As all those is the construction industry are aware, the reverberations of the COVID-19 pandemic are ongoing and at times, paralyzing to projects. Construction company owners, suppliers, workers, and commercial/personal clients are all feeling the pain points the pandemic has caused.
Material shortages are causing prices to increase and delays on projects. Lumber, steel, and concrete have all seen significant price increases. Shortages are vast for plywood, windows, doors, and shingles. Many projects have been put on hold to wait out these price increases until materials become more readily available and prices stabilize. Other projects are continuing but may face a sudden delay due to material unavailability which will result in frustration and increase in costs for the owner due to the halt.
These material issues are also making the bidding world very complicated. Contractors submitting a bid must do their best to factor in price escalation clauses for materials since many projects bid well in advance of breaking ground. This results in budget uncertainty for project owners.
HMK Insurance insures a significant amount of construction clients. Knowing the struggle the industry is currently facing has prompted us to reach out to our clients and determine how they are mitigating the challenges. Below we will review a few of the strategies that were shared with our team:
- Alternative Materials: General contractors, construction managers, engineers, etc. are getting as creative as possible to use alternative, more readily available materials for certain aspects of projects when it makes sense.
- Surplus Inventory: Many contractors are buying a surplus of inventory on items when they are able. This strategy is not strictly to buy the material at a lower price but more so that they have the materials ready for future opportunities and jobs. *An important note: This surplus purchasing can affect the insurance! Contractors should confirm with their agent that they have enough property insurance and installation coverage limits to cover these increased amounts.
- Increasing Borrowing Lines (Line of Credit): One of the more drastic strategies implemented was to significantly increase a borrowing line (LOC) to purchase large amounts of materials. One such example was a company increasing their LOC to purchase a large amount of rebar for a concrete project since concrete pricing has been increasing and volatile. The LOC was then paid off shortly after completion of the project started. This LOC allowed the contractor to have the surplus material until the money from the project started to come in.
Despite the hurdles the industry is facing, demand remains high from owners for construction projects. Interest rates have been, and remain, very low which makes borrowing money for construction projects more attractive for owners and is part of what has led the increase in demand for such projects. This is also keeping the residential housing market boom going despite the massive increase in lumber costs.
No matter the strategy being implemented by a construction company, it is important to keep the lines of communication open between the company owner and their insurance consultant. Proper property insurance limits, coinsurance, and installations coverage limits must be discussed. At times, underwriters at insurance companies are responding by revising insurance quotes to add an additional 3-5% value due to increased cost of building materials. It may only be a matter of time before underwriters begin revising the wording in their quotes to account for the increase as well. Review these items carefully and speak to your HMK Insurance consultant to determine you have the coverage in place to protect your work.
Authors:
Ryan Rispoli
Commercial Insurance Consultant
HMK Insurance
Tim Price
Commercial Insurance Consultant
HMK Insurance
