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After years of going full-throttle, the U.S. construction industry has been contending with various pandemic-induced bumps in the road that will continue to slow business down and challenge how much resiliency can be mustered for the recovery ahead.

It’s a tough environment to deal with. While there was room for caution after eight booming years in construction spending, the pandemic’s massive disruption has altered the economics of working safely, on time and on budget. The aftereffects are carrying into 2021 as the recovery begins. 

Being deemed “essential” has kept construction firms (mainly) open and workers on the job, depending on location. Of course, contractors were hit when subcontractors couldn’t show after employees were exposed to COVID-19 and quarantines were required. The pandemic also disrupted material and supply chains, throwing operations and schedules off. And it didn’t help the industry when projects in the bidding process or final stages came to a standstill when the economy shut down last spring.

It led to a 6.5% contraction of the business in 2020, which is expected to relax to a 2.0% decline in 2021. As firms press forward, relieving the financial pressures will be a big challenge. No less worrisome will be balancing the need to leverage technology more effectively with the accompanying risk of cybercrime. 

Add to the mix how insurers view the impact on a construction firm’s recovery in a market that’s already characterized by higher-trending rates and tightening availability. It means that risk management, not to mention a strong partnership with an experienced broker, will be increasingly important for saving the day.   

Financial Pressures on Every Front

The pandemic left the construction industry with weakened balance sheets and tight profit margins. With jobs delayed for one reason or another related to the novel coronavirus, the industry has been hit with unbudgeted labor and closure costs, in addition to schedule delays. 

Another issue is last year’s Paycheck Protection Program (PPP) loans under the federal CARES Act. The industry received $64.6 billion in loan approvals across 466,221 applications, averaging $138,560 per loan. There’s concern not just over the level of forgiveness contractors can expect, but whether they even want to apply for forgiveness. In addition to potential audit reviews by the Small Business Administration, expenses related to forgiven loans may not be deductible on federal taxes. That could result in hefty tax bills, adding to contractors’ financial pressures.   

Other serious concerns are the financial and operational risks arising from contract performance default. General contractors may be in a weakened position if they opted for subcontractor default insurance instead of surety bonds to cover losses on subcontractor performance. 

With SDI, general contractors assume sole responsibility for the subcontractor prequalification process, as well as a significant “first loss” deductible. Subcontractor surety bonds, on the other hand, involve third-party prequalification and typically transfer all financial risk to the surety. 

Both sureties and SDI carriers are typically less rate-driven than other lines even when claims are mounting, but they will restrict capacity, tighten policy terms and increase deductibles. Like property and casualty insurers, surety markets will also become choosier in their underwriting. Moving forward, subcontractors need to self-market by highlighting risk management track records and successes. General contractors must demonstrate how quality, as much as safety, is managed on the jobsite; it’s not just an important differentiator for contractors, but an increasingly important risk-selection factor.

The Rewards and Risks of Tech Innovation and Deployment

A different pressure facing the industry is the need to take advantage of technology if it hopes to address the costs of productivity underperformance. Globally, construction represents 13% of GDP, but for more than 40 years, productivity growth has declined. Shockingly, nearly 30% of every construction dollar is lost to waste and rework. 

Tech innovation and deployment have both streamlined the construction process and improved worker productivity, safety and quality. And the improvements will only continue in the next three to five years. Drone use, for example, has skyrocketed by 239% year-over-year in a diverse range of uses, from providing onsite security to offset the $300 million to $1 billion in annual construction equipment theft to reimaging activities like surveying and quantity takeoff estimating.

The downside is that most of these advances also leave the door open to cyber risk, and there has been a notable uptick in cyber claims. One study found 75% of construction industry respondents had experienced a cyber incident. Construction is particularly vulnerable to social engineering, where a cybercriminal impersonating senior management or important vendors uses business email compromise tactics to bring about the release of large sums of money or information that can be monetized. 

The industry needs to do a better job balancing the benefits of technology with the downside of cyber risk. Firms should also periodically undergo audits of their cybersecurity environments. 

Adequate insurance coverage is essential. Many contractors buy policies where cyber is blended with their professional liability insurance. That’s dangerous because the protection can be very limited versus a standalone cyber policy. Decoupling cyber insurance usually provides better terms and conditions, and contractors gain the expertise and resources of an insurer to guide them through a cyber event.  

Regaining a Solid Footing in 2021

The outlook for 2021 remains uncertain for construction as factors including the ongoing pandemic, availability of vaccines and their respective influences on economic recovery remain in a state of flux. It will take decisive actions for firms to stabilize their operations. At the same time, the central challenge for contractors has always been the ability to carefully balance opportunities with risks—never more so than now.  

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