3 primary risks facing the construction sector – and how to manage them

Inflation impacts

Inflation may be starting to slow in many parts of the world, but there is no avoiding the imprint it has left and will continue to make for the short to medium term on material and labor costs. With those rising costs and the scale of some of the contracts we’re now seeing, the value of insurance claims could be much higher.

For construction companies building out schedules, identifying, quantifying and prioritizing risks, and determining the right strategies for transferring or retaining them is critical, requiring advanced data and analytics.

Given the high costs associated with project delays, construction companies need to anticipate potential labor issues and take steps to ensure any insurance claims can be handled quickly. Though supply chain issues appear to be diminishing, businesses should take necessary steps to manage potential risks.

Climate and ESG

More frequent and more severe storms brought about by climate change are clearly a risk for construction projects, though they vary in scale by location. Already we have seen catastrophe risk insurance premiums rising as a result of insurers passing on higher reinsurance costs.

Alongside being as prepared as possible for those external physical climate risks, construction companies’ approach to minimizing their own climate impacts as part of the growing public and investor pressure of ESG (environmental, social and governance) factors is increasingly under scrutiny. A comprehensive ESG approach will need to involve multiple aspects of people, risk and capital policy due to the broad scope of ESG. It should also be factored into contractual risk issues.

If anyone still needs convincing, evidence of the growing public sentiment about the need for all companies to be “responsible” for their impacts on people, society and the planet is mounting. In the U.S., this is illustrated by what have been termed “nuclear verdicts”.

The labor market – and where AI fits in

Some of the $10-20 billion projects we are now seeing are likely to need upwards of 10,000 workers at key points in the project lifecycle which raises some questions. First, where are these workers coming from? And second, how much are they going to cost, given the competition for suitably skilled people and the effect of inflation on wages? Both must be factored into schedules and will impact the cost of insurance programs.

Partly because of the labor issue, discussion is increasing on how artificial intelligence (AI) technology may have a role to play in construction, today and in the near future. Although in the early stages of evaluation, most commentators see significant impact.

Whatever your own view, ignoring the shift is not a viable option, not just because of missing out on possible market benefits but also because of the need to be aware of new risks AI could present. Cyber risk is the obvious one, but with the trend toward smart buildings, contractors will need to be fully informed about their risks.

Close the risk understanding gap

In a simple multi-choice risk management world, construction companies have three basic choices to manage these risks – mitigate, transfer or avoid – albeit avoidance of the highlighted risks is not a real viable option.

The challenge for construction companies is to close the gaps in their understanding of risk exposures. Achieving that objective will likely entail a rigorous discovery phase to explore every aspect of potential exposures to determine options across the risk management spectrum. Although some of that may come from experience and past performance, the use of burgeoning data and analytics techniques can increasingly lead to a different, more evidential type of decision making that is an increasing prerequisite for those providing the risk financing capacity that will be part of any wider risk management strategy.