Business
Risk

Inflation Impacts the Cost of Risk for Construction Executives

Pre-planning can help mitigate inflation’s impact on contractors’ overall cost of risk.
By Lyndsey Christofer
November 7, 2022
Topics
Business
Risk

The combination of supply chain challenges, workforce issues and the rising prices of construction materials and labor costs have increased the cost of risk—creating a challenging environment for many construction companies and their leaders. This concern is top of mind for contractors and construction executives across the industry, with 68% of middle-market construction companies citing inflation as a risk that is expected to be extremely or very challenging to manage in the next 12 months, according to recent data from Chubb and the National Center for the Middle Market (NCMM).

As construction executives sort through the myriad of implications inflation has on their businesses, they should also consider how it magnifies the impact of rising material costs, supply chain snarls and workforce shortages. However, through careful pre-planning and other risk-mitigation strategies in consult with insurance agents and brokers, construction executives can help mitigate inflation’s impact on their overall cost of risk.

Rising Material Costs

The past two years have seen record materials costs, with the price of lumber, gypsum and concrete reaching record highs. The rising cost of building materials eats into the already slim margins for contractors who are often competing on price and value.

Data from Chubb and the NCMM shows that replacing materials in the event of a loss is a concern, with three out of four (75%) middle-market construction executives recognizing that the replacement cost of covered assets has increased.

From an insurance perspective, this highlights the importance of accurate valuations and strong business continuity planning so that contractors have the ability to replace or repair any materials in the event of a loss stemming from shipping accidents, fires, water damage, thefts or natural catastrophes. As a result, many contractors are beginning to look at sourcing materials from multiple vendors and have implemented much more robust supply chain management software and tracking systems. Additionally, proactively addressing potential challenges in the project with owners and other stakeholders is important to make sure the project will be able to adjust to unforeseen issues without penalty. This can include ensuring proper language is included in contracts and change orders, where possible, to accommodate for an increased cost of goods due to inflation subsequent to original project quotes.

Navigating the Myriad of Potential Delays

While the availability of some materials has improved since the beginning of the COVID-19 pandemic, shortages and delays of building materials remain a common obstacle facing contractors. Supply chain snarls can postpone projects from getting started, and a potential repair or need to reorder a product can cause costly delays as well, often extending projects far beyond expected completion dates. Postponements also can arise from complications with subcontractors, which might either be overcommitted with other projects or producing subpar work, leaving the general contractor at risk and potentially liable for any necessary fixes.

While project delays are inevitable, contractors should properly vet and explore all contractors and subcontractors, plus suppliers and materials—including alternate sources where possible—to help mitigate and minimize the impact of any delays. Vetting contractors, their suppliers and other work the firm has committed to is an important step in the pre-planning process to reduce potential exposures, minimize delays and resulting additional expenditures, and ensure the quality of work remains high.

Maintaining a Well-Trained Workforce

The “war on talent” continues to greatly impact construction executives, contributing to the rising costs on construction projects. This is a challenge across the construction industry, as 48% of middle market construction firms report that they are challenged in finding the right employees, according to data from Chubb and NCMM. The industry-wide talent crunch also can contribute additional pressure to existing workers, who might be taking on additional responsibilities to make up for open roles. Additionally, the rising cost of wages has a significant impact on contractors, which often absorb the additional cost—another key consideration given increasingly tight margins.

Another challenge unique to the construction workforce is the rapidly aging workforce. According to data from the Bureau of Labor Statistics, the average age of construction workers has risen to 42.3, up from 40.5 in 2018.

Upskilling and training new talent in-house is more essential than ever for construction executives looking to develop a robust, consistent talent pipeline to call on and avoid defaulting on projects. It is also important for construction executives to understand the value of their existing talent. Retaining talent also depends on more than competitive wages and benefits—workers want to see a positive culture of growth and identifiable career opportunities. While it takes time to develop young talent in-house, the investment pays off with individuals who are deeply ingrained in, and invested in, the business and their part in it.

Labor is one of the biggest uncertainties facing the industry and one of the hardest factors to account for; however, construction executives should account for the rising costs of hiring, training and retaining staff as part of their inflated cost of doing business.

Take Action with Strong Solutions

For construction leaders looking to complete projects on time and on or under budget, inflation adds another layer of challenges to the equation. The complications from workforce dynamics and material delays to supply chain difficulties are compounded by inflation, raising the cost of risk. Construction business leaders should explore a variety of solutions, from talent retention strategies to taking steps to make sure they include hiring and training costs early on during the budgeting process. It may also be in a decision-maker’s best interest to get ahead of renewals and work with their insurer to conduct a proper risk assessment. Contractors may want or need to adjust their insurance programs to ensure accurate valuations, ample coverage limits and appropriate policy language to accommodate inflationary-related pressures.

Insurance agents and brokers can provide valuable insights, helpful perspectives and important risk mitigation strategies during inflationary periods.

by Lyndsey Christofer

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