Construction risk management is in the spotlight as climate conditions change and associated risks are on the rise, delivering potential wins and losses for the building industry.
Australia’s buildings are worth approximately $5.7 trillion. Among these an estimated $159 billion’s worth are vulnerable to rising sea levels and storm surge, according to a 2012 report published by The Climate Institute. Buildings are also under threat from fires and degradation of their foundations and materials as a result of higher temperatures.
This should worry the construction industry because data modelling by the Bureau of Meteorology and the CSIRO predicts higher temperatures over most of Australia, the Environment Design Guide reports in Climate Change: Adaptation for Building Designers: An Introduction.
These conditions bring increased risk and intensity of extreme weather-related events such as:
- tropical cyclones
With these types of events on the rise the effects on the construction industry are tipped to be both positive and negative, according to a report by Monash University.
Positive because rebuilding and retrofitting buildings and infrastructure affected by extreme weather delivers stimulation and opportunity.
Negative because the damage leads to business and supply chain interruption, and pushes costs and insurance premiums up.
The changing picture
The Climate Institute warns that infrastructure costs are likely to increase substantially at the construction stage, as well as in maintenance and repair. Existing assets and those constructed in the future will need to withstand not only rises in sea level and temperatures, but the growing risk of extreme events and their consequences, its 2012 Coming Ready or Not: Managing climate risks to Australia’s infrastructure report states.
- thermal performance
- fixtures, claddings, fasteners, and wind-loading requirements
- moisture penetration, undermining foundations
- drainage and runoff
- higher risk of fire.
A concrete proposition
The main material used in the construction sector – concrete – is reactive to environmental factors such as temperature and humidity, as well as chemical interactions: increases in atmospheric carbon monoxide levels in urban areas, for example. The CSIRO predicts that ‘the impacts on concrete infrastructure from a changing climate are likely to be sizeable’, but adds that these can be addressed through design and maintenance standards.
So far, so good, but what about the logistics of achieving this? “With our experience of extreme weather, Australia should be well placed to adapt to the changing climate,” says The Climate Institute’s CEO John Connor, “but our readiness for the impacts of climate change is at best patchy.”
Part of the problem is that infrastructure owners and operators are focused on maintaining their assets to standards based on historic conditions, rather than looking to future requirements. The exception is the finance sector, particularly, the report says, insurers and institutional investors who are increasingly focused on reducing their exposure to risk.
Rightly so. Between 1994 and 2004 there were almost three times as many weather-related disasters than 35 years earlier, economic losses increased by more than 5 per cent and insured losses rose by as much as 9.6 per cent.
Traditionally costs from natural disaster-type insurance claims were recouped by increasing premiums across a large client base, EDG comments. ‘Now insurance companies are taking greater care in assessing the vulnerability of assets they insure at a local level.’
Changes to contracts
So how should building contractors respond to these changed conditions? More frequent weather-related events affect risk allocation in construction projects, with the responsibility for identified risks generally being transferred from the principal to the builder, according to law firm Norton Rose Fulbright.
This has contractual implications for
- time frame for completion.
Builders should also check terms for making contractual claims for relief on the basis of weather-related events or force majeure (which usually applies to natural disasters). It is becoming more common for builders to tender with entitlement to relief for weather-related events built into the contract, particularly in the case of civil works, NRF advises.
Some grey areas to be aware of are
- there is no common-law application for force majeure so the extent of the claimed relief must be built into the contract
- weather conditions are usually excluded from latent conditions entitlements.
Don’t rely on old or standard-issue documents for either contracts or insurance cover. Changed conditions call for adaptive strategies.
Watch our video about insurance cover for extreme weather impacts.
To the extent that any material in this document may be considered advice, it does not take into account your objectives, needs or financial situation. You should consider whether the advice is appropriate for you and review any relevant Product Disclosure Statement and policy wording before taking out an insurance policy.