This document provides an overview of the construction industry in the UK, including the current market outlook and some key issues. It notes that the construction sector is showing signs of recovery with growth predicted at 5% in 2015. However, it also outlines several risks and challenges facing the industry, such as skills shortages in trades like bricklaying, the introduction of new technologies like building information modeling (BIM), an increase in timber frame construction which poses greater fire risks, more extreme weather patterns due to climate change, and the risk of purchasing counterfeit equipment to meet demand. The document aims to help insurers understand the issues in the sector in order to provide robust risk management support and advice to construction firms.

1. Allianz Insurance plc
Construction
Part 1
Market Outlook
and Issues

2. 2
Allianz Insurance plc
Allianz Insurance is one of the largest general
insurers in the UK and part of the Allianz Group,
one of the leading financial services providers
and the largest property and casualty insurer in
the world.
As a leader in business insurance, Allianz
understands what customers need. Our
commercial propositions cater for small to large
businesses, providing tailored solutions and risk
management services for property, casualty,
motor and engineering.
Our experts have a wealth of knowledge that
can help our customers and brokers keep up to
date with legislation, stay informed of industry
developments, and better manage their risks
– thus enabling them to manage insurance
costs, reduce risks and concentrate on running
successful businesses.
For more information, please visit
www.allianz.co.uk
Euler Hermes Group
Euler Hermes Group, the world’s leading
provider of trade-related insurance solutions,
helps customers worldwide to trade wisely and
develop their business safely. Its financial
solidity, risk analysis and integrated global
structure, enable the Group to provide
companies of all sizes with the domestic
and export market knowledge they need to
successfully manage their trade receivables
in changing economic environments.
December 2015

3. 3
Introduction
After a tough recession, the construction
sector is showing strong signs of recovery
with the number of housing, commercial
and infrastructure projects on the up.
As activity increases, insurance has an
important part to play in its future success.
Understanding the issues facing the sector
and providing robust risk management
advice to support growth, will be key for
the insurance industry.
This, the first White Paper in our two part
series on construction, examines the
outlook of the market and some of the key
trends in the sector, from skills shortages
to changes in construction methods.

4. 4
Market Outlook
Growth is being nurtured by a number of factors. Interest
rates remain low, making financing cheaper, and a number of
government led initiatives such as Help to Buy and the New
Homes Bonus are supporting potential demand and revenue
opportunities within the sector. As a result, Euler Hermes is
predicting growth of 5% for the construction sector in 2015,
with projected turnovers hitting £265bn.
MARKET
Given the demand for new homes, forecasts for
the housing sector are particularly strong. Between
2000 and 2014, annual growth in the housing
construction sector increased by 8.7% and this
trend is set to continue through 2015. Euler Hermes
is forecasting 5.3% growth for the year, with the
sector expected to see turnover of £103bn.
Further, while the number of new homes being
built has increased by 36% in the last three years -
reaching 137,000 dwellings in 2015 - this still falls
short of demand. For instance, in 2014, demand
outstripped supply by 10%.
It’s a similarly positive picture for construction
within the industrial, commercial and institutional
buildings sector. Euler Hermes predicts growth of
2.5% for this sector in 2015, which is particularly
impressive against growth of just 1.1% over the
period 2009 to 2014.
Civil engineering, which represented 19% of
construction in 2014, is also expected to achieve
significant growth this year. Growth of 3.9% is
forecast in 2015 with turnover predicted to
grow by 4.3% due to major investments.

5. 5

6. 6
RISKS
of skilled trade
construction
vacancies are
hard to fill (LGA)
of firms reported
labour shortages
had led to limited
productive
capacity (RICS)

