Construction: Protecting Profits in Stormy Weather
Construction is a challenging field. Prioritizing your client’s vision within the parameters of engineering and cost can be difficult to say the least. Events consistently arise from the initial planning of the project to finalization that test those limits. Most formidable are the inevitable delays that occur during construction. Ideally, delays are best addressed in the early stages when strategic planning can reduce this type of setback. Completely halting work to deal with a delay can affect sub-contractors, schedules, permits, and most importantly it can escalate overall costs and push the completion date out. Moreover, if Old Man Winter comes early or spring/summer rains bring torrential downpours those delays can become a costly and insurmountable obstacle.
Precipitation, extreme heat, temperatures in the negatives, wind gusts…weather is one of the most commonly cited causes of construction delays. In the past, to assess reasonable costs and delays associated with adverse weather, a knowledgeable contractor used weather data to determine the likely number of non-optimal days (those days affected by adverse weather conditions such as heavy precipitation, extreme hot or cold, etc.) to complete a bid. While this may have been standard protocol in the past, climate change has made using data to predict seasonal or annual weather extremely difficult. Simple calculations using historical weather data can no longer be used effectively to gauge the potential days lost due to adverse weather. Weather patterns have changed and there is greater uncertainty of what the weather will bring with climate change impacting weather.
Weather delays are often determined to be no-fault. Further, weather loss tends to be non-compensable, so as a crew watches the heavy rains come in from the security of their cars they still need to be paid. The job is not moving forward but the financial obligations are still there and your overhead costs are going up and up. In some cases, delays can be so sizable and excessive due to adverse weather force majeure may be indicated as the cause of delay. Force majeure, sometimes referred to as the Act of God clause, is failure to uphold a contract due to unavoidable or uncontrollable events like extreme weather events. To prove a force majeure event, a party must demonstrate that the event occurred, it was out of their control, the event prevented or delayed performance, and plans to lessen or prevent impacts were attempted. Adverse weather can tiptoe or plunge headfirst into this category and can be an allowable pretext in breach of contract suits, which can sometimes be favorable to a contractor. However, a breached contract requires litigation, lost time, mounting expenses, and potentially a tarnished reputation within a community. Force majeure is sometimes seen as a cost of doing business, but does it have to be?
Abnormal weather conditions are becoming normal, and businesses must have added protection against this new normal. There are solutions to help mitigate your risk from adverse weather and its impact. First, you can write a contract that has you and your client’s best interest in mind distributing weather risk evenly between parties. Weather delays are often non-compensable, which can cause large financial losses to a construction company. Today, a contractor may extend their ability to utilize weather claims with a contractual clause. This clause delineates that compensation will be paid to a contracting firm for extensive or excusable weather-related delays citing the necessity to cover costs in keeping crews and attentions devoted to this project. In this scenario, a client becomes responsible for some of the more extensive costs related to adverse weather claims.
Secondly, utilizing a weather risk management product such as weather insurance or derivatives can help substantially reduce risk in cases of adverse weather conditions or a series of non-optimal days. These are highly specific and tailor-made products to suit a business’ or institutions’ needs to mitigate against adverse weather impacts. Weather perils such as excessive rainfall, days that are too hot, days that are too cold, wind, or a combination of elements can be insured against to lessen potential risk. For example, a job often begins with foundation work. Concrete pours have several limitations in regard to optimal temperatures and conditions. If adverse weather delays this portion of the construction process, there will be a stall and trigger delays on other portions of the job. Sub-contractors may be unavailable with this new timetable and the building schedule will never hit its anticipated deadline. Losses are now imminent. For those jobs that are most impacted by weather, e.g. excavating, framing, concrete, landscaping, weather insurance can be utilized for a very specific customizable period to lessen risk from adverse weather events. Coverage could simply be purchase for the duration of this process or it could be purchased for the extent of the entire project. Any business can purchase weather insurance, so if a payout is triggered, compensation goes directly to the purchaser—your business. Typically, National Weather Service data determines disbursements. Dealing with insurance adjusters and filling out long documents to “prove” your claim is not a part of this process.
An awareness that delays will be a likely part of any operation is just a part of life. Foreseeable weather delays can sometimes be calculated for using NOAA data to anticipate the likelihood of adverse weather delays in construction. However, climate change and weather’s increasing unpredictably has made calculation of non-optimal days extremely difficult to determine. Weather has never been less predictable. The risk of having a non-optimal scenario during a long-terms project, or even in the short-term is increasingly probable. To lessen financial risk, it makes sense to have a well-written contract that considers some type of weather risk coverage to help eliminate the costs associated with the increased likelihood of adverse weather. With adverse weather conditions, losses are imminent. Protecting yourself and your business makes solid fiscal sense.