To survive supply chain chaos, construction & insurance must collaborate

Since early 2020, contractors and construction teams have faced skyrocketing material costs and labor shortages, which have unexpectedly exacerbated the cost of doing business and contributed to the compounding nature of the global supply chain crisis.

Insurers are facing a difficult time because, for contractors that rely on bonding lines to run their businesses, it’s increasingly clear that developers and construction professionals aren’t communicating and finding compromises, especially on project timelines, which would enable construction to cross the finish line despite challenging economic conditions.

It is equally important that all parties in a typical design-bid-build project understand the complexities and uncertainties of the supply chain and contracted labor market throughout the industry so we can face the crisis together. This includes all stakeholders — from lenders and developers to contractors. We’re dealing with a market unlike any before and we need to work together to be realistic about where we are and how to handle the challenges ahead.

Here are three issues faced by the construction industry that insurers need to know about.

1. Material costs

Colleagues on the construction side have said that the industry should expect the unexpected for the foreseeable future.

Price increases on items like wood, steel, and plastic, and project slowdowns due, in part, to port congestion in Asia and the U.S. and labor shortages at factories, have hamstrung the jobs of estimators and underwriters since the beginning of the pandemic.

Goods that may have taken just a few weeks to arrive are now taking months to arrive — making finishing work on time nearly impossible.

Project managers, who typically stockpile as few raw materials as possible, may have been able to skirt these issues somewhat by instead locking in prices and buying up surplus goods where available. But those opportunities have been few and far between. Those that do stockpile unnecessary goods out of panic-inflected purchasing often end up inadvertently adding further stresses to the supply chain.

It’s almost a cliché at this point, but there’s no simple solution to the supply chain problem.

While developers and bond providers shouldn’t be asked to absorb cost overruns caused by rising labor or material costs, they might consider being flexible in the face of extraordinary circumstances and provide contractors with additional time to source materials and avoid even more substantial effects on projects.

2. Labor issues

In the shadow of the pandemic and various economic forces, labor shortages have been rampant, with major builders limiting home sales and non-residential sales lagging behind pre-pandemic levels.

In a workforce survey conducted earlier this year by the Associated General Contractors of America (AGC) and Autodesk, 61% of firms said their projects are being delayed because of workforce shortages, with 30% of delays due to a lack of approvals or inspectors, or an owner’s directive to halt or redesign a project.

Contractors appear committed to building a robust and more resilient workforce through new recruiting measures, hiring tactics and training programs, and the AGC has called on Washington to “take steps to help address challenging market conditions and labor shortages.”

However, for surety bond professionals in the short term, rising labor costs have to be factored into the cost equation. Projects cannot be completed without skilled labor — full stop.

3. Communication and a cooling crisis

The complexity of the problem has contributed to its insidious nature — and that makes communication and collaboration key in the face of supply chain entanglements.

Parties’ lack of understanding of issues early in the design and construction process, for example, could lead to downstream delays, budget overruns and failing businesses.

“The need for construction-driven design and integration of supply chain participants is more important than ever,” said Pardis Pishdad-Bozorgi, associate professor in the School of Building Construction at Georgia Tech. “The knowledge that each of these entities has can benefit the project in terms of cost, schedule, and productivity.”

For our part, surety bond professionals should be willing to understand that material and labor costs are more than anticipated, and speak to their insureds to consider providing additional time on projects and then leveraging those costs.

It’s crucial that bonding professionals clearly communicate how we evaluate partners for credit and how best to message the conditions on the ground to build positive, lasting professional relationships that help projects avoid a costly performance default.

Read more: How to navigate the construction insurance market

But nothing is guaranteed, and our industry may suffer losses over the next few months before things get better.

Some have predicted the overall supply chain crisis may begin to ease, possibly in the second half of 2022, as consumer demand cools, inventory levels stabilize and shipping capacity approaches pre-pandemic levels.

In the meantime, we must be willing to help each other make it to the other side.

Consider the problem not just as professionals, but person-to-person. Be aware of the complicated situation and be more lenient and respect each other a bit more.

We’re more successful when we work together.

James Bluzard is vice president and CUO Contract for Argo Surety.

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