Shift since the Great Recession toward increasingly complex projects with shorter deadlines has placed increased, novel risks on construction contractors
A major shift in the construction industry as it has recovered from the Great Recession is increasingly complex building projects with shorter deadlines. The dynamic has created increased and novel risks.
Since bonding is a crucial risk-management tool in construction, surety-bonds experts need to constantly keep their finger on the pulse of the industry. Based on sureties’ understanding of how construction risk is changing, here are the top perspectives surety specialists share about the future of the U.S. construction industry. They are extracted from the reports Managing Risk in the Construction Industry and the 2016 AGC/FMI Survey on Managing and Mitigating Risk in Today’s Construction Environment.
Subcontractor default is a major risk
Surety experts see the inability of subcontractors to complete contractual obligations as a top risk for general contractors today. According to the reports, subcontractors have not yet managed to adapt to new factors in the industry, such as increased project complexity, new margins that require business model adjustments, and shortage of skilled labor.
These shortcomings make it difficult for subcontractors to deliver on deadlines and handle their existing workloads. Many end up struggling with cash problems, which creates obstacles for their operation and prevents them from getting bonded.
Risks are shifting towards contractors
An important trend that surety specialists notice is the growing shifting of risk from project owners towards contractors. Owners aim for ‘sole-source responsibilities’ in contracts instead of having multiple entities take different parts of the risk. This means they would like to see contractors take the complete risk management process onto themselves.
While this is certainly a challenge for contractors, it’s also an opportunity to attract more clients and projects. With a proper risk management system in place, contractors can develop a serious competitive advantage. Proven strategies for risk mitigation include using building information modeling, drones and robotics, and prefabrication. On larger projects, surety experts recommend splitting the work into multiple sets, which makes them easier to handle.
The growing complexity of risks in construction makes contract bonds ever more important. They can provide a safety net for project owners and investors and are a guarantee that contractors can deliver on their contractual obligations.
Skilled workers shortage remains a problem
For both subcontractors and general contractors, the shortage of labor is a major challenge in recent years. Construction employment was at 6.5 million in 2016, while it hit 8 million in 2006 before the economic turbulences.
The biggest difficulty is at the level of specialty trades. With the changing generations in the industry, experienced craftsmen are retiring, while young newcomers offer a more limited skillset. In the same time, there is a growing demand for qualified workers stimulated by the increased number of project opportunities. Surety experts see the combination of these factors as a strong pressure on the industry that needs a long-term solution.
Overall industry perspective
Surety experts express moderate optimism for the construction industry in the short and long terms. Experts expect private investment to decrease in the next few years, while public spending on building projects is likely to go up.
Margin growth is seen as insufficient, which may pose a risk to contractors in the coming years. Margins have increased, but at lower levels than projected. In the same time, this factor can also prove beneficial for the field. With tighter margins, contractors can also move towards better controlling of risks and thus improved management.
What do you see as the biggest risks and opportunities for the construction industry today? Please share your thoughts in the comments below.
