By Peter G. Hessler
This article is a part of a series on managing change in power plant construction. After his first article on contracts and his second on claims management, Hessler presents the last part in his series on insurance management and mitigating on-site risk. Best-selling author of Power Plant Construction Management: A Survival Guide, Hessler’s valuable experience and practical knowledge guides all project stakeholders on how to handle power plant construction insurance and its many complicated details.
As we’ve all heard way too many times before, “the best laid plans of mice and men will often go astray”. That’s true in life, in love and in business; and it’s especially true in the power plant construction business. You plan, you scheme, you cajole � you do your best and things just will not happen as they should! What can you do? How can you mitigate this? And, when do you do it?
Let’s say you’re a contractor thinking to bid for a multi-million dollar labor job that includes parts supplied by others, interfacing work by the owner, and an extremely fast-track schedule. This is nothing unusual today. But what is unusual is that too many contractors often bid, and then they accept the award, and then they fail; and then the owner suffers as well. This article is the third in a series that talks about managing the changes that occur on a project like this, managing the three legs of a stool that supports the success of the contract: 1) the language, 2) the claims management process and 3) the insurance process.
It’s generally common to aggressively bid for outage work, just as it’s generally common to aggressively solicit for these bids. But aggression is fraught with risk, and to survive, risk must be mitigated by all parties. After working on the contract language, with a lot of lawyering involved; and after agreeing to a claims management process and hoping that the site staff will do what’s required, there’s still the unknown of what might happen when these “best laid plans go astray”. That’s where insurance, and the management thereof, comes into play.
A hypothetical example can put this into perspective. Let’s take the aggressive contractor, anxious to get the work, and the owner looking for a quick turnaround with minimum cost and maximum production; obviously, two different perspectives on the same goal. Maybe the job involves replacing fans, adding pollution control equipment, with excavation and civil works that need to be done. This will have its own set of risks � what’s in the ground below surface? What happens to other equipment when one disturbs the base soils? Will vibrations from the required new work affect existing equipment and operations? The list goes on and on.
Evaluating these risks, soliciting the protections and ensuring that the insurances are placed appropriately must be done very early in the process. It really must be done at the same time that the project is being conceived. But then after this, it must be managed – womb-to-tomb.
Again, let’s stay with the backend equipment project. First and foremost, where are the potential risks? And who is at risk? The contractor doing the work sometimes is asked to sign up for managing below-ground conditions not always obvious. Sometimes the owner is asked to accept this responsibility. But whichever of the two ultimately accepts it, they will want to minimize their exposure, and that’s where the insurers come in.
First and foremost, there’ll be the mating dance of who will manage the affairs of the risk. If the owner decides to assume this, there will be OCIPs (Owner Controlled Insurance Programs). If the contractor is asked to assume the risk, there will be contractor provided Builders’ Risk and General Liability insurance. Both have their costs, but in different perspectives. The owner may have to re-insure, or self-insure, to carry this obligation. The contractor, on the other hand, will have to pay real premiums to an insurance carrier, unless he also self insures, and then he will have to set aside funds to cover potential liabilities. Either way, someone pays.
So one question of how to mitigate risk becomes two questions of how to place and then how to manage the insurances � a) by the owner or b) by the contractor. Usually, the answer is decided by the economics of the insurance premiums and resultant costs for the deductibles each party is required to carry. If the work in this example could result in damage to existing equipment and operations, there could be issues of repairs, stopped operations and resultant consequential damages, such as loss of revenues.
So what does one do? One buys insurance. Of course, that’s normally done before the site mobilizes. However, once the insurance is in place, it then needs to be properly managed. And that’s really the gist of this article.
Let’s assume the insurances are now in place, whether OCIPs or contractor provided. If it’s OCIPs, the owner assumes the responsibility of managing the site safety program. Does he have the resources and skills to do this? Does he have the contractual right to manage his contractor’s process? This is not easy.
