CHAPTER SEVEN

PERSONNEL MANAGEMENT
Introduction
 The success of an organization largely depends upon the quantity and quality of human
resources.
 Human resources are one of the most vital assets of an organization.
 It is the people who manage other resources in construction activities.
 The placement of right kind of people in right numbers, at the right place and right time
is the basic function of human resources management.

HUMAN RESOURCE MANAGEMENT (HRM) VS PERSONNEL MANAGEMENT (PM)

 Even though, the terms human resource management and personnel management are
used interchangeably in different organizations, there is a basic difference between human
resource management and personnel management.
 The two terms differ in scope and orientation.
 Human resource management views people as an important source or assetto be used
for the benefits of organizations, employees and the society.
 Human resource management is emerging as a distinct philosophy of management aiming at
policies that promote mutuality-mutual goals, mutual respect, mutual rewards and
mutual responsibilities.
 Personnel management on the other hand has a limited scope and inverted orientation.
 It viewed labor as a tool, the behavior of which could be manipulated for the benefit of
organizations and replaced when it was worn-out.
Human resource management
 Human resource – the people, the policies, and practices that affect them in the workplace.
It refers to the personnel, staff, employees or workers working in an organization.
 Human resource management is defined as the performance of all managerial functions
involved in planning, recruiting, selecting, developing, utilizing, rewarding and
maximizing the potential of human resources to the best achievement of organizational
objectives.
 It is the management of activities to ensure the effective and efficient use of human
resource to accomplish organizational goals.
Human Resource Management Practices
 Human resource management (HRM), the policies, practices, and systems that influence
employees’ behavior, attitudes, and performance. Many companies refer to HRM as
involving “people practices.”
 there are several important HRM practices that should support the organization’s business
strategy:
 analyzing work and designing jobs, determining how many employees with specific
knowledge and skills are needed (human resource planning),
 attracting potential employees (recruiting),
 choosing employees (selection),
 teaching employees how to perform their jobs and preparing them for the future (training
and development),
 teaching employees (performance management),
 rewarding employees (compensation), and
 Creating a positive work environment (employee relations).

Strategic HRM

Human resource management functions

 the function of human resource management is to ensure that productive efforts of the
individual employee is connect in that he/she gives of his/her best towards the achievements
of the organizational goals.
 the most commonly mentioned functions of human resource management are:
1. Human resource planning, recruitment and selection
 An organization must have qualified individuals in specific jobs at specific places and
times in order to accomplish its goals.
 Obtaining such people involves human resource planning, recruitment and selection.
 Human resource planning (HRP) is the process of systematically reviewing human
resource requirements to ensure that the required numbers of employees with the required
skills are available when they are needed.
 Recruitment is the process of attracting such individuals in sufficient numbers and
encouraging them to apply for jobs with in the organization.
 Selection is the process through which the organization chooses from a group of
applicants, those best suited for the open (vacant) position and for the
organization/company.
 Successful accomplishment of these three tasks is vital if the organization is to become
operational and accomplish its mission.
2. human resource development (HRD)
 Human resource development is the process of developing the capacity of employees for
other jobs and involves organizational growth needscoupled with employee's needs.
 It assists individuals, groups and the entire organization in becoming more effective.
 It is needed because the organization, jobs and the people are ever changing.
A. career planning and performance appraisal
 Career planning is the process of setting human resource goals and establishing the means
to achieve them.
 Individual careers and organizational needs are not distinct and separate.
 Performance appraisal affords the employees the opportunity to capitalize on their strengths
and overcome identified deficiencies, thereby becoming more satisfied and productive
employees.
B. compensation and benefits
 Compensation is defined as the adequate and equitable payment of employees for their
contribution to organizational objectives.
 Compensation includes all the rewards (pay, benefits i.e., additional financial or
non-financial) that an individual receives as a result of his/her employment.
 Besides the concern of compensation, most organizations recognize a responsibility to
their employees by providing programs covering their health, safety, security, and
general welfare.
 These programs are called benefits and include all financial rewards that generally are
not paid directly to the employees.
 Benefits cost the firm money but employees usually receive them indirectly.
 Employee’s benefits can help a firm recruit and retain aquality workforce.
3. safety and health
 Safety involves protecting employees from injurescaused by work related accidents.
 It refers to the employee's physical and mental well being.
 Today, because of federal and stage legislations, which reflect societal concern, most
organizations have become attentive to their employee's safety and health.
4. Employee and labor union relations
 a labour union or trade union is an organization of workers formed to promote, protect, and
improve through collective action the social, economical and political interests of its
members.
 Such a relation has as due contribution to the organizations' productivity in the area of human
resource management.
5. Human resource research.
 Human resource research is a systematic study of a firm's human resources for the purpose of
maximizing personal and organizational goal achievements.
 Every human resource management function/activity needs effective research to determine
the most successful workers, on work-related accidents, etc mostly employing quantitative
based research.
 Slack
ES
5for the entire pr
activity can be delayed without affecting the completion date LS
weeks, i.e Activity C can be delayed up to 3 weeks 8
eks 5 and 8). EF
9

Figure shows functions of human resource management

Human resource planning

 Human Resource Planning is to get the right number of employees with the right skills,
experience, and competencies in the right jobsat the right time and at the minimum cost.

