Overcoming This Year’s Construction Market Challenges
Considering the recent rough couple of years for the construction market, how can your business prepare for what 2022 might hold?
While uncertainty will still be the theme, there are some things we can count on happening.
Hardening insurance market
Overall commercial insurance premiums increased 8.7% in 2020-21, and they’re expected to rise this year, too. Insurers’ costs are cyclical, with premium changes reflecting their costs of doing business.
Here’s what’s underpinning the forecast of premium rises:
- An influx of claims from natural disasters
- A deluge of claims from other policyholders within particular sectors
- Insurers’ investment returns
- Changes in governments’ taxes, duties or levies charged
- Disruption or changes to how an insured business operates (the quantity or value of what’s being insured, etc).
Specifically in the construction sector, what’s driving the hardening insurance market in Australia are:
- Non-conforming cladding issues
- Structural defects
- Challenges of incorporating renewable energy and waste to energy approaches
- Fewer insurers operating in this space
- Those that remain have greater scrutiny on policy terms and conditions – being more selective about who they cover.
Supply chain disruptions
The protracted and enduring supply chain disruption has hit the construction industry hard, with initially unforeseeable shortages of building materials continuing. Supply issues include:
- Structural and finishing timbers
- Dry-walling i.e. plasterboard
- Bricks and other cladding material
- Manufacturing fittings
- Pre-fabricated building elements, including plastic water pipes.
These disruptions resulted in higher prices, such as an 11.7% increase for structural timber in the 12 months to June 2021. As well, construction costs also rose due to a global scarcity of shipping containers, bushfires destroying 10% of plantation timber, and the shortage of skilled trades workers.
Expect all those shortages to continue into 2022, or further. For example, the Australian Forest Products Association estimates that by 2035 Australia will be 250,000 house frames short of demand. That’s equivalent to new houses replacing all of Geelong or Newcastle. Steel frames, anyone? The World Steel Association expects global demand to rise 2.2% this year, but it’s a wait-and-see game with China effectively setting prices. It accounts for more than 50% of the world’s global steel production.
Snap lockdowns and lockouts?
Late November, the Federal Government ruled out snap, rolling lockdowns to counter the Omicron variant, but temporary border closures could still happen. This is because each state and territory make their own rules on this issue. For example, Western Australia, which accounts for a third of our continent by landmass, is still ‘locked out’ from the rest of the country until 5 February, when its ‘safe transition’ out of COVID-19 starts.
In the face of uncertainty about lockdowns and border closures, the construction industry will still be dealing with the fallout from last year’s disruption. Your business may be playing catchup with project schedules, materials sourcing, productivity, delays and extra costs.
So far, contracting parties, unions, financiers and other stakeholders tend not to sue for contract breaches. They’re more likely to work flexibly and co-operatively through the pandemic issues, says law firm McGrathNichol. It says contractual force majeure clauses may cover COVID-19 induced delays and costs, so would mitigate the risk of liquidated damages and other penalties to the supply chain.
You’ll still need to scrutinise public health orders or vaccination policies – they, rather than the pandemic, might have caused delays to your projects. If so, contractual clauses might not cover these extra costs because they’re ‘ancillary’ to COVID-19. Keep in mind other issues that would have happened despite the pandemic. All these factors make for an uncertain and complex environment for possible project disputes, but talk to us to clarify how your insurance cover can support you here.
Restrictions on-site numbers
As each state or territory implements its own construction worksite restrictions, we’ll take a look at what’s been happening in the most populous state, NSW. To refresh what unfolded there during the Delta variant outbreak, this HBL Ebsworth legal guide explains the finer details for the construction sector.
Since then, the NSW government eased pandemic restrictions on 15 December, removing density limits, QR-code check-ins, the need to be vaccinated and mask-wearing for people entering or on construction sites (with the exception of indoor sites where masks are still required). COVID-19 Safety Plans became optional then, too. Keep up to date with this official NSW government website on any changes, though. Meanwhile, in Western Australia, building and construction workers should be doubly vaccinated against the virus (unless exempt) to be on a worksite.
Chances are the construction sector won’t return to a pre-COVID ‘normal’ this year. Knowing that uncertainty and the factors above could impact your business helps you grasp some of the risks to manage them. Be sure to reach out to us to help fine tune your risk strategy.