The rising cost and risk of construction delays

Authored by AXA XL’s Amanda Hammett and Ann Marie Snyder

Despite facing an amalgam of issues over the past few years, the construction industry is growing. Projects are back on track, and commercial projects are leading the recovery, with an expected 6.1% spending increase this year.

That kind of recovery has not been easy, nor has it been without challenges. Since 2020, the construction industry has been working its way back to normal. For the most part, the industry has done well despite project shutdowns and cancellations. Still, there were some serious pressures on the industry that is still impacting it today.

For example, labor shortages are prevalent, with 412,000 openings going unfilled as of February 2023. Pandemic-related slowdowns and supply chain issues continue. As a result, materials costs, fuel costs and labors costs have risen significantly. Add a hefty layer of inflation and most construction operations are facing some serious increases in pricing across the board.

All of these factors are impacting the project timeline. Start dates are moved back because materials or labor are tough to find. Supply chain delays cause project delays. Budgets need to be readjusted to account for increasing costs.

A change in direction

That has caused some project owners to shift gears. There was once a focus on office buildings, residential buildings, or retail buildings; however, there is now a focus on electric vehicle plants, data centers, and healthcare facilities.

What is not changing are the projections and coverage terms in the construction wrap-up policies or general construction coverage. Since many projects are planned well in advance of the start of construction, those coverages may fall short in terms of the costs associated with each project. As projects get delayed or re-evaluated, costs and economic and labor conditions, which are changing daily, could well increase beyond the scope of the coverage that is in place.

Construction project policies often have an escalation clause – terminology which allows for an increase in construction values to account for fluctuations in project costs associated with materials, labor, fuel or other covered portion of the project. However, as there is so much pressure on pricing in the construction industry, those escalation clauses have changed.

As a result, project owners are not always agreeing to accept those changes. Some of the clauses are attempting to put the onus of the rising costs on the owners. That puts owners in the position of having another conversation with the bank in order to increase funding, causing project delays or even cancellations.

The perfect storm

Since the pandemic began, many projects that were slated to happen had to be rethought. For instance, city condominium projects were stalled, as were office building construction projects when lockdown-weary residents left cities and companies decided to adopt hybrid work models.

That has left project owners in a bind. They have been shifting and reimagining their project goals to salvage the project and recoup some of their investment dollars. As most projects are planned years in advance, that type of re-evaluation can often seem like a sensible way to redirect efforts and breathe new life into a dying project

That in itself can cause unnecessary exposures, especially when project owners move into projects that are outside of their expertise. Turning a condominium project into affordable housing, for example, could create gaps in knowledge – and coverage – that project owners may not be aware of. Retrofitting an office building to serve as an apartment complex comes with myriad issues from plumbing to HVAC to ADA compliance and more.

It can also open the organization up to new loss exposures. Handling projects outside your organization’s normal focus can mean you are not covered for the specific functions, project parameters or risks that are associated with the new project.

Before switching project focus, it is critical that organizations have a conversation with their insurance carriers. A carrier that may be willing to take on an office building project, for example, may not be willing to take on a project that comes with different or more risky exposures.

Prepping for the long game

Even if your carrier is willing to consider insuring your project, how can you make your risk portfolio more appealing to underwriters? We recommend that before you take on a new-to-you project or when your current project focus shifts, have a conversation with us. Your carrier is your partner in protecting your investment. We will review your plans and the state of the market from a cost perspective. We can also advise you on risk management strategies and on insurance products that can best protect your investment.

AXA XL’s North America Construction team brings a comprehensive team of experts to every client account. Our risk engineers can walk you through the various risk scenarios associated with any new project. Also, our subject matter experts are well-versed in the state of the construction market, from supply chain to labor, and can be a valued resource to those project owners looking for information and support. Through the AXA XL Ecosystem, our clients have access to resources such as various benchmarking services as well as new technology solutions and other risk management services offered at special prices through our Preferred Partners.

When the pandemic bore down, organizations learned how to pivot quickly in order to stay in business. As businesses moves forward, even with some directional change, it’s important to stay in close contact with your insurance carrier. Markets are ever-changing. When those changes happen, how you adapt includes understanding how your risks have changed.

No matter what changes are occurring within your project or organization, talk with us. Communicate your concerns, your plans and your direction. We can discuss ways to reduce your losses and advise you when we believe the risks are too great.