandalism—Reduced visibility and poor security at an idle worksite can increase the likelihood of theft and vandalism, especially when criminals are able to access valuable project equipment and materials.
Third-party injuries—Because an idle worksite is often an attractive target to thieves and trespassers, this can pose ongoing premises liability exposures, even when no work is underway. If these parties are injured on-site, the project owner and contractors could be held responsible.
In light of these heightened exposures, construction companies will likely need to review and adjust their existing mitigation strategies amid project delays or stoppages to prevent related losses. This may entail maintaining worksite fencing, lighting, alarm systems, security cameras and fire suppression tools; removing or securely storing all high-value equipment and combustible and flammable materials; carefully documenting project inventory with photos and serial numbers; weatherproofing partially completed structures; and conducting routine safety inspections throughout the stoppage.
Contractual and Liability Considerations
A construction project contract typically includes an agreed-upon completion date set by the project owner and contractors. When a project goes beyond its original timeline, the contract’s liquidated damages clause will likely be triggered. This clause establishes a daily rate that contractors must pay for missing project deadlines. As such, lengthy project delays and stoppages can prompt serious financial penalties. Since liquidated damages arise from contract terms rather than physical loss to covered property, delay in completion coverage usually won’t apply to these penalties.
Complicating matters, completed operations coverage generally doesn’t begin until a construction project is finished. If builders risk insurance isn’t properly managed during delays or stoppages, it could create gaps in coverage and increase liability risks during the project wrap-up. Since contracts often require construction companies to maintain proper insurance throughout a project, coverage gaps could lead to additional penalties and related losses.
With this in mind, it’s imperative for construction companies to review project contracts for force majeure provisions, extension-of-time clauses, notice requirements and any indemnification obligations that outline which parties are responsible for handling delays and stoppages and associated financial penalties. Construction companies should also assess their wrap-up insurance programs, whether owner- or contractor-controlled, to determine how project extensions may affect their policy periods and completed operations tail.
Conclusion
Construction project delays and stoppages can create risks that standard policies and protections aren’t equipped to handle. By promptly notifying insurers, securing idle worksites and reviewing contractual obligations, construction companies can safeguard their projects, limit financial losses and maintain resilience throughout the entire building process. Contact us today for more industry-specific risk management guidance.