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3 risk management trends in construction and real estate

A 360 degree view of risk management in today’s construction and real estate industries

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By Bill Creedon and Joe Russo | November 13, 2019

At our recent Construction and Real Estate/Hospitality Risk Management Conference speakers discussed how market changes are impacting risk management.

The construction and real estate industries not only must contend with changes in risk management, but also structural changes to the economy that create new risks and opportunities.

For example, the trend toward telecommuting and contract workers is driving demand for hoteling and smaller offices, leading to an impact on the core revenue streams of real estate companies and developers. In turn, they’re exploring new ways to diversify their revenues with forays into financial services like lending and technology services like data and analytics. E-commerce also is disrupting commercial real estate and supply chains. With the diminishing need for brick-and-mortar stores, real estate companies and developers must now find new uses for conventional retail spaces converting shopping into spaces for entertainment, dining, health care and wellbeing use.

Participants at our recent Construction and Real Estate/Hospitality Risk Management Conference examined these market changes and risk management dynamics from multiple perspectives. The main themes were:

  • Changes in risk management
  • Technology’s impact on business and risk
  • Insurance market trends

Changes in risk management

If we look at the progression of risk management over the last decade, risk managers have witnessed great change, and risk managers in the construction and real estate industries were not immune to change.

  • General contractors: There is now more discipline and a more proactive approach to the management of subcontractors. However, general contractors have observed challenges in recruiting and retaining the talent needed to execute more robust risk management.
  • Developers: : The changes in risk management have been heavily influenced by broader changes in the industry. For example, technology advancements have created a dynamic new exposure bringing operational control and security to the forefront.

From a more granular level, risk management tasks have become more complicated given the changes in how projects are delivered and the level of collaboration among stakeholders. Risk management — from both the construction and developer sides — often finds itself at the crossroads between trying to manage and control risks and internal pressures from the business development sides to “get the deal done.”

For example, contract reviews have become challenging from the perspectives of all parties. As projects become more complex and non-linear with financing agreed to before design, contractors have become much more involved in contract reviews than in the past.

Similarly, we see general contractors taking a more proactive approach as well. For example, general contractors are trying to educate subcontractors on risk management in an effort to push some risk toward subcontractors, but in many cases, it is simply not possible to transfer or share the risk. However, it has also led general contractors to take on more risk on projects and thus, requiring more discipline in contract review and wording.

Technology’s impact

Technology cuts both ways by creating new risk exposures as well as opportunities to enhance the risk management function.

From the perspective of owners and developers, technology (and more specifically data and analytics) has positively impacted their approach to maintenance and proactive detection of problems within a property. Building management systems (BMS) coupled with Internet connectivity have made maintenance activities less problematic and intrusive upon tenants. However, this same data that has made owners and developers more proactive creates more of a need data security.

From the general contractor perspective, proprietary data from various sources such as projects, employee records, etc. have created a similar need for data protection and cyberinsurance. Additionally, connectivity to a general contractor’s job sites presents another potential breach point and the need for protection in terms of technology and insurance.

As project delivery methods continue to progress with advancements in technology like artificial intelligence and robotics, general contractors will have to identify the right mix of technologies that will improve productivity. To complement those efforts, data collected from past projects and experiences will also be analyzed holistically from a cost and productivity standpoint to help guide future technology decisions.

Some contractors have already adopted new technologies in a quest to create a competitive advantage. However, early adopters may not fully understand the risks of using these new technologies. System exposures and data protection may not be top of mind for these contractors, potentially resulting in cyber risks that are not fully appreciated nor considered from a risk management perspective.

A changing marketplace

Changes in the insurance marketplace will always influence how risk managers implement their strategies regardless of where they sit in the industry. However, with a hardening market, risk managers must remain flexible yet proactive to optimize their total cost of risk.

From the contractor perspective, it is important to maintain relationships with the parties involved in their risk management processes particularly their underwriters. This however becomes easy to overlook given the increasingly virtual workplace.

A hardening market forces discipline and structure (particularly where it didn’t exist before). From an organizational perspective, general contractors should require a formal risk management function that enables a strategic approach and creates the institutional approach to collaborate with the right external partners in risk management. From a more granular level, general contractors seek to partner with their stakeholders such as broker and carriers to communicate the details of their risk management programs and to collaborate to determine ways to improve.

Owners and developers share similar views in that communicating internally and more importantly externally with their stakeholders are key to manage through a hardening market. Ensuring that stakeholders understand the differentiating factors and information of a risk management program can help particularly in the underwriting process. In many cases, data and analytics can help accentuate differentiators and provide underwriters with an enlightened view of a program.

So, what does this 360 degree view tell us? Despite the different views on the evolution of risk management, the varying uses of technology and the different approaches to a hardening market, it is clear that there is increasing collaboration within the construction life cycle of a project. As a result, it is critical that collaboration between risk management departments keeps up with the changing nature of the owner/general contractor relationship.

Risk management serves as each organization’s last line of defense, so while it serves as a sign of the times that stakeholders with different objectives and organizational goals need to work together to share in the risks and the rewards of a project, risk managers need to remain focused on protecting their respective organizations.

Author

Bill Creedon
Construction Industry Leader, North America

Joe Russo
Northeast Regional Construction Industry Leader

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