By: Jefferey S. Lejfer, New Day underwriting Managers LLC
As we move into 2016 we wanted to bring you some things that we’re hearing about trends in the construction industry and related risk liability for this year.
(Finally!) Growth
Construction-related firms that managed to weather the 2008 recession are starting to see a return to growth and, for some, even profit. Knowledgeable sources have noted construction growth in 2015 and are forecasting increases of at least 6% for 2016 and beyond:

• “FMI expects growth to be 6% in 2016, reaching $1.09 trillion, and future growth should reach 7% in 2018.” (FMI)

• Non-residential construction is forecast to grow between 6 – 10% per year in 2016 and 2017, with wide ranges between segments (AGC):
  • Manufacturing: slight growth in 2016, decrease in 2017
  • Residential, multi-family: 8%–12% increase
  • Residential, single-family: 4%–8% increase

• “Growth in energy and cleantech is outpacing other construction markets and is expected to continue, due to good economic returns.”(FMI)

• “Specialty trades on average saw improvements to operating profit in 2015.” (FMI)

As always, there are concerns to keep in mind. In their annual U.S. Markets Construction Overview, FMI cautions: “Of course, an environment conducive to growth also invites risk. All forms of contracting are variable cost businesses and therefore margin-sensitive … virtually all industry enterprises will seek to manage and mitigate their risk profiles. ”
Return to Innovative Delivery Methods
Before the recession, the construction industry had started to move toward a more collaborative approach that saw engineering firms and construction companies forming partnerships to design and build better, faster, cheaper, and sometimes greener. When profits dropped, nervous owners shied away from the higher risks and (perceived) higher costs associated with this innovation. But, as the economy recovers, such delivery methods as Construction Management (CM) at-Risk, Design-Build, and Integrated Project Delivery (IPD) are again being sought.
For example, by 2020, FMI estimates some 30% of transportation construction will be delivered through design-build, increasing at a rate of 5.5% a year, compared to 3.7% for traditional procurement spending. “Many owners (both public and private) are increasingly seeking consultative, front-end services to supplement their stretched resources and evaluate and develop projects, including advising on delivery method, funding and schedule.”
As a result, many contractors will be hired based on their specific expertise and experience and will subsequently be treated as construction “professionals” — creating a potential legal responsibility. Contractors involved in this transformation in construction delivery methods should prepare for changes in their companies’ risk profiles. Potential risks include liabilities associated with vicarious design, Building Information Modeling (BIM), document processing, subcontractor management, Construction Means and Methods (CMM), and green construction.   Issues we have been discussing at New Day for some time.
Stubborn Labor Shortages
Persistent shortages are continually documented by many sources:

• “Talent is and will remain a critical constraint over the next few years, until there is either an influx of talent or market demand cools.” (FMI)

• “With the building sector already facing significant shortages of talent, the industrial construction boom will further exacerbate severe shortages among several trades in the building markets. This trend is of even more concern when considering that the oil and gas companies are typically able to afford higher wages than other sectors. For tradesmen capable of working in either of the industrial or building sectors, the wages and opportunities being created by the oil and gas industry may be too attractive to pass up.” (CEA)

• “The shortage of available workers … could result in decreased margins due to higher wage rates being required to hire more employees, higher subcontractor costs, and an increased risk of non-performance.” (AGC)

Contact New Day
If your insured also anticipates an upswing in activity in 2016, be sure to call us. Professional liability risk is inherent in nearly every stage of the construction process and throughout every project delivery method. To identify it, you just have to know what you are looking for.