In the current economic and credit crisis, construction entities — project owners, contractors, architects, engineers, material and equipment suppliers, and end-use customers — are all facing unprecedented levels of financial uncertainty. The financial deterioration of any of those entities can create substantial challenges for the construction project at hand and, in severe cases, may impact the ability of the project to continue as scheduled.

In instances where a project enters a standstill period, both a proactive approach to address exposures, and a continued focus on risk management and loss prevention practices are essential. A fully documented property conservation program implemented by the property owner and contractor can help to reduce the likelihood of property losses as the project enters the standstill phase. Documentation also can help facilitate the successful resumption of the project in due course.

Winding Down

The first stage of winding down should begin well before the decision to stop work at the project site is contemplated. As financial difficulties emerge, cost savings strategies such as lowering skilled labor qualifications or reducing site safety protocols can be tempting.

Such measures, however, can quickly transform a well-run project into a severely stressed project. For example, accepting a low-bid labor force without paying attention to required skill sets can lead to quality control and workmanship issues that create costly work-site inefficiencies.

Other cost-saving measures under consideration by the project owner may involve reducing overall management oversight at the worksite. However, this can result in problems such as an increase in workforce safety issues due to site congestion or increased property risk exposure as attention to debris cleanup, proper storage of combustibles, and maintenance and storage of critical equipment wanes.

Meanwhile, owners and contractors also have to be aware of the potential for moral hazards once the decision has been made to shut down a project. The frequency of arson, theft and water damage events may increase as workforce reductions become apparent. Therefore project oversight, including the maintenance of high loss prevention standards and proper site security, is paramount throughout the standstill transition period.

Conservation Practices

As soon as the decision to wind down a project has been made, it is critical to establish a written policy to address property conservation practices and establish authorities and responsibilities across the project team. Specific actions should be undertaken for the purpose of protecting property assets from the threat of accidental loss, including natural hazards exposures.

The project site should be adequately secured to control site access and deter unauthorized entry. All construction debris should be removed, and prudent housekeeping practices should be followed.
All fire protection services should be maintained, the local fire department consulted and emergency response plans formulated.

In addition, temporary measures to protect and preserve property from weather-related exposures should be implemented, and maintenance of critical on-site equipment should continue throughout the standstill period according to the original equipment manufacturer's recommended maintenance and storage practices.

Communication

Effective communications among the various construction entities including owners, facility engineering and maintenance, finance and purchasing, suppliers and contractors can help to minimize the potential for loss during the standstill period. The project's insurance provider should be at the top of the notification list.

Proactive communication between a policyholder and its insurers reaffirms and respects the partnership created during policy negotiations. This communication may also satisfy contractual obligations typically contained under property construction programs with respect to cessation of work conditions at a project site.

Policy coverage warranties generally provide a maximum cessation coverage period and, once the insurer is notified and assured that the property will be protected and maintained, it may be open to negotiating extended coverage for the standstill period. If a project owner does negotiate an extension, he or she will need to provide the insurer with periodic updates on the project status and confirm that property conservation programs are maintained.

Restart Operations

As a project emerges from standstill, the loss prevention efforts undertaken to secure the work site and maintain equipment can help to facilitate the restart of construction operations. By using a well-documented and executed standstill protocol, comprehensive records of site conditions, building and equipment preservation and maintenance procedures, and incident details can be reviewed to establish requirements to restart the works.

Following a lengthy standstill period, a comprehensive due diligence exercise will need to be undertaken to identify the structural, electrical and mechanical integrity of the property at the work site. A detailed analysis to determine appropriate actions, including the repair, refurbishment, or replacement of property, will also be required. This process may require the assistance of third-party experts, as well as may require original equipment manufacturers to assist in the review process.

For critical high-value equipment, project owners will need to determine what specific actions are required to reinstate the original equipment manufacturer's warranty provisions.

Upon completion of the above process, the selection process for contractors and applicable consultants can be undertaken to restart the works, develop a revised time schedule and complete the project.

While a standstill project exposure can present numerous challenges, implementing a proactive approach to protecting and preserving property can help mitigate the risks. This philosophy must resonate throughout the project team from the first indication of financial distress throughout the entire standstill period.

With proper adherence to a comprehensive risk management policy, the project will have the solid footing required to emerge from standstill and re-initiate the works toward a successful completion.