1. Supply Chain Disruptions, Labor Shortages, and Inflation
The most significant and surprising effect of the pandemic has been the effect on supply chains, lack of available labor, and increased pricing for everything. Virtually every material from lumber to steel has gone up in price, and contractors are often unable to get materials and equipment at any price as there is a shortage of shipping containers and drivers to deliver materials to the jobsite. Labor shortages are plaguing the industry, resulting in increased labor costs. With a new infrastructure bill working its way through Congress, we can only expect increased demand for both materials and labor. While the prospect of more work is a good thing, it is likely to come with the side effect of more shortages and higher pricing.
To address impacts of material shortages and disruptions from lack of critical materials, contractors will need to consult with their owners on ways to address these problems early in the contracting process. This may require owners to advance funds to lock in pricing or to order and store materials off-site well before they are needed. Owner selections will need to be made much earlier than previously required.
Many contracts allow for extensions of time due to "unusual" delivery delays. Contractors should review that language closely when negotiating contracts, and re-word it to avoid defenses from owners that the current environment makes no delivery delay "unusual." As always, contractors will need to update their schedules regularly, and they should include delivery times for even basic materials that they may not have traditionally tracked.
Owners will want to include clauses in their contracts providing that the contractors cannot make claims for material or labor escalation, while contractors, of course, will want to avoid such clauses.
The greatest risk involves sudden change in prices, and is particularly acute in hard-bid contracts. Many public owners require bid-bonds pursuant to which contractors guarantee their prices for 60 or 90 days to allow the appropriate public body to approve the contract. Outside the public arena, contractors will often have standard language in their bid stating the quote is good for a certain number of days. Sudden material price spikes have caused hard bid work to become unprofitable between the time the bid is submitted and the contract awarded. Contractors need to carefully evaluate how long they will leave their bids open. They should also lock in pricing on a contingent basis if they cannot control how long the bid must remain open.
Some relief may be coming as the Biden administration removes Trump-era tariffs on lumber and steel, but the issues go beyond those two commodities and the logistical challenges will remain for the foreseeable future.
2. COVID-Driven Market Revolution
In our prior update, we noted that COVID-19 was accelerating other demographic trends, such as movement of people and firms from New York to Florida or from California to pretty much any place else. We suggested that contractors consider opening offices where the work is moving. As more and more people are getting vaccinated, case counts are dropping, and local and state restrictions are easing or being eliminated, we expect internal migration to continue along its COVID-19 driven path. For example, some families moved from hard-hit areas with heavy restrictions to less restrictive environments so that their children could attend school. There are now reports that even as restrictions are removed and schools re-opened, many of these families are deciding to stay in their new homes.
This demographic trend is not only reflected in national migration, but also local migration. Many employers have learned that their employees can function just as effectively working from home as they can from working at the office. Home-bound workers have sought larger dwellings so they do not need to use their kitchen table as their desk and can make Zoom calls without interruptions from children and barking dogs. Many workers are expected to return to the office only a few days a week, which will both reduce the burdens of commuting and allow firms to reduce their leased space.
These dynamics have caused a revolution in the way we work and live. We have already seen the effect of this revolution in the housing market, but it will affect virtually all non-industrial construction. New housing tracts require new roads, new schools, and new shopping centers—even as the malls and old shopping centers lose tenants to online shopping. Urban landlords will need to find new uses for existing office space, which should drive more interior renovation work. Already, some offices have been converted to condominiums, and rents have dropped in many markets allowing remaining urbanites to rent larger spaces from which to both live and work.
3. Tightening Insurance Markets
We are seeing double-digit increases in insurance premiums across the market and corresponding efforts by carriers to tighten their underwriting standards and to include new exclusions in their products. Workers' Compensation rates have been affected by actual and potential claims arising from workers who were or who may have been infected with COVID-19 at work. Carriers have introduced exclusions for communicable diseases in the scope of coverage, so that claims from non-employees infected on the site would not be covered by your insurance.
