Contractors’ insolvencies increase risk in the solar industry
Insurers are scrutinising projects more carefully because the risk of insolvencies is on the rise.
Recently, Renew Economy reported on ‘the dark side of big solar’ providing some insights into the ongoing insolvency and collapse of contractors (https:/reneweconomy.com.au/hung-out-to-dry-the-dark-side-of-big-solar-75803/).
Developments in the booming solar energy sector in Australia can illustrate how quickly claims can rise if several contractors file for insolvency. A number of projects had to be delayed recently, resulting in liquidated damages imposed, and missed final payments.
Starting with RCR Tomlimson in 2018, up to now with the collapse of R&L, for those that have survived there are scores who have withdrawn from the market altogether such as Ellaktor, or others such as UGL, Tempo and Decmil who are doing BOP projects only. In a vacuum created by the withdrawal of a number of contractors, a number of lower tier contractors entered the market and have performed substandard work – as an example Lockton have seen clams where backpacker labour was used on construction projects which later manifested into defects claims for faulty workmanship.
As a result of COVID-19, the risk of insolvencies has risen substantially. Research by Euler Hermes suggests that global insolvencies are set to rise 35% by 2021 compared to 2019.
According to law firm Trowers & Hamlins, triggers for insolvencies include:
- Cash flow issues caused by late payments, bad debts and most construction contracts providing for stage payments in arrears.
- Low margins in the sector meaning that profit can be obliterated by unexpected delays or increased costs in the works which the contractor may take the risk of.
- The collapse of a main contractor triggering a domino effect on subcontractors.
Together with grid connectivity and prototypical or larger technology, a project developers’ choice of contractor is the most significant issue for the insurance market. Insurers have paid tens of millions of dollars in construction losses for defects or negligent works and as such there have been changes to how insurers look at contractors and provide insurance for contractors. Some examples are:
- Insurers are scrutinising the proposed Engineering Procurement Construction (EPC) or Operations & Maintenance (O&M) contractors before offering any cover. Previously, this was offered automatically.
- The indemnities between the operator and the contractor are critical to understanding the allocation of risk and insurers will seek to ensure that these are well understood.
- Where the contractor is a global company new to the local market, their experience on projects overseas will be taken into consideration.
- If an insurer has an issue with a specific contractor this can lead to higher deductibles or restricted coverage
- Where there have been previous defects or claims on a project, insurers are increasingly seeking to exclude any cover for these issues until they have been fully rectified.
In our view, the experience of overseas contractors will not automatically qualify them as competent if their local experience is not significant. Many international contractors fall over in the Australian landscape due to poor understanding of contractual risk allocation, IR laws, local weather conditions, access and logistics.
As the insurance market continues to harden, insurers will keep asking more probing questions about the contractual arrangements and the use of contractors. Lockton remains proactively optimistic that broad cover and competitive premiums are available for clients that can articulate a good risk profile and contractor due diligence. When looking to transfer risk to the insurance market, Lockton recommends the following to be considered in relation to contractors:
EPC / O&M Agreements
Ensure that there is an appropriate allocation of risk to the Contractor and any assumed liability is made clear to insurers
Invest early in quality, independent risk engineering. This will identify any issues on site and allow insurers to satisfy themselves of any defects.
Understand the warranties on components and communicate this to insurers. Lockton have helped clients with warranty backstops and system performance output guarantees, which increases a projects bankability and provides comfort to insurers.
For further information please contact:
Manager - Power & Energy
Lockton Companies Australia
Mobile +61 419 595 187 | Office +61 (3) 9492 6619