Construction Risks Created by Lumber and Labor Shortages

How Lumber and Labor Shortages May Create Construction Risks

Explore some of the issues that Argo Construction is keeping an eye on as work on projects resumes after nearly a yearlong standstill.

Economic slowdowns, such as the one that the world experienced during 2020 due to the COVID-19 pandemic, can have far-reaching and long-lasting effects on every industry.

In construction, decreased U.S. lumber mill operations created a supply shortage, and that, coupled with rising demand, has led to a 25% to 30% price jump on available materials. And now that on-hold projects are getting back on track, contractors are in high demand to make up for nearly a year of lost time.

Kevin Libeg, Vice President, Middle Market business leader at Argo Construction, told Insurance Journal that these circumstances have led to significant project delays and increasing requests for coverage extensions.

What brokers need to know

“Brokers can help protect their construction clients by getting ahead of their projections for the year, including extensions, for their year-end audit premiums,” says Alex Andrews, East Region Team Lead for the Middle Market segment of Argo Construction.

Click on the image below to explore a building site that has resumed activity after being on extended hold, and learn more about the potential construction risks within this scenario – a common one during economic recovery – that could affect business for brokers and their policyholders.

 

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Unlicensed contractors and sub-contractors

A pre-pandemic survey by the National Association of Homebuilders found that 85% of builders ranked labor shortage as their top concern. Some attempt to make up for it by hiring unqualified workers, which creates potential construction risks for insurers.

“We must verify that the contractor is licensed and see executed sub-contractor agreements,” Garcia says. “In areas that don’t require licenses for trades, we look at experience and loss history to make an educated underwriting decision.”

Written agreements between contractors and subs should indicate:

  • Necessary limits
  • Indemnity for the insured
  • Additional insured status

“We want to know that general contractors are hiring insured subs, and if trade contractors have their own employees,” she says. “With employees, there’s a little more control. A sub might leave to find other work and affect the turnaround of the job.”

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Preventable damage adding to costs

Environmental damage, such as water intrusion, can go unnoticed and create costly issues.

For example, a structure’s HVAC system that isn’t operating to standard can cause mold buildup – an obvious health hazard that requires extensive cleanup or replacing the affected materials, and potentially replacing the HVAC system altogether.

“Anything that is sitting is not being watched closely, and that always poses issues,” Garcia says. “Costs are increasing, so profit is lessening on already tight margins. In some cases, contractors are paying to get off a project because they can’t make money after the increased product prices.”

That can create further delays and prompt builders to request coverage extensions. Underwriters will need to determine if it’s a smart risk to take.

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Unmaintained equipment and structure

Ideally, when projects go on hold, equipment isn’t left behind at the site. Most heavy machinery, for example, must be greased and used often to continue working properly (in the same way a car often won’t run if it sits still for too long).

Not knowing the condition of equipment – or even the integrity of the structure itself – opens potential safety risks on the job site.

Of the 5,333 people who died from a work-related injury in the private sector in 2019, nearly 20% were employed in the construction industry, according to the Bureau of Labor Statistics.

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International lumber and alternative materials

Domestic supply shortages and transportation delays have led project managers throughout the industry to source lumber from outside the U.S. or opt for alternatives such as cross-laminated timber and steel.

“The biggest construction risks are not knowing exactly where lumber is coming from or what the regulations are in that country, and when using a product that you aren’t familiar with, knowing the dos and don’ts of that product,” says Kate Garcia, Assistant Vice President of Middle Market for Argo Construction.

Unlicensed contractors and sub-contractors

A pre-pandemic survey by the National Association of Homebuilders found that 85% of builders ranked labor shortage as their top concern. Some attempt to make up for it by hiring unqualified workers, which creates potential construction risks for insurers.

“We must verify that the contractor is licensed and see executed sub-contractor agreements,” Garcia says. “In areas that don’t require licenses for trades, we look at experience and loss history to make an educated underwriting decision.”

Written agreements between contractors and subs should indicate:

  • Necessary limits
  • Indemnity for the insured
  • Additional insured status

“We want to know that general contractors are hiring insured subs, and if trade contractors have their own employees,” she says. “With employees, there’s a little more control. A sub might leave to find other work and affect the turnaround of the job.”

Preventable damage adding to costs

Environmental damage, such as water intrusion, can go unnoticed and create costly issues.

For example, a structure’s HVAC system that isn’t operating to standard can cause mold buildup – an obvious health hazard that requires extensive cleanup or replacing the affected materials, and potentially replacing the HVAC system altogether.

“Anything that is sitting is not being watched closely, and that always poses issues,” Garcia says. “Costs are increasing, so profit is lessening on already tight margins. In some cases, contractors are paying to get off a project because they can’t make money after the increased product prices.”

That can create further delays and prompt builders to request coverage extensions. Underwriters will need to determine if it’s a smart risk to take.

Unmaintained equipment and structure

Ideally, when projects go on hold, equipment isn’t left behind at the site. Most heavy machinery, for example, must be greased and used often to continue working properly (in the same way a car often won’t run if it sits still for too long).

Not knowing the condition of equipment – or even the integrity of the structure itself – opens potential safety risks on the job site.

Of the 5,333 people who died from a work-related injury in the private sector in 2019, nearly 20% were employed in the construction industry, according to the Bureau of Labor Statistics.

International lumber and alternative materials

Domestic supply shortages and transportation delays have led project managers throughout the industry to source lumber from outside the U.S. or opt for alternatives such as cross-laminated timber and steel.

“The biggest construction risks are not knowing exactly where lumber is coming from or what the regulations are in that country, and when using a product that you aren’t familiar with, knowing the dos and don’ts of that product,” says Kate Garcia, Assistant Vice President of Middle Market for Argo Construction.

 

Watch a replay of Andrews and Garcia’s LinkedIn Live discussion, “Construction in Focus: Lumber and Labor Risks.”

With an appetite for projects or operations with up to $25 million in sales, Argo Construction’s Middle Market segment writes coverage for a wide scope of the industry. Learn more.

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