The conversation about rising construction costs has been ongoing over the past couple years. Depending on who you are talking to or what article you are reading, the cause, or causes, behind the rising costs varies. Whether you attribute the rising costs to the financial crises and recession of the 2000s, the COVID-19 pandemic, “the great resignation,” supply chain woes, or perhaps the conflict in eastern Europe, the story is the same: costs continue to rise and gaps in the workforce continue to widen.
Global supply chains remain in flux with businesses, contractors, and consumers all grappling with the new reality of material shortages, excessive lead times, and rising inflation. The industry has faced a growing number of hurdles while the challenges keep stacking up with little to no resolution.
In a February 2022 analysis, the Associated General Contractors of America (AGC) notes construction materials costs increased sharply between January 2021 and January 2022. More telling was AGC’s chief economist stating that costs continued to rise, but the bigger challenge would be getting timely deliveries and finding enough workers.
It sounds like the biggest issue we have now is that material goods are pricier than ever, may or may not arrive on time, and, when they do show up, we may not have anyone to get the job done. Is that three strikes? Are we out? It is time to explore why we are where we are, how this is impacting claims and litigation, and potential saviors that are in queue.
Not a New Topic
The best place to start is looking at the “why” so that you can gain an understanding of what has put the global construction industry in the position it is in. The biggest challenge to most, if not all, industries in recent memory is the COVID-19 pandemic that spared no one—no company and no industry.
The U.S. was already dealing with rising prices for construction materials and a shortage of skilled labor when we were knocked completely off our feet. In 2018, at a CLM Construction Conference roundtable, the discussion painted a grim future. At the time, reports indicated that nearly 75% of contracting firms wanted to increase their rosters, while 50% of firms had difficulty finding craft and salaried workers. Predictions indicated the construction industry would need another 1.5 million workers two years later, and, as of November 2021, the construction industry was lagging 2.2 million workers.
The labor shortage was occurring despite construction spending reaching an all-time high, with over $1.2 trillion spent in 2017. The all-time high has been topped each year since, with $1.5 trillion spent in 2021 and forecasts remaining bullish with spending continuing upward. With this kind of spending comes increased labor shortages and challenges to the industry.
The Associated Builders and Contractors (ABC) highlights that spending continues to outpace construction employment. ABC reports, “One billion dollars in additional construction spending creates 3,900 jobs. In 2022, the construction industry needs to attract 650,000 new workers.”
It does not matter if you think we are post-pandemic or not, we are all grappling with “the great resignation.” In the last four months of 2021, the U.S. Bureau of Labor Statistics (BLS) indicated nearly 800,000 construction workers quit their jobs, while ABC estimates that 1.2 million construction workers will quit in 2022. There is a major imbalance.
Impact on Claims and Litigation
As in our personal lives, we consider and plan for what something will cost tomorrow. Gasoline prices are the easiest example. We generally see demand rise during the summer months, and, with such demand, the cost of gasoline increases. This is a cyclical relationship and it can be considered in forecasting.
However, how can we forecast future costs, schedules, or availability of labor when the construction industry remains in a volatile state? Will construction companies be forced to reduce hours the way retail businesses have, cutting store hours because they cannot staff regular shifts? How can a truly green workforce be expected to perform highly technical tasks to the same level as the generation that has just resigned?
The global economy is proving to be volatile, and we are awaiting the next unknown or disruptor while simultaneously waiting for the industry to stabilize. In the tangential relationship between the construction industry and claims and litigation, the challenges have resulted in a seemingly endless list of questions posed to industry analysts and experts alike. Some of those questions include:
How can you forecast construction costs when prices are at year-over-year highs and continue to rise? When will costs flatten or stabilize? Will we regress or continue upward?
The best answer, and likely not what you want to hear, is that there is no crystal ball. It is no surprise the idea of timing comes up. We want to know whether any given construction project will be feasible in 12 months or 24 months, and whether it will cost $100 million or $250 million. There have been recent news stories about costs and timelines being so out of whack lately due to the supply chain issues that, to cut a schedule in half, costs of materials can be 50% higher than normal. As construction professionals, whether adjusting a claim or developing a cost of repair estimate, we must rely upon what we know. We perform our tasks based on the best information we have available at the time, through time-tested and reliable methods, and adjust such methods if new and/or more reliable information becomes available. Live bids are becoming increasingly beneficial to claims professionals to handle the unknowns, and live bids are no longer for the largest projects; small- to medium-sized projects are benefiting as well.
Has inflation hit project costs?
Inflation is surely a hot topic at the moment, as inflation is impacting the cost of just about everything. As of April 2022, the U.S. is enduring an 8.5% inflation rate, according to the U.S. Labor Department’s Consumer Price Index (CPI), when considering the previous 12 months (March 2021 to March 2022). AGC published its “Construction Inflation Alert” first in 2021, and has since revised the alert multiple times, with the latest revision in February 2022.
According to the AGC and BLS, the producer price index (PPI) increased again during 2021. Given the PPI is a weighted average of the goods and services purchased for new non-residential construction, and includes importer and distributor markups on imported goods, we can anticipate that construction costs will continue to rise, at least in the near future.
Are construction defects on the rise with the absence of skilled labor and the increased cost of materials
Construction-defect claims are not new and have been on the rise for years. The industry, as well as the claims that are brought forth, are constantly evolving. Given that the labor shortage traces back to the financial crisis and recession of the late 2000s, there is definitely the appearance of a correlation, or a connection, at minimum.
Materials are changing. Designs are evolving. Technology is being added. Thus, when you throw in rising costs for materials, inability to source materials, and an absentee workforce, the result is complex, to say the least. Unknowns await the industry moving forward, as we will likely be dealing with material substitutions, cost overruns, and overall project challenges.
What other challenges should we be cognizant of?
Considering the unknowns is a difficult proposition. Most of us did not accurately predict the COVID- 19 pandemic and its global impact. However, we would be wise to look forward and consider the x-factors that are facing us today and how they will affect our claims of tomorrow.
Globally, the supply chain and unexpected delays caused by unforeseen increases in travel time for materials can be considered in the critical path. Similarly, the longer a project remains in construction, the greater the risk and expenses. Compounding this, the increased time on policy/bonds means greater risk and longer exposure for catastrophes (i.e., hurricanes, tornadoes, snowstorms). These may require a review of risk evaluation during underwriting.
Many ask when the industry, and perhaps society, will see relief with the ongoing plethora of challenges. With inflation increasing, gas prices climbing, and materials largely unavailable, we are collectively in need of a win. Many industry experts look toward creativity, innovation, and technology as their solutions. One thing all claims professionals, construction experts, and litigation professionals have in common is the anticipation and expectation of change. While there is no crystal ball, we do have our creativity (such as calling local truss manufacturers to find cold-formed steel trusses with a six-month shorter lead time than traditional wood trusses), innovation (such as zoom depositions, which are less costly in time and money compared to in-person), and technology (such as the use of wearable sensors on construction sites to minimize accidents and exposure).
So, until we discover the magical crystal ball, we will need to rely on our ability to embrace change with the big three: creativity, innovation, and technology.