With the construction sector, residential and commercial combined, having the highest rate of insolvency of any industry across Australia, the probability that local governments will have challenges is higher than usual.
Year on year Australian’s see stories about another construction company going bust, at one point it seemed like a weekly occurrence. In September 2024, the West Australian reported that about 15 construction firms collapse in WA every month and that a further 27 were on the bring with massive unpaid tax bills. The state saw some of the biggest and most reputable names collapse including Pindan, ProBuild and Clough Group leaving some LGIS members in a terrible situation with major projects uncompleted.
According to corporate watchdog ASIC, there were 2832 construction industry insolvency appointments for the 2024 financial year until June 16, an increase of 28 per cent on the 2213 insolvencies over the previous financial year. In 2024/25 the trend seems to be continuing.
The construction sector, particularly those companies that had fixed-price contracts, has struggled with a surge in costs since the pandemic. Unprofitable building contracts, cost blowouts, planning delays, labour shortages, red tape and other challenges have all contributed to the staggering number of insolvencies.
The 2024 WA Local Government Convention over 8 to 10 October was an excellent opportunity to chat with members and talk about the issues that matter to you. Over 650 delegates attended from across the state and we appreciated the effort many made to seek out our team to provide feedback and ask questions.
Members are once again asking questions about fire safety for e-bikes, e-scooters and other light electric vehicles (LEV), alongside the installation of EV charging stations. This is an evolving risk area and members should consider the developing situation.
2023/24 proved an interesting year for the LGIS scheme and our members. There have been inflationary pressures, labour markets have been tight and skilled workers difficult to find, the workforce is ageing, and there has been substantial legislative change including the Local Government Act and a brand-new Workers Compensation and Injury Management Act.
Our suburbs are littered with abandoned building sites that sit vacant for months or even years. Often this is because the contractor is struggling with cashflow or has become insolvent during a project. In most cases where the contractor/ construction company were the party responsible for obtaining the necessary insurance it is highly likely that the insurance coverage has also ceased. The project is left unfinished and without any protection against potential losses.
Imagine if this occurred on one of your local government’s projects? It puts your organisation in a challenging position as it can be difficult to seek a new contractor to take over the remaining works, as well as provide the required insurance. This can lead to further complications and delays, resulting in additional costs.
Local government construction projects are complex bringing with them the additional consideration of high community interest. There’s often a wide range of work required for the project to be completed, multiple parties and various stakeholder interests.
Whatever the project the finished product must meet a high standard of workmanship, be delivered on time and on budget, and meet the needs of the community.
Construction insurance is a useful tool to make sure that your project can continue if there are issues. It’s essential to ensure a project runs smoothly, regardless of the size or scale of a project. While the specific insurance requirements may vary depending on the project’s scope, it plays a crucial role in managing the risks associated with the project, such as complying with legal requirements, covering capital investment and protection against unforeseen events.
Typically, local governments look to the contractor to arrange insurance coverage for construction projects, however, relying solely on the contractor can pose its own risks.
Basically, this means that the ‘principal’ (local government) has passed the responsibility for implementing insurance of the works and third party (public) liability insurance to the head contractor. The contractor must include all parties, including subcontractors, on the cover.
Given the current situation in the construction sector, along with horror stories from local government experiences, many local goverments now want to have more control over insurance arrangements for their key projects.
This is called ‘principal arranged construction cover’ (PACC) and allows local government to have much greater control on cover decisions. PACC will:
A PACC is a procurement approach that offers project owners enhanced protection, control, and security. Essentially, a PACC involves the project owner taking charge and acquiring bespoke insurance coverage for the contract works and third-party liability, ensuring all parties involved are covered.
One of the benefits of having principal arranged insurance is that it simplifies the handling of a contractor insolvency event. If a contractor becomes insolvent during a project and a PACC is in place, the impact of this event is typically easier to manage. This means that the insurance coverage would not be cancelled and the local government would still be protected against potential losses. The local government would then need to assess the works completed and find an alternative contractor to take over the remaining works. As a result, additional costs and delays that may arise from such a situation are avoided.
Principal held cover can protect a diverse range of local government major works projects including, but not limited to:
More information
Talk to your LGIS Account Manager for more information and advice on how a PACC could sort your local government’s next major project.
An LGIS member faced a dire predicament when construction industry stalwart, Pindan Group, went into external administration. The collapse left 1,400 creditors owed up to $80 million and projects across the state came to a halt.
At the time the local government had engaged Pindan Group to complete a multimillion-dollar project. The community was deeply invested in the development and the stakes were high.
Pindan group was required under contract to hold the necessary cover for the project. This meant that when the contractor collapsed the project came to an immediate standstill and the local government had little control over next steps. A bank guarantee or bond will not provide adequate protection for this scenario.
The build was at 90% completion and no other insurer would take on the risk as construction was almost complete.
The member had no choice but to complete the project at their own risk. This was a substantial exposure for the local government. Fortunately, nothing further went wrong and the building was completed, however it meant that the member had been exposed at their own risk for the remainder of the project.
The risk transfer exposures would have been better managed if the local government had held a PACC.
The recent WA Local Government Convention was an excellent opportunity to chat with members and talk about the issues that matter to you. LGIS also appreciated the invitation from WALGA to provide members with an update at their AGM on our 2023/24 results and achievements. For more information, our end of financial year reports, A Year in Review and Annual Financial Report, are now available on the LGIS website or you can read the article on page 18.
By their very nature playgrounds have an element of risk, designed to challenge children and deliver development opportunities. They’re valued and sought-after amenities in every local government area across Western Australia. They also come with high levels of expectation from the community that they will be well designed, in appropriate locations and maintained in a condition that ensures safe and enjoyable experiences for children
The claimant (child) was travelling across a bridge in the playground and fell through a confined space causing a broken femur, cuts and bruises. The claimant alleged that the playground was unsafe and had design flaws that didn’t prevent children from injuring themselves.
LGIS is the unifying name for the dedicated suite of risk financing and management services for WA local governments, established by the WA Local Government Association in conjunction with JLT Public Sector (part of the Marsh group of companies). LGIS is managed by JLT Public Sector (ABN 69 009 098 864 AFS Licence 226827).
Risk Matters, via this website, is designed to keep members, their staff and elected members informed on topical risk management and insurance issues and LGIS programs and services.
