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Contractors' All Risks
Monday, May 5, 2014 - 09:01
Reasons why

The cost of insuring public infrastructure projects in South Africa doubled between 2011 and 2014, due to a combination of vandalism, theft and poor workmanship by unqualified contractors.

This is according to Pride Choruma, Local Authorities Manager at Lion of Africa Insurance. He says that unless the Government introduces stricter procurement processes and quality control measures for contractors, the cost of insuring public infrastructure projects in South Africa is estimated to triple over the next two years.
While the City of Johannesburg should be lauded for increasing its budget on maintaining existing infrastructure from 2,5% to more than 7% in 2014, the emphasis should be placed on developing long term risk management processes to reduce costs. “The issue of vandalism, theft and underperformance by contractors should be tackled head-on. Municipalities should work closer with their insurers to implement risk management strategies that will lead to cost savings on maintenance and reduced insurance rates,” adds Choruma.
He says that from an underwriting point of view, the common risks associated with insuring infrastructure projects include, but are not limited to:
• Poor workmanship from unqualified contractors;
• Poor maintenance;
• Deteriorating infrastructure;
• Vandalism and theft;
• Liability claims from the public and;
• Poor project planning which leads to greater risks like flooding.

“The biggest risk lies in appointing unqualified contractors that expose municipalities to financial and liability risks, due to delays in completing projects and poor workmanship,” he says.
He explains that before a tender can be awarded, municipalities should ensure that the contractor is qualified and has a performance bond guarantee that verifies their credentials. Furthermore, contractors are required to take out a Contractors’ All Risks (CAR) insurance policy when working on large construction and infrastructure projects. However, when contractors default and abandon projects, the municipality is often held responsible for any liabilities incurred by the contractors.
“As a result, many construction and infrastructure projects get delayed and additional funds are required to sustain the projects. For example, if a contractor has defaulted on insurance and a citizen gets injured due to equipment failure and poor safety hazards, the municipality will be held liable,” says Choruma.
He advises municipalities to take out a principally controlled CAR policy when a contractor is appointed. This allows municipalities to take out insurance on behalf on the contractor by deducting the amount in their contract.
“With the City of Johannesburg having committed to spending R110 billion in infrastructure development over the next 10 years, the implementation of stricter procurement processes and quality control measures for contractors will go a long way to ensure the effective delivery of infrastructure development projects.”

Copyright © Insurance Times and Investments® Vol:27.5 1st May, 2014
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