Jonathan Kaiser | Claims Manager | SHA Risk Specialists | mail me |
In George, thirty-four people died when a partially completed five storey residential building collapsed. This event is tragic, and albeit the worst building disaster in South Africa, is by no means an isolated incident of professional incompetence.
Whenever disasters of this magnitude unfold, questions are rightly asked around why disasters of this magnitude persist in today’s age of technological advancement and education. Are we doomed to repeat history or are we able to distil lessons and learn from them?
The building industry faces a myriad of challenges with well-known companies going into business rescue and some liquidation. It is no secret that developers push for the cheapest designs and engineers are left holding the bag when this gamble falls through. An already distressed built environment is further aggravated by adverse insurance claims, which threatens the sustainability of professional indemnity insurance within the built environment.
We have investigated, by analysing claims data over the last few decades, the proximate cause for prolific and severity claims against professionals in the built industry. In this article, we explore what lessons should have been learnt and ought to be re-emphasised.
Insurers are in a unique position where we have a bird’s eye view of most claims and therefore can advise on trends and risks within this space.
Build cheap, build twice – design cheap, design again
This expression (borrowed from buy cheap, buy twice) unfortunately finds application in a distressed economic environment.
The tender process is already fiercely competitive, leaving professionals provisioning ‘bare bones’ designs to win contracts and thereafter assigning inexperienced staff to projects with an absolute minimum number of professionals to maintain oversight and review designs. This is a recipe for disaster.
Inexperienced professionals being assigned to supervise high-risk, complex construction projects due to insufficient deployment of resources is a worrying trend that has already given rise to high severity losses.
An apathetic attitude around supervision often emerges as the root cause for many avoidable errors. Supervision undertaken contractually requires professionals to inspect and ensure that buildings are constructed in accordance with the designs. Supervision does not guarantee that construction errors will be discovered, but arguably if carried out with due care, should mitigate most.
Regrettably, we are seeing far too many claims where professionals appear to have, all but abandoned their oversight responsibilities. Insurance covers fortuitous loss, and if risk is courted through professionals deserting their duties, Insurers will be entitled to reject such claims. Egregious conduct of this nature, harms not only the public confidence in the built industry but it also undermines the sustainability of the insurance market to provide affordable insurance cover to professionals.
It remains inexplicable to us why professionals are reluctant to undertake geotechnical investigations. Establishing the true soil conditions is paramount to ensuring that the correct foundation is designed.
Often properties move, owing to expanding or contracting soil conditions and where the foundation did not appropriately anticipate this in the design. This leads to cracks forming and structural damage. Countless engineers and building developers appear unwilling to incur the cost (miniscule by comparison to the cost of structural collapse) of a geotechnical report to ensure structural efficacy. This problem is especially rife within the residential housing developments.
Costs exceed the tendered amount
There is an alarming trend gaining traction in South Africa, more especially amongst governmental departments and those special ‘recovery’ institutions, to sue professionals on the basis that the project cost more than what had been budgeted for.
The basis of the claim being, since the professional undertook to bring home the project at a certain cost (irrespective of external factors), any additional or unforeseen costs to bring the project up must be carried by the professional team. This problem is amplified where the professional team conducted only cursory feasibility studies. Fixed price contracts pose the same risk.
Why is it raining indoors?
Time after time, claims are notified owing to water ingress into buildings. The apparent lack of proper consideration and application of waterproofing is extremely concerning. Aesthetic designs should never trump functionality. Tried and tested methods should be preferred over experimental solutions.
The climate change effect
Recent studies have shown that human-induced global warming has contributed to increased flooding. Over the last century, and with a specific focus on KZN, catastrophic flood events have risen from an average of 1.1 occurrences per year to an average of 1.7 per year.
The April 2022 KZN flood, where over 300mm of rain fell in one day, was the most catastrophic flood event in South Africa in recent years resulting in estimated ZAR35 billion worth of damages.
Historic data though points to the fact that KZN has habitually been at the receiving end of catastrophic flooding. More than a hundred years ago a similar event occurred which resulted in rainfall of over 1,000mm over the span of a few days. So called ‘one in a thousand’ year events are becoming all too frequent for that classification to remain relevant. Engineers are often not called upon to design for 1:1000 events. Are modern designs accommodating this risk? To us, it appears not.
One of the biggest problems we see in the built industry relates to construction designs not factoring in the increased levels of water/rainfall and with inadequate drainage systems. We must improve city infrastructure, particularly drainage systems, to better prepare for heavy rainfall and flooding that we now know, not just as a matter of historical perspective but future climate analysis, will happen.
Underwriting to build a sustainable line of insurance
The sustainability of liability cover in the built environment is at risk as insurers can no longer shoulder the exponential cost of claims.
Reinsurers have increased rates and applied more cover restrictions and exclusions, making professional indemnity insurance rates for the built environment more and more unaffordable, potentially leaving more professionals exposed. Casualty insurers and brokers need to collaborate and share learnings with our professional insured clients to mitigate against this high-risk landscape. Applying better risk management measures will result in fewer claims and therefore lower premiums.
Underwriting criteria must enforce better risk management to ensure not only the future sustainability of the industry, but safe, quality developments and increased economic activity.
Related FAQs: Built environment risk management
Q: What is risk management in construction projects?
A: Risk management in construction projects involves identifying, assessing and mitigating risks that could impact the project’s success. This includes understanding different risk factors and implementing strategies to manage them effectively throughout the project lifecycle.
Q: How can effective risk management improve the construction industry?
A: Effective risk management can enhance project outcomes by reducing delays, minimising costs and ensuring safety. By systematically assessing risks and implementing mitigation strategies, stakeholders can improve overall project performance and stakeholder satisfaction.
Q: What are some common risk factors in the built environment?
A: Common risk factors in the built environment include financial uncertainties, regulatory changes, environmental hazards and project-specific challenges such as resource availability and stakeholder engagement.
Q: How does the PMI contribute to risk management in construction projects?
A: The Project Management Institute (PMI) provides guidelines and standards for risk management through its resources and PMI courses. These courses offer training on risk assessment and management processes tailored for construction projects.
Q: What is the role of stakeholders in the risk management process?
A: Stakeholders play a crucial role in the risk management process by providing insights into potential risks and contributing to risk assessments. Their involvement ensures that all perspectives are considered, leading to more comprehensive risk management strategies.
Q: Can you outline the steps involved in the risk management process for construction projects?
A: The risk management process typically involves the following steps:
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- Risk identification
- Risk assessment
- Risk response planning
- Risk monitoring and control
- Risk communication with stakeholders
Q: What are PDUs, and how do they relate to risk management in construction?
A: Professional Development Units (PDUs) are credits required for maintaining project management certifications. Engaging in PMI courses related to risk management can provide PDUs, helping professionals stay updated on best practices in managing risk in construction projects.
Q: What are the key considerations when implementing risk management strategies in South Africa’s construction industry?
A: Key considerations include understanding local regulations, integrating risk management into the project planning phase, assessing cultural factors and ensuring that the project team has the necessary contract and risk management skills to address specific risks in the South African context.
Q: How does risk assessment integrate into the overall project management process?
A: Risk assessment is an integral part of the overall project management process as it informs decision-making and helps prioritise actions. By continuously assessing risks, project managers can adapt their strategies to manage project risk more effectively and ensure successful project delivery.
Q: What is the importance of having a risk management outline for construction projects?
A: A risk management outline serves as a roadmap for identifying and addressing potential risks throughout the project. It helps ensure that all team members understand their roles in the risk management process and promotes a proactive approach to managing risks in the built environment.