 The effective management of an organization’s employees (i.e. its human resources) is

may be the single most difficult, most complex, most ambiguous, yet most important
task that managers face.

 Human Resource Planning is also called as Manpower planning consists of series of

activities including :
 Forecasting future manpower requirements
 Preparing an inventory of present manpower
 Anticipating manpower resources
  Meeting Manpower requirements
 This can be achieved through:
 planning
 Recruitment and selection
 training & development
 induction and placement
 Promotion and transfer
 Motivation and compensation to ensure that future manpower requirements are
correctly met.
 The construction sector is one of the most complex and problematic areas within which to
manage people.
 Objectives of manpower planning are to ensure optimum use of human resources
currently employed.
 In an organization, employees who have grown old or who resign, retire, die or become
incapacitated because of mental or physical ailment have to be replaced and new
employees have to be recruited.
 This can be done through manpower planning.
 It is also needed for identifying surplus or shortage manpower areas and there by
balancing manpower.
 In short manpower planning provides right size and structure of human resources which
provides the basic infrastructure for smooth functioning of an organization.
 The focus of HRP is on the following:
1. To have the right skills and jobs at the right time
2. To forecast the types of human resources needed
3. To ensure replacements will be available and be prepared to fill vacant posts
4. To ensure recruitment policies meet the present and future number of jobs and qualities
5. To ensure that there is effective utilization of human resources.
6. Facilitate personnel procedures for the present and future jobs e.g. recruitment, placement,
training, career planning etc.
HUMAN RESOURCE TRAINING
 The benefits that organization might expect from increased training efforts includes:

1. Training enables the management to face the pressures of changing environments.

2. Training usually results in the increase of quantity and quality of output.
3. Leads to job satisfaction and higher morale of the project personnel.
4. Trained personnel’s need lesser supervision.
5. Trained personnel enable the project institution to face competition from rival institution.
6. Training enables employees to develop and rise within the institution and increase their
earning capacity.
7. It moulds the employee's attitudes and helps them to achieve better co-operations with the
organization.
 8. Trained employees make better economic use of materials and equipment resulting in
reduction of wastage and spoilage.
9. Training instructs the workers toward better job adjustment and reduces the rate of labor
and absenteeism.
Training and development methods

The training and development methods, in this regard, can be classified into the following two
categories.

 on-the-job training  off-the-job training

1. On-the-job training
 Refers to learning usually by performing a particular work or job.
 On-the-job training has the advantage of providing "hands-on" experience under normal
working conditions and an opportunity for the trainer a senior employee to build good
relationships with new employees.
 This type of training is more suitable to every type of employee.
 a staff member involved in such training learns and at some time contributes to the aim of
the organization by accomplishing assigned tasks.
 On specific jobs, job rotation, special projects and apprenticeship are most commonly
used on the job training methods.

On specific job

 the most common method of training in every organization, where the employee can develop
his skills for doing the job in a better way.
 Critical evaluation and correction of the methods are some of the techniques adopted in this
type of training.

Job rotation

 this is the method of training involves the transferring of members from job to job on a
systematic and regular basis.
 The major objective of job rotation training is the broadening of the background of the
trainee in the organization.
 The main advantages of this training method are:
 it provides a general background to the trainee,
 training takes place in actual situation,
 competition can be stimulated among the rotating trainees, and
 It stimulates a more co-operative attitude by exposing member to problems and view-points
of other methods.
1. of-the-job training
 Under this method of training, trainee is separated from the job situation and his attention
is focused upon learning the material related to his future job performance.
 It requires trainees to devote their entire time to the staff development objective.
 Such training programs may be conducted with the organization or they may be offered
externally by other educational institutions or agencies.

Communication
 One of the most critical factors in the area of staff morale and motivation at work is that of
employer-employee communication and consultation.
 Employees will generally perform at their best if they know the company, and
understand its needs and aspirations.
 The setting up of effective communication channels enables employers and employees to
understand each other’s needs, interests and difficulties and reach agreements which are
most beneficial to both sides. In particular, employers should note that :

 when dealing with changes in working practices, procedures or employment issues which affect
employees, employers should be prepared to consult them;

 it is also important to consult staff associations, in-house unions or other consultative committees
if such exist; and
 to be effective, employer-employee communication must meet the following requirements :
 support from top management and employees;

 information to be communicated should be objective, clear and concise;

 regular and systematic;

