Project Management Competency Assessment and Development of a Bridge and Road Contractor

The application of insurances and bonds to manage the risks is not new. However, not all the contractors and clients fully understand or appreciate their benefits, even if they obtain insurance coverage for their project. The reason that they purchase is mostly to comply with standard contracts or construction laws instead of their own interests of mitigating the construction risks.

The real trouble is the difficulty in making claims which they believe that the claim service is not standard. The fear and distrust of claims discourage the contractors to buy insurance.

Bonds/Guarantees are interesting but it is necessary to note the legal aspect of them. The owner may be refused in some cases because of illegal bond. It is the reason that the State Bank of Vietnam issued on October 3, 2012 Circular No. 28/2012/TT-NHNN on bank guarantees issued by credit institutions and branches of foreign banks.

Indentifying risks and transferring by insurances and bonds are the good ways for risk management, therefore the project performance will be better.  Mr. Ly Minh Van made a case study aimed to :

(i) study the risks of owners in high rise building project development

(ii) study the application of insurances and bonds to manage the owners’ risks

(iii) study the administration of insurances and bonds

a)   Conditions and negotiation process

b)   Claim procedure

(iv) develop a risk, insurance and bonds management framework

  

1 

Conclusion

Objective 1: To study the risks of owners in high rise building project development

The findings for this objective have indicated various kinds of risks in construction projects. The external risks are weather, political, economic, legal, and public and third party. The internal risks are contractor, consultant, designer, lender related, personal related, bidders related, contractual, technical, design and specification.

The owners’ risks may come any time from the planning stage of the project to the operation and maintenance stage. Risks affect the project through three primary constraints which are time, cost and quality.

The positive aspect of risks is that if any contractor has a good management of risk, they have ability to compete with others. This aspect is illustrated in figure below:

The application of insurances and bonds to manage the risks is not new. However, not all the contractors and clients fully understand or appreciate their benefits, even if they obtain insurance coverage for their project. The reason that they purchase is mostly to comply with standard contracts or construction laws instead of their own interests of mitigating the construction risks.

The real trouble is the difficulty in making claims which they believe that the claim service is not standard. The fear and distrust of claims discourage the contractors to buy insurance.

Bonds/Guarantees are interesting but it is necessary to note the legal aspect of them. The owner may be refused in some cases because of illegal bond. It is the reason that the State Bank of Vietnam issued on October 3, 2012 Circular No. 28/2012/TT-NHNN on bank guarantees issued by credit institutions and branches of foreign banks.

Indentifying risks and transferring by insurances and bonds are the good ways for risk management, therefore the project performance will be better.  Mr. Ly Minh Van made a case study aimed to :

(i) study the risks of owners in high rise building project development

(ii) study the application of insurances and bonds to manage the owners’ risks

(iii) study the administration of insurances and bonds

a)   Conditions and negotiation process

b)   Claim procedure

(iv) develop a risk, insurance and bonds management framework

1 

Conclusion

Objective 1: To study the risks of owners in high rise building project development

The findings for this objective have indicated various kinds of risks in construction projects. The external risks are weather, political, economic, legal, and public and third party. The internal risks are contractor, consultant, designer, lender related, personal related, bidders related, contractual, technical, design and specification.

The owners’ risks may come any time from the planning stage of the project to the operation and maintenance stage. Risks affect the project through three primary constraints which are time, cost and quality.

The positive aspect of risks is that if any contractor has a good management of risk, they have ability to compete with others. This aspect is illustrated in figure below:

Objective 2: To study the application of insurances and bonds to manage the owners’ risks”

One of the risk management methods is that the owner transfer risks to the other parties by applying the insurances and bonds. Based on the case study data analysis, each type of insurances and bonds can provide different categories of risk coverage for the project as follows:

      (i) Professional Liability Insurance covers breach of professional duty arising from any act    of      error or omission.

       (ii) Worker’s Compensation Insurance covers personnel injury and death of employees in the project.

    (iii) Construction Plant and Equipment Insurance covers for unforeseeable, accidental losses, physical damages to plant and equipment because of external causes, working or at rest, being dismantled specifically excluded in the policy.

    (iv) Erection All Risks Insurance covers for unforeseen and sudden physical damage during erection, including but not limited to the following risks: fire, lightning, chemical explosion, physical explosion, theft, burglary, earthquake, flood, inundation, windstorm, malicious acts, human errors, lack of skills... and for the insured’s legal liability for accidental bodily injury to or illness and/or loss of or damage to property damage belong to third parties arisen in connection with the insured erection works. 

    (v) Product Liability Insurance cover legal liability for personal injury or damage occurring anywhere in the world caused by goods or products which the Insured has supplied, sold, erected, repaired, altered, treated or installed in connection with and in the course of Business.

     (vi) Construction All Risks Insurance covers physical loss of or damage to the contract works necessary for repair or reinstatement costs caused by all risks not otherwise excluded by the policy wordings and endorsement.

     (vii) Third Party Liability Insurance covers legally to pay for accident bodily injury to any third party, damage to third party property occurring in direct connection with the construction or erection of the items insured.

