Construction risk associated with early works and main works contract packages
Within the residential and commercial construction space, a trend is emerging whereby developers are splitting construction works into two components, being the early works (demolition, excavation, piling, shoring and shotcrete) followed by a main works contract for the construction of the new building.
This approach has some advantages for developers as they can get initial works underway with a specialist groundworks contractor (who would only otherwise be engaged directly by the main works contractor) whilst they finalise the plans and selection of the main works contractor. However, this method of contracting constitutes a material change in the risk profile of a project. It may expose the project to uninsured losses which would not usually be an issue if a single contractor carried out the entirety of the works in a development.
Potential risks may include:
- Early works contractor is contracted to get excavation completed and then when complete hands the site back to the developer. Until the main contractor mobilises to site, the existing works are at risk of loss or damage, and third-party liability for any injury or property damage would not be insured by the initial contractor from practical completion and would be at the site owner/developer’s risk.
- The incoming main contractor would need to consider their liability in respect of defects in the main works, arising from defective early works (works they are not responsible for).
- In the event of a significant loss during the main works, the early works could suffer loss or damage which would not automatically be insured by the main works contractor.
- Ongoing liability for defects during any statutory warranty period (say under the Home Building Act) could result in difficult disputes between the parties as to who is responsible for the defect occurring, and who bears the cost of rectification. This would delay any rectification and potentially result in protracted and expensive legal disputes between the parties.
Risk management for developers considering split contracts
Advice should be obtained from a legal and insurance perspective on risk apportionment prior to the contracts for tender being issued to ensure they are drafted correctly. It is critical that the risk of loss, damage and defects are transferred to the appropriate parties and that such conditions are likely to be palatable to the contractors the developer is looking to engage. This would include having the main works contractor accept responsibility for the efficacy of the early works as part of the contract.
Consider your superintendents role in the project and ensure they can assess whether the works being undertaken at the site are free from defects or issues prior to issuing PC.
If this method of contracting is to be used, the developer should consider managing the contract works and public liability under a single project placement, covering both works packages under a single policy and avoiding any potential gaps in cover due to delay between the two works packages.
We have previously traversed the topic of Principal Arrange Insurance in our article here. When two contracts are being considered, these advantages are amplified. Having a single project placement will provide protection to all parties (developer, early works contractor and main works contractor) in respect of loss/damage and third-party liability arising out of all works associated with the project.
By ensuring that risk has been managed during the early project planning phase, developers can be more confident that the project will not encounter any short- or long-term issues arising directly from the engagement of two separate contractors to complete separate sections of the project.
Bellrock advises developers on project risk and innovative methodologies to transfer it. Please contact us via the form below to discuss your requirements.