 a two-way flow as to allow a free exchange of ideas.
 CHAPTER EIGHT
SITE ORGANIZATIONS
Introduction
 Site Utilization Plans (SUP), also known as Jobsite Layout/Logistics Plans, are documents
that depict the locations of temporary facilitieswithin the construction site boundary.
 SUP is similar to the construction plan and schedule in that they are long-term and
consider all aspects of the construction process.
 Optimum SUP minimizes the labor involved with movement of materials so that workers
can spend the majority of their time performing productive construction tasks.
 Construction Site Utilization Planning (CSUP) is a decision making process for
determining the location of temporary facilities within the boundary of a construction site
identifying spatial relationships and developing best alternative solutions so that the
efficiency of the construction process is improved over the project life cycle.
 In the absence of a precise site layout plan, the following problems may occur:
a. Material stacks wrongly located.
 Materials arriving on site are off-loaded into what someone guesses to be the correct
location.
 This problem may involve double or triple handling of materials to another location.
 For example:
 They may stocked over a drainage line or near the edge of excavation;
 They are too far from the work area;
 They are too remote from the hoist or not within the radius of the crane;
 They impede the smooth flow of work traffic across the site;
 Their delivery was wrongly phased and they are not needed until much later in the
project;
 They are fragile.
b. Plant and equipment wrongly located.
 For example:
- The mixer is inaccessible for the delivery of materials; not enough room for the storage of
aggregates;
- Fixed cranes are unable to reach all parts of the works;
- Hoists have insufficient capacity or height to handle the loads or badly located in relation to the
floor layout;
c. Inadequate space allowed.
 Where inadequate space is allowed for the stacking of materials or activities:
 Materials may be stacked to high or stacked on roadways causing hazards.
  Working areas may become too cramped or additional areas may have o be allocated with
the consequent waste of time caused by having to travel between them.
d. Site hut wrongly located in relation to their effective use, such as:
 Site office located too near noisy activities such as mixer, or located too near to site roads
in dusty conditions, or too remote with insufficient overview of the site.
 Warehouses having inadequate access for loading and unloading or located in insecure
area.
 Therefore, before moving on to a site, it is necessary to prepare a detailed site plan,
showing the positions to be taken by every item of equipment, accommodation,
ancillary work areas and materials storage areas.

8.1 General construction site plan /map requirements

 Jobsites that are clean and well-organized provide a working environment that has a
positive impact on work morale and in turn results in higher production during the work
shift.
 A site utilization plan should include the following aspects:
1. Jobsite space allocation – areas on the jobsite for material delivery, material storage,
temporary offices, and facilities
2. Jobsite access – access to and from the jobsite and to work areas within the jobsite,
including haul roads
3. Material handling – including material movement on the jobsite, both horizontally and
vertically; lifting equipment, including forklifts and cranes
4. Worker transportation – personnel movement and access to the jobsite
5. Temporary facilities – temporary offices, storage facilities, dry shacks, sanitary facilities,
temporary water, power, heat, telephone, and internet connections
6. Jobsite security – temporary fencing, guard dogs, security patrols, electronic alarm systems,
and watchmen
7. Signage and barricades – protection of the public fromconstruction hazards on the jobsite
Importance of Site Utilization Plans
 Many tasks are involved in managing a construction site, one of which is site utilization
planning.
 Typically, a project manager is responsible for developing a site utilization plan based on
past experience, knowledge, intuition, and imagination.
 In the absence of a well-developed site utilization plan, many problems can occur
resulting in time delays and cost overruns.
 Site utilization planning overlaps with other planning tasks such as scheduling, selection
of construction method, procurement and material planning, manpower and equipment
planning, and financial planning.
 These interactions exist due to the fact that the timing for each plan must coincide at a
precise moment so that the correct material, equipment, manpower, and finances are
available to complete a planned task.
 Therefore, CSUP is an essential task for successful management of a construction
project.
 Despite the importance of CSUP, it is often done in a speedy manner or overlooked
completely.
 The results of such acts reflect in the day to day operations of the project, making it
difficult to manage site operations.
 The decision to develop good SUP early on in a project can have a significant impact on
later site operations.
 Temporary facility and equipment placement is directly related to the construction
sequencing and performance of a project.
 Poor site planning and management can lead to:
 work delays,
 misplacement of materials,
 double handling of materials,
 schedule delays, capital loss, and
 unsafe working conditions.
 For construction to flow seamlessly, many projects specific factors must be
consideredduring the space demarcation process.
 Site space demarcation should involve:
i) Site boundary identification
ii) Temporary facility identification
iii) Identification of temporary facility constraints
iv) Determining the relative position of each temporary facility so that the functionality
and efficiency of temporary facility operations are maximized.
 In addition, the scheduled timing of establishment and removal of each temporary
facility should be determined .
 To allocate space effectively, the planner must have a clear understanding of the
construction execution plan.
 It is imperative to realize the significance of site space constraints during the planning
process due to the fact that site plans dictate the working conditions of site personnel for
the duration of the project.
 Depending on the location of a construction project, site space may or may not be
limited.
 Typically, urban areas (e.g., downtown/metro areas) have less space available for
construction activities due to the structure/building encompassing the majority of the site.
 Therefore, space planning is critical and should be delicately handled so that
construction activities can be executed efficiently.
 On the other hand, space planning for large construction sites tends to be pushed aside during
project startup due to space abundance.
 In such a case, project managers tend to place facilities randomly within the site
boundaries, creating an environment that becomes increasingly inefficient.
 No matter the scenario, jobsite planning and organization is essential for construction
projects to be productive and profitable.
Construction Site Utilization Plan Management
 For a project manager to create an effective site utilization plan, he/she has to have ample
knowledge of current construction practices.
 project managers must determine the elements (e.g., material, equipment, etc.) needed for
construction, element schedule (e.g., arrival/departure times), and individuals (e.g.,
tradesmen, operators, etc.) associated with each element when starting a new project.
 By implementing a SUP that incorporates staggered work schedules, housekeeping, and
organization; congestion can be minimized, thus allowing labor productivity and
performance to remain optimal throughout the project duration.
 When developing a SUP, it is critical to consider storage locations for certain materials so
that workers are not constantly interfering with one another.
 By implementing these principles, general contractors can have a positive impact on
subcontractors, thus increasing the likelihood of the subcontractor following the site
utilization plan (e.g., storing materials in the proper location, keep pathway clear of debris)
selected for the project.
Construction Site Temporary Facilities

