Strained sub-contractors adding risk to construction books

Strained sub-contractors adding risk to construction books | Insurance Business

Strained sub-contractors adding risk to construction books

The construction industry today is facing many bulldozer-sized challenges. While demand for construction work in the US continues to increase, contractors are battling issues like material price volatility, a tightening labor pool, and project delays and deferrals.

As contractors start to wrack-up more considerable project backlogs, they’re starting to take on more risk when it comes to their insurance programs via loss-sensitive or high-deductible plans, according to Mike Walsh, managing director – New England, NFP. They’re also engaging in more contractor and owner wrap-up activity, he added.

“I think contractors are looking for creative ways to make their insurance operations a more profitable part of their businesses,” Walsh told Insurance Business. “To do that, they have to take on a certain level of risk, but in general I think the ones doing this have evolved and matured enough to feel sufficiently confident in the controls and the discipline they have in place in order to take on that risk and ultimately add profitability for the company.

“Given the amount of risk contractors take in their overall business anyway, and the fact that they work on such low margins, I think they’ve realized they can find some profitability in their risk management and insurance programs. I think we will continue to see more of this because of how competitive the industry is and because contractors need to find margin wherever they can.”

A common theme Walsh has noticed in NFP’s larger construction book is the increasing prevalence of sub-contractor issues, especially sub-contractor defaults due to extreme backlogging. While the risk of construction defect has remained fairly static, there are opportunities to address the increasing claims trends in the sub-contractor space, Walsh added. One method might be to make the sub-contractor pre-qualification process more robust.

Another issue causing headaches in the construction sector is the tightening labor pool. Contractors who used to self-perform certain tasks are no longer doing so because they’re short-staffed, and so they’re asking more of the already-strained sub-contractor community. On top of that, as more construction workers reach retirement age, the industry is finding it difficult to attract new talent.

“We’re also seeing construction projects being delayed or deferred more and more frequently,” Walsh added. “This is sometimes a result of the challenge of managing man power, but it’s very often because of financing. For example, in the case of any type of municipal project, a vote needs to be extended in order for the project to go forward. We’re increasingly seeing things like that being pushed out, which is causing financial difficulty for the contractors. It also causes difficulty in scheduling because pinpointing start dates on jobs, especially as you get into integrated delivery, becomes more and more challenging.

“Furthermore, there’s still a lot of mystery and difficulty around PPP work, and I think our contractors are challenged by having clarity of who is the true dollars behind a project and who is the owner. The relationship is so un-traditional in the PPP space, and I think that continues to challenge contractors.”