It will come as no surprise that the global construction industry was substantially impacted by the COVID-19 pandemic. Site closures by government mandate in some jurisdictions, transportation issues, border closures, supply chain issues, inability to move materials and labourers, a generalized shut down and stoppage resulting in delays and disruption, you name it. That, coupled with rising inflation and increasing costs, increasing 20-30% on some projects and now a war in Russia and Ukraine. Not a pretty picture from anyone’s perspective.
The obstacles encountered by the pandemic were magnified in Latin America because of the complex economic and political environment, especially a sector which was still seeking to recover from the Lava Jato scandal. Consequently, in order to protect and promote investment in infrastructure on this side of the globe, sureties have come to the fore front.
Focus turned to force majeure clauses utilized instead of triggers on bonds and guarantees. In fact, in some countries, like Peru, we saw a government ban on the trigger of bonds which provided some respite to guarantors who would otherwise have been crippled by calls on bonds. It remains important that sureties continue to support large infrastructure projects and provide the necessary backing to this sector, especially with so much in the pipeline in Latin America; major roadway concessions in Colombia, the Reconstruction with Changes project in Peru, funding across the region from the UK prosperity fund, to name a few.
The net result was more contractual negotiation at the ground level which has seen us through this difficult time. Believe it or not, we are now seeing a rise in construction across the globe for the first time in a while. This is a welcome step in many respects as in LATAM, in particular, performance bonds are often triggered prematurely and without justification. With some on-demand jurisdictions, the stakes are high and a trigger can set hares running. It is good to see some level of policy intervention as contractual issues should first be addressed at contract level, and with the direct insurances before a bond is even triggered.
The result of this is a more competitive surety market with international support for projects in countries which previously lacked investment. The rise of government-to-government projects, like the RCN in Peru, should also help us see more stability in the sector. The next step will be for all these different products to come together via a universal language, used back-to-back with the underlying contract. In this way, there will be less doubt going forwards as to who will respond when needed.
Whilst the pandemic is not yet over and we all wonder if it will ever be, there is some light at the end of the tunnel and some positive outcomes which are here to stay. The pandemic brought new opportunities for technology and innovation and a heightened awareness of ESG (Environmental, Social, Governance) to the construction sector. The legal and insurance landscapes are consequently also changing.
Design professionals need to be trained and up to speed with the use of 5D Building Information Modelling (BIM) and digital twin. Both technologies allow designs to be produced with greater accuracy and collaboration between remote teams. Designers will feed into the collaborative design process at an earlier stage with more sophisticated digitally visible output. At a time when site meetings and in person discussions are rare, technology like 5DBIM and digital twin has become our friend. The goal being less room for error when the ground is broken, removing some design risk from the Construction All Risks policies (CAR) and LEG clauses and shifting it to the professional liability policies where off site design is focused.
The line between the various insurances on construction projects is often blurry. Pushing such technologies to the forefront forces the need for greater clarity and understanding of what various insurance policies are needed on any one project. It will also ensure sufficient professional indemnity insurance (PI) at the outset. So much emphasis will be placed on the pre-design stage now that BIM is becoming more common. Understanding the cobweb of designers on various projects will also be key for any design and build contractor who will assume that risk and ensure that sufficient professional indemnity insurance is in place. CAR insurers will also want to see that PI is properly in place for these more complex projects so they can direct claims to the right policy. Further, underwriters can take comfort that there is sufficient design cover elsewhere. This will be especially important given the precarious standing of the sector after such a tough period.
One thing is for sure, whilst physical borders may have closed, we have become a smaller world with the use of technology and innovation. We can now connect more readily and this should have a positive on the construction sector as it does on others. It also points the finger at other policies not typically associated with construction like the need for cyber insurance. But that’s another story!
Author: Anna Weiss, Regional Managing Partner for Latin America and the Caribbean (LAC), Kennedys Miami LAC hub office.