Insurance premiums are based on volume of work or payroll, and as business has dropped off for some contractors, it appears that the carriers have raised rates to offset the lower base and maintain their over-all premiums revenue. Market forces should address this over time, but COVID-19 claims are difficult to quantify at this time. While contractors have always had to live with the risk of fluctuations in their insurance rates, contractors should consider adding provisions to their contracts sharing the risks (and perhaps rewards) of these rate changes with owners over projects where policies are to be renewed, possibly at much greater rates. In cost reimbursable contracts, this may be reflected by having the actual cost of the insurance included as Cost of the Work.
4. Technological Changes and Cyber-Risk
In our last update, we discussed increased risks from cyberattacks, including a ransomware attack where all of your data is frozen for several days. This point was driven home by the recent attack on the Colonial Pipeline, which caused widespread gas shortages on the east coast.
Another facet of this risk is the emerging trend toward using higher technology on jobsites. 3D Concrete Printing ("3DCP") is already used on construction sites in Singapore. It can be used both for precast concrete and as an updated version of Cast-in-Place concrete. In the U.K., autonomous robots are being developed to replace gas lines located under streets to reduce the impact on traffic. These technologies are often integrated into the web as part of the "internet of things." Additionally, architects, engineers, and contractors should all keep in mind that many buildings are controlled remotely though that internet of things.
Use of this technology requires all parties to a construction contract to understand and allocate the risks associated with the technology. For example, the 3DCP will print the concrete as it is programmed, but there are risks that it will print using corrupt or outdated design files. While this same risk applies when humans pour concrete, the tendency is for humans to let the technology to take over. As a result, mistakes may not be caught as quickly as they may be if workers were casting the concrete in more traditional methods.
The other risk is a cyberattack that could go beyond a ransomware attack. A machine that can replace old gas pipelines under a road, could be hijacked through the internet and used to destroy other underground infrastructure. Likewise, a slight change in the 3DCP could introduce a structural weakness into the work. As we become more dependent on this amazing technology, we must also take greater care with cyber-security, use our imaginations to foresee possible risks, and make sure that existing insurance policies cover those risks.
5. Increasing Regulation
At the start of the year we noted that vast changes were expected to come from the change in presidential administrations and control of the Senate. President Biden made headlines with executive orders, and proposed legislation canceling projects like the Keystone XL Pipeline and imposing a higher minimum wage. Those changes are now evolving into less dramatic, but potentially more impactful regulatory actions. For example, the administration has restored the local-hire test program on projects receiving funding from the Department of Transportation. Under this program, contractors and subcontractors will be encouraged to use geographical and economic preferences in hiring workers for such projects. We expect to see much more pro-union and pro-labor programs like this and increased regulation.
Additionally, both OSHA and the EEOC are getting involved in vaccination efforts. If employers mandate that their employees get vaccinated, OSHA guidelines released on April 20, 2021 require the employer to report any adverse reactions to the vaccine as a recorded illness. To avoid having to make such reports, contractors should only encourage vaccinations. The EEOC had previously released guidance on flu vaccines that prohibited employers from requiring flu vaccines if the employee had a serious religious objection to being vaccinated and the EEOC is expected to release new guidance on vaccinations and back-to-work issues. New EEOC guidance will need to be watched carefully.
Because of the highly nuanced nature of this market, it is imperative that you are working with an insurance broker who specializes in your particular industry or line of coverage. Due to the variability that we're seeing in this market and specific account characteristics, your individual situation may vary from others. Gallagher has a vast network of construction specialists who understand your industry and business, along with the best solutions in the marketplace for your specific challenges.
Gallagher provides insurance, risk management and consultation services for our clients in response to both known and unknown risk exposures. When providing analysis and recommendations regarding potential insurance coverage, potential claims and/or operational strategy in response to national emergencies (including health crises), we do so from an insurance/risk management perspective, and offer broad information about risk mitigation, loss control strategy and potential claim exposures. We have prepared this commentary and other news alerts for general informational purposes only and the material is not intended to be, nor should it be interpreted as, legal or client-specific risk management advice. General insurance descriptions contained herein do not include complete insurance policy definitions, terms and/or conditions, and should not be relied on for coverage interpretation. The information may not include current governmental or insurance developments, is provided without knowledge of the individual recipient's industry or specific business or coverage circumstances, and in no way reflects or promises to provide insurance coverage outcomes that only insurance carriers control.