Following a spate of fires in high-rise buildings around the world, the Australian building industry is under the microscope. But faced with the potential of increased regulation, IAG urges small businesses to use risk mitigation as a way to build greater resilience.

In a recent submission to the Senate Inquiry into non-conforming building products, Insurance Australia Group (IAG) gave an unequivocal assessment. The use of plastic-foam external cladding, as used in high-rise buildings across Australia and the world, poses a high fire risk and a “great threat to life.”

However, the problem doesn’t end with plastic-foam external cladding.

There is a “broader problem” in Australia with non-compliant building products, such as braided hosing, electrical wiring and PVC piping – which is often a result of imported products that have had insufficient and inadequate offshore testing.

The application of the cladding (and other non-compliant products) is also a significant concern which heightens risk.

In fact, 96% of building permits do not comply with building and safety standards as a result of inferior product quality, inappropriate application and oversights in the certification process, according to a 2011 Victorian Auditors General’s Office’s report into the private building surveying industry.

Implications for SMEs

There are severe implications for the small business who operate in trades who must manage – and mitigate – the risks inherent in non-compliant building products.

Not only do these products pose an “unacceptable threat” to the community, they also have other ramifications including an upward pressure on the cost of insurance premiums, for example, and the uncertainty of “hidden risks” that can’t be adequately assessed.
 
With huge consequences for supply chains, underwriting and claims, the solution, according to IAG, is the compulsory testing of building products to ensure they meet Australian Standards, and increased regulation of the importation, supply and use of the products.

Greater compliance

So how will this push for greater compliance affect those small businesses in trades at the coalface of the Australian building industry?

Trade businesses operate in a highly dynamic and competitive environment and face numerous risks, says IAG’s Simon Pallavicini, Manager Underwriting Risk Services.

And managing cost, contractual and health and safety risks are one of their biggest issues.

"Unlike larger organisations, small businesses tend not to have the resources to devote time to understanding and managing their risk profile and internal controls," he says.
 
He suggests that businesses avoid wasting time focusing on any one individual risk. “We recommend that small businesses implement a risk management framework reflective of your business’ nature and size.  Once a framework has been developed individual risks can be assessed.”
 
"This may seem difficult but it’s worth taking the first step," he stresses, citing evidence that risk management creates a competitive advantage and builds resilience. "No matter what size business, a strong risk culture defined by your values, beliefs and business objectives, will guide you as you make decisions about the inevitable trade-off between risk and return."
 
In terms of implementing an effective risk mitigation policy, Pallavicini advises small businesses to be proactive. “Our advice is look at risk management as the key to your business success, not just something that’s to be ignored or done for the sake of compliance.”
 
It might seem an onerous task, but there is no need for SMEs to go it alone.
 
"After all, you have a business to run," says Simon. "Industry associations are a great place to start. They typically provide industry-specific information and advice on where to get the support your business needs."