08 April 2024
Logistics Construction Projects:
Risk Considerations & Mitigation
The number of business premises used for transport logistics and warehousing in the UK has almost doubled in the last decade. The rise of transport and storage has accelerated in the last two years, following the EU exit and the onset of the coronavirus pandemic.
The warehouse and logistics industry was worth GBP5.59bn in 2021, according to the Office for National Statistics (ONS). That represents a record high since the ONS started measuring the sector's value in 1985. It also surpassed the GBP2.29bn sector value in 2020, having jumped by nearly 150 per cent.
These projects come with their own set of risks and exposures, which will need to be managed by a specialist Construction insurance broker. Gallagher Specialty’s Construction division has 100+ specialists in the UK, and more than 500 working globally, working across all major construction sectors. As such, we have significant market leverage for the benefit of our clients.
When it comes to these types of construction projects they can broadly be split into two categories; pre-construction risks and construction and property risks. In this article, we cover the risk considerations for both.
Pre-Construction Risks: All you need to know
As with all large and complex construction projects, consideration needs to be made for the pre-construction risks. Below we have categorised the four main areas you should consider prior to commencing construction.
Land
Finding the space, with the right level of access to suitable transport infrastructure can be difficult and may mean that the land is not ideal for building works. Brownfield sites or previously polluted areas may be the best option, however, the land will need to be remediated correctly and you may need to seek protection against the escape of pollutants and other environmental issues.
The surrounding areas of the site will need to be made suitable for heavy-load vehicles, this is easier to manage on a new build basis but for fit-out, the existing services may also need to be moved to be able to make the surrounding area accessible for increased traffic . Our Environmental Insurance Specialists have extensive knowledge and expertise in creating and sourcing the required insurance, for not only the associated risks but also to comply with any relevant legislation.
Protests
As highlighted by the Financial Times in July 2023, there has been a rise in local protests against development projects. The UK has one of the largest e-commerce markets in the world but is restricted due to its lack of available space in which to build. This could lead to further protests and a possible reduction in planning permissions as a result. Perhaps a more sustainable and environmentally friendly method of construction and way of operation may assist with reducing protests and planning permission issues, however, this could increase different risks, depending on what measures are taken.
Finance
This could be either protecting against loss of revenue, or debt financing costs if there is a delay to the completion of the project from a damage event.
For fit-out works, there could be a combination of both Delay in Start Up (DSU) and BI to be considered, for instance, damage to the works could affect the operation of the business, therefore it’s important to determine if the operational BI can be amended to cover this risk, or if the DSU can cover this. Alternatively, in the event of a major incident, there may be additional expenses associated with using an alternative site temporarily. Either way, consideration needs to be taken as to how to protect against loss of revenue/profit.
In either case, our construction specialists can help guide and source the most optimal solution. This could also include Business Interruption (BI) insurance once the completed project moves into operation.
Sustainability
As with all construction works, the impact on the environment must be a consideration. The impact of a new logistic property could significantly affect the surrounding area, not only in terms of the property itself but also due to the anticipated increase in traffic. A way to combat this would be to look to alternative sources of energy, whether this be electric vehicles (which come with their own set of risks), solar panels, Combined Heat and Power (CHP) plants etc. to help combat the effect on the local area, which could help with planning permission. But also the construction material, as widely publicised a good sustainable material is timber, however, this comes with its own set of risks and complications.
Construction & Property Risks: A Close-Up
During the construction phase of a logistics construction project, there will be a number of considerations that need to be made. The first question is whether you should proceed with a fit-out or pursue a new build. There are then multiple factors to think about such as water and fire protection and automation risks. We’ve listed below the risk considerations that should be taken into account during the construction and property risks phase of a logistics project.
Fit-out or new build?
Government and industry, due to justifiable sustainability and environmental reasons are increasingly encouraging developers to refurbish and re-purpose existing buildings rather than demolish and do new builds. The question is, can existing logistic properties be extended and refurbished, and can supply and demand be addressed through alternative locations?
If a refurbishment and extension option is preferred, then there are several factors to take into account. Insurers would expect that proper due diligence has been undertaken in respect of the existing building and if and how it can support an extension and that this has been properly designed and planned for.
For example, is the floor space being increased?
- If so, how will this be done keeping in mind the potential automation systems that may be utilised?
- Will the property be operational, even in part during this time?
- The interface between operational and construction works needs to be managed carefully, not only for the protection of people but assets as well. This would include fire protection measures during the works affecting the existing property and products.
In addition to the risk factors, the contractual position needs to be understood and detailed correctly, not just to insurers but to all parties involved in the construction project. To assist we have detailed the position under the Joint Contracts Tribunal (JCT), which would be the expected base contract for this type of work.
A development involves the refurbishment or extension of an existing building, the standard JCT contract requires the Employer to insure both the contract works and existing structures for specified perils (definition from standard JCT Design and Build [D&B] is below).
‘Fire, lightning, explosion, storm, flood, escape of water from any water tank, apparatus, or pipe, earthquake, aircraft and other aerial devices or articles dropped therefrom, riot and civil commotion.’
Unless the existing structure has a reinstatement value of under 50% of the value of the work, it has to remain insured on the property policy. Furthermore, construction insurers struggle to consider insuring structures that will be operational/occupied during refurbishment works and are more than 30 years old.
