Inflation Drags Wisconsin Construction: Pivots and Smart Management Are Key

By John Wallen, HUB International

Wisconsin’s construction industry is struggling with a host of business roadblocks that can be laid at inflation’s door.

Customer demand is still there but stifled by high interest rates intended to cap inflation. Residential construction has been particularly hit, but commercial developers are deterred by rates combined with lack of clarity over market needs in an era of remote work. Labor and supplies are another point of pain, as inflation keeps those input costs up, requiring multiple “re-do” bidding.

No surprise. Costs of projects are exceeding budgets. Milwaukee’s convention center, for one, is now expected to exceed its initial $420 million budget.

Inflation Escalates Supply Chain Risks

Inflationary pressure has shrunk profit margins as it intensifies the vise on the supply chain that has been tightening since the pandemic. Bottlenecks and shortages are affecting every aspect of a building project.

Among the biggest supply chain hurdles:

  • Manufacturers have stopped guaranteeing prices and pre-selling materials is a thing of the past.
  • Essential build materials – think aluminum, copper and nickel – continue to escalate. Transformer shortages have caused project completion delays and driven prices up by as much as 50% since 2020.
  • Labor shortages are a continuing drag, with 650,000 workers currently needed to meet demand.
  • Costs of diesel fuel to run equipment have relented from 2022 levels, but are still high. Costs of equipment itself may be a bigger pain, with little difference in pricing between new and used. That causes disparities in valuations between the purchase price and the insurable value.

Another Hurdle: being underinsured

The ongoing pressures of inflation have led to a tightening of the industry’s margins. Conditions also have contributed to higher insurance costs – aggravated by extreme weather events across the U.S. that have resulted in catastrophic property losses.

Photo of John Wallen

John Wallen

Inflationary pressure has shrunk profit margins as it intensifies the vise on the supply chain that has been tightening since the pandemic. Bottlenecks and shortages are affecting every aspect of a building project.

Builder’s risk insurance rates have risen as much as 30% in the past two years and availability and pricing for frame construction has created further cost challenges. Liability insurance costs have almost quadrupled. Large-scale projects in some riskier markets have seen insurance costs jump to 8% of a project’s total cost – versus 2% previously. Compounding the problem is the risk of diminished capacity as insurers are reluctant to take on the sole risk of a single, large project.

It’s leaving some projects underinsured, even as owners and project managers are stymied by supply chain aggravations. Carriers are reluctant to provide a buffer for the purpose of a claim, and the 10% escalation clause that once helped hedge against inflation is no longer common.

Pivoting and planning to come out ahead

Increasingly, builders are evaluating next steps on pending projects given high costs, the impact on returns and an uncertain market. Despite the difficulties of the current environment, many now find an opportune time to explore new technologies and methodologies that stand to transform the business.

Even without inflationary and supply side pressures, prefabricated construction overall – from roof and floor construction to interior room modules – had been growing in popularity due to a simpler supply chain and cost-effectiveness (among other advantages). The market is expected to grow at a 6.85% rate through 2030 from 2022’s $145.85 billion.

Construction that is 3D printed is also taking off, with interest growing on its strength as a process that simplifies conventional building and minimizes materials and labor use. The global market is expected to hit a nearly 200% growth rate through 2026. Similarly, companies doing prefabricated concrete buildings have never been busier, as they know their costs going in and their timelines are shorter.

Next steps

Yesterday’s management playbook may not be quite as relevant for today’s conditions. Emerging ahead takes a sharpened focus on a best-in-class positioning. That equates to being a good risk, that’s a first choice among clients, and also wins the best insurance rates. It’s also helpful to keep in mind that when capacity is limited, underwriters are more choosy on where they deploy it; best-in-class players are at the front of the line.

Here’s what also makes a difference:

  • Sharpen those valuations, not just for projects themselves, but also for equipment. It’s tough to grapple with rising inflation, supply chain delays and conversion rates. Closely read all contracts and share them with brokers to ensure valuations — and the associated insurance coverages — are accurate.
  • Your workforce – your future. Consider benefits that are both cost-effective and also help attract and retain workers. Pay is always important, but health plans and financial wellness programs have considerable appeal for millennial and Generation Z workers.
  • Find a good partner. Work with a broker who understands your needs and can help you design a risk mitigation strategy that secures the best coverage and reduces your total cost of risk.
 

John Wallen is Vice President and Wisconsin Construction Practice Leader for global insurance brokerage Hub International, with more than 30 years of experience providing risk management consulting, effective insurance solutions and innovative risk and cost reduction strategies for the construction industry.

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