Supply chain woes test contractors
Underwriters are looking more closely at quality control and assurance issues among construction contractors as supply chains and labor markets are beset by shortages and delays, which are driving construction costs higher and making mistakes more expensive.
Ensuring that appropriate building materials are being installed by trained workers can go a long way to reducing the risk of loss, but difficulties in securing supplies and experienced staff are testing many companies.
Even a general contractor’s or subcontractor’s finances can be a concern as they must have the resources to withstand the cost of any necessary rework and ensure procurement in a difficult market.
Overall, construction input prices, which include labor and material costs, are up 22.3% from a year ago and nonresidential construction input prices have increased 23.2%, based on an analysis of U.S. Bureau of Labor Statistics data by Associated Builders and Contractors Inc., a national construction industry trade association.
Insurers are taking note of the changes.
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“The underwriters are going to want to understand what quality control the contractors have, what practices they have in place and how those practices are followed,” said Jim Gloriod, St. Louis-based CEO of Aon Construction Services Group U.S., a division of Aon PLC.
“Carriers are absolutely interested in quality assurance,” said New York-based Rob McDonough, a managing director and U.S. construction practice leader at Marsh LLC. “Increasingly, underwriters want to understand, ‘What is your supply chain process and procedure? What redundancies do you have in place?’” he said.
“We underwrite our partners’ overall practices, so we want to see that they have the mechanisms in place to avoid materials issues,” said Dallas-based Cheri Hanes, who heads the subcontractor default insurance risk engineering team at Axa XL, a unit of Axa SA.
Good quality practices can help a contractor sell its risk to an insurer in a tough market. “Certainly, the ability to highlight that to a prospective insurer in a hard market and differentiate yourself is always an advantage,” said Paul Primavera, Irvine, California-based executive vice president and national risk control services practice leader for Lockton Cos. LLC.
“We certainly look at the track record of the general contractor — have they done this type of job before? What is their history?” said Drew Feldman, senior vice president, global marine business unit leader, in Chicago for CNA Financial Corp.
The insurer could be reluctant to consider covering contractors without relevant experience for the jobs they are taking on, he said.
Brokers are also counseling clients more about sourcing and quality challenges.
“Aon is speaking to more clients around supply chain issues and labor issues,” Mr. Gloriod said. “We are advising our clients that this is a topic of interest to the underwriters and to be prepared to talk to the underwriters about quality control programs.”
“Our direct service with our insureds is much more supply chain focused than it’s ever been before,” Ms. Hanes said.
“It’s a conversation now with everyone,” Mr. Feldman said of his contacts and conversations with clients. “Supply chain is now one of if not the biggest issue that we’re contending with.”
Supply and labor challenges can also exacerbate problems caused by losses and mistakes, experts said.
“Right now, any small issue can turn into something fairly large,” Mr. Feldman said.
Difficulties getting materials for repairs and replacements after a loss have led to long delays with customers resuming operations, which in turn caused larger than expected business income claims, Mr. Feldman said.
In addition, errors with materials and installation that must be corrected can lead to a mushrooming in costs over a short time as contractors struggle to quickly find replacement materials.
“If it was difficult, time consuming and expensive to get something the first time, it will be worse to replace any materials that need to be torn out and reinstalled,” Ms. Hanes said.
“When we think about material rework, it can be a significant component of total construction cost, and it can certainly result in significant claims,” Marsh’s Mr. McDonough said.
Issues and errors with materials quality and installation can also lead to project delay, which could necessitate an extension of insurance coverage.
“One of the challenges right now is project extensions. Those extensions can be very expensive,” Aon’s Mr. Gloriod said.
Market conditions have changed since some larger multi-year projects began. For example, some insurers writing construction risk three years ago are no longer participating in the market, meaning any extension would be with a new insurer. “Extensions have been a challenge for the last couple of years as the market has changed,” Mr. Gloriod said.
Insurers are closely examining subcontractors’ finances to make sure they have the resources to withstand any materials, quality or reworking issues.
“We are taking a deeper dive on subcontractor financials to ensure they have the finances to cope with rework” and other issues, said Axa XL’s Ms. Hanes. “These issues can lead to subcontractor default.”
Tech helps reframe risks
Although the construction sector is benefiting from an influx of innovative tools, such as water damage sensors and worker safety equipment, technology has not yet been developed to fully manage end-to-end supply chain logistics, according to industry experts.
Overall, “there is a tremendous amount of tech being deployed around the construction industry,” with some of it focused on quality assurance and quality control, said Jim Gloriod, St. Louis-based CEO of Aon Construction Services, a division of Aon PLC.
Aon Construction has a technology assessment panel for the construction sector to determine how technology can be helpful in different areas, including quality control.
Many tools focus on one aspect or portion of a supply chain or construction process.
“I’ve looked into tech solutions quite a bit and haven’t found one which seamlessly moves from the manufacturing through to the transport” of materials, said Cheri Hanes, risk engineering manager for subcontractor default insurance with Axa XL, a unit of Axa SA.
“There are good ones around manufacturing and shipping and very good ones for onsite,” she said.
Much of the technology now available in the construction sector is focused on job site and worker safety, said Rob McDonough, managing director and U.S. construction practice leader in New York for Marsh LLC.