Reinsurance
Product Family
Cheri Hanes

By

Risk Engineer, North America Construction

As 2021 has unfolded, we’ve seen a very strong rebound from the doldrums of 2020. That sounds like great news, right? Turns out it is - and it isn’t, because that strong construction market, when combined with an almost unbelievable variety of material supply chain impacts related to ports, fuel, winter storms, the COVID 19 pandemic’s lasting effects, and a host of other issues brings us to this: a real crisis in construction supply chains.

Projects today are grappling with longer lead times and higher prices for more materials than ever in recent history. Just in Time delivery seems like a distant fairy tale in many cases. More likely, projects are tending to hoard all the materials they can get their hands on and dealing with the inconvenience and safety issues involved in working around them.

The chart below gives an indication of the magnitude and breadth of the situation by showing increases in prices for six common construction materials and comparing them against the incredibly modest increase in bid prices over the same period. This is not a sustainable situation.

chart showing escalating construction materials costs vs bids and estimates

There is no question this is a highly complex situation. No simple answers to this problem exist. There are only tactics, that, when combined, may help blunt the current impacts and allow the industry to come out of this with a better understanding of what it really means to know and manage supply chains and address cost escalation from start to finish.

While these concerns are certainly on everyone’s’ to-do list, the actual approach to solving the problem remains hard to nail down. Every component of a construction project has a related supply chain. Where should the effort begin? In this article, we’ll look at actions you can take, now and in the future, to develop resiliency in your supply chains and hedge against future impacts.

What to do NOW:

  • Appoint dedicated supply chain leadership. This is a complicated subject; someone needs to own it to drive success. The role of supply chain leadership should include efforts to compile and digest the information being gathered by your various teams and fully leverage it across the organization. There are many moving parts: processes, systems, compilation and assessment of data, and the strategy to make sense of it all. In other words, this should be someone who can see the big picture, and who has the authority to take big picture actions. Whether it’s a dedicated specialist or part of another position, there’s value in someone taking point.
  • Implement a robust, documented, and continuous subcontractor communication plan around supply chain. Subcontractor outreach is foundational to correctly understanding supply chain risk. They are closest to the risks and can give you the best possible intelligence on them. What might a sub outreach program include? It varies, but the common themes are fairly consistent. Talk to subs about:
    • Known Materials Status and Availability - Do the subs or suppliers know there is a problem, or that there is no problem? Find out.
    • Potential Areas of Concern - What are sub/suppliers worried might become a problem?
    • Lead Time and Price Impacts – On both, work with subcontractors and suppliers to strategize a solution. Their insights may provide a solution you wouldn’t otherwise think of. This will also facilitate project schedules being developed realistically and incorporating anticipated lead times and allow for accurate budgeting.
    • Comments – In a nutshell, understand what keeps them up at night. This freeform opportunity for subs to elaborate regarding anything on their minds regarding supply chain can be very revealing - if you read between the lines. Ensure that someone does.
  • Conduct a Supply chain audit for all in-progress projects and upcoming or potential projects. Make a consistent effort to understand what is at risk and where to focus. In today’s environment, “Required on Job” and “Material Procurement/Tracking” logs need to be managed 6, 9, and 12 months out. Verify that your Trade Partners and suppliers have placed their orders in time and that the anticipated lead times are current – and have a buffer.
  • Mitigate potential impacts. Plans may include alternate materials or suppliers for those with potential for delays or escalation, re-sequencing work to accommodate delays, pre-purchase and storage – with appropriate controls.
  • Share your knowledge. It’s important to educate owners and designers. You’re going to “own” this risk together for the duration of any project. Some of the smartest strategies will have cost associated or require a design compromise. Make sure everyone knows WHY it makes sense. If the owner makes a different choice, ask them to indemnify you for the risk with contingencies, price escalation clauses, or other appropriate measures.

It’s important to educate owners and designers. You’re going to “own” this risk together for the duration of any project.

 

  • Implement a materials management plan for all at-risk materials, tracking from point of origin to your site with documentation along the way. Confirm the materials are being fabricated. Know when they are headed your way and know when they will arrive. This level of upstream communication may be new for many organizations, but it is a critical step in understanding and managing supply chain risk. Once on site, check materials in against submittals to check for correct and sufficient materials. This is an environment in which substitutions might happen or quantities might be short. Missing or damaged materials will take longer to replace. Don’t leave these responsibilities to subcontractors only; builders need to own this risk and manage it. This is a trust but VERIFY situation.
  • Incorporate material constraints/delays into your project schedule so that it accurately reflects the actual activities on site. This forms the basis of any request for increased time or cost, so be sure it is accurate.
  • Consult your lessons learned. Have you experienced this in the past? What did you do then? Make sure you leverage past experiences.

