How North American Construction Contractors Can Mitigate Emerging Risks

How North American Construction Contractors Can Mitigate Emerging Risks
Construction and Infrastructure

01 of 09

This insight is part 01 of 09 in this Collection.

May 28, 2024 8 mins

How North American Construction Contractors Can Mitigate Emerging Risks

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Getting ahead of risk is vital for North American construction contractors, as they aim to manage evolving issues, while delivering job safety, solving workforce shortages and containing project costs.

Key Takeaways
  1. Contractors in North America are faced with many risks that challenge their ability to grow profitably in a volatile landscape.
  2. In this environment, the contractual review process is especially critical to establish the sharing of liability among project participants.
  3. Making better decisions starts with finding a risk advisor and broker with the right expertise to help contractors navigate and manage myriad project risks.

North American construction contractors are faced with a challenging risk conundrum: mitigating current and emerging risks, ensuring job safety and containing project costs. However, there are ways to navigate these difficulties to remain successful.

Cost control and protecting project profitability are critical for any business, including construction companies. By managing expenses, controlling project costs, optimizing resource allocation and negotiating favorable contracts, construction stakeholders can maintain profitability and financial stability. This becomes particularly important during economic slowdowns, when demand may decrease and margins tighten.

Top 10 Risks for the Construction Industry
  1. Economic Slowdown/Slow Recovery
  2. Failure to Attract or Retain Top Talent
  3. Workforce Shortage
  4. Cash Flow/Liquidity Risk
  5. Commodity Price Risk/Scarcity of Materials
  6. Cyber Attacks/Data Breach
  7. Major Protect Failure
  8. Political Risk
  9. Aging Workforce and Health Related Issues
  10. Regulatory/Legislative Changes

Source: GRMS 2023

As a result, project owners have frequently pushed risk to contractors using structures such as engineering, procurement and construction (EPC), design-build and public-private partnership contracts. However, these models often lead to large losses, causing many contractors to avoid their use.

Instead, contractors are increasingly looking for structures that improve and balance construction risk management, including progressive design-build, alliance and integrated project delivery.

Current and Emerging Risks in Construction

Near-term volatility is top-of-mind within the construction and infrastructure industry. Climate issues and emerging technologies are introducing new challenges. Other hurdles found across North America and the globe include:

  • The Current Labor Market

    Contractors of all sizes are aggressively seeking ways to find more skilled workers in an industry where nearly one in four construction workers are older than 55.1 In February 2024, Canadian construction employment fell by 0.6 percent year-over-year.2 Further, the construction industry in the U.S. needs to attract half a million new workers in 2024 to balance supply and demand.3 With fewer and less skilled workers available, productivity suffers and job site safety is put at risk.

  • Alternative Building Materials

    Mass timber and concrete alternatives are innovative building materials being deployed to address sustainability goals. With these new approaches, there are potential risks that project stakeholders and their insurers must address, including the long-term durability of such materials.

  • Geopolitical Risks

    The conflict in Ukraine, issues in the Middle East, upcoming elections in the U.S. and other geopolitical risks are pushing governments to rethink climate spending and reallocate funding to defense spending. This impacts construction spending as projects are scaled down.

  • Artificial Intelligence

    The use of artificial intelligence (AI) in the construction industry can transform an industry that is still strongly associated with manual, in-person labor. AI technology has the power to impact many aspects of construction — from production, design and bidding to financing, supply chain, asset management and daily operations. However, at the same time, it can introduce new risks.

    “While AI can create efficiencies, more clarity around the liability associated with this technological innovation is needed,” says Brenna Mann, Head of Strategy and Account Executive Practice Leader in Aon’s U.S. Construction & Infrastructure practice.

    One example is the operation of self-operating vehicles on job sites. This innovation raises new liability concerns, such as who is responsible if a self-driving vehicle gets into an accident on site.

  • Subcontractor Default

    Emerging project risks also impact subcontractors, who have had to shoulder substantial additional costs, creating cash flow issues. Consequently, subcontractor default is now a major concern. In 2023, 46 percent of subcontractors reported cash flow as a significant challenge.4 This issue is mostly linked to risks including labor shortages and a potential economic slowdown.

