By John Wallen, HUB International
Wisconsin’s construction industry faces a mix of business and economic uncertainties that will keep the pressure on profits as we enter 2023.
In some respects, it’s more of the same: The persistent shortage of skilled workers continues to hold the industry back. Lead-times on materials are still stretched (albeit improved from 2021 levels). Costs continue to rise, and the interest rate hikes intended to keep them in check have not been wholly successful. And worries over a pending recession are another damper on business.
Firms that invest in the future and proactively manage the risks on the horizon will be in the best position to weather the uncertainties. That will take all the agility and creativity they can bring to the challenge. Here’s what to expect.
Profits under pressure
There’s good news and bad news on the road ahead. The post-pandemic building boom pushed total construction starts in the U.S. up by 17% from 2021 levels, according to Dodge Data and Analytics, and should be flat in 2022 – which beats a decline.
In Wisconsin, some segments have suffered from the year’s economic uncertainty, like hospitality, retail and office space. Others, like manufacturing and health care, have held their own. And the state will benefit by the $1 trillion federal infrastructure bill investment – with $5.4 billion earmarked for its highways and bridges over the next five years.
New home construction, though, has been hit hard by inflation, as rising interest rates have hammered mortgage affordability and discouraged buyers. Accordingly, housing starts in Wisconsin dropped 44% from the second quarter levels.
Then there’s materials costs, more good news and bad, as they have dropped 70% from their peak in 2021 but are still 17% higher year-over-year. Lead times aren’t as long but shortages remain, leading some contractors to pre-order for anticipated needs. The downside is the drain on capital and added risks and costs (including insurance) for storage space.
And finally, the labor shortage remains the industry’s top challenge. While construction employment in Wisconsin reached about 130,000 in 2023, it’s still not enough to meet current demand.
Labor, technology and act-of-God issues ahead
Contractors need to be ready to address critical issues for 2023.
One of the top issues is the persistent need for skilled labor to meet demand when the workforce is graying fast – one in five is 55 or older. That’s a concern in a “right to work” state where their real wages have been flattened, but employers should consider other ways to add value to the job.
Benefits, for example, could be enriched, and paid leaves – think vacations and sick days – are a good way to go. Also valued are unpaid leaves such as family and parental leaves, particularly for millennials and GenZs. And a growing number of construction firms – 20% of the country’s largest contractors – are converting to employee stock ownership plans (ESOPs) to attract and retain people even as they strengthen their capital structures.
Technology is one way to add efficiencies and improve productivity, especially when manpower is short. More than a third of construction firms say their financial resources are too limited to make the investment. But the return on investment can’t be ignored. Savings in materials costs using 3D printing can reach 40%, while reducing costs of labor and logistic processes.
The downside of the tech migration, though, is the risk of cyber intrusion, with particular risk associated to web applications. More than 75% of construction-related respondents to a Forrester survey experienced an incident in the previous 12 months, with an industry-wide average annual cost of about $6 trillion. Technology advancements will remain one of the key ways for construction companies to differentiate themselves from their competition. Therefore, mitigating and insuring this ever-emerging risk is crucial.
Obtaining cyber insurance – is not as easy as it would seem. It’s increasingly difficult to get and very expensive. Protection against the risk has never been more important, requiring a stringent technology plan with safety protocols. Regular training of employees on safety practices is essential. Another important security measure is multi-factor authentication.
Finally, construction insurance is stabilizing after several years of higher rates and tighter capacity, but factors such as weather instability and natural disasters are exacting a price. The industry needs to protect itself from catastrophic property losses stemming from severe storms, flooding, wildfires, persistent drought and record-breaking heat.
This is putting pressure on builder risk insurance, where rates could continue to rise by as much as 30% – 40% in 2023. Employers can expect fleet coverage to continue rise by as much as 5% to 20%. These insurance rate increases can vary based on individual risk factors. Because of these and other financial pressures subcontractors will be at an increasing risk of default in a bad economy, calling for extra care in vetting and choosing partners.
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.