 These temporary facilities range from simple laydown areas to warehouses, fabrication
shops, maintenance shops, batch plant, and residence facilities. Required temporary
facilities and their areas are depending in many factors including project type, scale,
design, location, and organization of construction work.
 A temporary facility is a physical area within a construction site that has an associated
time of establishment and removal during the project life cycle.
 Many factors dictate what TFs are required on construction sites, some of which are:
 project type
 scale
 design
 project location
 Organization of construction work.
 The TFs included in a site utilization plan differ from project to project, as well as the
duration of the TF in a specified area (e.g. TF may need to be relocated instead of
eliminated).
 The location and size of a TF is directly related to the project for which the utilization
plan is being developed.
 Many similarities can be found in site utilization plans for different project; however,
each project has its own unique features (i.e., construction boundary, building orientation,
site topology, etc.) that controls the space available for TF placement.
 If construction site space is not abundant, which is the case in many scenarios, the size of
TFs can sometimes be reduced while also keeping their functionality.
 several key factors were identified as being of importance during the development of
site utilization plans includes:
i) access and traffic routes
ii) material storage and handling
iii) administration building and welfare facilities
iv) equipment, workshop, and services.
 Engineering and construction professionals also consideredsite utilization planning to
be:
 i) Difficult to specify (e.g., difficult to define the best layout plan),
ii) interrelated with other management task,
iii) highly dynamic (e.g. optimal site layout is changing through the project duration), and
iv) under researched.

Construction Site Utilization Plan Development

 Site management, in general, involves many tasks, such as site investigation before construction
process starts, material delivery and procurement management, keeping better site records,
keeping good site communication and high level of information flow, monitoring performance
regularly, establishing a well co-ordination system among different parts, and performing a good
site layout planning.
 Among the important tasks of site management is the site layout planning.
 Extensive time loss and cost overruns could result in large projects, where the number of
manpower, subcontractors, and equipment involved are high, if there is no effective and
systematic approach to site planning.
 Failure to plan the site layout in advance is a prime cause of operational inefficiency, and can
increase the overall cost of a project substantially.
 There are two general objectives which planners should seek to meet through careful
organization of the site for construction.
 First, the site must be designed to maximize efficiency of operations in order to promote
worker productivity, to shorten project time and to reduce cost.
 Second, the final plan must create a project with a good work environment in order to
attract and retain the best personnel and thus contribute to better work quality and
productivity.
 Before starting the development of a utilization planthe developer must be aware of
three important elements:
i) What is to be constructed?
ii) What tasks are associated with construction?
iii) What method of construction will be used?
 With a comprehensive understanding of these elements the process of planning can begin;
however, the development process is highly subjective and nontrivial and requires the
developer to meet multiple prioritized objectives .

8.2 construction site zones

Site Layout Planning Elements

 A well planned site including all temporary facilities and utilities lead to:
1) Increasing productivity and safety,
2) Reducing area(s) needed for temporary construction, and
3) Maximizing utilization.
 The following points should be considered in good site layout.
1. Safety
 Fire prevention:
 Fire is a major cause of damage on construction sites.
 So that, fire extinguishers are basic requirements on a construction project.
 Medical services:
 On construction project a first aid kit is a must.
 In remote projects a well-equipped medical room with a doctor and nurse is important.
 Construction safety clothing:
 Basic safety supplies like safety shoes, hard hats, gloves, and goggles must be used by
workers.
2. Site Accessibility
 Easy accessibility will keep the morale of the equipment and vehicle drivers high, minimize
the chance of accidents, and save time in maneuvering to arrive at and leave the project.
 In case of large projects, proper planning is required to layout the roads leading from the
nearest highway.
 Internal roads are necessary for easy flow of work.
 Also, Parking Lots are provided for the owner, office, and craft personnel, but this
facility must be planned where space does exist.
3. Information Signs
 Site map:
 It should locate details of the project, and displayed in the office of the site superintendent or
project manager and posted at the entrance gate.
 Traffic regulatory signs:
 For large projects, traffic regulatory signs help in guiding the traffic on the site and avoid
accidents to a considerable extent.
 Display of labor relations’ policy and safety rules:
 This will help in eliminating disputes between labor and management.
 Emergency routes and underground services:
 It is important to display the emergency escape routes on every floor as the building
progresses.
 Locations of underground services should be marked to prevent its damage.
4.Security
- Entrance:
 It is necessary to have a proper guard entrance to the site provided by a booth.
 Also, it is necessary to keep track of all visitors to the project.
 Lighting:
 It is necessary to have a standby generator to maintain site lighting.
 Fencing:
 The boundary should be fenced off from asecurity point of view.
5. Accommodation
 On large construction projects, it is necessary to provide camp accommodation for all type
of
staff involved in the project.
6. Offices
 The offices should be close together, close to the site, and in a safe area.
 Also, provide the offices with proper office equipment.
 The offices at the site may include job office, general contractor office, and sub-
contractors and consultants Offices.
7. Water Supply and Sanitation
 It is necessary to have water and toilet facilities in convenient locations to accommodate the
work force.
8. Material Handling
 One third or more of all construction operations can be classified asmaterial handling.
 The use of proper equipment for material handling and advance planning for
minimizing multiple handling will result in direct cost and time savings.
9. Storage and site cleaning
 It is necessary to plan and reserve storage areas for materials so that multiple movement
of material is avoided.
 Lay down areas:
 Areas reserved for storage of large materials and equipment and it can be short-term or
long-term.
 Warehouses:
 They are sheltered storage facilities where materials are stored until they have disbursed to
the job.
 Material staging areas:
 They used when materials are stored near the work on a short-term basis.
 They are generally as close to work as possible.
 Site cleaning:
 Site cleaning is necessary at a work place and especially where the extent of debris produced
is high.
 Regular disposal of debris is necessary.
10. Craft Change-Houses
 Craft change-houses provide sheltered space for craft personnelto change and store
clothes, wash, and rest during waiting periods.
11. Batch plant and Fabrication Shops
 Batch plants are provided on projects where it is more economical to produce concrete on
site than to buy a ready mix.
 Aggregate storage piles, cement silos and admixture tanks will accompany an on-site
batch plant.
 Shops are used where materials and equipment are fabricated on site.
 This includes electrical, mechanical, carpentry, and paint shops.
 Also, testing shops used to house the necessary testing equipment and personnel for the
project.

