In South Africa’s high-risk construction industry, suitable covers for main contractors, subcontractors and professionals are crucial for operational and financial continuity. Many stakeholders are pressured to reduce costs to secure a contract and may undercut their competition by removing essential covers or intentionally incorrectly underwriting their insurance policies to reduce their premiums and overhead costs. This leaves their projects, fellow stakeholders and principals exposed to significant legal and financial risks. A well-structured insurance policy and plan protects their assets, manages the risk and ensures long-term stability, profitability and financial continuity for all parties involved.

 

Below are some of the key risks in the construction industry that partners, stakeholders and business owners need to consider when structuring insurance coverage:

 

1. Cash Flow / Liquidity Risks

Subcontractors who are responsible for most construction work may lack the financial stability, resources and experience of larger contractors. Factors such as labour performance, order changes, back charges and complex contracts can lead to financial strain, payment disputes and significant misunderstandings that affect the entire supply chain and project success.

With one of the longest payment cycles of all industries and the nearly ever-present risk of outstanding or pay-when-paid agreements, every facet of the supply chain is subject to financial risk in the event of unforeseen circumstances. Comprehensive insurance and Risk management solutions can account for and provide surety in such circumstances, helping businesses protect against many of the financial uncertainties that would otherwise directly affect their profitability and financial well-being.

 

2. Contractual Obligations

Missed deadlines, errors or misunderstandings in documentation and delivery can result in contractual disputes and payment delays. Contractual liability is one of the most important risk management factors that construction companies must consider. More specifically, what party to a contract agrees to reimburse which damages or losses suffered by another party and under which circumstances. This provides the parties involved with a framework of commitments and responsibilities to one another as main and subcontractor/s as well as to the principal or client. 

 

3. Defects in Design

A defect in design can lead to costly liabilities and significant reputational damage. Examples include structures that fail to meet safety or functionality requirements. Contracts often include liability clauses related to design defects, making Professional Indemnity cover essential for engineers, architects, quantity surveyors and other professionals in the field.

 

4. Specialised Machinery

Many construction projects rely extensively on yellow metal equipment, such as excavators, bulldozers, and cranes amongst others. These items are often extremely costly to purchase, operate and replace. 

Insurance policies should consider the replacement value of such equipment and circumstances where the loss of use as a result of a claimable event could incur other penalties. The use of site machinery often requires the operators to be certified and in compliance with the relevant legislation governing the use of the specific machinery, it’s important to remember that even though someone is capable of using it, it doesn’t mean that they’re certified to do so – this onus usually lies on the employee using the machinery and the employer to ensure that they meet the expected legal requirements.

 

5. Crime and Theft

Construction sites are frequently targeted for theft and looting, especially for materials like copper wire and easily uplifted, scrapped, or sold assets. Insurance policies will clearly state how materials need to be stored and protected. Ensuring that construction sites have adequate security and that insurance policies make provision for the theft or damage of stock on site is key to minimising financial losses and significant losses of productivity as a result of on-site stock shortages.

 

6. Construction Mafia and Extortion

A growing challenge in South Africa’s construction sector is the presence of the “construction mafia,” which extorts contractors or demands a percentage of project costs. These groups often delay or halt projects, creating safety and security risks for staff and increasing variable project costs that cannot be budgeted for.

Including clauses in contracts to address these threats and having a Business Continuity Management (BCM) plan with the relevant authorities and stakeholders involved can help mitigate the impact of such criminal activities.

 

7. Adverse Weather and Natural Disasters

Extreme weather events, such as heavy rains and flooding, can cause significant delays and critical damage to construction projects. Advanced natural catastrophe models and weather-related risk assessments are becoming increasingly necessary for businesses in the industry, particularly on the East Coast of South Africa in recent times. An insurance policy that incorporates weather-related risks can protect your company from unexpected financial disruption despite asset damage or loss.

 

In conclusion, in a critical industry marked by complex risks and challenges, the consideration of construction and associated insurance needs to be more than just a formality, it must be interwoven in the planning, decision-making, and the implementation stages of the project.

Now more than ever, a comprehensive insurance and risk management programme with a skilled partner is essential to the success of any large-scale construction project.

By partnering with Wyngaardt brokers, businesses can ensure they are suitably advised, structured and covered for the unique risks they face.

From cover for contractual obligations to the latest trends in strategic risk management solutions, visit www.wyngaardtbrokers.com to book a consultation and improve your commercial insurance and risk management strategy. 

 

Wyngaardt Brokers (Pty) Ltd is an Authorised Financial Services Provider (FSP 53138)

 

Disclaimer: The information provided is not intended to be a substitute for legal, medical, or financial advice, but is only provided for informational purposes. Ts and Cs, limits, and standard rates apply.