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Insurance & Commissioning

Insurance & Commissioning

Quality, Consequences and the Construction Industrial Complex (part 202).     

Have you noticed how all the small and medium sized AEC firms are being purchased and merged into larger entities like WSP, Stantec, Aecom etc.? 

Some of the reasons for this are:

1. Industry trend towards large complex, mega projects.

2. Proliferation of the Design, Build, Finance, Maintain procurement model. 

3. Clients preference towards vertically integrated AEC firms i.e. one firm to manage.

Firms that compete for large complex projects have to be large , highly resourced and well insured to be able to take on the associated risks.

The days of small and medium sized firms designing and constructing for example, hospitals, military bases and large data centres are over. So how does the commissioning (Cx) firm fit into this landscape? 

Currently in North America, Cx firms are being purchased and vertically integrated into large, full service AEC firms. The remaining small Cx firms are finding it difficult to;

1. attract and pay for talent, 

2. resource large projects,

3. be competitive. 

Commissioning (Cx) firms fall into two categories: 

1. Small specialist sub-contractors

2. Boutique, specialist consultants 

IMHO to be effective, independent and attractive to a purchaser the Cx firm needs to be a specialist consultant with a highly specialized and qualified talent pool. Also to be “ligit”, the Cx firm must have all the requisite insurance cover because, some of the barriers Cx firms face when bidding large projects are the insurance and bonding requirements. 

Some specialist Cx sub-contractors assure me they do not need Errors & Omissions (E&O) or Professional Indemnity (if you are from the UK) insurance as they are sub-contractors. This is incorrect! Risk does not magically go away because you are a small sub-contractor. 

So what are the risks and the insurances required to be a “ligit” Cx firm? 

The Cx firm is insuring for professional “errors and omissions” i.e. mistakes, plus low probability, high impact or consequential risks. To fully understand, we have to distinguish between two distinct project phases. 

Design Phase

Cx begins in early design, it is a game of Quality Management. Cx firms that understand and service this phase of the project are IMHO, more professional, they are “consultants” and more likely to be a purchase target. 

Design phase Cx work carries risk and requires Errors & Omissions insurance because the Cx firm is part of the professional project team. Generally, design phase Cx tasks consist of: 

1. Developing OPR

2. Reviewing BOD (design reports)

3. Design documents Commissionability Appraisal 

These all contribute to building design and therefore require Errors & Omissions insurance. 

To be clear, MEP Commissionability Appraisal is not a “first principals” design peer review. It is primarily concerned with 3 things;

1. Systems commissionability.

2. Good practice observations.

3. Errors & omissions that others may have missed.

Good practice observations plus errors and omissions identified are not the responsibility of the Cx firm, but are consequential benefits from the Commissionability Appraisal.

Construction Phase

Cx during construction is only concerned with the concept of “Trust but Verify” i.e are the building systems set to work and performing in accordance with specified requirements. It is a game of Quality Assurance. However professional judgement and physical testing that contribute to a project outcome require Errors & Omissions insurance.

Insurances Required

I focused on Errors & Omissions insurance because this is the one that most Cx firms do not believe they need. IMHO, this is the list of insurances all Cx firms should carry:

1. Errors & Omissions (E&O) to $5m.

2. Third Party Liability to $10m.

3. Workers comp and social insurances consistent with legislation in the territory of operation.

4. Bonding capacity consistent with the size of project worked on. I consider bonding a form of insurance. 

In high compliance, mega project environments, large AEC firms have the advantage in terms of: 

1. Size.

2. Talent pool.

3. Financial resources to purchase and manage multiple specialist software tools plus support a BIM environment.

4. Scale to purchase insurance and manage financial risks. 

The downsides to large AEC firms are:

1. Slow and bureaucratic responses.

2. High staff turnover (they can be soulless places to work in, some are cubicle farms).

3. Lack of individual ownership from assigned project team members.

However these downsides are mitigated in the clients mind by having:

1. Single point responsibility i.e. one firm to manage and one ass to kick.

2. Ability to change team members from a large resource pool if the client does not like the assigned team. 

3. Well insured and resourced firms i.e. a good target for litigation that will not go bust if things go south.

The days of the “scrappy” small firm are coming to an end in my opinion. Going forwards I believe the AEC industry will further consolidate to larger multi discipline, transnational firms. 


Twitter: @BLDWhisperer

Related posts & links:

#153 – Hiring Vs Recruiting? 

#85 – Who Wants Free Risk & Quality Management? 

#198 – FAT 

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