The construction industry emerged relatively unscathed from the COVID-19 pandemic — in fact, after an initial pause, construction activity in most markets resumed at a record pace.

Since most construction activity takes place outside with socially distanced workers, the addition of personal protective equipment (PPE), handwashing stations and other basic COVID-19 safety protocols made a return to work for most contractors relatively straightforward.

This has resulted in steady construction activity across North America since COVID emerged in early 2020. New construction in the U.S. was valued at $1.36 trillion in 2020; while the amount fell slightly from 2019, due to the pandemic, social unrest and other factors, it still represents a historically strong and growing market. 1

However, supply chain disruptions and a sharp rise in building materials costs have threatened the viability of many projects. In the fourth quarter of 2020, 71% of contractors reported at least one material shortage. Lumber was the most commonly reported shortage2 while the increased cost of lumber has resulted in an average $24,000 increase in new home prices.3 In addition, diminished truck and rail shipping capacity has created logistical hurdles that can bust project completion deadlines.4

This convergence of labor shortages, supply chain disruptions and the high cost of building materials may contribute to a spike in project cost overruns, delays and, ultimately, defaults — especially among key subcontractors and trades — by late 2021.

An additional wildcard: PPP (Paycheck Protection Program) funds that many contractors accepted and how pending repayment and tax implications of those relief funds may affect contractors’ balance sheets.

Protecting the business

With so much at stake, many owners and general contractors rely on surety bonds or subcontractor default insurance (SDI) to protect themselves from downstream defaults. While the two share some similarities, there are important differences: Surety bonds provide beneficiaries (primarily owners and general contractors) with a third-party guarantee that the bonded contractor will fulfill its contractual obligations to the client, while SDI protects the general contractor against risks associated with subcontractor default, performance failure or other material breach of contract.

With supply chains stressed, higher materials costs and increasingly tight schedules, surety and SDI underwriters are monitoring the situation carefully. Meanwhile, construction firms need robust risk management to take care of their bottom line.

With problems looming, it’s important for the industry to have robust risk management procedures, which often took a back seat to profitability and productivity during the latest construction boom. Here are four best practices that can help construction companies protect their bottom line:

  1. Get back to basics. Because construction has boomed since the 2008 recession, many project management best practices have been neglected. Construction companies should refocus on basics such as aggressively managing project cash flows, carefully monitor project under-billings and deploy well trained crews that operate safely and productively.
  1. Choose jobs wisely. Overloading the pipeline with unprofitable work causes problems with cash flow, labor availability and deadlines. Given the abundance of available work in most markets, contractors should maintain a disciplined bidding strategy, focusing on work for which they have expertise with solid profit margins, and only chasing work that they can appropriately staff.
  1. Implement subcontractor prequalification procedures. It’s critical for general contractors to implement robust prequalification procedures for all subcontractors, not just new trade partners. General contractors should review subcontractor balance sheets, work-in-progress schedules and backlog, as many subcontractor balance sheets may look much different today than even a year ago. The emergence of new subcontractor credit-scoring tools and outsourced subcontractor “prequel” services can assist general contractors.
  1. Create a resilient supply chain. Supply chains have become lean and highly efficient, but also fragile. Many contractors learned this firsthand during the pandemic. Just-in-time supply chain management practices work well so long as supply chains operate normally. But when supply chains are under extreme stress, things can quickly fall apart. Many contractors need to know the difference between an efficient supply chain and a resilient one — and learn how to build the latter

HUB International’s construction services specialists can help construction firms manage their risk.

1 Stastista, “New construction put in place in the United States from 2005 to 2019, with forecasts from 2020 to 2024,” accessed April 26, 2021.

2 U.S. Chamber of Commerce, Q4 2020 Commercial Construction Index, February 3, 2021.

3 National Association of Home Builders, “Higher Material Costs, Interest Rates Lower Builder Sentiment,” March 16, 2021.

4 Engineering News-Record, “What’s Behind The Materials Price Spikes?” March 24, 2021.