In this scenario, a key consideration for the employer is how you treat the main contractor during the works i.e. where the risk of the works damaging the existing structure sits. Where JCT form of contract is being utilised, two key insurance requirements apply as standard:
- C.1 - The employer effects and maintains a joint names policy with the contractor in respect of the existing structures for loss or damage due to any of the Specified Perils e.g. fire, flood, escape of water, storm etc.
- C.2 - The employer effects and maintains a joint names policy with the contractor for All Risks Insurance covering the contract works.
The C.2 requirement should be fairly straightforward however in respect of C.1, you will need to speak to your property insurers as soon as possible to make sure that you are able to comply with the requirements of C.1, or of course if you are not wanting to provide this contractual protection.
If you are unable to comply with C.1 then early discussions need to take place with the main contractor undertaking the works, as this is a major change, it needs to be understood early so that an alternative can be sourced.
There are of course a few alternatives that can be undertaken, and we strongly recommend that the early appointment of a specialist construction broker can assist with these risk and contractual discussions.
Protection against water damage
Over the last 5-10 years there have been a huge amount of water damage claims in the London insurance market, specifically escapes of water from burst pipes which has often happened during the fit-out stage of a development, which from a construction insurers’ perspective is when the risk is most apparent. Unfortunately, this has been particularly common and costly for high-rise developments as they tend to have high pressure in the water system with boosters used to deliver the water. Although we are not discussing high-rise buildings specifically, the considerable floor space and materials involved in logistics properties raise similar exposures and concerns for insurers.
Therefore, effective water damage risk management holds significant importance for insurers. A comprehensive, site-specific Water Management Plan (WMP) is essential for insurers considering quotes. Without it, insurers may opt not to provide a quote or may impose burdensome conditions and increased excess levels.
Insurers will want to see a leak detection system installed during construction including automatic shut-off valves at the main intake, this could also be a requirement for any operational insurers as well.
Best practice advice should be taken from the Construction Insurance Risk Engineers Group (CIREG) guidance notes for mitigating the escape of water risks during construction. Factoring this guidance in at the design stage of the projects would be most advantageous, both from a risk management and construction & property insurance cost point of view.
Furthermore, a project risk management strategy for water risk (including the water management plan) should not only focus on escapes of water from burst pipes but also other areas e.g. external access. A robust WMP should not just focus on risk prevention but also have a clear emergency response plan in place in the unfortunate scenario of a loss occurring.
Effective water damage risk management holds significant importance for insurers.
A comprehensive, site-specific Water Management Plan is essential for insurers.
Fire protection & compartmentation
How the building will be finished, either through cladding or insulation forming the cladding system, can bring additional fire risks and requirements for additional information and restrictions but also the use of any prefabricated materials. These on their own bring additional risks and requirements that need to be factored in on a risk and insurance basis.
In addition, given the size of the building and the normal lack of internal walls and protections, insurers would be keen to understand the fire management of not only the works but also the completed property. Is the intention to utilise a sprinkler system? If so would this impact any possible automation that may be included within the building as well as any stock once fully operational?
Any fire management systems and protection in place will need to be compliant with the latest edition of the Joint Code of Practice on the Protection from Fire of Construction Sites and Buildings Undergoing Renovation.
The 10th Edition contains a number of changes from the 9th, with some key changes being as follows:
- Banning of deep-fat fryers
- Increase of fire watch requirements post-completion of hot works to 2 hours for all projects
- New guidance for the storage and charging of electric vehicles
- Updating of standards for fire resistance throughout to match European Standard EN 13501-2
- Additional requirements for fire extinguishers, including the need to check those brought onto site by sub-contractors
- Requirement for wet riser for all buildings above 50m/c15 storeys
- Requirement for horizontal compartmentalisation every 5 floors on high-rise projects, reducing from every 10.
While full compliance is a standard requirement there may be some exceptions to the new guidance granted by insurers on a case-by-case basis. However unless explicitly agreed, main contractors should ensure full compliance for the avoidance of doubt. The other consideration is the JCT contract position, where any deviations may result in a technical contract breach. However, in this situation, we would encourage a dialogue between all contract parties before deviations are agreed, it being expected that if insurers are comfortable, other contract parties should be also.
Clauses on Contractors’ All Risks (CAR) policies requiring compliance are usually written in the form of a warranty, with a requirement for insurers to give notice before cover can be suspended. Insurer’s awareness of any non-compliance would typically arise via a site survey. As notice may take the form of post-survey risk improvements, full compliance with all resulting insurer requirements is therefore imperative. This need to give notice does mean there is quite a high threshold before cover can be effected, however, known non-compliance may result in less competitive annual renewal or project-specific terms.
Joint Code of Practice:
9th vs. 10th Edition
Read our article which details the updates to the 10th edition of The Joint Code of Practice on the Protection from Fire of Construction Sites and Buildings Undergoing Renovation.
Automated technology risk
For example, constructing a large, completely flat floor may require a single continuous pour of concrete, leaving no margin for error. Contractors may hesitate to accept fitness-for-purpose obligations when requested to do so.
Whilst this is difficult to manage during construction of the floor, it will need to be carefully monitored during any internal fit-out to avoid possible damage issues, as well as proper maintenance during the operation of the completed property. Additionally, with an extension project, if the floor space is being increased then consideration needs to be made for how the floor will be kept suitable for automation. This is key because how this risk is managed during the works as well as contractually is something that requires careful management.
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