Product Fundamentals: Contract Works

Contract Works (also known as Contractors All Risk, Annual Floater, Project Material Damage Cover, Construction Works) is a policy designed to protect builders and contractors against on-site losses during construction. Even with the best preventative measures in place, unexpected events such as accidental damage, vandalism, fire, flood, earthquakes, and cyclones can cause delays and damage that result in huge financial losses. Such losses may be exacerbated by labour shortages and the increasing cost of building materials, in turn making building sites a lucrative target for thieves.

Even after construction has been completed, buildings can suffer damage from defective workmanship, design, or materials. These are all insurable events that make Contract Works an important and effective risk transfer mechanism.

Anyone involved in the management of a construction site should consider having Contract Works Insurance – from owner-builders to established corporations. Not only is it a common contractual requirement for builders to have construction insurance, but it is also good practice for all businesses to manage their risk with appropriate insurance.

The scope of cover offered by insurers can be highly variable, though in general, insurers offer the same optional sub-limits of cover:

Contract Works has broad coverage as it is an “all-risk” policy, but this implies there will be exclusions. For example, contracts involving mines, rail or airports are regarded as a high risk – so they are excluded by most insurers. Contract works provide various levels of exclusions for defective workmanship, from complete exclusions, resultant damage, and costs to redesign defects depending on the policy purchased.

There are also sub-limits that are not automatically included, such as cover for existing structures being worked upon. If undertaking building extensions and renovations, cover for existing structures should be considered if the original building insurance has an exclusion during significant renovation works.

Financial losses incurred due to delays, contractual disputes, or economic downturns are common exclusions.

Gradual deterioration or general “wear and tear” of materials or equipment due to normal usage is also excluded by insurers as it is seen as a commercial risk.

Theft cover is also limited to specific loss or damage which can be attributed to an event – routine inventory shortage is excluded.

Contract Works covers damage to the works, and does not cover damage or injury to third parties

(including sub-contractors and contractors). Separate third party liability is required to manage this exposure. As such, Contract Works is almost always taken out along with public liability.

Professional Liability exposures arising from errors, omissions, or negligence in the provision of professional services (such as project management, design, advice or specification) are also not included under contract works, which is intended to focus on insuring loss or damage arising from specific events. See our article here in relation to Professional Indemnity which would provide cover in lieu of a contract works policy.

There are two main types of Contract Works: Single Project Contract Works and Annual Contract Works. Within Annual Contract Works, there are two subtypes. The choice of type depends on individual circumstances.

Covers specific projects until completion, or until the agreed maximum construction period has expired. This is suitable for owner-builders or projects that are too large or complex to fit under an annual policy.

Covers all projects during a 12-month period and up to an agreed limit. This would be appropriate for a professional builder with several, similar-sized projects throughout each year. Projects that have commenced prior to the policy’s inception date will need to be declared to the insurer.

There may be instances where builders would require both types of Contract Works. For example, a builder with an existing Annual policy may want to consider taking Single Project insurance if it is for an unusually large project. This is likely to be a more cost-effective solution as higher limits would not be necessary for their regular projects.

Annual Contract Works is further divided into two bases of cover: Contracts Commenced (or Run-off) and Transfer (or Turnover).

If a project begins during the policy period of a Contracts Commenced policy, it will be covered through to completion. Cover will continue past the policy’s expiry and will only cease once the construction period (or defects liability period if applicable) has ended.

Annual Transfer covers projects that commence within the policy period and will continue to provide cover so long as the policy is active. Cover will cease once the policy expires.

Both bases of cover can be just as effective, though care needs to be taken when switching between the two. For example, when moving from Transfer to Contracts Commenced bases, existing projects will no longer be covered by the Transfer policy and the new Contracts Commenced policy will not pick up projects that have already started. In most cases, the new insurer will agree to cover the existing projects.

For further information, or a review of your exposures, please contact our Team of risk advisors via the form below.