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Although the U.S. Construction industry is still seeing single-digit growth in most business sectors, several persistent market issues are affecting profits and hampering the ability of construction contractors to manage and control risks. Among those risks are various market-wide and industry-specific issues that will negatively affect insurance rates, terms and capacity for many months to come.

Skilled Labor Shortage

With the ongoing labor shortage and reduction in skilled workers, finding and retaining good help will be one of the most vexing challenges in 2020.

Spurred by an aging workforce and the gradual retirement of the Baby Boomers, the labor shortage makes it difficult for construction companies to hire, retain and train appropriate workers. In the effort to address and resolve this situation, Congress passed a bill in 2018 providing nearly $1.3 billion per year toward careers and technical education. Yet construction firms continue facing challenges in recruiting and retaining talent. With so few workers available, many contractors are forced to hire inexperienced, unskilled and/or temporary workers, creating workplace environments that are ripe for on-the-job injuries and lost productivity.

Workplace injuries can affect skilled, unskilled and temporary workers alike, but they are especially prevalent in settings where inexperienced workers are functioning without adequate training, oversight or support. The resulting injuries can be detrimental to the employer’s productivity and lead to costly workers’ compensation claims that can damage a company's Experience Modification Rate and suggest that it is a poor risk. By extension, a high EMR can make a contractor ineligible to bid on certain construction projects and prevent them from vying for profitable jobs. 

With no end in sight to the ongoing skilled labor shortage, contractors are advised to develop and implement effective risk management strategies that include instituting and/or updating workplace safety programs and managing claims more aggressively. This will go a long way toward keeping workplace injuries and excessive workers’ compensation claims at bay. 

Trade Tariffs

The construction industry faces ongoing challenges related to the U.S. economic trade war in which tariffs and restrictions have been placed on imported construction materials and metals, including steel, aluminum and lumber. As a result, construction companies have had difficulty sourcing raw materials and have encountered rising prices, loss of jobs and other outcomes that make it difficult for them to remain competitive and profitable. The impact of trade tariffs on project costs and profits remains unclear, and with other tariffs being considered for early 2020, construction companies are advised to stay on their toes and maintain an effective risk mitigation plan should needed supplies and materials be affected. 

Catastrophic Weather Events

In the past few years, tornadoes, hurricanes and severe storms have crippled parts of the U.S., and devastating wildfires have monopolized the news. Burning thousands of acres and threatening a multitude of homes and businesses, the wildfires have been fueled by exceedingly strong winds and dry weather. 

With construction materials and equipment heavily exposed to these disasters, construction companies face increased property risks. Fire events such as these, along with other weather-related catastrophes, have damaged construction sites, equipment and materials, resulting in substantial property losses. With an influx in costly insurance claims, carriers generally respond by limiting insurance and increasing premiums—making it more difficult for construction companies to obtain adequate coverage. Adding insult to injury, some standard insurance policies do not cover specific weather-related losses, and some carriers are putting affirmative wildfire exclusions onto policies. 

To prevent financial and other losses, construction companies must understand their exposures and ensure they have the appropriate coverage in place to protect their worksites and assets. Preventative measures, like erecting a protective barrier or fence around a worksite, are viewed positively by insurance carriers and underwriters and can help reduce the potential for loss. 

Among other notable issues that show no signs of abating in 2020 are:

  • malicious cyber events arising from the industry’s increased dependency on technology and artificial intelligence (including the use of robotics, drones, GPS, laser-guided equipment, modeling systems, smartphones/tablets, etc.). Cyber-attacks can cause significant damages including financial, property and reputational losses; and
  • increasing general liability and workers’ compensation claim activity resulting from renewed interest and demand for prefabricated/modular construction. 

Managing the Risks 

Effective risk management is the key to ensuring a more profitable and productive New Year, especially when labor shortages, catastrophic weather events, trade tariffs and other threats to construction companies show no signs of letting up. Organizations that assume a proactive and disciplined risk management approach will receive a more favorable view from insurance carriers. Starting the process early is a good first step. Working with a qualified and experienced risk adviser can help contractors navigate the process, setting them on the right track towards the most favorable outcome. 

Key steps for contractors to remember, include: 

  • identifying and prioritizing risk exposures in order of importance in partnership with an experienced risk adviser;
  • monitoring potential risks throughout each stage of the project to address real or perceived threats in real time; 
  • establishing risk management goals with a clear understanding of any exposures that can be transferred; 
  • developing analytics around risk financing opportunities to drive better decision making and favorable outcomes; 
  • considering capacity deployment. Capacity for construction insurance remains competitive as insurers are becoming increasingly selective in this area; 
  • communicating and highlighting strong and/or improved claim trends, safety culture and risk management strategy to carriers; and 
  • ensuring property and builder’s risk policies are structured properly when making decisions about material purchasing. This helps to minimize cost and maximize coverage.

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