The construction industry is facing a one-two punch of rising material costs and shortages along with an acute shortfall of skilled labor, from tradespeople to professional quality control positions at major contractors. On top of that, when they are seeking insurance coverage, project owners and contractors face a combination of still firming rates and capacity cutbacks.
The combination of rising insurance prices and the shortages can cause problems with:
- Project scheduling
- Securing coverage for construction projects
Business Insurance states that demand is set to rise further with another half-trillion dollars of federally funded projects about to commence as a result of the federal infrastructure bill. Song Kim, senior vice president of construction at CNA Financial Corp. stated that larger projects in geographical proximity to each other could further exacerbate an already tight labor market as projects compete for talent.
Global real estate manager CBRE Inc.'s Construction Cost Index forecasts a 14.1% year-over-year increase in construction costs by year-end 2022 as labor and material costs continue to rise.
Danette Beck, head of industry verticals and national construction practice leader for USI Insurance Services Inc. in Valhalla, New York, said that input costs for construction have risen 40.5% since February 2020, based on data from the Associated Builders and Contractors. She also stated that the labor shortage, and in particular skilled labor, is by far the single largest struggle construction companies face, following closely by shortages of materials and equipment due to supply chain issues.
"There's going to be a bigger demand for construction than supply of talent to do the work. There's nothing that would push the market into a soft environment, as inflation and supply chain issues continue to vex the construction sector and wider economy."
President of North America construction at Axa XL | Gary Kaplan
According to the Council of Insurance Agents and Brokers pricing survey, average construction insurance rates rose 4.2% in the second quarter. Most sources agreed the toughest parts of the property insurance market are catastrophe-exposed properties, including in areas prone to wildlife, particularly in California, although Colorado and New Jersey have also seen blazes.
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Kelly Kinzer, Schaumburg, Illinois-based head of construction for U.S. national accounts for Zurich North America stated that the property market has remained very firm and demand for critical catastrophe capacity continues to outpace supply.
Risk & Insurance reports that a lack of labor in any industry has many implications, from decreases in productivity to increases in workers' compensation claims. For the construction industry, a labor shortage can contribute to:
- Delays in project completion
- Issues with quality control
- Increased builder's risk costs
An Associated Builders and Contractors analysis revealed the construction industry will need more than half a million workers above its current pace of hiring in order to meet demand. That would mean, the report estimated, an additional 650,000 workers.
According to a DataBid blog titled "3 Major Challenges Facing the Construction Industry," the construction industry and especially general contractors are now facing the following major problems:
- Workforce shortages
- Supply chain issues
- Inflation challenges
Local construction businesses are dealing with the above problems in different ways and trying to find solutions by pre-ordering equipment immediately when available and resequencing parts of projects as necessary to keeping a deep bench of trade and supplier resources on call in order to find backups or alternative solutions.
Michael Meagher, president of McHugh Construction stated that he anticipates McHugh's revenues will be more than 30 percent above last year's total. But, he does raise a cautionary note, as inflation and rising interest rates are making it harder for projects to pencil out and for developers to secure financing.