1 Material Management
 Material management is an essential task that must be fulfilled to maximize worker
efficiency and prevent project delays.
 The location of material storage areas on a site have to be incorporated into the SUP and
these areas should be carefully selected.
 Ineffective site material management can contribute to waste in time and money.
 Some principles that would affect site utilization planning are:
i) locate parking lots, tool sheds, and spoil piles as far away from the building as possible, and
ii) materials should be stored to allow easy access and retrieval .
 It is extremely difficult to consider all the activities that could develop into a conflict
when developing a site utilization plan.
 To assist the space conflict resolution process, established criteria to resolve space
conflicts between activities.
 The major criteria listed are:
1. logical sequence of activities
2. Critical path
3. Space divisibility
4. Location change
5. Space size modification
6. Start time of conflicting space
occupation
7. Length of occupancy time.
 Construction Management

 Using these criteria, a prototype decision support system was developed to solve the
multi-objective problem.
2 Equipment Management
 The movement of equipment on a construction site requires knowledge of how the
equipment functions as well as the space required so that the equipment can operate
safely.
 For a project to operate efficiently, the project manager or engineer must know what
equipment is required to construct a project and monitor the equipment delivered to the
site.
 The concept of equipment utilization planning can be of great concern when dealing with
large construction operations (e.g. highway construction) that require a significant amount
of earth moving equipment.

CHAPTER NINE
INSURANCE IN CONSTRUCTION INDUSTRY
Introduction

 Construction works are hazardous by nature and accidents are frequent and often severe.
 Construction insurance is a practice of exchanging a contingent claim for a fixed payment
to protect the interests of parties involved in a construction project.
 The construction industry is subject to more risk and uncertainty than many other
industries.
 The development of a construction project from inception to completion takes a long time
and involves many phases.
 Construction projects are sensitive to an extremely large matrix of hazards and risks, due
to some of the inherent characteristics of construction projects, which can be listed out as
follows:
 All parties involved in a construction project must accept that there is some risk attached to
their activities.
 If one cannot control a risk through a business practices or transfer that risk to
someone else through an indemnification clause, then he can manage that risk through
insurance .
 Some risks have enormous size in financial terms and the party to whom a risk is allocated
may want to cover it by means of insurance.
 Construction project parties, whether they are the owner, contractor, engineer or supplier,
can protect their interests by insurance but must accept that not all risks are insurable.
 Insurance is not the only means by which risks associated with construction and
infrastructure projects may be addressed, however, it is one of the principal means by
which parties to major projects treat risk.

For 5th year Civil Page 16

 Construction Management

9.1 definition of insurance

 Scholars and writers have given various definitions of insurance from different perspectives
such as economic, social, legal, etc.
 Article 654(2) of the Commercial Code of Ethiopia [1960] provides a legal definition of
insurance as follows:
 An insurance policy is a contract whereby a person, called the insurer, undertakes against
payment of one or more premiums to pay to a person, called the beneficiary, a sum of
money where a specified risk materializes.
 In construction contract perspective construction insurance can be defined as a contract
whereby the insurance company seeks to provide coverage and indemnify the
construction contractor or the client against a potential peril, loss, damage, or liability
that arises from the performance of the construction work.

