Construction Accounting Article -
New Technology Helps Contractors Manage Weather-related Risk

Target Audience: Construction Industry Professionals, Contractors, Construction Business Owners, Construction Accountant Interest, Risk Managers, Risk Management Software Interest, Forecasters

Let’s face it, you’re at the mercy of Mother Nature. Whether battling ice storms in New England, drought on the West Coast or thunderstorms in the Midwest, weather can wreak havoc on any contractor’s project schedule.

Fortunately, technology can now help you weather the storms without getting soaked. Software developers have created “weather risk management solutions” specifically for contractors to help mitigate the weather’s effects on their jobs.

Forecasting the Inevitable

Construction is so closely linked to weather that many contracts specify the conditions that constitute acceptable reasons for delay. Yet, often, only weather deemed unusually severe or unforeseeable, as in the case of a tornado or prolonged flooding, qualifies as “acceptable.” The rest of the time, you’d better build some weather delays into your schedule from the start.

Even then, you may not recover all that weather delays cost you. You may win an extension on your contractual completion date, but, in the construction business, time may literally be money. If you’ve financed a project with a bank loan, for instance, the interest doesn’t stop accruing because you’ve stopped work. And if the rain keeps coming, you may be forced to defend extended delays in court.

In the last few years, however, companies such as MSI Guaranteed Weather (guaranteedweather.com) and Storm Risk Solutions (stormexchange.com) have begun offering indices that allow you to quantify the type of weather most likely to affect your projects in financial terms. Then you can manage the risk in stock market terms.

Hedging Your Bets

When you know, for example, that a certain location typically sees 10 days of rain in June, with an average total precipitation of 2 inches, you can more accurately gauge the time you might lose during site preparation, framing or other weather-dependent job phases.

You can also decide how to hedge with insurance coverage. Weather prediction being the uncertain science that it is, deciding on coverage is still something of a gamble. But if your biggest weather risk is an extra-rainy summer building season, you may want “call” option coverage that will pay you a specified amount if rainfall totals more than a certain number of inches.

Your coverage will depend on your specific circumstances but, as an example, say you get $100,000 for every half-inch of rain over the two-inch average in June. (In this case, two inches is the “strike,” or the “trigger,” point.) If it rains four inches in June, you’d receive $400,000. With a “put” option, you pay if weather doesn’t happen.

Continuing the example above, let’s say the put strike is an inch of rain in June. If it rains an inch, you might pay the carrier, say, $200,000, or $100,000 for each half-inch under the two-inch strike. The advantage to you is that the $200,000 is probably less than the extra revenue you’d see from a drier-than-normal summer month.

Or you may choose to cover both ends with a “collar” option, which includes provisions for both excessive weather and unusual weather deficits. You get paid if it rains four inches, and you pay if it rains only an inch.

Exploring the Concept

As you can see, using weather risk management software to handle your insurance costs is a bit of a gamble. And, understandably, not every contractor is comfortable with the perils and demands of this approach. Nonetheless, it’s a concept worth exploring.

Find out how our expertise in construction accounting can add value to your business. Email us or call us at 1 (888) 875-9770.

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