THINGS are changing fast, warns Stuart Macfarlane
The Scottish construction industry welcomed the good news at the end of March that the sector’s performance in recent months has continued to improve, which bodes well for the future and spreads an air of confidence amongst developers, contractors and investors.
The Scottish Construction Monitor, which gathers data from members of the Scottish Building Federation (SBF), recently awarded the industry a confidence rating of +29 for the first three months of 2015, three points up since the end of last year. All good news, particularly in a sector that suffered so badly in the wake of the recession.
For the 31,000 construction businesses in Scotland at present, the new normal can’t just mean going straight back to the heady days of pre-2006. The reset button has been pressed, and things are a bit different. The 2015 Construction (Design and Management) Regulations (CDM) will have a big impact on the industry’s approach to health and safety, while skills shortages caused by recessionary cutbacks are also causing some concern.
All of that, however, is fixable in a pragmatic industry that knows how to pick itself up and carry on in the wake of change. The best news is the imminence of long-awaited projects, such as Henderson Real Estate’s £850m, 750,000 sq ft development at St James in Edinburgh, and Land Securities’ £300m, 600,000 sq ft extension to Buchanan Galleries in Glasgow. Where big projects lead, the smaller will follow.
However, while the industry is keen to make up for lost time as the economic recovery picks up, a desire to secure projects is having an impact on both risk and insurance cover for construction firms.
Weightmans recently surveyed more than 200 construction professionals to find out their attitudes towards risk and insurance cover and the results were surprising. As building projects start to pick up and construction firms get busier, their attitude towards risk and insurance cover is interesting – although 80 per cent review the scope of their insurance cover as their business evolves, 65 per cent indicated they did not have confidence in insurance cover as a reliable safety net when things go wrong. This comes against a backdrop of increasing risk – 82 per cent thought risk in the construction sector was increasing. The stakes are high – in this environment of risk and high levels of competition, construction professionals are asked to accept contractual terms which could compromise or exceed their insurance cover.
Fitness-for-purpose guarantees and performance warranties are becoming more common, as are clauses requiring work to be done to the “satisfaction” of the client. Such clauses are likely to breach the provisions of a standard professional indemnity policy.
The findings suggest when considering insurance for the risks they face, construction professionals either operate on an “it will be all right on the night” basis or else have experienced things going wrong on a construction project previously and have the feeling insurers have in some way not done their bit to help them.
To remedy this, it is clear a closer understanding between insurers and construction professionals is needed to ensure both parties can reduce areas of risk proactively, rather than cover being perceived as a necessary evil.
The key to addressing risk and liability issues is for appropriate time to be spent identifying risk on a project and carrying out a few “what if “ scenarios with the cover to test its adequacy, identify whether additional cover is required – or to conclude the risks that predominate are uninsurable in any event.
We operate in a climate where the drive for efficiency is now standard practice – whether that is in regard to new materials, construction methods or management practices. As technology and innovation are being used to come up with new ways of better tackling old problems, risk and liability inevitably increases.
As risk increases, innovation finds new ways to address it, in a constant cycle.
Part of that cycle is the need to continually, and properly, assesses exposure – as risk isn’t going to go away any time soon, and taking on projects on a wing and a prayer isn’t by any measure a sustainable solution.
• Stuart Macfarlane is a partner and construction specialist at Weightmans LLP (Glasgow), www.weightmans.com