7. 7
Market issues
Although the prospects for the construction sector are positive,
there are a number of issues and trends that may not only
affect growth but also have implications for risks. These include
shortages in skilled workers, the increasing use of building
techniques such as timber frames and icebergs, and changes
in weather patterns.
Skills shortages in the UK
An uptick in construction projects is good news
for the sector but it can also lead to problems
around labour supply with firms struggling to
recruit the necessary staff.
The extent of the problem was highlighted by
the Federation of Master Builders (FMB) in its Q2
2015 State of Trade Survey(1)
. This found that almost
half of construction small to medium enterprises
(SMEs) are struggling to recruit adequate numbers
of bricklayers with others reporting difficulties
hiring carpenters and joiners, site managers
and supervisors.
The Royal Institution of Chartered Surveyors (RICS)
has also noted these issues. In its UK Construction
Market Survey (Q2 2015)(2)
, it reported that 59% of
respondents had found that labour shortages had
limited their productive capacity.
These findings were echoed by the Local
Government Association (LGA)(3)
. It found that
while the construction industry’s forecasted annual
recruitment need was up 54% from 2013, there
are now 10,000 fewer construction qualifications
being awarded by colleges, apprenticeships and
universities. This, it warned, could threaten the
government’s pledge to build 275,000 affordable
homes by 2020.
As well as hampering growth in the construction
sector, shortages of skilled personnel could
potentially lead to greater risks if staff with less
experience are recruited.

8. 8
RISKS
The introduction of building information modelling
(BIM) could mean that construction firms need to
invest in more IT equipment, potentially requiring
additional cover, as well as cyber insurance, due to
the greater exposure to e-risks.

9. 9
Introduction of building
information modelling
The adoption of BIM is also testing the construction
sector. This is a collaborative process through
which a digital 3D model is created to give insight
into the design, construction and management
of a building.
There are benefits. By having all parties involved, it
gives a better understanding of how each element
interacts. This makes it possible to rehearse a
construction project, highlighting any potential
design issues and driving savings throughout
the project. As the benefits are so compelling,
the government is mandating the use of BIM on
all public sector centrally procured construction
projects by 2016.
But BIM presents a number of challenges
for insurance. These include:
• Liability - with so many people working on the
same model, determining liability if something
goes wrong with the build could be an issue.
Having tight controls and audit trails in place
will be essential.
• Intellectual property - as the model will have
input from various sources, it will be essential to
determine who owns it and what permissions
there are around it.
• Property and computer covers - the introduction
of BIM could mean that construction firms need
to invest in more IT equipment, potentially
requiring additional cover, as well as cyber
insurance, due to the greater exposure
to e-risks.
The introduction of BIM could also drive wider
change for the construction industry. Not all
contractors will be prepared to invest in the new
technology and may have to consider outsourcing
BIM instead. This will create longer supply
chains, with additional implications for risk
and insurance cover.
Benefits of BIM: The First Direct Arena in Leeds
was managed by Bam, which used BIM to achieve a
variety of savings including 9,000 drawings, 15,000
man hours and numerous major design clashes
during the build. Going from the typical 100
design clashes to just two saved in the region
of £350,000.

10. 10
Increase in timber frame construction
Demand for housing is helping to drive an increase
in timber frame construction throughout the UK.
But, while using timber can make construction
cheaper and faster and deliver properties that are
more energy efficient, there is also a potential
disadvantage - the fire risk.
Analysis of fires in buildings of timber framed
construction by the Department for Communities
and Local Government(4)
, found that fires in
timber frame dwellings under construction had,
on average, larger areas of damage compared
to dwellings of no special construction. Almost a
quarter of fires (24%) in timber framed dwellings
under construction resulted in damage of an
area in excess of 100m2
, compared to just 4% for
dwellings of no special construction.
As timber frame buildings are at their most
vulnerable to fire during the construction phase,
and particularly before external cladding or internal
plaster boarding is put on, firms should ensure they
take appropriate steps to reduce the risk.
First and foremost, it’s sensible to minimise
exposure. Good planning can help ensure that,
where possible, construction firms narrow down
the rolling window of exposure by making sure
surface finishes are fixed promptly. In the case
of house building, using good site planning to
reduce the number of adjacent dwellings under
construction at any one time, in conjunction with
applying surface coverings, assists in limiting the
potential of fire spread.
This can be more difficult with social housing,
which is more commonly terraced, or with
commercial projects that are large single
structures, as illustrated in the case study.
It is also advisable to follow the Joint Code of
Practice on the Protection from Fire of Construction
Sites and Buildings Undergoing Renovation
(JCoP). This sets out the specific measures that
should be followed with the aim to prevent fires
on construction sites. Its recommendations
represent best practice and include site security,
to reduce the arson risk; building in fire protection
during construction; designing out hot works; and
compliance with the Construction (Design and
Management) Regulations.
RISKS

