Tuesday, July 16th, 2024

According to a recent article from Business Insurance, cyber, financial, and labor are among the top risks faced by the commercial construction industry. Our construction-specializing client advisors from 3 different markets provide their insights on each of these risks.

Little Rock-based Client Advisor, Elisha Burks, looks at the cyber risks that commercial construction companies are vulnerable to and how they can mitigate these risks.

The construction industry faces vulnerability to cyber risks due to:

• Collaborative systems.
• Urgency to complete projects may lead to less time to review or be suspicious of potential threats.
• Limited regulation and guidance in recent years may have contributed to less focus on cyber security, putting the industry behind others on realizing the threats, opening up for greater exposure.

Mitigate against cyber threats by:

• Create a team of trusted advisors with internal and external input to assess your company’s needs and vulnerabilities and plan for them effectively.
  • The internal team should also implement controls for the physical, administrative and technical exposures to ensure good cyber hygiene.  Examples of each…
    • Physical – Implement proper physical security of servers, mobile devices, etc.
    • Administrative – Create policies and procedures to ensure good practices, like technology daily routines and behaviors, and accountability of the practices.  Training of employees to increase knowledge and awareness of threats and practices to deal with potential threats can act as a human firewall.
    • Technical – Use software to prevent cyber threats, firewalls, security software, data backups, implementing two-factor authentication, etc.

• Include strong cyber security and provisions in your contracts with third party vendors and sub-contractors, etc.
• Purchase Cyber Liability Insurance to help transfer some of the risk and obtain coverage for cyber attacks, such as business interruption, fraud wire transfer, extortion or ransomware, data breach, etc.

Atlanta-based Client Advisor, Jarrod Wright informs us about the labor shortage facing the construction industry.

• The construction industry will need to attract an estimated 501,000 additional workers on top of the normal pace of hiring in 2024 to meet the demand for labor, according to a proprietary model developed by Associated Builders and Contractors.
  • In 2025, the industry will need to bring in nearly 454,000 new workers on top of normal hiring to meet industry demand, and that’s presuming that construction spending growth slows significantly next year.
• The unemployment rate in the U.S. is at historic lows and construction companies are having great difficulty finding qualified workers.
  • This will act as a constraint on the growth of the construction industry and will provide a continuing challenge for construction in 2024 and beyond.
• These labor supply issues will be compounded by the aging of the labor force.
  • Between 2003 and 2020, the percentage of construction workers who were age 55 and older increased from 11.5 percent to 22.7 percent.
  • Their impending retirements will continue to contract the industry’s workforce.
• In 2020, 25 percent of construction industry workers were born outside of the U.S. Future immigration policy could potentially be a headwind if it restricts the flow of these workers.
  • Congress must enact much-needed reforms to our legal immigration system and provide high-demand industries, like construction, with access to new or expanded visa programs.

Mitigate the risk of losing your current workforce with these tips:

• Offer ongoing training and education.
• Recognize crew member’s hard work and commitment to your company.
• Provide flexibility for a better work-life balance.
• Create a sense of community so that they see employment as more than just a job.
• Provide competitive benefits.

How to attract more workers to your company:

• Recruit construction ready workers from other industries.
• Tap into the female workforce.
• Open doors to unskilled workers and provide on the job training.
• Partner with schools and community organizations to draw more attention to your business.
• Offer internships and mentorship programs to get the younger demographic interested.

Tampa-based Client Advisor, Greg Palmer, provides his insight on cost challenges facing the construction industry.

Nonresidential Construction:

• Despite high interest rates, Backlogs continue to hold steady throughout the country. The “South” Region continues to path the way as the only region with double digit backlog indicator.
• According to the Construction Confidence Index, sales expectations are holding while profit margins are dropping. Nearly 80% of contractors expect no change or an increase in sales. However, over 66% of contractors are reporting no change or a reduction in profit margin.

Residential Construction Confidence:

• High interest rates and increased costs have caused a slowdown in residential new construction projects.
• The National Association of Home Builders Housing Market Index has dropped to 43 in June, which is the lowest level of the year. A reading below 50 indicates a negative outlook.

The Good – Industry Growth

The construction industry continues to show signs of growth throughout the country.

• Consolidation through Mergers & Acquisitions and Barriers of Entry, due to cost and labor concerns, have narrowed the field of “qualified competition” in the construction industry.
• Maintaining strong financials and increasing bonding capacity for existing Construction Companies should be a priority for any contractor looking to expand their business.

The Bad – Cost Creep

Cost creep has put contractors in a peculiar position.

• While the work is steady, profit margins are down.
• Labor shortages will continue to drive labor costs up.
• While other inputs have stabilized, it’s important to consider how these changes have impacted the construction industry since 2020.

The Ugly – Insurance Costs

Insurance costs continue to challenge the construction industry.

• Cumulatively, insurance costs have rose over 50%-100% over the past 5 years.
• While premiums have slowed to a single digit increase for most lines of coverage, auto insurance and umbrella insurance premiums continue to increase at an alarming pace.
• Implementing risk management best-practices can help control unnecessary premium increases.

Risk management strategies to control insurance costs:

Auto Insurance:

• Accident prevention strategies are the best safeguard to keep auto premiums stable. Regularly review of telematics reports and Dash Cam footage will thwart potential problems.
• Auto accidents often result in workers compensation claims, which is a double whammy to insurance costs.
• Work with an agent who provides you with simple and effective strategies to identify, fix, and monitor driver behaviors to keep claims frequency down.

Workers Comp:

• Create a “see something, say something culture”. Most labor workers know the “weak link” or “bad apple” in the group.
  • Provide “weak links” with additional training & supervision
  • Get rid of “bad apples”.
• Learn and understand how to effectively control workers compensation claims from impacting your experience modification.

Contractual Insurance Requirements:

• Have your agent review the insurance requirements within a contract. Whether you have the appropriate coverages or not, negotiate the contract to your advantage.

Group Captives:

• Do not jump into a group captive to solve a short-term problem. Weigh the pros and cons of a group captive and the long-term impacts on your company before making a commitment.
• Group captives can be a great option for the right company.

Work with an agent who takes a proactive approach to protecting your assets and people.