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Construction insurance implications of the supply chain, labor and inflation issues



Construction insurance

As the construction industry recovers from the covid pandemic, supply chain issues and inflation are creating new challenges. Both building materials and skilled labor are in limited supply, and costs are rising at a rate not seen in decades. These market conditions affect construction insurance and risk management in many ways.

New York Construction Outlook

According to Construction Dive, construction in New York dropped during the pandemic, when non-essential construction was put on hold for 11 weeks. However, construction soon began to recover. The New York Building Congress says construction in New York City for 2021 was about $60.6 billion, up 26% from 2020.

Although construction activity has increased, both the direct and indirect effects of the pandemic continue to affect the market, and other political and economic factors add to the challenges.

Contractors are struggling to keep up with rising material costs

The National Association of Home Builders says building material costs have increased 33% since the pandemic began.

According to the New York Construction Report, prices for many materials have skyrocketed. The Associated General Contractors of America analyzed government data and found that price increases in November outpaced the rate at which contractors raised their bids. Almost all types of materials were subject to price increases, and trucking costs also rose by 16.3%.

Supply chain problems

The supply chain has made headlines in recent months. According to an economist at the University of Rochester, supply chain problems haven’t been this bad in 50 years. The current problems began when factories and ports closed during the pandemic and were exacerbated by strong consumer demand. Now the war in Ukraine and the sanctions against Russia are contributing to the problems with the supply chain.

The construction industry has also been affected. In the Commercial Construction Index Q4 2021 from the US Chamber of Commerce, 95% of contractors surveyed say they are facing at least one material shortage. Contractors also report being concerned about the impact of tariffs on materials, with 49% saying tariffs on new construction materials and equipment will have a high or very high impact.

According to Supply Chain Dive, in light of the Russian invasion of Ukraine, US entrepreneurs are dealing with the threats of war, inflation and supply chain issues all at the same time. As Russia is a major producer of aluminum and copper, these materials are expected to see further price increases – and it comes after the 33% and 25% year-over-year increases in January.

Lack of skilled workers

According to the Commercial Construction Index Q4 2021 from the US Chamber of Commerce, 91% of contractors say they have trouble finding skilled workers, and 62% report a high level of difficulty. A year ago, only 42% of entrepreneurs reported a high level of difficulty. Labor shortages force contractors to change their routines in various ways, such as turning down projects and raising their bids.

Labor shortages have been a common problem since the pandemic, but the construction industry’s problems are not just a new development. According to the HIB Construction Labor Market Report, the lack of skilled construction labor is limiting the ability to expand home construction, and in 2020 sales outpaced construction. To keep pace with demand, the construction industry would need an additional 2.2 million net hires between 2022 and 2024.

But according to McKinsey & Company, experienced construction workers are drawn to other industries, including transportation and warehousing, which offer better pay raises and working conditions. At the same time, educational programs have been halted since the pandemic, and it has also been more difficult to attract international labor.

Insurance consequences

These issues affect insurance and risk management in many ways:

  1. All property owners need to review their property insurance limits to see if they are adequate. In light of supply and labor shortages, the projects will take longer. Also, due to inflation and rising property values, projects will cost more and insurance limits may be insufficient.
  2. For the same reason, contractors must review the builder’s risk insurance limits for ongoing projects.
  3. Given the labor shortage, strong workplace safety is more important than ever. New and untrained workers are more likely to make mistakes that lead to liability issues and accidents.
  4. Careful contractual risk management with subcontractors is essential. Your subcontractors are also struggling to hire and retain talent and, as a result, have the same increased exposures.
  5. Beware of entering into contracts/bonds with performance requirements that may be affected by prevailing market conditions.

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