11. 11
Case study - University of Nottingham
An electrical fault is believed to be the cause of a fire that
destroyed a University of Nottingham laboratory that was
under construction in September 2014. The £20m timber
framed GlaxoSmithKline building was nearing 70% completion
when a fault in the temporary power caused a fire to start.
At this stage in construction, there were no fire doors or
glazing in some areas, creating open voids between floors
that enabled the fire to spread rapidly. More than 60
fire-fighters attended the site, with operational activity
continuing for three days, but the nature of the fire
meant it was a total loss.(5)
Icebergs
Icebergs, the name given to the multi-storey
basements that are becoming increasingly
common in London as homeowners look to
increase their living space without moving house,
are another design feature that presents issues
for the insurance industry.
As these projects tend to be technically challenging
and involve significant structural alterations
and excavations, the risks are often substantial.
Proper and careful planning and the sourcing of
competent engineering advice – both in advance of
and during the works – is critical.
In terms of risk management advice and guidance
relevant to such projects, areas of particular focus
would include:
• Selection of competent designers and structural
engineers at the design stage.
• Selection and appointment of competent
contractors, with experience and knowledge of
undertaking this type of project.
• Appointment of a competent temporary works
engineer to design suitable propping to support
excavations and existing structures.
• General arrangements for day-to-day
management of the site and project to
ensure identified precautions are
implemented and maintained.
• Arrangements for liaison with owners or
occupiers of adjoining properties, recognising
the potential nuisance issues arising as a result
of the works, including noise, dust and vibration.
The nature of these constructions means
there are also issues to consider following
construction. Being underground means there
can be a greater risk of flood water entering the
property, causing damage but also potentially
resulting in electrical fires.
To manage this increased risk, property owners can
take steps such as tanking and the use of pumps to
prevent water ingress, as well as having their drains
regularly cleaned and fitting anti-back flow devices
to help to keep the water out.
But while icebergs may be creating a buzz, it
could be a short-lived trend. The Royal Borough
of Kensington and Chelsea has already banned
this type of development and it’s likely that other
councils will follow suit. However, while extending
a property underground remains an alternative to
moving house, it’s a development that needs to be
watched closely.

12. 12
Weather events
Weather patterns are changing in the UK, leading
to increases in both the severity and frequency
of extreme weather events such as flooding,
windstorm and large hail.
One of the reasons behind this is likely to be
changes to the jet stream, which is a major
determinant of the weather we experience in
Europe and North America. Research(6)
by
US professors Jennifer Francis and Steve Vavrus
has found that, as climate change pushes up
temperatures in the Arctic, this is causing the jet
stream to take a wavier path, resulting in more
extreme and prolonged weather events.
The changes in weather patterns will affect the
construction industry in a couple of ways. As
well as ensuring that properties are designed
to withstand more extreme weather patterns,
construction firms may also need to adjust the
way they work. This could include making sites
more weather resilient so they are not prone to
flooding or wind damage.
Changes may also need to occur to the construction
process. For example, with storms more likely, it will
be increasingly important to ensure foundations
are in and protected from water ingress and that
there is as little open exposure as possible in a
property, as this could be prone to wind damage.
In order to respond to these challenges, the
industry needs to look around the globe at places
where these hazards have already existed for some
time, and where practises and methods
have evolved to combat these exposures.
While adapting to the new weather patterns may
lead to additional costs for construction firms,
for example adjusting building sites to reduce
flood risk, over time this approach is likely to bring
significant benefits.
RISKS

13. 13
Although green belt land is largely
protected from development, the
number of new homes being approved
on this land in England has increased
five-fold over the last five years.
Green belt building
Although green belt land is largely protected from
development, the number of new homes being
approved on this land in England has increased
five-fold over the last five years.
According to figures from construction data
analysts Glenigan, while 2,258 homes were
approved to be built on green belt in 2009/10,
this had increased to 11,977 by 2014/15(7)
. Further,
research(8)
by the Campaign to Protect Rural
England (CEPRE) has found that local plans are
proposing more than 226,000 homes on
the green belt - most of which will be in addition
to the properties that have already received
planning permission.
But, while building on green belt may be necessary
to meet the demand for housing, it can also
increase the risk of flooding. For example, CEPRE
argues that, as a result of climate change, green
belt land is likely to have an increasingly significant
role in storing carbon and preventing flooding.
Although properties built after 1 January 2009 will
not be covered by Flood Re, which should help
to incentivise sensible planning in high flood risk
areas, it will be important to ensure that the risks
are adequately assessed when building on green
belt land.

