Andy Desmond is UK construction industry leader at insurance broker and risk adviser Marsh
A new wave of advanced insurance-backed alliancing (IBA) contracts are challenging the supremacy of traditional design and build procurement contracts.
The main advantage offered by these new advanced IBA contracts is that they are structured to eliminate many of the negative outcomes typically seen in the design and build procurement process. Behaviours such as lowest-cost tendering, maximising profit by cutting costs at the expense of quality, and the shirking of risk along the supply chain until it settles on those least able to handle it, have long hampered the intended operation of design and build contracts. All of these negative behaviours tend to result in costly and time-consuming disputes.
Conversely, an advanced IBA can help stakeholders pool their expertise, manage their costs and develop greater resilience to harsher insurance market conditions. These benefits are more relevant than ever in the current environment, following a spate of major claims in 2017-18 that triggered an insurance market hardening, since worsened by the COVID-19 pandemic. We now see the cumulative outcome in an insurance market with reduced capacity, increased rates, and more stringent terms and conditions.
More tantalisingly, IBA contracts can even incorporate cost-overrun cover, a type of insurance that has been virtually extinct in the UK for more than 15 years. Policies of this sort could be a game-changer for UK project procurement and delivery.
Benefits of an advanced IBA
The basic notion behind an advanced IBA contract is an incentive-based agreement that binds the project owner and all other stakeholders contracted to deliver it (including main contractor, subcontractors, architect and engineer). It aims to optimise the capabilities of all of the stakeholders involved in the project, remove conflicts, and encourage efficiencies through transparency and collaborative working.
“The IBA approach requires changes in culture, attitude and ways of working throughout the supply chain”
The alliance members – as they are collectively known – all sign a single contract with conditions that stipulate and incentivise shared responsibility. The ‘pain’ of any unforeseen problems is shared and linked with overall performance, with risk apportioned across the alliance members in an appropriate fashion. Similarly, ‘gain’ is shared, meaning all parties will benefit from any improvements achieved through project efficiencies.
How does it provide cost-overrun cover?
Construction insurance is a key element in the success of advanced IBA contracts. Generally, no claims are allowed between alliance members unless there is wilful misconduct or statutory breach. This minimises each party’s potential legal exposure, and hence their professional indemnity insurance costs.
The optimum insurance procurement approach for advanced IBA projects is for a single integrated project insurance (IPI) policy, to cover both the client’s investment and the team’s potential liabilities. Providing reassurance to the insurers, the team is supported by an alliance manager, a technical independent risk assurer, and a financial independent risk assurer.
Construction cost-overrun insurance has not been available since the early to mid-2000s, following a clutch of high-profile, multimillion-pound claims in the UK and abroad. In its new iteration, as part of IPI, the team is given a target price for the project. Participants are incentivised to work together to come in below the target price and share the savings. However, they must also share in the cost of going over the target up to a capped sum, beyond which the IPI cost-overrun insurance comes into play.
As a point of reference of how far such arrangements can benefit the construction community, Dudley College’s first alliancing project, the Advance II construction training centre, came in within 1 per cent of budget as a result of the collaboration enabled by advanced IBA. This is in stark comparison to most projects contracted out on a design and build basis, which are reported to run 30 to 40 per cent over budget, with the extra costs distributed between claims to clients for changes and main contractors passing the pain down the supply chain.
So why aren’t IBA contracts more widely used?
Currently, alliancing is used in only an estimated 1 per cent of projects in the UK. The reasons for this, when the benefits appear so striking, have much to do with entrenched attitudes within the construction industry.
There is no doubt that the construction industry’s traditional wariness of new processes and procedures has hindered take-up in the UK. Stakeholders involved in this type of contract need to work openly and closely with each other, and depend on each other for success. The IBA approach, therefore, requires changes in culture, attitude and ways of working throughout the supply chain.
However, the fact that advanced IBA is government-backed, together with the introduction of appropriate insurance (with that elusive prospect of cost-overrun cover), could finally make it a more attractive proposition for project owners and developers.
Credit: Source link