9.2 benefits of insurance

Role of Insurance for the Construction Industry

 In the construction industry, insurance is one of the most important ways to tackle risk.
 The majority of construction companies rely on insurance policiesfor different risk
scenarios.
 They purchase a number of insurance policies depending on the project and contractual
requirement.
 One of the primary functions of a construction contract is to allocate certain risks to one or
other of the parties and in view of the enormous size of some of these risks in financial terms, it
is obvious that the party to whom a risk is allocated may want to cover it by means of insurance .
 Due to the fact that different bodies are involved in a typical civil engineering projects (clients,
consultants, contractors, sub-contractors, suppliers, employees, financers, members of the public,
etc.), it is important for everybody to be sure that insurance is given proper attention and
covers the expected risks satisfactorily without paying for unnecessary cover or duplication
of cover .
 Insurance is not a substitute for effective risk management.
 Insurance is only intended to deal with measurable or known risks and serves to spread the
impact of loss .
 In considering whether or not insurance should be looked at as the answer to a particular
identified risk, the following questions need to be considered :
 Is the risk insurable? - Can a policy be procured which specifically covers the risk?
 Is the cover adequate? - If a policy is procured, will it respond to the risk which you have
identified and to the fullest extent of that risk?
 Does the cost outweigh the risk? - What is the cost of the policy?
 What is the nature of the policy? - How long will the policy operate to provide cover?
 Can the policy be tailored or negotiated?

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9.3 Principles of Insurance

 Due to the specific nature of insurance agreements and construction insuranceis no

exception; certain legal rules apply, irrespective of the jurisdiction where the agreement is
made .
 Generally accepted insurance rules are summarized as follows:
1. Utmost good faith contract
 When insurance is transacted, the purchaser of insurance makes a proposal to the insurer,
sometime by the completion of a ‘proposal form’, designed by the insurer for the specific
perils to be insured and in which the proposer is expected to answer specific questions about
these perils.
 Unlike the purchaser of ordinary goods, who is under no obligation to give any information to the
seller, the purchaser of insurance must furnish to the insurance company any information it
requires and volunteer any further facts relating to the risks for which cover is being sought.
 Article 668 of the Commercial code of Ethiopia with regard to utmost good faith contract
states that the policy shall be of no effect where the beneficiary intentionally concealed facts
or made false statements and such concealment or false statements cause the insurer wrongly to
appreciate the risks to be insured so that, had he been aware of the truth, the insurer would not
have entered into the policy or would have imposed terms less favorable to the beneficiary. The
insurer shall retain all premiums paid.
2. No financial profit
 The insurance contract invariably includes a statement establishing and clarifying the basis of
claim settlement.
 As a contract of indemnity, the insurance policy is intended to place the insured, after a loss event
covered by it, in the same financial position as that which existed immediately prior to the event.
 Therefore, except in limited circumstances, profit is not allowed as a result of an insured
event and it is generally accepted that to allow profit would be against the interest of
society .
 Article 665 and Article 678 of the Commercial code of Ethiopia states that the insured receives
to the extent of the insured amount as depicted below:
Article 665 (2) The insurer's liability shall not exceed the amount specified in the
policy.
 Article 678 A contract for the insurance of an object is a contract for compensation. The
compensation shall not exceed the value of' the object insured on the day of the occurrence.
 Hence, an insured can only recover the actual loss that he is able to prove and is not allowed
to make a profit.
2. Insurable interest
 A fundamental requirement of insurance law is that the insured must have an insurable
interest in the subject matter of the insurance.
 An insurable interest is an interest which is recognized and enforceable at law.
 It may be legal or equitable, a proprietary right or a contractual right.
 According to Gould [2003], an insurable interest is not required under general contract law,
but it is necessary under insurance because:
 Of a statutory requirement; and/or

 It is inherent in the nature of the contract of insurance (e.g. indemnity insurance).

3. Subrogation

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 Subrogation is the complimentary principle of indemnity.

 It arises from two principles of common law.
 First, an insurer cannot avoid liability on the basis that the insured has a right to claim
against some third party.
 Secondly, a third party cannot avoid liability to an insured on the ground that the insured
will be indemnified for the loss by way of insurance.
 As indicated by Gould , the principle of subrogation provides the insurer with two benefits:
 To stand in the shoes of the insured and avail himself of all the rights and remedies
available to the insured against the third parties and the action by the insurer is brought in the
insured’s name and the third party can raise any defenses which would have been available
against the insured;

 To recover from the insured any benefit received by the insured from third parties which reduces
the loss covered by the insurance.

However, the insurer can only exercise a right of subrogation when:

 The insurance is indemnity insurance;

 The insurer has made payment under the policy, unless the policy provides otherwise.

 The policy does not exclude the rights of subrogation as it may be possible to exclude
subrogation from the policy for an additional premium.
 Article 683(1) of the Commercial code of Ethiopia states the right of subrogation of the insurer
as:
(1) The insurer who has paid the agreed compensation shall substitute himself to the extent of
the amount paid by him for the beneficiary for the purpose of claiming against third
parties who caused the damage.
5. Contribution
 If an insured subject matter is covered against a peril for the benefit of an insured party by more
than one policy, and if that peril eventuates into a loss, the insured cannot recover from more
than one insurer.
 In that event, an insurer, having paid a claim, can seek a contribution from other insurers liable
for the same loss to contribute towards the payment made .
 According to Gould [2003], in order for an insurer to exercise this right the insurance policy
must:
 Cover the particular event;

 Cover the same subject matter

 Contain no provision stating that the policy only applies after other insurances have
been exhausted.
 Article 681of the Commercial code of Ethiopia states the right of contribution of the insurer as:
(1) Where several insurers insure the same object against the same risk so that the object is over
insured, each insurer may, where there has been fraud on the part of the beneficiary, require the
termination of the policy and may in addition claim damages.
(2) Where the beneficiary is in good faith, each insurer shall, where the risk materializes, pay
compensation in proportion to the value insured by him.
6. Proximate cause

