Contractors may assume that smaller projects equate to smaller problems — but that’s not always the case. Construction jobs of all sizes share many of the same logistical and legal risks — and those risks have become even more complex in the wake of the COVID-19 pandemic.
Supply chain issues, labor shortages, and payment delays now define the construction landscape — and many small and midsize contractors don’t have the financial cushion to stay afloat if something goes awry. A series of tough jobs could lead to significant losses for contractors who are unprepared. Here are six risk areas that construction companies should address to position themselves for success in the current COVID-19 era.
1. Distribution issues
As contractors are aware, the COVID-19 pandemic temporarily shut down manufacturers and suppliers across the nation, leading to unprecedented distribution challenges.
As of July 2021, the cost of construction materials is up 20 percent, with a 3.2 percent increase just in the last month. For some common materials, like softwood lumber, prices have increased by more than 125 percent in the last year.
These price hikes are likely due to limited supply. Contractors are not only struggling to pay for more expensive materials, they’re also struggling to source the materials they need to complete projects.
Climbing prices forced some contractors to increase estimates they had made before the pandemic, causing last-minute plan changes and canceled jobs. It also delayed the start of many projects, particularly with governments and municipalities. On top of that, other supply chain shortages continue to make it difficult for contractors to access essential equipment. For example, a recent Business Insider article revealed that the ongoing computer chip shortage is causing delays because contractors are struggling to source the vehicles and technology they need to complete work on schedule.
Unfortunately, there’s no end in sight when it comes to distribution issues. Contractors can prepare by being transparent with customers and building time for delays and shortages into project timelines.
2. Payment delays
Pandemic-era disruptions have led to payment delays for many contractors, particularly those working with public agencies. Even before the pandemic, public agencies were often slow to make payments. Now, with the switch to remote work, many agencies are experiencing massive delays. Invoices that used to take six to eight weeks can now take several months or more to process.
Even with these delays, some agencies mandate that contractors must continue to work, even if payments are outstanding. In this instance, negotiations are typically held at the end of a project to determine the final cost for the customer, resulting in late payments — even if contractors still need to pay their staff in the meantime. For contractors who enter those jobs unprepared, there can be serious financial repercussions.
Payment delays can lead to real financial trouble for smaller contractors that don’t have a nest egg to fall back on. Subcontractors are at an even higher risk for these delays because, often, their contracts include a “pay when paid” clause — meaning that they won’t get paid until the general contractor does. To stay afloat, construction companies should ensure they have additional sources of revenue to tide them over until delayed payments are processed.
3. Contracts and legal pitfalls
In the current environment, where jobs are scarce and margins are tight, many small and medium-sized construction companies may choose to sign their contracts without legal representation to cut costs. Others may assume they don’t need legal counsel because they have a close personal relationship with the project manager or agency they are signing with. But when problems arise on a project, the contract will always take precedence over handshake agreements or friendly conversations. Even if firms have strong relationships with their obligees, they should have experts review contract stipulations before signing.
Whether a project is large or small, contractors who take advantage of legal representation when signing contracts are generally in better positions to protect their companies and negotiate mutually beneficial agreements.
4. Labor shortages
Construction companies aren’t just facing material shortages in the aftermath of the COVID-19 pandemic — they’re also grappling with skilled labor shortages. According to a recent article from CNN, the construction industry needs to fill more than 400,000 jobs by the end of this year to keep up with demand and more than 1 million jobs in the next two years. Additionally, the average age of construction workers is rapidly increasing. Based on data from the Bureau of Labor Statistics, the median age of construction workers today is 43 years old — a figure that’s rising more than twice as fast as in other industries. With more construction workers retiring early because of the pandemic and fewer young apprentices choosing the trades, contractors should prepare for project delays and more time spent recruiting new hires in the years to come.
5. Limited selection of work
Before COVID-19, it was not unusual for contractors to take on less lucrative projects to keep staff employed, particularly when backlog levels were dwindling. But the pool of available work has been reduced significantly because of COVID-19 — which means these smaller projects are no longer a reliable way for contractors to stay afloat during slow periods. With fewer projects to compete for, larger companies are now bidding on projects that would usually go to small firms, whether they are profitable or not. Shortly after the economy opened back up, it wasn’t uncommon to see as many as 20 bidders on a construction project. This shortage of work is particularly impactful for small and midsize companies, who rely on lower-budget projects and can get the job done with a higher profit margin.
Fortunately, a booming housing market and slow but steady economic recovery indicate a more robust fourth quarter for 2021 and a more plentiful workload going into 2022. But in the meantime, contractors should prepare to be outbid, and consider looking into additional income opportunities until workloads are back to their normal levels.
6. Improper plans
Finally, as with any construction project, improper planning can cause significant delays and affect a contractor’s bottom line. While not all contractors are architects or engineers, incorrect plans and design issues can cause delays that can lead to damages, mounting legal bills, and claims. And with the current distribution delays, it can sometimes take weeks or months to resolve a dispute or error. During that time, parties may start pointing fingers and placing blame, which adds to further lost time and expenses. For small and midsize contractors, who may not have the staff to get the project back on target, improper plans can even lead to termination and lost contracts. It’s critical for construction companies of any size — but particularly smaller firms — to invest extra time and energy into ensuring the proper plans are in place to avoid future losses.
How contractors can reduce risk in a post-pandemic world
COVID-19 hit the construction industry hard — and small and midsize contractors bore the brunt of that burden. But according to many experts, the future of construction is looking bright. Based on data from Research and Markets, the U.S. construction industry is expected to grow steadily over the next four quarters, with 15 percent anticipated growth in 2021.
Although it has been a long, slow road toward economic recovery since March 2020, with the right knowledge in hand contractors can continue to keep their heads above water. By understanding the complex risks involved in post-COVID-19 construction — and working with brokers and surety providers to mitigate those risks and acquire appropriate contract bond programs — construction companies can help navigate the ebbs and flows of the economy, continue keep their staff employed through thin times, and thrive.
To learn more about Liberty Mutual Surety Plus™, Liberty Mutual Surety’s flexible bond programs for small to midsize construction projects go here.
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