How evolving construction delivery models are impacting your clients’ risks

How evolving construction delivery models are impacting your clients’ risks | Insurance Business Canada

Construction & Engineering

How evolving construction delivery models are impacting your clients’ risks

This trend is part of a swath of challenges in the sector

Construction & Engineering

By
Gia Snape

Construction is among Canada’s most dynamic and high-revenue industries today, but it also carries a high level of operational risk.

One of the key factors that directly influence the risk is the choice of project delivery model, an area that continues to evolve as projects grow more complex and insurers grapple with rising claims.

David Bowcott (pictured), executive vice president for PLATFORM Insurance Management’s construction industry group and a board member of the Canadian Construction Association, spoke with Insurance Business about how different delivery models affect risk exposure, insurance, and the overall success of a project.

He said there are two main types of construction project delivery models: design-bid-build (DBB) and design-build (DB). However, other models, such as integrated project delivery, are quickly gaining traction as construction projects increase in complexity and with labour shortages further straining delivery timelines.

Design-bid-build versus design-build – what are the risks?

Whether it’s a residential building or a massive infrastructure development, the choice of delivery model in a construction project can be make-or-break, according to Bowcott.

Delivery models dictate how the design, financing, and construction responsibilities are divided. The selection of the wrong model can lead to significant issues down the road, from incomplete designs to high insurance claims.

The traditional design-bid-build model, once the dominant method of construction, is a prime example of a delivery model where risks can escalate quickly. Under this model, the design and construction phases are separate, with contractors typically bidding on completed designs.

On the surface, it might seem straightforward, but Bowcott emphasized that splitting these phases creates fragmentation. When the design and construction teams are siloed, communication can break down, and the opportunity for early collaboration is lost. The division between designer and contractor often means that issues aren’t identified until it’s too late, leading to higher costs and delays.

“When you’re not involved early enough in the process, you’re not able to mitigate risks before they become big problems,” Bowcott said.

The design-build model has emerged as a popular alternative to this fragmented approach, offering a streamlined process where a single contractor is responsible for both the design and construction of a project. Bowcott noted that this has been the predominant model over the last two decades.

“The problem with design-build,” he cautioned, “is you’re getting three or four people competing on a job and they have to do a design, but they don’t want to spend too much money doing the design.”

This leads to incomplete designs, where often only 15-30% of the project is fully designed by the time a contractor is selected. What happens next is that construction begins with incomplete information, which sets the stage for costly mistakes and disputes.

“If I give you a box of Lego saying, ‘build something,’ and you’ve only got some of the instructions, how do you think that’s going to go?” Bowcott asked.

The gaps in design can lead to higher error rates, cost overruns, and even legal disputes, with insurers often left holding the bag. According to Bowcott, the lack of upfront planning in design-build projects has been a key driver of insurance losses, particularly in professional liability. 

“Back when I started (in the construction sector), a big job was $100 million, and that seemed huge. Now, $100 million is nothing—you’re seeing hospitals go for $7 billion. That’s far beyond the rate of inflation,” he said.

“The problem is, when you don’t plan well, the losses on these massive projects are much bigger. While builders’ risk policies typically cover the value of the project, general liability and professional liability limits have stayed relatively the same. So, we’re seeing full-limit losses in some cases, with contractors bearing a lot of the risk.”

As a result, insurers are growing more cautious about what risks they are willing to underwrite. For many contractors, navigating this hard market has become a significant challenge that brokers need to help them overcome.

Alternative construction delivery models are on the rise

In response to the challenges presented by both dominant project design models, a newer model known as progressive design-build has started to gain traction.

Unlike traditional design-build, progressive design-build introduces an interim phase where the design is developed more fully before a final price is locked in. This extra step allows for greater collaboration and planning before shovels hit the ground, reducing the likelihood of costly surprises during construction.

Bowcott said this is a step in the right direction, as the model creates a framework for better communication between the owner, contractor, and designer, resulting in more accurate pricing and fewer surprises down the road.

The move toward more collaborative models like progressive design-build has largely been driven by necessity. As projects become more complex, and with immense labour shortages impacting projects, contractors and owners are seeking ways to reduce risks from the outset, and the need for more sophisticated planning is unavoidable.

How are data and technology improving risk exposure for the construction industry?

One area where Bowcott sees significant potential for improvement is in the industry’s use of data. Despite the vast amounts of project-specific data generated by construction firms, much remains untapped. “Both the construction and the insurance industries have not done enough to harness the power of data,” Bowcott said.

By gathering and analyzing project-specific loss data, both sectors could better understand where the biggest risks lie, allowing for more informed decision-making regarding project management and insurance coverage.

Effective risk management in construction is also crucial. There are three main types of controls, according to Bowcott: contractual, operational, and technological. Contractual controls involve ensuring that risk is allocated to the party best able to manage it. Operational controls, meanwhile, focus on practices like prequalifying subcontractors to ensure they have the financial stability and safety capabilities to complete a project.

But perhaps the most exciting area of innovation is in technological controls. From IoT devices that monitor project sites to reality capture technology that overlays designs on to the physical environment, technology is increasingly being used to identify risks in construction workplaces in real-time.

“This tech can identify risks as they happen, making it a key tool for risk control,” said Bowcott. “It all starts with data. First, you identify the top risks. Then, you implement controls – contractual, operational, and technological. Once you’ve done that, you’re in a perfect position to decide how much risk you want to retain and how much to transfer to the insurance market.”

What are your thoughts on different construction project delivery models and their impact on insurance? Please share your comments below.

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