    “We're in uncharted territory in terms of the size of the packages and the ability of subcontractors to get adequate performance security, which doesn't exist when you have ultra-large projects being built,” says Martha Gaines, Senior Vice President of Aon Risk Solutions in the U.S. “The risk is concentrated in a few subcontractors and there's not enough capacity. We need to start thinking of alternate ways for contractors, subcontractors and the surety market to work together.”

  • Design-Build Project Coverage

    The complexities of projects are increasing, whether driven by size of contract or scope of work. Contractors are focused on risks associated with design-build projects, which have caused many large losses and cost overruns.

    “Contractors have concerns around design-build risk and the inability to adequately insure it, along with the fact that there is little to no cover for liquidated damages due to delay associated with the cascading problems that design-build risk can create,” adds Mann.

Getting Ahead of Construction Risk

Contractors operating on tight profit margins must be able to make better decisions to proactively navigate risk and prepare for evolving market challenges. This includes insurance solutions that provide certainty of claim payments and liquidity upon a loss occurrence.

Contract Analysis: A Crucial Process to Address Potential Coverage Issues

The contractual review process is crucial. At the outset of a project, contractors should work with a broker that will understand the project, including local coverage nuances. For instance, each state in the U.S. has its own interpretation of what is insurable and how various insurance policy conditions apply, including the application of limits and deductibles for each project participant and the ability to transfer liability to others.

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It's only in strong contractual risk mitigation that contractors can find relief, whether seeking compensation from the owner or working with their brokers to modify insurance policy wording to transfer unmanageable risks to insurance companies.

Jeffrey Segall
Executive Director, U.S. Construction and Infrastructure

If a contractor doesn't set up the contract so that costs stemming from delay and disruption, supply chain issues, labor shortage and design difficulty are covered, no insurance policy can respond.

Key contract issues to watch out for include:

  • Scope creep
  • Delay and disruption
  • Payment disputes
  • Design and specification issues
  • Health and safety risks

“It’s possible that a contractor or risk manager doesn’t see beyond some of the various risk exposures, so the contract must have a fair risk allocation,” says Chris McLean, Head of Aon’s Construction and Infrastructure in Canada. “It’s important to work with a broker who advises around areas in the contract that the general contractor would be responsible for so they can use that information in negotiations and build those costs into their estimate.”

Four Strategies to Manage Evolving Risks

Contractors can employ the following strategies to manage risks head-on and get ahead of the many challenges associated with operating in a volatile climate:

  1. Evaluate contract structure with a focus on required insurance and risk assumptions, such as whether the contractor is responsible for site conditions.
  2. Determine liquidated damages or other delay costs that contractors may be responsible for and use risk transfer tools like parametric insurance to address this exposure.
  3. Find the right broker — with experience in construction risks — to create a program that best fits the contractor’s risk retention, risk-reward and desired risk profit.
  4. Implement risk control measures to ensure job site safety.

Learn more about how contractors can manage interconnected risks and notable macroeconomic developments through effective risk mitigation and tailored insurance solutions.

Aon’s Thought Leaders
  • Martha Gaines
    Senior Vice President, Aon Risk Solutions, U.S.
  • Brenna Mann
    Head of Strategy and Account Executive Practice Leader, U.S. Construction and Infrastructure
  • Chris McLean
    Head of Construction and Infrastructure, Canada
  • Jeffrey Segall
    Executive Director, U.S. Construction and Infrastructure

1 U.S. Bureau of Labor Statistics
2 Statistics Canada Labour Force Survey | March 2024
3 2024 Construction Workforce Shortage Tops Half a Million
4 2024 National Subcontractor Market Report

General Disclaimer

This material has been prepared for informational purposes only and should not be relied on for any other purpose. You should consult with your own professional advisors before implementing any recommendation or following the guidance provided herein. Further, the information provided, and the statements expressed are not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information and use sources that we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. All descriptions, summaries or highlights of coverage are for general informational purposes only and do not amend, alter or modify the actual terms or conditions of any insurance policy. Coverage is governed only by the terms and conditions of the relevant policy.

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