If the contractor carries the insurance responsibility, there will be a cost to the owner, in addition to the risk that the owner has by depending on the contractor, with minimal ways to manage the parts of the process. But either way, the insurance process must be managed by the respective organizations.
How do they do that? First and foremost, they do this by understanding the inherent risks in the project, from all sides. Then, they must read the documents and have an understanding of the
coverages: inclusions, exclusions, and deductibles. For example, if Workman’s Compensation is not included in an OCIP, the contractor/s must provide this coverage. If the deductibles in an OCIP are high, the contractor/s must evaluate whether their tolerance for risk is able to accept this or if they have to buy additional insurance to cover it.
Their site staff must also understand the insurances. They must, first of all, understand the notification, implementation and documentation requirements. For example, the insurer usually reserves the right to mitigate the insured damage in ways he deems are in his best interest. If he is not given timely notification of the event, he may no longer be able to rectify the situation in a manner that is cost effective to him. This may be as simple as a 72 (seventy-two) hour notice that there is an issue, to providing photographic evidence of damage to equipment within a specific window of time. If he’s not given that opportunity to rectify the issue in a timely manner, the insurance coverage may not be usable.
To ensure that the insurance coverage is as required and is actually in effect, most owners will not allow any contractor to start work on site until proof has been provided of coverage and proof that the coverage will remain in force until the job is complete. This is usually in the form of a Certificate of Insurance that outlines the insurances and limits provided, names the insurer providing the coverage, and also specifically names all of the additional parties that are covered. Usually, the personnel on site are the ones charged with the responsibility of ensuring this certificate is in place.
In summary. most construction projects are estimated, bid and awarded based on known and predictable events. The costs of unexpected issues are seldom included. However, unexpected events do occur, and since they do, they must be managed in a way to minimize their impact on the project. This is generally done through the use of insurance companies providing financial protection in the event of unexpected incidences or unforeseen perils.
Although the site management does not need to have insurance experts on its staff, it must have staff members familiar with the concepts. They must know the requirements of what to do to protect the interests of the insured as well as the insurer. They must know when to make notification of events that might trigger a claim. They must understand the interrelationships between the owner, contractors and subcontractors.
Managing the day-to-day construction operations of a power plant project, whether it is a new plant or a retrofit, is complex in and of itself. But add to that the realities that nothing ever remains the same, that things are not always as they seem, and suddenly a host of unplanned and unexpected issues arise that must be managed to prevent the collapse of the project.
These are the risks that require intelligent planning, often long before the site even mobilizes. They require smart site managers that understand the potential for damage if left unattended. They require careful managing, in accordance with defined parameters and they require teamwork. The unexpected can be tamed!
The three legs of the stool that provides the base upon which the contract protection rests � the contract language, the claims management process and the management of the insurance protections � must all be worked as a project within themselves. Far too many dollars are spent litigating issues that could have been avoided if basic contracting principals had been adhered to.
With the advent of many, many more power plants being built and renovated during the next two decades, prudent contract management will separate the men from the boys. There will be winners and there will be losers. Those who adhere to the basics will not be on the side of the losers!
This article is based on portions of the best-selling book, Power Plant Construction Management: A Survival Guide, by Peter G. Hessler and published by PennWell Books.
Peter Hessler is the President of Construction Business Associates, LLC, a provider of business management services to the power plant construction industry. He has over 30 years of experience in the power plant maintenance and construction industry worldwide, having worked as an owner, contractor and consultant. He holds a Bachelor’s degree in mechanical engineering from Virginia Polytechnic Institute and is a member of ASME and the Lean Construction Institute. In addition to consulting for owners and contractors, Mr. Hessler also speaks at industry conferences, is a guest lecturer at Columbia University on the topic of the construction world overseas and provides training and seminars on a wide range of subjects regarding good business practices in the power plant construction world.
Mr. Hessler can be contacted at [email protected]