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 The principle of proximate cause is implied into contracts of insurance and requires the insured
to show that the loss was caused by an insured peril.
 Proximate cause means the effect of the common, dominant or real cause of the loss and will
be a question of facts in each case.
4. Warranties
 A warranty is a term of the insurance policy which if broken entitles the insurer to terminate the
contract from the time of the breach regardless of whether the breach is material.
 In the law of insurance the term “warranty” is therefore used in a similar sense to that more
readily associated in general contract law with the term “condition”.
5. Fortuity
 The principle of fortuity is fundamental to the basic concept of insurance and the grant of
coverage.
 The term “Fortuitous” means accidental, unintentional or unexpected.
 Article 663(3) of the Commercial code of Ethiopia confirms that intentional damages are not
covered in insurance policy as: (3) Notwithstanding any provision to the contrary, risks arising
out of the intentional default of the beneficiary shall not be covered by the insurance.
Furthermore, it is expected that all parties involved in construction insurance should act in unison
to provide correct allocation of risks and responsibilities, which must be reflected in the contractual
agreements. These agreements must also encompass the allocation of liabilities and how they are
to be dealt with, if they arise. The provision of indemnity must be considered and, if required, the
shift towards insurance should be carried out with the minimum of gaps (sufficiency of cover) and
overlaps (expenses).

Insurability and Uninsurability of Risks

1. The Insurability of Risks
 Insurable risk means a risk, which can be covered by insurance.
 Not all risks are insurable and while the principle of the equitable contribution of many for the
benefit of an individual suffering a loss is the cornerstone of insurance philosophy, certain
limitations must be put on that principle to make the insurance transaction viable.
 For a risk to be acceptable by an insurer it has to be a “pure risk” which means it has the
down side of the effect only (opportunity for loss only); speculative risks are not covered by
traditional insurance.
 Moreover, it has to be sudden and accidental, with statistics available for insurers to simulate
past events and generate a creditable premium.
 Insurable risks are defined by FIDIC and CII together as follows [FIDIC, 1986]:
1. The principle of insurance is based on the theory of probability and, therefore, there
must be an element of uncertainty relating to the matter to be insured, i.e. accidental or
fortuitous in character.
2. An insurable risk should preferably be measurable in quantitative terms and in such a way that
the theories of probability and the law of large numbers may be used.
 Without this stipulation, the premium required to insure the risk could not be scientifically
calculated.
 Insurance becomes lottery in the absence of such calculations.

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 It is, however, important to note that, if the extent of the risk is unquantifiable, it is the
assessment of the premium and not the insurability that is in question.
3. An insurable risk should preferably be such that it is acceptable to the insurance market
through appropriate risk selection methods.
 The objects insured must be numerous enough and homogeneous enough to allow sufficient
selection.
4. An insurable risk should preferably be such that one can determine whether loss has in fact
occurred and the cause of the resultant damage. The extent of the damage should also be capable of
assessment.

2 The Uninsurable of Risks

 The insurance industry as a whole is increasingly confronted with risks where for reasons of
principle and capacity doubts as to whether they can or should cover.
 It is important to note that the responsibility and liability for damage to property and/or
personal injury emanating from uninsurable risks must be clearly defined in any contract.
 Bunni [2003] classified uninsurable risks with four categories as outlined here under:
1. Foreseeable risks
 An insurer will argue that if a contractor stores cement in an uncovered condition during a
rainy season, then any damage caused is foreseen to be inevitable and, thus, is not the liability
of the insurer.
 On the other hand, if the cement was stored in a watertight shed and the roof of the shed
blows away under severe wind, then the contractor will argue that this is unforeseen
damage.
2. Unquantifiable risks
 A consequential economic risk is unquantifiable, even in a certain circumstance.
 It is, therefore, very rarely covered.
 However, the word ‘consequential’ must not be confused with ‘consequence’ as in risks resulting
as a consequence of defective design, material and/or workmanship because these risks are
quantifiable and their limit is the value of the contract which is insured.
 Such damage resulting from, or occurring as a consequence of these defects is insurable and
the intention of a good insurer must always be clear in this respect.
 Insurance policies must be written in clear and precise language at all times but more
especially so when dealing with this issue because, otherwise, it could result in a dispute if
repair to a resultant damage is costly.
3. Political risks and risks on an international scale
 War is a good example of these risks that are normally uninsurable.
 The reason is that the principle of the contribution of many for the benefit of an individual
suffering loss breaks down in such a situation, unless governmental institutions carry out the
insurance.
4. Causation
 To prove the cause of any damage on a project is to establish the responsibility and liability
for it and to establish whether or not the damage is covered through the provisions of the
insurance contract.
 If such a cause cannot be proven for any particular risk, the risk becomes uninsurable.