14. 14
Counterfeit cranes
Increased activity in the construction market also
heightens the risk of counterfeiting as criminals
exploit demand for plant. As well as performance
and safety issues, acquiring counterfeit equipment
can have serious financial implications.
An example of this is the recent warning issued
by manufacturers Terex relating to counterfeit
cranes. It had identified instances of counterfeit
Terex/Demag crawler cranes originating from
South Korea.
The counterfeit cranes, which had been assembled,
branded and sold as Terex cranes, either painted
white under the Terex brand or red with the Demag
badge, were made from a mix of different parts,
often not designed to work together. Additionally
the counterfeits had poor weld quality, inferior
steel structures, improperly fitted tracks and were
missing many of the standard safety components.
As well as posing a potential safety risk, the
implications for the owner can be very serious.
“Depending on size, even second hand cranes can
cost £1m or even more, meaning that often they
are financed,” explains Neville Green, Underwriting
Manager at Allianz Engineering.
“This means that if it’s found to be counterfeit,
either during a routine inspection, servicing or
following an accident, the valuation may well
plunge, the crane may not be able to be used
and with finance still outstanding and needing
to be paid, it could potentially put the owner out
of business.”
Although, in the event of an insurance claim,
liability may not be an issue if the owner can show
they bought it in good faith, the fact that a crane
is counterfeit could have a serious impact on the
value of the crane and hence the amount an insurer
would pay. In addition, they would still be left with
a crane that would either need to be scrapped or
would require considerable investment to bring it
up to standard.
To help firms reduce the risk of purchasing
a counterfeit crane, Green recommends the
following steps:
• Arrange a thorough inspection of the crane
by a qualified engineer before purchasing.
• Ask the seller for the last inspection report.
• Check the provenance with the manufacturer.
• Remember - if it looks too good to be true,
it probably is.
RISKS
The fact that a crane is counterfeit could have a serious
impact on the value of the crane and hence the amount
an insurer would pay.

15. 15
“This means that if a crane is found to be
counterfeit, either during a routine inspection,
servicing or following an accident, the valuation
may well plunge, the crane may not be able to
be used and with finance still outstanding and
needing to be paid, it could potentially put the
owner out of business.”
Neville Green, Underwriting Manager at Allianz Engineering

16. 16
Conclusion
As the construction sector continues to benefit from demand
for housing, commercial and infrastructure projects, it will be
essential for the insurance market to understand the issues it
faces in order to support this growth.
While there are opportunities for construction
firms, they also face a number of significant
changes and challenges. These range from changes
in construction methods and the increased use of
technology in building design through to a growth
in counterfeiting of plant and equipment and
weather-related issues.
Part two of our construction White Paper series
will examine some of the associated regulatory
changes and risk management topics,
highlighting the insurance related issues.
Providing risk management advice and insurance
insight is a key way the insurance industry
can support these businesses. By working
together, insurers and brokers will be able to
ensure the construction sector continues to
build on its successes.
(1) http://www.fmb.org.uk/about-the-fmb/newsroom/building-boom-endangered-by-skills-shortage/
(2) http://www.rics.org/Global/RICS%20UK%20Construction%20market%20survey%20Q2-2015.pdf
(3) http://www.local.gov.uk/web/guest/media-releases/-/journal_content/56/10180/7435305/NEWS
(4) https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/66062/Timber_frame_analysis_17_Jan.pdf
(5) http://committee.nottinghamcity.gov.uk/documents/s18768/Jubilee%20Campus.pdf
(6) http://marine.rutgers.edu/~francis/pres/Francis_Vavrus_2012GL051000_pub.pdf
(7) http://www.bbc.co.uk/news/business-32998019
(8) http://www.cpre.org.uk/media-centre/latest-news-releases/item/4033-60th-anniversary-poll-shows-clear-support-for-green-belt
CONCLUSION

17. 17
At Allianz we can support you
with a range of insurance and
risk management solutions.
To find out more about what
we offer, speak to your broker.

18. 18
Notes

19. 19
Notes

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ACOM682012.15
Allianz Insurance plc. Registered in England number 84638. Registered office: 57 Ladymead, Guildford, Surrey, GU1 1DB,
United Kingdom. Allianz Insurance plc is a member of the Association of British Insurers. Allianz Insurance plc is authorised
by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation
Authority. Financial Services Register number 121849.