Construction projects for public entities, whether it’s a new build, remodel, or repair—carry a multitude of risks. These projects often involve complex regulations, multiple stakeholders, tight deadlines, and significant investments. One crucial aspect that should never be minimized is addressing risk financing (coverage) and risk transfer (contracts). Neglecting to properly include these factors in the overall plan can lead to costly and lengthy consequences. Thomas Bryson, Senior Vice President with Alliant Insurance Services, explains why it’s essential to give them the attention they deserve and how to manage them effectively.
Why Addressing Risk Financing and Risk Transfer is Crucial
- Financial Protection
Public construction projects are funded by taxpayer money, so it’s critical that funds are protected. Accidents, unexpected damages, or delays can quickly spiral out of control and leave districts facing a multitude of liabilities. Insurance coverage can help absorb the financial burden and ensure that the project continues without depleting district funds. - Risk Transfer Minimizes Liability
Risks such as delays, quality control issues, or accidents are bound to arise in today’s climate. By using well-drafted contracts, public entities can transfer specific risks to the contractors, vendors, or subcontractors involved. Thus, liability for certain project delays or damages can be shifted away from the district and onto the responsible party, helping to protect from unseen financial strain. - Long-term Sustainability
Proper risk management ensures that the public districts do not become financially burdened by issues that could arise during or after construction or new systems. By integrating insurance and risk transfer into the initial contract, entities can promote long-term sustainability by ensuring that resources are available to manage risks as they appear. - Compliance and Legal Requirements
Many construction projects, especially those done at public districts, are subject to strict legal and regulatory requirements. Insurance and risk transfer help meet these standards and protect public entities from legal disputes or penalties related to construction mishaps.
How to Address Risk Financing and Risk Transfer Effectively
- Understand the Risks Involved
Before drafting contracts or securing coverage, it’s essential to identify the potential risks specific to the project. These may include worker injuries, design errors, catastrophic weather disruptions, or cyber-attacks. Understanding these risks will allow districts to determine the most appropriate insurance policies and contract terms. Mr. Bryson shares several benefits to districts placing coverage rather than simply paying a contractor to obtain coverage. These include direct input on the suitability of coverage, no added cost for the contractor’s overhead or profit margin, and access to all claims information—even when contractors or vendors are named as additionally insured. When districts opt to provide the coverage, rather than pay for it through a contractor or vendor, they are better able to control costs and can often negotiate better rates or premiums. - Secure Adequate Insurance Coverage
Public entities should ensure they have comprehensive insurance coverage. This can include general liability insurance, builder’s risk insurance, and workers’ compensation, along with additional course of construction coverage. Adequate insurance will ensure that any unforeseen event during construction—whether a natural disaster, accident, or equipment failure—does not derail the project or lead to significant financial losses. Reviewing options also allows a clear understanding of premium and deductible options before and after binding coverage, explains Mr. Bryson. Districts will also want to think long- term, which usually has better results with district provided coverage. This allows public entities to tailor the policy to specific needs and ensure everything needed is covered, including district- furnished equipment that will be added to projects at various stages. - Utilize Contracts to Transfer Risk
Contracts should clearly outline the allocation of risk between the public entity and its contractors or vendors. This includes specifying who is responsible for specific issues such as delays, cost overruns, damage, and more. The contracts should also include provisions for dispute resolution, warranty obligations, and indemnity clauses that protect the district from financial exposure in case things go wrong. - Monitor and Review Risk Management Plans
Throughout any sizeable project, it’s important to continually assess and review the insurance coverage and contractual terms. As the project progresses, new risks may emerge, and existing risks may evolve. Regular check-ins will ensure that the coverage and risk transfer strategies remain aligned with the project’s changing needs. Mr. Bryson urges districts to ensure equipment testing is also addressed in the policy wording. Such policies should accurately define the conditions for delay and testing coverage. If a district opts for Contractor-provided insurance, it may have exclusions or limits that don’t fully cover the district’s specific risks or the full scope of the project. This makes it necessary to monitor the plan to ensure there are no gaps, and the policy covers the full spectrum of potential risks, at all levels of the project.
Conclusion
Minimizing the importance of addressing coverage, whether through contractual risk transfer or district placed insurance, can expose public entities to significant financial, legal, and operational risks during construction or systematic projects. Public entities must prioritize comprehensive insurance coverage and well-structured contracts to protect against these risks. Doing so ensures that fiduciary spending is safeguarded, projects are completed on time and within budget, and potential liabilities are minimized. When managed properly, risk financing and risk transfer can be the key to a smooth, successful public enhancement project. GSRMA agrees with Mr. Bryson when saying—a district’s evaluation of coverage specific to projects “is an administratively efficient way for your organization to achieve real savings that can be quantified—a rarity in the world of risk management.” GSRMA has the resources to help you identify which route might be best for your organization as you consider future capital investments, contact riskcontrol@gsrma.org when planning the future of your public entity.