The above list contains tactics you can use to react to the situation now, but what are some strategies to put your organization in a better position for the future? Consider the following:

  • Focus on your Go / No Go criteria. Understanding supply chain challenges can help you pursue the right projects. Knowing how flexible and accommodating an owner is likely to be matters. To the greatest extent possible, try to:
    • Work with owners you know and trust. Your knowledge of how fairly an owner manages contract issues, how flexible they are likely to be when design or material changes make sense, certainty of funding, schedule and cost priorities, and involvement in sub decisions is valuable, and should be cultivated and leveraged.
    • Make reasonable schedule commitments. Incorporate new realities around labor and materials in your schedule. It is likely that projects built now will not go up as quickly as those in the past. Adapt to this reality.
    • Make reasonable cost commitments. Use reasonable and current assumptions around cost. Shifting supply chains almost certainly mean there will be cost deltas from historical data.
    • Review contract language with legal counsel. The details matter with regards to risk allocation. Use what you’ve learned and definitely don’t take on a contract with the same problems you have identified previously.
    • Stick to your core competencies. If there’s ever been a time to double down on your strengths, this is it. Avoid “firsts” and exceptions. Play the long game.
  • Collaborate. Implement a process for projects to communicate with subcontractors and suppliers to understand their supply chain challenges. Begin this conversation at the earliest possible stage of bidding and continue it over the life of each project.
  • Include supply chain conversations in subcontractors’ qualifications analysis. Identify those with supply chain redundancies and strong supplier relationships and weigh those things in award decision. Ask subs to disclose the value and source of all potential materials as part of their bid and use this information to make reasonable risk management decisions.
  • Focus on Resiliency. This may include redundant sourcing, redundant subcontractors, stockpiling some vulnerable materials, and building strong relationships in situations where redundancy is less possible.
  • Incorporate Supply Chain strategies into your Business Continuity Plan. Whether a pandemic, strikes, tariffs, or embargoes, interruption events like these will arise again, and supply chain interruptions are typically close behind. Contemplate your approach in your business continuity plan.

There is no doubt that the issue of supply chain management is incredibly complex, and a challenge to even begin to address. With a defined focus on these strategies, we can work to build a new, better system for managing supply chains in construction. These logistical matters are seemingly mundane on their own, but combined, they comprise the critical tactics needed to foresee and avoid unexpected impacts. When strong vision and strategy is coupled with the tactics discussed above, it may be possible to both mitigate current risks and avoid or soften future supply chain impacts.

To contact the author of this story, please complete the below form

Invalid First Name
Invalid Last Name
Country is required
Invalid email
Invalid Captcha
 
Subscribe

More Articles

Global Asset Protection Services, LLC, and its affiliates (“AXA XL Risk Consulting”) provides risk assessment reports and other loss prevention services, as requested. This document shall not be construed as indicating the existence or availability under any policy of coverage for any particular type of loss or damage. AXA XL Risk. We specifically disclaim any warranty or representation that compliance with any advice or recommendation in any publication will make a facility or operation safe or healthful, or put it in compliance with any standard, code, law, rule or regulation. Save where expressly agreed in writing, AXA XL Risk Consulting and its related and affiliated companies disclaim all liability for loss or damage suffered by any party arising out of or in connection with this publication, including indirect or consequential loss or damage, howsoever arising. Any party who chooses to rely in any way on the contents of this document does so at their own risk.

US- and Canada-Issued Insurance Policies

In the US, the AXA XL insurance companies are: AXA Insurance Company, Catlin Insurance Company, Inc., Greenwich Insurance Company, Indian Harbor Insurance Company, XL Insurance America, Inc., XL Specialty Insurance Company and T.H.E. Insurance Company. In Canada, coverages are underwritten by XL Specialty Insurance Company - Canadian Branch and AXA Insurance Company - Canadian branch. Coverages may also be underwritten by Lloyd’s Syndicate #2003. Coverages underwritten by Lloyd’s Syndicate #2003 are placed on behalf of the member of Syndicate #2003 by Catlin Canada Inc. Lloyd’s ratings are independent of AXA XL.
US domiciled insurance policies can be written by the following AXA XL surplus lines insurers: XL Catlin Insurance Company UK Limited, Syndicates managed by Catlin Underwriting Agencies Limited and Indian Harbor Insurance Company. Enquires from US residents should be directed to a local insurance agent or broker permitted to write business in the relevant state.