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Procurement Perspectives: Gauging the temperature of the construction industry

0 42 Government

by Stephen Bauld

In a country prone to extreme variations in weather — with temperatures ranging from the high 90s in the summer to 30 below in the winter — materials, equipment, personnel and the quality of work can all be adversely affected.
Procurement Perspectives: Gauging the temperature of the construction industry

Delays in project completion and increased costs are the inevitable result. The allocation of risk relating to weather is thus a matter of critical concern to both the owner and the contractor.

Most contractors will include a hedge factor in their contract price to protect them against the risk presented by inclement weather.

Although it is not possible to predict reliably on when it will rain, weather patterns are generally similar from one year to another. For instance, in a given area, April may average 15 days of rain, while June may have an average of only seven.

If the contract runs from April to July, these averages can be factored into the price. In fact, there is now "weather risk management" computer software available to facilitate the process of working out the proper amount to include for this purpose.

Sophisticated owners often include provisions in the contract to adjust the price if the weather is unexpectedly good. Such arrangements are usually balanced by an off-setting payment that is made if the weather is unexpectedly bad. This year we have had a great deal of rain so far, which is most likely causing problems with projected completion times for projects.

For instance, if April averages three inches of rain in a given area, but only 1.5 inches fall during construction, the price will be adjusted down to reflect the better conditions that actually prevailed during construction. If, however, the construction site is hit with four inches of rain, then the price is adjusted up accordingly. Similar adjustments can be built into contracts in relation to temperature, snow and other weather conditions.

It is also possible to take out insurance coverage against the risk of poor weather. Coverage depends on the specific circumstances of a contract. In particular, the coverage must be tied to the risk for which the contractor is liable under the construction contract.

However, as an example, a contractor might purchase $100,000 of insurance for every half-inch of rain over the two-inch average in June, so that the average level of rainfall is used as the "strike" or the "trigger" point.

Obviously, neither the owner nor the contractor has the ability to control the weather.

However, both have the ability to undertake steps that can mitigate the impact of adverse weather conditions.

If properly advised by the contractor as to the extent to which weather is likely to impact the construction process, given historic experience, it is usually possible for the owner to arrange its affairs so as to avoid severely adverse consequences resulting from delays that should have been anticipated.

Also, since the adverse impact of weather is greatest during the early phases of the construction process, the owner can structure the payment schedule under the contract so as to encourage the contractor to proceed quickly with such early work.

The greatest opportunities for mitigating weather-related risk resides with the contractor. In addition to increasing the size of work crews, to catch up on the work delayed due to inclement weather, aggressive scheduling can facilitate the catching-up process.

In addition, it is important to note that the adverse impact of weather conditions is far from uniform.

Weather has potentially two distinct influences on construction.

There is, on the one hand, the seasonal effect. Construction activity is hampered by the adverse conditions which prevail from the late fall to the early spring. A secondary risk is the effect of unseasonable weather. The impact of bad weather is more significant on starts then completions.

Stephen Bauld is a government procurement expert and can be reached at swbauld@purchasingci.com. Some of his columns may contain excerpts from The Municipal Procurement Handbook published by Butterworths.

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