The Expert:
Rob McDonough, U.S. Construction Practice Leader, Marsh
QUESTION: How has inflation impacted the construction industry?
A: Today’s inflationary environment has made construction projects significantly more expensive. We have seen project cost estimates rise to levels not seen in over 40 years. The rising costs of raw materials, labor, fuel, and utilities—coupled with a rise in interest rates—are putting pressure on already tight margins as project owners grapple with starting new projects and contractors focus on executing profitably.
Q: What has this meant for the construction claims landscape?
A: One way some project owners deal with executing profitability in a high inflationary environment is to cut costs. Any cost and safety-measure cutbacks inevitably increase the risk of construction site bodily injury and construction-defect claims.
Increasingly, leading owners and contractors are engaging with insurers to proactively manage, assess, and close claims. Additionally, the importance of loss control to assess safety and claims prevention remains paramount, as does the interpretation of data and claims history to help predict and prevent future claims. The real issue is, how do owners and contractors manage higher project costs without compromising safety?
Q: How are the construction and insurance industries adjusting to mitigate the risks?
A: Insurers have traditionally considered inflation and the potential for cost increases in the construction project underwriting process. What is different now is the sheer magnitude and speed of these cost escalations, especially for key material inputs such as steel and lumber. As a result, total insured project values are increasing substantially and project stakeholders are having to purchase higher limits across all lines of insurance coverage, including builders risk, single project policies, surety bonds, and general liability. As limits increase, contractors are seeking alternative insurance program structures, including higher self-insured retentions and the use of captives.
To address cost escalations and ensure a safe worksite, leading contractors are strategically using data and construction technology—including wearables, water intrusion sensors, and offsite modular construction—to bet on themselves and make smart risk decisions.
Another important consideration in managing escalating construction costs is properly assessing and estimating supply chain strategies. This is critical to managing both construction costs and construction schedules. It also is essential that open communication exists between insurers, owners, general contractors, and subcontractors about the potential cost escalation challenges and how to equitably manage them.