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April 25, 2023

What is inflation’s impact on the construction industry?

Hunter Bendall, Jr.

Over the past 24 months, inflation has heavily impacted the construction industry. One issue is that firms that locked in pricing through guaranteed maximum price contracts are now grappling with increased material costs. Having to pay out of their pocket, firms’ already thin profit margins are becoming even more strained. Another issue is the industry’s increasingly aging workforce. Talented workers are nearing retirement, with reinforcements in skilled labor and experience being hard to find. Moving through 2023, the construction industry will contend with rising material prices and an aging workforce; two components affected by inflation that will challenge the industry’s goal of meeting ever-increasing demand.

Materials are becoming expensive.

As discovered in the Associated Builders and Contractors Construction (ABC) Confidence Index for October 2022, only 31% of surveyed ABC members expected their profit margins to increase. One issue that affects contractors’ margins (particularly mid-size contractors) and complicates the bidding process is the increase in material costs. With no firm handle on future material costs, contractors may be blindsided by expensive projects. 

Kelly Outram, Marsh’s Managing Director and Head of Global Contractor Development, notes that some material costs have reached a 40-year high. One example is fabricated steel, which Kelly says “ now 66% more expensive than it was in November 2020.” Additionally, labor shortages and shifts in wages are adding to further construction expenses, which, as Kelly notes “can account for 50% of the overall construction costs.”

Construction’s aging labor force.

Inflation isn’t just affecting current prices. Grappling with tight profit margins that allow for fewer mistakes, contractors are faced with a future lacking in experienced and skilled workers. Observing some trends, one could briefly assume the construction industry is in a good place. Demand is high, and job opportunities are abundant, with an estimated 390,000 openings per month in 2022. Additionally, the industry’s unemployment is at its second lowest on record at 4.6%. Nevertheless, the construction industry’s workforce is an aging one. Currently, one in four construction workers is older than 55. ABC Chief Economist Anirban Basu adds, “Many of these older construction workers are also the most productive, refining their skills over time.” This cements their importance in ensuring each project is executed efficiently. 

The problem emerges when trying to replace these tenured workers with younger and less experienced talent, a process that is moving too slowly to keep up with the increase in construction projects. Entry-level positions have accounted for nearly four out of every 10 new construction workers since 2012, while the number of skilled workers has grown much slower. With more projects in demand, contractors have little time to let these new and inexperienced workers experience growing pains, as any mistakes made during a project could prove catastrophic to the business’s strained margins.

Marsh McLennan Agency (MMA)’s helping hand.

MMA understands your needs and will work with you to navigate the obstacles. Here are a few of our solutions that your organization can utilize. 

  • Risk mapping – determine the risk factors facing your organization.

  • Benchmarking – learn what your competitors are doing for their policy limits.

  • Carrier partnerships – get in touch with insurance companies that know and want your business.

  • Safety consulting – drive down your cost factors with MMA’s safety and qualified risk management solutions. 

In addition to these solutions, another alternative for your organization could be joining a captive program. With more than 400 colleagues managing nearly 20% of the world’s captives, gain the flexibility, control, and involvement your organization needs in facing this challenging year.

Visit the Marsh McLennan Agency Business Insurance Trends Report page to learn more.

Contact a Marsh McLennan Agency representative today to learn more about our solutions.