Construction Business Owner, December 2007

“Right about now, Jerry Choate should be hiring workers and getting ready to install displays in the visitor's center at Cheyenne Bottoms near Hoisington. Instead, he's waiting. Persistent rains have turned what generally is shallow-water wetland into a sea of deep water.”—9/21/2007 The Hayes Daily News, Kansas

“Construction cannot begin until the area receives adequate rain… soil conditions at the new school site are about eight percent drier than what is considered normal for this time of year… the general contractor cannot begin construction on the school's foundation...”—9/20/2007 The Madison Courier, Kentucky

 “The work still is not over at South Junior High School. Because of 45 days of weather delays, the new completion date has been moved back from Oct. 1 to Nov. 16.”—10/9/2007 Lawrence Journal-World, Kansas

Bad weather can turn a missed construction deadline into a news headline. But bad weather isn’t news to construction business owners who go to work with the elements every day. Severe, unpredictable weather can send construction costs skyrocketing and revenue spiraling. Bad weather impacts materials, equipment, laborers and the quality and quantity of work. Delays are especially expensive when a construction loan is involved. Loans come with interest, and with interest, time is literally money. Bad weather certainly isn’t cheap. Economists say weather impacts $3.8 trillion a year in the United States. That’s one-third of the economy.

According to the Institutional Investors Group on Climate Change (IIGCC), the construction industry will be impacted by global warming in three ways:

1. The physical impact of weather, such as too much rain, heat and cold.
2. The need for new materials and building techniques that protect structures and roads from severe weather
3. The cost of insuring climate change

The insurance sector is beginning to factor climate change into premiums, making it more expensive to build in severe weather-prone areas like the Atlantic Seaboard and Gulf Coast. High premiums could prevent new homeowners from being able to afford to build and prevent previous homeowners from rebuilding. Higher premiums could mean fewer projects.

The IIGCC also outlines the key risks climate change poses on the construction industry, which includes the risk of reduced raw materials, increased regulatory standards, increased energy prices and higher costs caused by weather delays.

 When it comes to climate change, it’s not all gloom and doom for the construction industry. The good news is that warm winters are lengthening the construction season. Projects are starting earlier in the spring, and deadlines are reaching well into winter months that were once off limits. According to WeatherBill, Inc.’s recent study on temperature trends in the United States, 57 percent of major United States cities are experiencing winter warming trends.  

Then there is the bad news: Scientists say global warming is contributing to more intense, more unpredictable storms that can dampen the goals of a construction deadline. As climate change becomes more pronounced, more and more businesses are seeing the impact of weather on their revenue and costs. Business owners in weather sensitive industries like construction are looking for protection from climate change and the impact of unpredictable weather.  

Getting Paid for Bad Weather 

“If a project isn’t done on time, costs can add up and profits can be lost,” says John Hickey, a civil engineer and attorney in Jordan Schrader’s Dirt Law practice. “Construction delay is one of the most litigated issues in construction law. Knowing that risk, I am surprised that many contractors enter contracts without a plan of action for documenting impacts to their performance.  With respect to impacts caused by severe weather, contractors can usually recover extra time but not extra money.  That said, even if the contract allows for the recovery of extra time because of a weather delay, contractors still must be sure to document the impact to their performance properly or risk losing any right to recover.”

Project contracts and insurance have been historically used in the construction industry to safeguard projects from weather delays, but they only safeguard against catastrophic damage. Severe weather that isn’t catastrophic can be just as damaging to a business, physically and financially. In the 1990s, an old financial tool called a future was turned into a new type of weather protection against the threat of day-to-day weather events.  

In 1997, energy companies started using weather futures to protect their bottom lines against unseasonably hot and cold temperatures. The unusual temperatures kept consumers from turning down their air conditioning or turning up their heat, preventing energy companies from reaching revenue goals and leaving them with excess energy. Weather futures reduced the energy companies’ seasonal weather risk, and the concept soon caught on with Fortune 100 companies.  

Over the past decade, other weather-sensitive industries like construction, agriculture, travel, leisure, retail and transportation have started using futures to protect their revenue. Today, futures are simple and affordable.

Unlike insurance, derivatives do not require proof of loss for payment. There’s no claims process. Businesses get paid for bad weather as soon as it is measured at a weather station. The stations are typically managed by the National Weather Service and are located at airports.  The U.S. Commodity Futures Trading Commission requires that businesses purchasing futures have a net worth of $1 million (an individual must have $5 million). 

 

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