OCIPs can cut cost of stadium construction
Old timers remember the days when a stadium was a place to watch a ball game — period. Bad sight lines, mediocre food, scant comfort facilities and exposure to the elements were all part of the experience. Today, the spectator’s experience in modern facilities is hardly one of self-denial. New comforts — from waiter service and gourmet foods to instant replay televisions in every seat’s arm rest — have changed the concept of what going to the ball park is about. Even Chicago is talking about building a facility that removes had weather as a factor in spectator comfort.
The new environment has sports teams on the move — motivated by the ability to make venues super-profitable. Venue owners are pushed to improve their existing physical plants to meet income projections or build new structures I that can deliver stellar I results. The leverage, of course, comes from the threat of teams moving to new cities that promise to build suitable structures for the marketing realities of the year 2000 and beyond. Existing sports facilities are not always physically worn out but have become financially obsolete by the revenue potential of luxury box sales.
The current trend is to have the public entity in the city where the facility is located assume responsibility for at least 80 percent of the financing and 100 percent of construction management.
The need to make facilities television and corporate sponsor-friendly and the costs of these new sports palaces have risen dramatically.
Economic development, inner city revitalization, demanding construction schedules and local politics often complicate an already elaborate building project. Still, elected and appointed officials find it hard to believe insurance can have an impact on the outcome of large-scale building projects. Building sites in abandoned industrial areas, innovative designs never before attempted and intensive public scrutiny of the building process all create the potential for problems.
The definition of a great location varies. For some, sports facility construction becomes a valuable tool to revitalize downtown areas that are politely described as distressed.
For example, Cleveland and Baltimore used stadium construction as a method of encouraging redevelopment around anchor locations, and the favorable results are encouraging similar redevelopment projects in other cities.
Most areas targeted for redevelopment are long-abandoned industrial sites that may have significant pollution problems. Clean-up and remediation costs can add significantly to the cost of preparing the site for construction of the planned facility. Thus, some sites are rejected out of hand because they are perceived as involving clean-up costs that will make a project unworkable, both politically and financially.
Driven by concerns about architects `and engineers’ liability and the assumption of design risks, many owners of planned facilities now require more substantive evidence of adequate insurance and indemnification. Contractual obligations regarding delay in opening or starting the project, as well as team owner-imposed penalties for not finishing the facility on time, also create disputes. Public financing of the facility usually results in the public entity assuming control of the entire construction project.
Given such a process, the public’s expectations create a need to protect the diverse interests of all stakeholders at the lowest cost possible.
Consequently, many public entities have been searching for a method to stabilize the cost of risk in these very complex construction projects.
The Integrated Wrap-Up-Program, sometimes known as an Owner Controlled Insurance Program (OCIP), is usually defined as the placement of a single insurance program that covers all job site risks of the facility owner, the project manager, the general contractor and all subcontractors in a large-scale
I building program. The traditional coverages of workers’ compensation, commercial liability, excess liability and builders’ risk insurance are purchased by and directly benefit the facility owner.
With an OCIP, the traditional 3 percent to 6 percent of building costs allocated to insurance is reduced by half.
Bulk purchase of all the insurance by one buyer creates tremendous leverage with the insurance marketplace and allows one insurance program to maintain safety, claims management and consistency of coverage terms and limits of insurance. If a claim occurs, it is handled efficiently and appropriately without finger pointing or negative media coverage of the project.
Few public entities understand how insurance requirements in construction contracts limit the pool of contractors available to bid on projects. Providing the insurance as part of the bid process spurs healthy competition among contractors. Many contractors view insurance programs as a source of profit: The insurance cost is often included in the bid worksheets at the retail cost, although the true cost is actually a wholesale cost. Combining a 1.5 percent to 3 percent margin attributed to insurance and adding overhead and administrative burden to the retail insurance costs quoted in the bid leads to a significant cost increase.
A few special-interest groups persist in safety promoting the idea that insurance should be a consideration in selecting low-cost contractors. In this view, high insurance cost indicates a poor contractor, and low insurance cost indicates the contractor’s relative quality.
Ironically, low insurance cost can result from buying inferior coverages, misreporting payroll data or even creating fictitious companies.
The Integrated Wrap-Up Program extends the traditional OCIP to include such coverages as building site pollution remediation and clean-up activities, professional errors and omission coverages needed by the architects and engineers, and project delay and other ancillary coverages that protect not only the physical risk of loss but also the financial risks to the public entity. Project completion coverages and operational coverages can also be included in the Integrated Wrap-Up insurance program.
A broker or insurance consultant can help evaluate the potential savings from the Integrated Wrap-Up approach. First, it must be determined whether public entity OCIPs are legal in the state. If they are not, special legislative relief, such as obtaining permission from the state insurance department or from the governor, may become necessary.
An experienced broker or consultant can obtain a capital improvement budget or preliminary bid document to create fairly accurate estimates of insurance costs with contractor-provided insurance or Wrap-Up coverages provided by the public entity. Because of the non-traditional label hung on public entity OCIPs, opposition can be expected. A well-thought-out education campaign is the best way to defuse such opposition. Constituencies should be identified and brought into the discussion at the right time.
The decision to implement the Integrated Wrap-Up should be prior to and independent of the construction bid process if the list of constituencies includes elected and appointed officials, union representatives, local insurance agents, local contractors and others who may have an interest in site acquisition, economic development and project management.
Public entities should not try to use any Wrap-Up or OCIP product without a clear understanding of the concept and the management obligations it imposes. This type of program will only work when management wants to control the construction process.
The safety program is a key underwriting criterion for the insurance markets to evaluate. Underwriters want clients willing to enforce safety practices and procedures before a calamity occurs. This means the entity must have complete organization goal congruence. Contractors need to know that they will be held responsible for the safety program and that the project can be stopped for safety procedure violations and offending employees sent home or fired. Additionally, the contractor must be aware that the contract can be terminated with one or two warnings.
Selecting the broker to administer the Wrap-Up and place the insurance programs is as important as any other aspect. The size and complexity of a stadium project today, and in the next five years, requires a rigorous selection process. This process is not bid procedure. A professional services firm with experience, a good reputation and quality team members must be selected.
The Public Risk Management Association maintains files on public entity RFPs for broker selection. To provide a seamless effort, large, complex programs need coverages and limits of liability that require sophisticated insurance companies. The insurance market is limited, and allowing brokers to approach markets before knowing their qualifications can result in higher costs and inferior insurance programs. Responsible bid documents require informing project managers or prime contractors of the Integrated Wrap-Up Program before asking for submission of bids. They need to know about the proposed insurance programs, submitting their costs, participating in safety programs and other features requiring special attention. Releasing bid documents before announcing the Wrap-Up only causes confusion, drives up costs and can contribute to mistrust between the parties involved.
An OCIP does not change the legal relationship between the construction project participants. Rather, the OCIP consolidates purchasing power, safety and claims management and does not relieve any party of legal obligations.
It is shared values and a sense of partnership among all contractual parties that make the OCIP work.
Public entities can use the Integrated Wrap-Up insurance program to provide cost savings, receive consistent coverage, create economic development opportunities and contain project delays and cost overruns.