Wednesday, September 20, 2017

Monitoring construction delay

Humans are by nature optimistic. How else to explain the settlement of remote islands, the popularity of marriage or the cost of active fund management? Our bias towards the upside is an evolved trait.

And while this optimism bias is a boon for con artists, it can be a real problem for risk managers, especially when it comes to forecasting the progress of major projects. As construction becomes more complex, with new architectural, design and construction methods, the risks of delay can be significantly increased thanks to multiple optimistic assessments of critical steps in an interconnected sequence of tasks.

“In the context of construction projects, optimism bias can lead to the over-estimation of the benefits and an under-estimation of their duration, which invariably leads to delays,” says Jacob Hewitt, head of construction and engineering for North Asia at Allied World.

“Risk managers identify this as a significant risk, with a successful risk management strategy being to take a proactive approach by owners creating their own independent project programme. This allows for comparison against the contractors’ proposed works programme so as to impose a ‘reality check’ on reasonable timeframes for task completion.”

Project monitoring is also critical for weather-related delays. On the face of it, a delay-in-startup (DSU) policy would appear to cover project owners against the risk of a delay to a project, but, as ever, the devil is in the wording. Yes, delays caused by a physical damage event can be insured against, but only those that are applicable under the material damage section of the policy. More important, policyholders need to be able to provide support for their claims.

“A common theme echoed from risk managers familiar with DSU is the difficulty in assessing whether an event during a project has actually adversely affected the critical path of the project programme and to what extent,” says Hewitt.

It can take many months in some cases to provide the information needed to trigger an insurance payment, which is an obvious source of frustration.

DSU monitoring has been growing in popularity in Europe and the US, but has only recently started to gain traction in Asia, with few major companies offering in-house capability in the region.

Working in conjunction with owners, risk managers, project managers and contractors, DSU monitoring takes advantage of analytics and project intelligence to increase transparency around a project’s critical path status, programme logic and information flow.

“This enables a more efficient analysis of the programme and critical path in the event of a loss, which leads to faster decision making and claims assessment,” says Hewitt.

This type of monitoring also allows risk managers to make management aware of their options throughout the rest of the project to further reduce the project delay risk.

Another benefit: lawyers don’t have to get involved in claims when a project is well monitored. Or perhaps that’s being too optimistic.

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