Boom or bust in 2022? Perhaps both
Supply chain disruption and labor shortages will continue to challenge the construction industry. Resiliency will be essential to cope with these shortages as business opportunities surge.
Underwriters are looking for evidence that construction firms can withstand the unique risks of the business, whether those risks are well known or as unpredictable as a pandemic.
Resilience in managing supply chain risk and labor shortages will be the industry’s biggest issue in 2022
In 2020 and 2021, a global pandemic was an unknown risk that the construction industry could never anticipate. But in 2022, that risk won't stop the industry from moving confidently into the future.
The most urgent issue impeding progress? In a word, it's “shortages,” specifically involving materials and labor. Not having the materials or the personnel to complete a project on time can kill revenues and the bottom line.
There's substantial risk management and insurance challenges, as well as opportunities. Modular construction and emerging technologies can help productivity but introduce new risks as well. Subcontractor performance and default, cyber exposure and site security continue to bedevil the construction business.
The prize ahead, of course, is the red-hot North American construction market, which could get even hotter when taking into account the U.S. infrastructure bill. That makes resilience — in managing supply chain risk and labor shortages — perhaps the most important issue for the construction industry in 2022.
Here's what to expect in construction in 2022:
About 90% of builders have suffered from shortages of appliances, lumber, plywood, windows and doors
Mitigating supply chain woes requires engagement with suppliers, strong materials reserves and developing backup suppliers
1. Supply chain disruptions may become a way of life
In 2021, contractors couldn't get enough supplies to finish jobs on time and on budget.
Material shortages brought about by COVID-19 that interrupted the supply chain continued through in 2021. The delta variant of the virus, along with natural disasters, set back supply chains for several materials.1 And unfortunately, these supply chain disruptions will continue in 2022.
The winter storm that pounded Texas and the Southwest shut down production of chemicals used in making roofing membranes, making them virtually unavailable.2
And the lumber shortage is only now rectifying itself — futures per thousand board feet were $610 in early November, down from a record $1,711 in May but still far up from about $250 in April 2020.3
According to one survey, more than 90% of builders said there were shortages of appliances and lumber, while 90% had shortages of plywood and 87% said they had shortages of windows and doors.4
Material shortages interrupt cash flow, affecting costs, timing and budgets. Contractors are lucky if they can overpay for materials and stockpile. Supply-related project delays have contractors scrambling to extend expiring builders' risk policies.
The key to mitigating supply chain issues comes down to resilience: engagement with suppliers, creating materials reserves and developing backup suppliers. It's also important to reconsider reliance on foreign-made supplies and just-in-time materials sourcing, making it important to establish local and regional suppliers when possible.
1 Marketplace, “Construction industry still hammered by supply chain issues,” September 7, 2021.
2 Sika Sanafil, “What the Heck is Happening with Roofing!?” August 8, 2021.
3 Trading Economics, Chicago lumber futures, accessed November 5, 2021.
4 Wall Street Journal, “Builders Hunt for Alternatives to Materials in Short Supply,” October 6, 2021.
Alternative materials hold great promise but create risk management and insurance issues
2. Alternative materials will finally emerge — but not because of supply issues
After years of being the “next new thing” that never quite took hold, alternative materials in construction will emerge in 2022.
But the increased use of alternative materials will have less to do with alleviating supply issues than the improvement in the quality of materials themselves.
Consider cross-laminated timber, also known as “mass timber.” Though it won’t alleviate the lumber supply issues, its strength and improved fire resistance make it a viable alternative for certain applications, plus its domestic manufacture helps mitigate supply chain problems.
Other new materials include “bendable” concrete, which has greater durability than regular concrete, reducing the need for costly repairs down the line.
There are drawbacks: Alternative construction materials won't completely mitigate supply chain risk nor are they flawless. The cost of alternative materials can also be an issue.
So when exploring these new materials as an alternative, contractors need to check the insurance implications, including the effect on property, general and product liability coverage.
2022 US Construction Insurance Market and Rate Report
Understand what to expect in advance of your next renewal.
The construction industry will need 1 million new workers by 2024
3. Could high-tech improve recruiting?
It’s likely that the labor shortage in construction will worsen in 2022, which presents more than an issue of delayed projects, but survival. Even with a boom in construction projects, it doesn’t matter for contractors if they can’t get anybody to work on them.
The stark macroeconomic reality: The U.S. needs 1 million new construction workers in the next two years. The average U.S. construction worker is 43 years old, and young people aren't lining up to work in construction.5
With a median annual wage of $37,080,6 the pay may not appeal to younger workers, given the nature of the work. Paid apprenticeship training programs are one solution, and vocational skills training programs especially help retention. Members of the Associated Builders & Contractors invested $1.3 billion in 2020 alone to “up-skill” workers.7
But trends in construction itself may offer the best solution. Modular construction provides the opportunity to practice a trade in a protected environment. And technology plays a role: not only does it improve productivity but drones, robotics and digital tools in construction appeal to young workers.
What’s more, younger workers will have skills in technology that older construction workers might lack, putting that younger demographic in demand, helping boost entry-level wages.8 And offering voluntary employee benefits can also give contractors an edge in attracting employees.
5 CNN Business, “America desperately needs 1 million more construction workers,” July 11, 2021.
6 U.S. Bureau of Labor Statistics, “Construction Laborers and Helpers,” accessed September 17, 2021.
7 Associated Builders and Contractors, “Survey: ABC Members Invested $1.3 Billion in Construction Workforce Education in 2020,” May 24, 2021.
8 ConstructConnect, “Using Construction Tech to Attract Younger Workers,” April 5, 2019.
Since late 2020, three-quarters of construction-related firms have experienced a cyber incident
4. Technology — and its risks — will come to the forefront
Technology will continue its unstoppable march into all aspects of construction, having a profound impact on the business.
Drone use is skyrocketing,9 and industrial-scale 3-D printing is moving beyond the proof-of-concept stage. And more contractors are using automated construction robots and self-driving vehicles. Smart project management tools will make scheduling and budgeting more efficient. Robots and wearable sensors improve efficiency and safety.
There’s a lot at stake: Technology stands to improve the industry’s productivity as much as 60%, delivering as much as $1.6 trillion annually in incremental value.10
The downside is additional risk, particularly cybercrime. Technology makes contractors and their customers vulnerable to ransomware, social engineering and other cyberattacks. One study showed that 75% of construction-related firms had experienced a cyber incident in the previous 12 months.11
Underwriters have more stringent guidelines than ever for cyber coverage, and cyber insurance premiums will increase 20% or more in 2022. This puts the industry in an uncomfortable reality: Cyber insurance is no longer optional. Attacks will only increase, and those lacking coverage could end up suffering devastating losses.
9 BigRentz, “Top 10 Construction Industry Trends to Watch For In 2021,” January 19, 2021.
10 McKinsey, “The next normal in construction,” June 2020.
11 Forrester, “Cybersecurity Trends,” September 13, 2021.
Moving forward in 2022
Opportunities for growth are expanding, but as the last two years have shown, the industry can’t take anything for granted. The most important determinant to success? The ability to navigate the supply, labor and financial uncertainties in 2022.
It will take the type of resiliency, planning and risk management that may be foreign to experienced construction companies.
Working with a broker is the best way to counter the risks and boost resiliency. Equipped with knowledge and experience of the construction industry and its insurance players, the right broker can help secure the right insurance in the right amounts at the lowest cost.