Despite the plethora of construction work currently available thanks to state and federal infrastructure investments and the pent-up demand for new housing it’s a challenging time for contractors.
Several factors beyond contractors’ control are negatively impacting the construction industry and increasing exposures, particularly for smaller trade contractors. Insurance rates are also rising at the same time, making the cost of doing business more expensive.
Here are four of the biggest issues facing contractors that agents should be aware of and how they can help their clients navigate through them:
Shortage, Higher Costs of Materials
The worldwide shutdown caused by the COVID-19 pandemic brought the production of construction materials like steel, lumber and appliances to a screeching halt, which has seriously disrupted global supply chains over the last 18 to 24 months.
More than 90% of builders reported some type of material shortage last year, which was the most widespread shortage since the National Association of Home Builders (NAHB) began tracking shortages in the 1990s.
Contractors are paying higher costs for construction materials and experiencing significant project delays. Construction input prices in July 2022 were up 17.4% over the same month in 2021, according to the Associated Builders and Contractors (ABC). Being unable to find the right or affordable materials is tough on smaller trade contractors who are already struggling to make a profit. However, there are hopeful signs that supply chain issues are easing, with prices dipping 1.8% in July compared with June 2022.
Finding and Retaining Skilled Labor
The pandemic also led to a huge exodus of skilled labor from the construction industry, and many of those who left the workforce are still reluctant to come back. ABC said in February that an estimated 1.2 million construction workers would leave their jobs to work in other industries during 2022.
While the construction industry added 32,000 construction jobs in July, according to an ABC analysis of U.S. Bureau of Labor and Statistics data, it wasn’t enough to fill the gap, with the association noting that “the industry’s labor supply remains severely constrained.”
Competition for good workers is tough, forcing contractor companies to increase wages to attract or retain workers, which eats into the bottom line.
Average hourly earnings for residential construction workers have risen consistently over the last couple of years, NAHB says, noting that “between December 2019 and December 2021, residential building workers’ average hourly earnings increased about 12%.” That trend has continued this year with average hourly earnings in May 2022 up 5% over the same time in 2021, NAHB says.
As the prices of goods and materials have crept up, so has inflation. This is affecting construction demand and costs, especially for new housing starts.
New home sales fell in June to the lowest level since April 2020, NAHB said in July, “reflecting builder sentiment as construction bottlenecks continue to slow new home building and raise housing costs.”
Moody’s Analytics reported in June that inflation rose to 8.6% on an annual basis but noted there were indicators that “global supply-side inflation pressure is peaking in some areas.” The Bureau of Labor Statistics says inflation dipped to 8.5% in July after peaking at 9.1% in June.
The Federal Reserve has been steadily increasing interest rates over the last year to combat rising inflation, and that is hurting home sales.
The combination of inflation and a nearly three-point jump in mortgage interest rates during the first half of 2022 sidelined potential homebuyers, Moody’s noted in mid-July.
The Fed’s second .75% rate hike at the end of July came as the housing industry was already in a recession, according to NAHB.
Helping Contractors Navigate Current Challenges
Each of these individual issues are of course intertwined and create additional exposures and insurance costs for contractors. Agents should ensure their clients are aware and prepared for current challenges, as well as taking steps to avoid potential claims related to negligence, property damage or worker injuries due to material and/or worker shortages.
Contractors should be transparent with their clients about how these issues could affect a project, increase its cost or lead to delays. Contractors should also consider the timing of starting a project. If, for example, materials like windows won’t be available for six months, could a building project be damaged by elements like wind and rain if it is unable to be completed on schedule?
Other exposures like job site accidents or worker injuries may be more prevalent if contractors are operating without enough workers or are hiring workers who are unqualified or not properly trained.
Contractor insurance premiums are directly related to payroll and gross receipts, so with the increase in building values and wages, policies have become more expensive. Add to that a tightening of capacity in the property market because of natural catastrophes, and contractors are looking at high single-digit rate increases or more in some areas.
It is up to agents to help their contractor clients navigate and mitigate other exposures that could lead to even higher insurance costs. Agents should also look for insurance partners with experience in the contractor/construction space.
There are signs of light at the end of the tunnel for the segment. The rate of inflation appears to be slowing, and the demand for new construction is still prevalent given the current massive housing shortage. With the help of trusted agent advisors, contractors can mitigate the current challenges and be positioned to take advantage of new opportunities in the years to come.
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