     (viii) Bid Bond means a commitment of the guarantee party with respect to the party receiving the guarantee (bid solicitor) for assurance of obligation participating in bidding of the guaranteed party. If the guaranteed party violates the regulation of biding without performance or with insufficient performance of finance obligation for participation in bidding, the guarantee party shall perform for replacement.

     (ix) Performance Bond implies that the tenderer provides security by paying a deposit, providing collateral or providing a letter of guarantee for a definite term as stipulated in the tender invitation documents, in order to secure the liability of the winning tenderer to perform the contract.

     (x) Advance Payment Bond means a commitment of the guarantee party with respect to the party receiving the guarantee in order to ensure for obligation of repaying the advance of the guaranteed party under contract signed with the party receiving the guarantee. If the guaranteed party must repay advance but not repay or repay insufficiently, the guarantee party shall perform for replacement.

     (xi) Warranty Bond is similar to Performance Bonds but usually covers a warranty period after the contract completion.

Although the application of the insurances and bonds listed above brings the project owner a lot of benefits, these insurances and bonds still have some limitations that deserve the owner’s consideration.    

Objective 3: To study the administration of insurances and bonds

The main points of the insurance policy that must be taken into account include: 

(i) Preparing the survey report on the condition of any endangered surrounding property or land or building

(ii) Period of insurance;

(iii) Exclusion conditions;

(iv) Deductible;

(v) Some conditions are adverse or difficult to meet;

(vi) Some conditions need to be noticed;

(vii) Some conditions are useful for the insured.

The owners also need to pay attention to the following features of the bond:

(i) Its legality

(ii) Period of bond validity

(iii) Term of payment

Due to the perennial problem of failure to make full disclosure of all material facts and failure to promptly notify possible claims when making a claim, the claim management plays an important role in risk management. Any party taking out insurance should always carefully consider the policy wording to check that it is adequate for their purpose.

Recommendation for the owners

1. Using the insurance brokers

Policies are all too often unclearly or inconsistently worded and may contain exclusions which limit their usefulness. It is a reason that the owner should buy insurance through insurance brokers.

Technically, brokers work for the insurance buyer and are able to arrange insurance with any insurance company (Palmer et al., 1996). Under most insurance laws of the State, the broker has a legal obligation to be diligent in the placement of coverage. Their role is to represent and protect the exclusive rights and interests of their clients. Additionally, insurance brokers offer a wide variety of risk management support services such as:

(i) Issuance of certificates of insurance, endorsements, and other evidences of coverage

(ii) Premium cost estimation and billing

(iii) Advising the clients on insurance and risk management based on careful analysis and understanding of clients' requirements

(iv) Negotiation with the insurers to find the best terms, conditions and premiums based on  experience acquired in the world and in Vietnam

The owners can therefore be reasonably comfortable with the idea that their broker will make an effort to assure that there are no errors in the placement of insurance coverage.

2. Using one person specialized in insurances and bonds.

It is a good idea to assign one person full responsibility for all insurance matters. This person should maintain a checklist of a complete coverage, the due dates of reports and returns, and similar matters. It is this person’s responsibility to follow up on all reports, claims, cancellations and renewals (Palmer et al., 1996).

3. It is better if the contractor buy all insurances.

If the project scale is small or the owner chooses only one contractor for all of works, the contractor should purchase all types of insurance. The advantage is that the administration work is easier as compared to the owner buying insurance. Furthermore, the owner can transfer all of risks to the contractor.

On the other hand, the project scale is large or has many contractors; the owner should purchase Construction All Risks and Third Party Liability Insurance. The good point is that the owner just only purchase one time covering for all contractors. Therefore, the owner can get cheaper premium. However, the administration work may be complicated.

4. The consultants must purchase professional liability insurance with high limited liability.

The expense for consultants (soil survey, design, supervise, management) is often very small (3-5% of project cost), so it is difficult to pay compensation if the big loss come from the consultants’ fault. The owners should require the consultants to purchase professional liability insurance with high limited liability.

5. Getting bonds from the guarantee bank that is prestigious and reliable.

The prestigious bank with financial strength assures that the finances are available during the performance of the project. The reliability of the bank is also essential to assure the legality of the bond.

6. Risks, insurances and bonds management framework

Table below illustrates the recommendation for risks, insurances and bonds management framework. 

His thesis abstract is copied below:

Abstract

Construction projects have a lot of uncertainties and risks that affect both project performance and human being. Particularly, the high-rise building projects have more uncertainties and risks. Geological risks, height and others are one of the causes. In such cases, insurance and bond are very important to these projects because they can cover the risks and the contractor’s default. As a result, the project can get the financial and performance security.

With a focus on a case study approach to the high-rise building projects, an eighteen-storey complex in Ho Chi Minh City conducted in this study is to examine different types of risks, insurance and bonds of the owner. 

Although a variety of risks occur in construction projects, most of them can be protected by applying for insurance and bond schemes. The most common insurable risks include professional errors or omission, personnel injury and death of employees, material damages and losses, erection risks, public liability, construction risks and third party liability. The other risks which can be protected by bonds are contractor’s breach from tender phase to warranty phase.

Some problems, however, occur in administrating the insurances and bonds. This study is then to analyze the conditions of the processes and claim procedures. A framework for risk, insurance and bonds management are recommended at the end of the study.