General contractors operate on tight margins – between 1.4 and 2.4 percent as reported on in Construction Business Owner – and therefore need to carefully guard against risk. If things go awry on a project, profits can disappear. How many losses can firms experience before their business is in trouble or even forced to go under?
One way for general contractors to guard against risk is insurance, a requirement in many states. Insurance premiums are part of the cost of doing business. Those costs, however, are rising dramatically due to the added risks brought on by the pandemic.
Why are insurance prices going up for general contractors, how will the rising costs impact the construction market, and how can general contractors adjust? Let’s read on.
In the beginning of 2021, Construction Executive magazine published an article entitled “The Insurance Market: What Contractors Can Expect in 2021.” The article listed 12 types of insurance common to the construction industry. While they note, “every account is underwritten individually and ultimately pricing will be affected by risk control strategies and loss histories,” their predictions show nearly every type of insurance going up during 2021 (one may go down and a couple may be flat). They note one type of insurance – umbrella/excess – may increase as much as 50 percent!
This is quite a shock to the industry, as rates have been flat or declining for years, according to Construction Executive. However, even before the pandemic, rates were starting to rise.
A Wall Street Journal (WSJ) article from February 2020 (just before the pandemic began to affect life in the United States) noted the rise in premiums for U.S. companies over the previous year and remarked that insurers “have warned price hikes are likely to continue.” The WSJ attributes the increase to “… a challenging landscape for U.S. insurers following several years of large catastrophe losses and continued low interest rates, which have weighed on their investment returns.” In addition, major insurance companies AIG and Lloyd’s of London have “retreat[ed] from some accounts and lines of business ….”
People have changed their habits due to the pandemic and the shutdowns. These shifts have impacted the construction market and brought uncertainty. While the residential construction market is booming, the overall market is mixed, even though it is above the lows of 2020. Fewer people are going to a store or an office building these days.
A perfect storm hit the construction insurance market. Premiums were already on the rise for a variety of reasons, including supply and demand, and then the pandemic hit. The impact on the economy has led to supply chain disruptions, worker shortages, and some project cancellations, meaning firms have a smaller backlog. All of this means more risk, which propels overall construction premiums even higher.
On the bright side, the construction industry was deemed essential in most parts of the country, and work continued throughout the shutdowns during the pandemic. And, many contractors have reported rising backlogs and growing confidence in the six-month outlook for revenues, staffing levels, and profits.
However, there are a few red flags, including some that began with the pandemic. A report from the American Society of Civil Engineers noted the pandemic-related challenges the industry faced, some of which are being felt post-pandemic. These include “(1) delays and suspensions of existing projects; (2) cancellation of planned and new projects; (3) supply chain complications, production delays, and logistic bottlenecks; (4) creation of additional and new risks related to the workplace, jobsites, and contract responsibilities; (5) labor or workforce issues including shortage of labor, protection of workers, ensuring proper health and safety precautions, and decreased workerpower; and (6) financial problems, including economic slowdowns, low cash, and restricted access to capital.”
Supply chain complications and workforce shortages are particularly challenging and may be restraining growth post pandemic. Regarding these challenges, Associated Builders and Contractors’ Chief Economist Anirban Basu told ForConstructonPros, “What all this has done is to suppress the vigor of nonresidential construction’s current recovery by inducing certain project owners to further delay their projects, hoping to ultimately receive more favorable bids.”
General contractors may pass on projects that involve greater risk and specialization. Due to a less experienced staff, the continual rise of the cost of construction materials, and an excess of caution, firms may have to reconsider what projects are worth their time and effort. The potential of missed deadlines and worker injury can ultimately lead to claims and insurance premiums rising even more.
The pressure on the bottom line may very well lead general contractors to raise their rates. A hike in fees can make a risky project worthwhile. Continuing up the line, owners/states/municipalities may have to reconsider moving forward on projects as the price to complete them rises. Even with higher rates it’s very possible there will be fewer general contracting firms willing to go after riskier projects. This means owners will have fewer bids to consider.
Although insurance premiums have been rising due to the hard market, rates don’t increase uniformly for all firms. Some firms may be able to hold the line on premiums or even see a decrease. There are steps general contractors should take as they try to secure the lowest premium possible.
Honesty and forthrightness are the foundation for relationships, including the one between general contractor and insurance carrier. Be transparent. When insurance needs to be renewed, it should be reviewed. Smith & Howard suggest, “Make sure existing policies reflect your current circumstances. If you’ve sold or retired some equipment, for example, remove it from your schedule of current assets. If you’ve reduced the number of workers on your payroll, adjust workers’ compensation estimates accordingly. On the other hand, if you’ve added vehicles or staff, see that they’re appropriately covered.”
Relationships matter in all walks of life, including insurance. That’s why insurance firm Hub International suggests general contractors meet regularly with their brokers and build a relationship with their carrier. Their advice to firms: “Check in with your broker regularly to review your losses throughout the year, especially in the four months leading up to your renewal. Understanding your losses will allow you and your broker to better negotiate the renewal.”
Insurance premiums for general contractors are on the rise. In this uncertain market that includes rising costs for labor and materials, heightened insurance premiums propose a challenge to general contractors.
Although the increase in insurance premiums is not the fault of general contractors but is instead due to market forces, contractors will have to adjust accordingly. How firms adjust and how the market is impacted is yet to be fully told. In all likelihood, however, the adjustments will lead to price increases and a shakeout of the market i.e., some firms growing, others pulling back, and others going under.
General contractors can take steps to minimize insurance premiums. That starts with communication, an emphasis on safety, and using the right technology.
Briq, a corporate performance management (CPM) platform built specifically for construction financial professionals, can easily identify where to save on overhead, minimize risk, and drive more profitable outcomes into the future. And with general contractors facing higher costs, having greater insight on where money is being spent is essential.
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