6 Critical COVID-19 Risks for the Construction Industry
In otherwise eerily quiet streets, the ring of hammers and the clatter of cranes continue.
In many jurisdictions, construction is deemed an essential industry, especially when the project is to enhance health care, housing or infrastructure.
Just as grocery store clerks never imagined they would be on the front lines of an pandemic, neither did the workers in hard hats. Risk & Insurance® surveyed an array of sources for insight on emerging risks for construction viability despite COVID-19.
1) Delay and Suspension
“The key pandemic risk associated with the construction industry is the delay, suspension or cancellation of projects,” said Brian Cooper, managing director of Gallagher’s U.S. construction practice.
“Each contract can present unique challenges,” Cooper explained. “For example, most public works projects that are considered essential may continue without interruption, whereas many private projects may be shelved due to funding sources drying up or government shut down. Boston, and all of Pennsylvania, among other locations, has shut down all construction.”
There are other situations where the project may not be shut down but the subcontractors decide not to put workers at risk and don’t show up to ongoing projects.
“That puts the general contractor in a difficult position,” said Cooper. “They still have contractual responsibilities, as do the subs, but now they must consider whether to place the sub in default to protect their contractual rights.”
Most contracts have force majeure language that can allow for additional time, but typically not additional cost reimbursement.
“If this situation continues for any length of time,” Cooper added, “cash flow will be affected, and there may be business casualties. Subcontractor-default insurers and bonding companies may be taking a very conservative approach to issuing insurance or bond credit, as these areas may be hit due to defaults caused by this pandemic.”
Reports to date indicate that builders are still working on projects already begun, but that planned and new projects are at risk of cancellation.
“With prospective new home buyers either furloughed or facing economic uncertainty, expectations for new home sales during the rest of this year are severely reduced,” said Leonard F. Herk, executive director and senior economist at the National Council on Compensation Insurance.
“Large homebuilders are discontinuing land purchases and putting new developments on hold,” Herk detailed. “Smaller builders are likely to see existing commitments cancelled or have project financing pulled back.”
3) Supply Chain
At the moment, this is secondary to demand uncertainty, but both availability and logistics may be limited.
“Some building components, like plumbing and electrical equipment, originate in China and the rest of Asia,” Herk said.
“Building [materials and components] manufactured in the U.S. — for example, doors and window assemblies, heating and cooling equipment, insulation and roofing materials — are likely to be subject to production delays or logistic bottlenecks as the pandemic continues.”
More broadly, Herk added, “all these observations suggest that employment in contracting is likely to be hit hard if the COVID-19 pandemic lasts through spring and summer — peak building season in most of the country.”
4) Delays Create Additional Risks
“Work stoppages can occur on construction projects for several reasons,” said Jay Siegel, senior team leader for energy and construction risk consulting at Allianz Global Corporate & Specialty.
Those can include “bankruptcy, principal’s insolvency, decision of public authorities, infectious disease and natural disasters,” he said.
“However, the potential for losses from events such as fires, vandalism and theft and flooding remains when sites are idle or largely unoccupied, and can even be exacerbated.”
To minimize project losses it is critical that actions are taken early to protect the project, he urged.
“Those can include maintaining site security, ensuring safe storage of materials, securing site utilities, maintaining and protecting equipment and machinery, ensuring partially completed work and temporary structures are safe, protecting against natural hazard risks, and considering what testing and inspections may be required prior to restarting the project,” he said.
“Construction companies are taking every precaution to protect their employees,” said Jake Turley, area president of Gallagher’s benefits and human resources consulting division. Sick workers are kept at home, shared equipment and areas are being sanitized, and interpersonal distances are being maintained.
“Depending on geography, critical infrastructure and public works are considered essential services and are pressing ahead,” Turley added.
“Some areas may see a decrease in non-essential construction, but most are allowing health care, low-income housing, and other infrastructure projects to continue. Some have made the comment that COVID-19 will create a pullback in the market, reducing their backlog and allowing the labor shortage to normalize,” he said.
With the passage of the CARES Act, smaller construction companies are quickly moving to access capital through their local banks and Small Business Administration originators, “They should use this opportunity to strengthen those relationships,” urged Turley.
“As the economy slows and interest rates remain low, long discussed infrastructure investments may begin to gain steam at a Federal level,” Turley suggested, “which typically is a way to spur the economy. Private market projects, however, may slow significantly due to lending shortages.”
All of these risks can be expected to continue throughout the duration of the crisis.
“The COVID-19 crisis involves broad impact to supply chains, labor supply, and emerging financial challenges,” according to Gallagher’s construction industry guidance.
“Additional demand delays should be anticipated, such as homebuyers putting their plans on hold until times seem more certain, and then creating a surge in the market with a flood of new activity.” &