HOW ROBUST CONTRACTS AND CONSTRUCTION INSURANCE GO HAND IN HAND

Contracts play a pivotal role in construction insurance. They serve as the backbone of any insurance agreement, clearly defining the responsibilities and obligations of each respective party involved. Vague contracts or a lack thereof can lead to difficulties in quantifying losses and processing claims. In addition, without a robust contract, disputes can arise, leading to costly legal battles, delays in project completion as well as claim settlements.

According to Jan-Hendrik Botha – head of underwriting at Western National, the construction sector faces both risks and opportunities as government seeks to boost its investment in infrastructure, stimulate job creation in construction and encourage foreign investment.

“These are times of unprecedented change. As South Africans we are innately optimistic, but as insurers, we remain acutely aware of emerging risks which are a sign of the times – the influence of the construction mafia, escalating economic pressures and the increasingly evident impact of climate change.

Despite these very real challenges, there are also opportunities for construction firms to tighten their risk mitigation strategies and revisit some of the tried-and-tested ways of protecting their investments and ensuring business continuity.

Contractual agreements are designed to hold parties accountable and safeguard their interests, but they are also effective ways of promoting transparency. In the construction industry, these are the building blocks of valuable relationships and ultimately, resilient businesses,” says Botha.

As he explains, Western has observed several reoccurring issues involving the use of construction contracts over the past few years. These include vagueness and a lack of specificity, which can lead to disputes over the interpretation of roles and responsibilities, and terms and conditions. This is turn, can also lead to the parties involved shirking their responsibilities due to lack of accountability.

Another issue identified by Western is inaccurate timelines – unrealistic or poorly defined timelines that are not built around the potential of unforeseen events can cause unnecessary delays, circumvention of risk mitigation measures and ultimately financial losses. Addressing these issues using precise and detailed contracts can significantly reduce the likelihood of disputes and enhance project efficiency.

What construction contracts should include

Formal contracts should outline several key details, including the scope of work, with all details regarding specifications, timelines and milestones being clearly communicated. They should also include the relevant payment terms, including agreed amounts and due dates to prevent unnecessary disputes over financial matters.

To guard against lengthy disputes and legal processes, contracts should provide a clear path for addressing conflict, whether through mediation, arbitration or litigation. It’s also vital to include details regarding risk allocation and to define who is responsible for various risks, such as contract works damage, third-party damage and delays.

In providing clear guidelines on what each agreement entails, contracts can lay the groundwork for deciding what kind of insurance cover would be best suited to each project. Some of the most common forms of insurance requirements include public liability cover, workers’ compensation cover and contract workers’ cover. These protections serve as a financial safety net in the event that the unexpected occurs.

Botha warns against trying to sidestep or rush the formal processes involved with the drawing up of contracts and instead, urges construction companies and developers to seek legal counsel to ensure that contracts are clear and valid. Alternatively, they can consult contract and construction committees such as the Joint Building Contracts Committee (JBCC), the Master Builders Association, etc.

“Consulting with an attorney who specialises in construction law or a committee that provides standardized forms of construction contracts like the JBCC, will ensure that the contract adheres to all relevant laws and regulations. Lastly, building developers and contractors need to understand that contractual agreements are dynamic rather than static and need to change and be updated as circumstances evolve and the project progresses.

As standard best practice therefore, they should conduct regular reviews of their contracts to check for relevancy, accuracy and comprehensiveness. Proper contracts, coupled with timeous premium payments, compliance with engineering specifications, regulations and standards will ensure that insurance cover remains in place,” adds Botha.