How to reduce risks facing developers

Dubai: The recent action of Dubai Municipality in outsourcing its building inspection services (Gulf News, March 28), making the consultants responsible for the quality of construction of buildings, is to be welcomed. The new step is sure to result in better quality, safety and a high standard of building construction and reduce accidents on site.

Accidents during construction can lead to financial loss arising from material damage, or delayed handover. Conceptualisation and development of a real estate project is a serious business involving considerable risks. Whereas the business risks in the project could be controlled by adequate project planning and forecasting, there are however external forces beyond control which can seriously hamper progress.

Defective design and workmanship, accidents during construction and maintenance period, political and credit risks are some of the major risks which a property developer is constantly exposed to. Being closely involved in the project, most of these risks emanate from other interested parties like consultants, sub-contractors and government authorities. These risks have huge financial implications and unless managed effectively, could make serious dents in the balance sheet.

In a real estate project developed and sold by a US national real estate enterprise, carbon monoxide was once discovered, emitting from the heating and air conditioning system of two adjoining apartment complexes, when the poisonous chemical levels were measured at 148 parts per million; more than 100 parts per million is considered lethal. The building's hot water, air conditioning and gas lines had to be immediately shut off and both buildings evacuated, leaving hundreds of families in need of temporary housing.

Not long ago, there was a serious power outage lasting nearly 48 hours, in a prestigious apartment complex in Dubai, managed by a leading property developer. Providing temporary accommodation to the affected tenants would obviously involve huge expenses which are ordinarily not provided for within the project management costs. More and more real estate companies are now going public and getting listed in reputed stock exchanges putting their acts into public limelight.

This would make the real estate firms and the directors and officers that manage them face heightened scrutiny from shareholders, regulators, employees and others.

They also face significantly greater potential management liability.

From an owner's or developer's perspective, the easiest of ways to manage the risks, is to transfer the responsibility to different parties like contractors and sub contractors involved in the projects. The owners would however be taking a bigger risk if they left everything to the contractors expecting them to do a fool proof job. The ultimate responsibility for managing the project risks lies with the owners themselves and it is in their interest to have a total control on risk management. The best way to manage the risk is to entrust the responsibility to professional insurers who have the financial and technical muscles to carry such huge risks.

Specialist insurance companies can offer their real estate clients loss control and consulting services that encompass hazard and risk identification, risk analysis, protection systems and risk mitigation strategies. They have the expertise to help their clients optimally address complex physical damage and business continuity issues.

- The writer is Deputy General Manager with Al Rajhi Company For Cooperative Insurance, Riyadh. The views expressed herein are his own and not necessarily subscribed to by his employers.