Reinsurance
Product Family
Gary Kaplan

By

President, North America Construction

The U.S. construction industry emerged from the COVID-19 pandemic relatively unscathed. Deemed essential, most projects suffered only small hiccups in their timelines, and contractors quickly adapted work sites, schedules, and wearable technology to ensure safe, socially distant spaces.

Thanks to growing demand for large infrastructure projects, data centers, warehouses and residential units, the industry is poised for continued prosperity. According to data compiled by Research and Markets, the U.S. construction industry is expected to grow by 15.6% in 2021, with a CAGR of 4.7% between 2021 and 2025.

But several risks threaten to stall that growth. Here are the top six exposures that, left unmitigated, could topple even large general contractors over the next three to five years:


1. Skilled labor shortage
During the economic recession of 2008, the U.S. construction industry laid off roughly 28% of its workforce. Most of those workers never came back, and the industry is still struggling to appeal to the younger demographic. Lack of skilled labor is now the #1 cause of loss in subcontractor defaults. Insufficient workforces lead to schedule delays, budget overruns, and increased safety risk if existing workers are consistently asked to work overtime.

Many contractors are taking advantage of technology to boost efficiency, including advanced modeling, project planning and scheduling software, and use of automatic equipment and drones. But this may not be enough to keep pace with growing demand.


2. Increasing cost of materials
Decreased supply of lumber and steel – driven by supply chain disruption, factory closures and general inflation – combined with growing project demand has led to budget-killing price increases. According to the National Association of Home Builders, lumber prices have risen by 130% since April 2020, while the price of structural steel has risen 91%. And it’s not clear when costs will come back down. This will lead to inflated project costs, lengthy delays, and more subcontractor defaults.

Contractors should be prepared to factor in increased material costs over the long-term, and adjust bids and contracts accordingly.


3. Economic uncertainty
Economic recovery appears to be on the right track, helped by several rounds of stimulus bills and rapid availability of vaccines. However, here also exists a real possibility that the recovery will take on a W” or “Double Dip” pattern. Another recession, however temporary, would increase default risk and further impair future growth opportunities.

Another risk accompanying economic turmoil is contractors’ inclination to accept projects where they lack expertise or experience. Moving into a new sector or geography presents liability exposures that should not be taken lightly. And presents risks to owners who hire these contractors. It’s best to stick with a team that is familiar with the project type, geography, and local vendor community.

At its core, the entire construction process must change to meet aggressive environmental sustainability goals.

4. Prefabricated/modular construction
Utilization prefabricated components is increasingly popular. Modular construction – a type of prefabrication -- is also growing, expected to reach over $100B by 2026, up from $65B in 2018. Modular is touted as allowing for 30-50% faster project completion – a huge factor in reducing cost.

By moving some processes off-site, this construction method also allows for more control over job site variables, safer job sites due to decentralized activity, and greater efficiency. However, similar to mass timber, it concentrates risk in the early stages of a project. Financing looks very different than with conventional practices, since 80-90% of the construction cost is already spent when the unit is still sitting in the factory.

Prefab construction requires a bulletproof design plan from the outset and careful coordination among subcontractors who have experience with this type of project.


5. Cyber
Today, it’s not a question of if but when you’ll be hacked. Are your systems fully backed up and ready to relaunch quickly when a breach occurs?

As contractors incorporate more technology into their operations, they increase their exposure to all kinds of cyber attacks - phishing scams, denial of service attacks, data breaches of personal info, etc. Many overlook these risks and continue working on outdated, antiquated, under protected IT architecture.

According to Advisen cyber loss data from 2020, U.S. construction incurred nearly $359 million in total cyber losses. Cyber coverage rate increases that began in late 2020 are expected to continue. Contractors that still aren’t buying cyber coverage are playing with fire and may experience sticker shock when they eventually decide to purchase a policy.


6. Sustainable construction
The green building market is among the fastest growing worldwide. LEED-certified projects in the U.S. jumped from 296 certifications in 2006 up to more than 67,200 in 2018. For many general contractors, the risk lies in missed opportunity.

Manufacture of construction materials, long-distance transportation and operation of heavy equipment all contribute to greenhouse gas emissions. Calls for more use of more sustainable materials (i.e. mass timber) have been heard for years, but industry has yet to figure out a cost-effective way to implement “green” practices comprehensively.

Mass timber construction is growing in popularity due to its efficiency and environmental sustainability. Mass timber projects can be completed about 25% faster than similar projects using more conventional materials and methods and require fewer workers. This means reduced cost and safer job sites. Mass timber also encourages planting of trees and minimizes reliance on materials that leave a large carbon footprint, like concrete and steel.

But mass timber construction shifts more risk onto the material themselves, and away from the building process. Those massive, laminated wood pieces are hard to replace, and require greater care both in transportation and once on the job site. Damaged materials could derail an entire mass timber project.

Education and prequalification are paramount. Contractors and sub-contractors need thorough education on the process and full commitment to the design for mass timber to work.
At its core, the entire construction process must change to meet aggressive environmental sustainability goals. If new regulatory requirements are enacted, or project owner demands grow more stringent, many large contractors may be at a loss.

These are just a few of the risks that could derail U.S. construction growth. Identifying and addressing these exposures early, with the help of risk management experts, will position contractors to take full advantage of emerging opportunities.

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