With Inflation Still in Play, Sharp Management Against Risks is Key
By John Wallen
Steel prices are cycling down after spikes early in 2023. Lumber prices have marked higher highs and lower lows, confounding construction planning. Inflation has boosted the cost of borrowing, canceling some construction projects while others – think downtown Milwaukee’s convention center – have substantially exceeded initial budgets.
The U.S. inflation rate is moderating – now at 3.2% after hitting 7% in 2021 and 6.5% in 2022. But the aftershocks are still with us, and Wisconsin’s construction industry is fighting against them.
The uncertainty poses any number of hurdles to contractors. They may not be as high as they were six months or a year ago, but it will take continued flexibility and planning for them to emerge largely unscathed.
Supply chain risks couple with inadequate insurance
A few of the biggest risks to contractors lie in ongoing supply chain challenges, labor shortages and now ongoing challenges with the cost and adequacy of insurance coverage.
On the supply chain front, the pressures ebb and flow. But prevailing conditions have put manufacturer price guarantees in abeyance, and materials pre-selling is no longer common. At the same time, essential building materials and equipment continue to be costly – if available at all. The scarcity of transformers has driven prices up by as much as 50% and there are cases where job completion and occupancy is halted due to the delays. This has impeded grid expansion and modernization projects. And it’s a never-ending battle to fill the holes in manpower; the 130,000 construction workers employed by the industry this year are still insufficient to the need.
This problem is not going away soon. The American workforce continues to age. In 2000, 12.5 percent of those over 65 were working; by 2016, that share had increased to 18.6 percent. 2 According to the Bureau of Labor Statistics, the number of individuals ages 55 and above in the labor force will grow from 35.7 million in 2016 to 42.1 million in 2026.
The vise is also tightened with higher diesel fuel costs and construction equipment. While the parity between new and used equipment is changing as prices of the latter stabilize, contractors need to pay close attention to valuation of their equipment and work with their equipment suppliers and insurance brokers to schedule coverage based on proper values and replacement cost coverage.
And insurance makes for another aggravation. Inflation and extreme weather events have created catastrophic property losses and higher insurance costs, driving builder’s risk rates up as much as 30% and beyond, while liability insurance costs have continued to rise. There was a time when insurance for larger projects in risky markets (think hurricane-prone coasts) accounted for 2% of a project’s budget. That number has jumped to 8%.
It’s dealt the industry a double whammy and left some projects underinsured. Carriers are reluctant to provide a buffer for the purpose of a claim, and the 10% escalation clause that once helped hedge against inflation is no longer common.
How to manage successfully through it
The industry should escalate its evaluations of options that will help it through the challenges. Evolving technologies and methodologies are one place to start. But adapting the management playbook to sharper, best-in-class practices will go a long way, too.
Technology, as a class, continues to transform the business, whether that’s electronic monitoring for security purposes, drone technology for monitoring work progress – especially in hard-to-reach areas – or worker wearables that enhance safety. Use of prefabricated construction is escalating as its cost and resource efficiencies continue to be proven out. And 3D printed construction is also increasingly being adopted as a predicted 200% growth rate through 2026 attests.
As far as management goes, the focus should be on all the elements that create a good risk and make firms a preferred choice among clients. That also translates into the best insurance rates. Plus, when capacity is limited, underwriters are choosier on where they deploy it; best-in-class players are at the front of the line.
Here are some specific provisos:
- Sharpen those valuations, not just for projects themselves, but also for equipment. It’s all important with rising inflation, supply chain delays and conversion rates. Closely read all contracts and share them with brokers to ensure appropriate valuations — and the associated insurance coverages — are accurate.
- Your workforce is your future. Benefits should be both cost-effective and also help attract and retain workers. Pay is always important, but health plans and financial wellness programs have considerable appeal for millennial and Generation Z workers.
- Find a good partner. Work with a broker who understands your needs and can help you design a risk mitigation strategy and provide risk management and claims advocacy resources that secure the best coverage while reducing your total cost of risk.
About the author
John Wallen is Vice President and Wisconsin Construction Practice Leader for global insurance brokerage Hub International. He has more than 30 years of experience providing risk management consulting, effective insurance solutions and innovative risk and cost reduction strategies for the construction industry. John is active in multiple construction industry trade associations including ABC, AGC, ASA, Plumbing and Mechanical Contractors Associations as well as the Construction and Financial Management Association. John has been a featured speaker for several of these and other construction associations on various risk management topics.