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Risk Outlook 2023: Pressures on Profits Persist

2023 challenges include the ongoing skilled worker shortage, lead times for materials and inflation-driven cost escalation.
By Craig Tappel
December 12, 2022
Topics
Risk
Business
Workforce

Construction executives shouldn’t file away the management strategies that helped them get through the last two years quite yet: More of the same lies ahead, requiring their continuing ability to pivot to manage effectively through the pressures.

The hurdles in 2023 will continue to keep profit margins squeezed: The ongoing shortage of skilled workers. Lead times for materials that challenge work schedules, accompanied by inflation-driven cost escalation that interest rate boosts haven’t checked. And the uncertainty over an economic recession drags on business as well.

Responding effectively to the challenges will take sharpened risk management and investment in the future.

The profit squeeze

The post-pandemic building boom has resulted in a 17% jump in starts in 2022 and should stay flat in 2023, according to Dodge Data and Analytics. That’s not a bad outlook, considering the overall environment.

In fact, there’s good and bad news ahead. Lumber costs have dropped a whopping 70% from their peak in May of 2021, but average material costs remain 17% ahead of 2021 as a whole. Then there’s the still clogged supply chain. Delivery lead times have shortened, but just about everything—from roofing membrane to electrical equipment—is still in short supply.

Those contractors that can make it work are preordering and stockpiling supplies. But it takes careful maneuvering, given the risks involved. Not only does this tie up capital and require storage space, but it also is another exposure that can drive up insurance costs.

Then there’s the ongoing shortage of labor that is just intensifying and keeping the vise on profits. One in five skilled construction workers is 55 or older, making it imperative for employers to find ways to make up the shortfall to win and complete contracts.

Trends to watch: better benefits, more tech investment, sharpened risk management

Wanted: skilled workers

If anything, the construction labor shortage is only intensifying. With 25% more jobs open than there are people to fill them, the situation has become endemic. It’s driving up the cost of building and is increasingly hard to fix.

Continued wage growth lies ahead, but managers might do better to think outside the box on what matters to employees beyond the paycheck. What adds value to the job are benefits and policies that meet workers where they are—and are personalized to meet their individual needs.

Employers should think about enriched benefits, including taking a look at whether policies for paid and unpaid leaves are adequate for the times. It’s not just vacations and sick days that should be put on the table. Unpaid family and parental leaves can be especially attractive to Millennials and Generation Z workers. Another possibility? Give them a tangible stake in the organization’s future through an employee stock ownership plan (ESOP). Some 20% of the largest U.S. contractors have converted to an ESOP, improving their recruitment and retention while also strengthening their capital structures.

Technology is the fix for many issues

With profits increasingly squeezed, investment in technology is something that more than one-third of construction firms say they lack the financial resources to pursue.

But they really can’t afford to avoid investing to some extent. Not only can tech solutions help with the shortfall of people, but they add efficiencies and enhance safety so everyone benefits. Take 3D printing, whose use continues to expand in the United States. In addition to reduced labor costs and improved labor processes, it can turn in materials cost savings as high as 40%.

But the industry should be wary of the downsides, ensuring their risk management strategies adequately respond to the heightened exposures that come with technology. It is particularly vulnerable to costly security breaches through their web applications, like ransomware. A Forrester survey found that 75% of construction industry respondents had been exposed in the previous 12 months; the annual cost is about $6 trillion.

Protecting against cyber intrusions has become increasingly important and also harder to secure and at a higher price: Cyber insurance rates are likely to rise as much as 40% ahead of 2022 levels in 2023. That makes risk management all the more important, consisting of a stringent technology plan and comprehensive safety protocols like multi-factor authentication. Training on safety practices also should be part of the program.

Risk management builds resiliency

Finally, the industry faces greater risks than ever before, and anticipating and managing them effectively has never been more challenging.

The uncertain economy, of course, is part of the concern for the future. High interest rates and inflation will pressure subcontractors as much as anyone else, and that raises the risk of subcontractor default. It will require firms to be extra cautious in pre-qualifying subcontractors, suppliers and other partners.

But the unpredictable events may be the most costly. The industry has been affected by catastrophic property losses stemming from severe storms and flooding, along with deadly wildfires. And global warming has led to the 10 warmest years on record since 2005, conditions that endanger workers. It will push builder risk rates in the most at-risk areas up 40% in 2023.

by Craig Tappel

Craig Tappel is the Chief Sales Officer for global construction insurance brokerage HUB International’s Construction Practice. His experience in construction began when he joined his father working in the family company after college. For 10 years, they worked together as independent risk management consultants serving energy, industrial and construction contractors. This led him to a role as the Chief Marketing Officer for HUB Gulf South. Craig has also held leadership roles at other national brokers and served as a General Manager for an MGA providing contractor package and commercial auto fleet coverage. He holds a number of professional designations including CPCU, CLU, AMIM, ARe, CPA, and CGMA.

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