What risks do contractors in the construction industry face today?

Burgos, October 21, 2022.- The first victim of an economic recession is investment in infrastructure and public works. Traditionally. If in the coming months the main European countries enter a technical recession, it will be necessary to see how the construction companies react. 

At the moment, Business Schools and specialized magazines are warning about how contractors can manage these risks while minimizing threats to their profitability. 

1. a tight labor market

With construction activity expected to be strong in the coming quarters and with the well-documented industry labor shortage, it’s no surprise that contractors are focused on attracting new employees and retaining existing ones. Like many other industries, construction has and continues to be impacted as baby boomers head into retirement. Added to this the challenge is getting younger generations interested in construction as a viable career option. Together, these dynamics have created strain and uncertainty for many construction firms. Here are some ways to manage the talent tightrope.

  • Team up with other contractors: A network of trusted contractors is a valuable resource for dealing with the current labor market shortage. Subcontractors and resources can be shared within the network and work can be referred to other members when one is over capacity. 
  • Build a talent pipeline: To attract younger workers, consider visiting high schools to talk about the industry, career progression, and what a job in the construction industry means personally and professionally. Partner with local trade schools and hire interns. 
  • Take care of current employees: Happy workers stay; unhappy workers leave. A healthy talent pipeline will mean nothing if a company does not retain current employees. A fair salary is just the beginning. It’s also important to do the little things that create engagement and a sense of belonging to an organization. This includes providing robust and meaningful benefits so employees can take care of themselves and their families. Another idea is increasing gas mileage reimbursement or offering special bonuses such as weekly gas cards to make it easier to get to a jobsite. 
  • Create a culture of workplace safety: Employees want to work in a safe environment and know their employer cares about them. Contractors should offer safety training to all employees, regardless of experience or role. It is also important to encourage teamwork and provide mentoring programs to foster an environment of cooperation rather than blame if something goes wrong. 
  • Encourage community involvement: Organizations that regularly give back to their communities create loyalty among their employees. These should be concrete efforts that also encourage employees to get involved as well. Whether it’s coaching high school students to work on their own projects or helping to actualize a dream for a disadvantaged family, community work makes everyone feel good.

2. supply chain disruptions and rising material costs

Although there has been some relief in material pricing in recent weeks, on balance, contractors must continue to manage existing supply shortages and pricing that remains elevated. The good news is material costs appear to have spiked during the first quarter of 2022 according to the second quarter Producer Price Index report. However, some inputs like steel and plastics remain stubbornly elevated. Potentially exacerbating elevated material pricing is the use of just-in-time delivery methods creating heavier reliance on trucking companies and other logistics organizations that may lead to delays down the road. 

Because material costs and other variables like transportation continue to show some level of volatility, contractor risk remains elevated. And with contracts less certain relative to their ability to recoup increased project costs, pricing is tricky and becoming a true blend of art and science. Contractors must figure out how long they can guarantee a price—or how they will try and pass on rising costs to their customers.

Ways to reduce liability from these unpredictable risks include the following.

  • Include cost escalation clauses in contracts: A well-crafted cost escalation clause can help offset at least part of the financial burden when there are unexpected price increases. 
  • Modify projects: When materials, labor or other inputs are in short supply, contractors should consider meeting with the project owner to discuss ways to change the project while still delivering on requirements. Mutual agreement versus unilateral decision by the contractor is a must in these circumstances.
  • Seek alternatives: In the current market, contractors have to be more flexible. Shifting suppliers or materials may provide its own challenges, but the ability to adapt helps ensure the success of a project. Any substitution of materials should also be accomplished by mutual agreement with the owner or owner’s representative. 
  • Document all changes: Keeping track of any changes, including material and labor costs, can help avoid future legal issues and potential disputes with the project owner. Poor record keeping is a major cause of contractor losses, therefore it’s important to carefully document all aspects of the job, including but not limited to site conditions, scheduling issues, change orders/additional work and material price escalations. 
  • Enhance site security and monitoring: Now that materials are more expensive, there’s potential for more jobsite theft. Similarly, any water or fire damage to materials at a construction yard or jobsite could create a devastating loss. Automated monitoring devices such as water or theft alarms are relatively inexpensive and can be moved from site to site as needed. Secure fencing and/or surveillance are imperative to protect a company’s investments. It’s also important to have the right insurance in place for every project and jobsite, as well as the company itself. Risk mitigation and ensuring a quality insurance solution and carrier(s) are in place is something sureties will want to know as well. 

3. risk transfer

With all parties trying to minimize their own exposure, it can be challenging to transfer risk sufficiently—and to ensure all the risk is administered proportionately based on the stakeholder’s obligations. Contractors should read and understand their builder’s risk policy and discuss specific coverage limits with their agent. For example, project owners, mortgagees, contractors and subcontractors are usually additional named insureds under a builder’s risk policy, meaning there are very limited, if any, options to transfer risk for the project to other parties. 

Successful projects are in part managed through effective risk sharing on a macro and a micro level. This can be helped by fully understanding all risks and making sure the contract provides ample time for resolving conflicts on site, as well as a defined process. This should include the ability to work with the owner to resolve conflict. It is a good idea to have an ongoing relationship with an attorney specializing in construction law to review all contracts before signing. Sureties will be looking at these risk elements and many others, such as liquidated damage and dispute resolution clauses, as they evaluate project support. 

Managing contractor risk is an ongoing process

Change will continue to happen in the construction industry resulting in new and different risks. Anticipating what to expect, now and in the future, will help contractors weather the storm today and help guide their next moves. While no one can predict the future—and the past few years have definitely demonstrated this—understanding that risk management is an ongoing part of running a construction business helps contractors position themselves to respond to the inevitable headwinds that will arise.

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