by Carmine Cimetti
Despite the prospect of growth thanks to the Infrastructure Investment and Jobs Act, the U.S. construction sector is still grappling with numerous challenges.
Persistent inflation, along with escalating labor, fuel and material costs, has led to significant budget increases, with some projects experiencing cost hikes of up to 20% overall. The rapid rise in interest rates further dampened the industry’s growth during the first half of 2023.
Acquiring the necessary construction materials and equipment results in limited inventories and, now with a significant shortage of expertise, potential project delays, contingencies, extended schedules and ultimately, added project costs. Even as the materials markets have appeared to stabilize, the cost of construction materials remains considerably elevated, upwards of 5% compared to 2022.
Rising Costs Leaving Some Projects Underinsured
The construction industry’s ongoing challenges have led to tighter profit margins and an upswing in insurance costs. These challenges have been exacerbated by the record number of extreme weather events in recent years, resulting in catastrophic property losses. Builder’s risk insurance rates have surged by 30% over the past two years, with no clear indication of returning to pre-pandemic levels. Similarly, liability insurance costs for construction projects have nearly quadrupled during the same period.
For large-scale projects, particularly those in catastrophe-prone areas such as condominium construction, and construction conversion projects, insurance costs that previously accounted for approximately 2% of the total project cost recently surged to 8% or more. It has also been noted that high inflation and increased construction costs are also leaving some projects underinsured mid-build.
Supply chain disruptions and potential project delays have made some construction underwriters cautious, and some insurance carriers are now more reluctant to assume the entire risk for a project. Unlike the past, when a single insurer would underwrite a large-scale project, it now often requires multiple carriers to provide the same level of coverage.
Project managers and owners grappling with rising costs based on conceptual estimates schedules are now faced with significant delays and face an increased risk of being underinsured. While some seek to mitigate these exposures through insurance, carriers are increasingly hesitant to extend buffers for claims.
Five Strategies for Success
Economic forces have made it increasingly difficult to predict costs and timelines for building projects. In light of these uncertainties, contractors can no longer rely solely on traditional project management approaches. To ensure the survival and success of your business in this dynamic environment, contractors should consider the following strategies:
- Prioritize risk management. Given the prevailing market conditions, construction firms must prioritize risk management to position themselves as a best-in-class risk. Developing comprehensive risk management plans for jobsites and investing in mitigation technology can be instrumental. This includes the use of products designed to prevent common issues, such as treated wood to mitigate fire risk or environmental monitoring and alert systems to address water leakage, temperature fluctuations in addition to changes in relative humidity/moisture levels. The implementation of these measures has been viewed favorably by most carriers and can potentially lead to insurance rate discounts.
- Focus on valuations. Accurate valuations are critical not only for construction projects but also for equipment. Contractors making equipment purchases must contend with rising inflation, supply chain delays and fluctuating conversion rates. Careful review of all contracts and close collaboration with brokers can help ensure that valuations and associated insurance coverages remain accurate. This is most effective when viewed in real time: i.e., when equipment is being considered for purchase, and at a minimum annually, prior to renewal.
- Attract and retain your workforce. Consider offering cost-effective benefits that can help attract and retain workers. While competitive pay remains crucial, health plans and financial wellness programs may be particularly appealing to the younger generation of workers. Employers should work closely with their brokers and take a deeper dive into the demographics of their workforces; the traditional “one size-fits-all” approach is no longer in play; a solid demographic analysis will identify gaps in a program which support a more diverse workforce in addition to addressing the needs of an employee population.
- Consider 3-D printed materials. 3D printing technology is playing a pivotal role in manufacturing pre-fabricated components for buildings, bridges and highways, offering the potential to save up to 70% in construction time and 80% in labor costs.
- Choose the right partner. Collaborate with a knowledgeable broker who understands your specific needs and can assist in developing a robust risk mitigation strategy. Such a strategy should help secure the best coverage options while reducing the overall cost of risk.
There is no doubt the construction industry faces a complex, changing landscape characterized by inflation, supply chain disruptions, a shortage in expertise, and economic uncertainty. Contractors must proactively adapt their strategies to successfully navigate these challenges by prioritizing risk management, demonstrating their reliability to insurers, ensuring accurate valuations, addressing workforce needs and partnering with knowledgeable experts. By enhancing their resilience, construction firms can thrive — yes, even in these challenging times.
Carmine Cimetti is vice president in the construction specialty group at insurance brokerage Hub International New England.