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Types of Construction Insurances

 Construction insurance encompasses all contracts of indemnity within the activities of the
construction industry where insurance is chosen as the medium through which liabilities are
shifted.
 Construction insurance is a practice of exchanging a contingent claim for a fixed payment to
protect the interests of parties involved in a construction project and it is a major method of
managing risks in the construction industry.
 The primary function of construction insurance is to transfer certain risks from clients,
contractors, subcontractors and other parties involved in the construction project to
insurers to provide contingent funding in time of difficulty.
 Construction insurance plays an increasingly important role in guaranteeing the success of
projects, with insurers sharing losses resulting from natural disasters and other
contingencies.
 Most construction insurance products currently on the market can be divided into two
categories:
a) property insurance
b) liability insurance .
 Table shows insurance policies usually issued for each party in connection with
construction.
Table Typical Insurances on a Construction Project: Source Bunni [2003]

ProfessionalTeam Owner Contractor

LiabilityInsurance LiabilityInsurance LiabilityInsurance

1. Employer'sLiability 1. Employer'sLiability 1. Employer'sLiability

2. PublicLiability 2.PublicLiabilityforlimitsinexcess 2. PublicLiability

ofthatstipulatedinthecontractorinre
spectofliabilitynotindemnified
bytheContractor

3. 3. PublicLiabilityfor Non- 3. PublicLiabilityfor Non-

ProfessionalIn negligence negligence
demnity
PropertyInsurance
4.Insuranceforanypartoftheworkst 4.ProfessionalIndemnity,ifdesignw
akenoverorusedoroccupiedpriorto orkiscarriedoutbyContractor
completion
DecennialInsurance PropertyInsurance
5. Decennialcoverpolicy 5. ContractorsAllRisks
MarineInsurance
6. MarineTransportpolicy
OtherTransportInsurance

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7. MotorInsurance

A) Property Insurance
 This insurance mainly provides protection to the works and any material, equipment and
machinery connected with it.
Table 2.2: Property Insurance and Liability Insurance: Source Bunni [2003]

Typeof Coverage Transaction

Insurance
Provideprotection to the worksand Transactedthrough:
PropertyIn • Contractors'All
anymaterial,equipmentandmachineryco RisksInsurance Policy
surance
nnectedwith it •ErectionAllRisksInsurancePo
licy
Transactedthrough:
LiabilityIn Provideprotectionto
•Employer’sLiability:towards
surance theinsuredpartyagainstspecificlegalliabilities employees
towhichhemaybecomeexposedasaresultofact •PublicLiability:towardsthirdp
artieswhoarenotpartlytotheins
ivitiesculminatinginbodilyinjuryand/orprope urancecontract
rtydamage. •ProfessionalIndemnityInsuran
ce:towardsthedesignprofession
al

 In the case of Ethiopia, property insurance is regulated in the Commercial Code of Ethiopia
[1960] under Article 654(2) to Article 675.
The Commercial Code of Ethiopia [1960] under Article 654(2) states that
(2) Where damages are insured, the insurance policy shall extend to the risks affecting property or
arising out of the civil liability.
 To illustrate some of the property insurances commonly issued are;
 (Private) Property Fire Insurance

 Burglary Insurance

 Contractor’s All Risk Insurance

B) Liability Insurance
 Under a liability insurance policy, an insurer undertakes that, if the insured person (the client)
becomes legally liable to someone else (the ‘victim’), the insurer will indemnify the client against
damages and legal costs which become payable .
 Liability insurance is intended to provide protection to the insured party against specific legal
liabilities to which he may become exposed as a result of activities culminating in bodily injury
and/or property damage.

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 Liability insurance under the Commercial Code of Ethiopia [1960] is discussed under Article
654(2) to Article 685.
 To illustrate some of the Liability insurances commonly issued are:
 Compulsory (Liability) Motor Insurance; (in case of car accident or collision on road);
 Employer’s Liability Insurance; (to compensate the employer in case of the worker’s
negligence who injures third party ); see also Article 2130 of the Civil Code;
 Professional Liability Insurance/Professional Indemnity Insurance;(in case of Engineer’s
or Architect’s liability towards its client);
 Workmen’s Compensation Policy; (to cover the liability of the employer to the worker as
per the Labour Law).

Insurance Companies in Ethiopia

 Insurance service is fundamentally important both for the construction business and construction
project, since there is an obvious and inherent element of risk in them.
 Despite the advancement of insurance as commercial business, it is little understood and
exercised by the Ethiopian society in general and the construction industry in particular .
 The emergence of insurance business in Ethiopia was closely linked to expatriates and foreign
insurance companies.
Table : Ethiopian Insurance Companies; Source, website of the National Bank of Ethiopia:

No CompanyName Date ofEstablishment

1 EthiopianInsurance Corporation 1975
2 NationalInsurance CompanyofEthiopia S.C. 23/09/1994
3 AwashInsurance CompanyS.C 1/10/1994
4 AfricaInsurance CompanyS.C 1/12/1994
5 NyalaInsurance CompanyS.C 6/1/1995
6 NileInsurance CompanyS.C 11/4/1995
7 GlobalInsurance CompanyS.C. 11/1/1997
8 TheUnitedInsurance S.C 1/4/1997
9 NIBInsurance Company 1/5/2002
10 LionInsurance CompanyS.C 1/7/2007
11 Ethio-Life andGeneralInsurance S.C. 23/10/2008
12 OromiaInsurance CompanyS.C. 26/01/2009
13 AbayInsurance Company 26/07/2010
14 BerhanInsurance S.C. 24/05/2011
15 TsehayInsuranceS.C. 28/03/2012
16 Lucy Insurance S.C. 13/11/ 2012

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