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 physically 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 Canada was valued at $75.6 billion in 2020; while the amount fell from 2019, due to the pandemic 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 early 2021, 60% of Canadian contractors reported that a materials shortage was holding back activity. Lumber was the most commonly reported shortage[2] while the increased cost of lumber has resulted in an average of nearly $20,000 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 labour 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.

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 monitoring project under-billings and deploying well trained crews that operate safely and productively.
  1. Choose jobs wisely. Overloading the pipeline with unprofitable work causes problems with cash flow, labour 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 as 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] Daily Commercial News, “2020 U.S. and Canadian Construction Performances in Review,” accessed September 3, 2020.

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

[3] Financial Post, “Homebuilders have been busy during the pandemic, but Canada still needs more housing,” July 8 2021.

[4] Canadian Contractor, “WRLA issues second building materials update,” May 21, 2021.