How Wisconsin’s construction firms can get through inflationary storms

Listen to this article

While inflation has moderated from 2021’s nosebleed heights, its effects are still blowing through the economy.

Wisconsin’s construction industry is also pushing against the still forceful winds.

Interest rates, for example, have remained high, as the Federal Reserve keeps tight control on the Federal Funds Rate to tamper inflation. It’s helped. Inflation edged up to 3.7% in August, after hitting a high of 7% in 2021. But the cost of money has made everything from mortgages and commercial building loans to wages and materials more expensive.

Take Wisconsin’s housing market. By the first half, very tight inventories kept the clamp on home sales, which dropped 20.4%, and pushed prices higher 8.6% past 2022 levels. There’s a demand for new home construction, but second quarter starts were down 7% from the first quarter, when they were down 7% from 2023.

Inflation is also wreaking havoc with carefully laid plans – and budgets. At the University of Wisconsin-Madison, an additional $60 million had to be approved to cover cost overruns driven by inflation and supply chain issues for several projects.

Risks escalate in inflationary environment

Supply chains continue to be feeling the vise of inflation. But the riskier environment for contractors is also creating a bigger problem that’s tied into a challenging insurance market, both in cost and especially in capacity.

Start with the supply chain. Essential build materials and supplies continue to reflect inflationary pressure. Ready-mix concrete prices, for one, have shown historic increases since 2021. Transformer shortages have driven prices up by as much as 50% since 2020, and there are cases where job completion and occupancy is halted due to the delays.

This problem is not going away soon. The American workforce continues to age. In 2000, 12.5% of those over 65 were working; by 2016, that share had increased to 18.6%. 2 According to the Bureau of Labor Statistics, the number of individuals ages 55 and above in the labor force will grow from 35.7 million in 2016 to 42.1 million in 2026.

Further Wisconsin’s contractors are hurting as much as the rest of the industry for workers. In Milwaukee, Waukesha, Ozaukee and Washington counties, for example, construction job openings are at a 20-year high, creating manpower issues for work in the pipeline. (The good news, though, is the number of apprentices outpaces any seen in the last 20 years.)

Economic conditions combined with catastrophic property losses to extreme weather events have also made insurance coverage and costs a tough business hurdle.

Builder’s risk insurance rates have advanced as much as 30% and beyond since 2021. Liability insurance costs have continued to rise. Insurance costs have jumped to 8% of a project’s total cost – versus 2% previously – for large projects in riskier markets. Plus, insurers are reluctant to take on the sole risk of a single large project due to diminishing capacity in the insurance industry.

There’s a risk of being underinsured, capping the issue of supply chain aggravations. Carriers are reluctant to provide a buffer for the purpose of a claim, and the 10% escalation clause that once helped hedge against inflation are no longer common.

Looking for solutions

Now might be the right time to take advantage of technologies that are beginning to transform the industry.

There are reasons, for example, why prefabricated construction has taken off, inflationary pressures aside. A simpler supply chain and cost-effectiveness are two of its many advantages. The market is expected to grow at a 6.85% rate through 2030 from 2022’s $145.85 billion.

3D printed construction is also taking off as a process that simplifies conventional building and minimizes materials and labor use. The global market is expected to hit a nearly 200% growth rate through 2026. Similarly, companies doing prefabricated concrete buildings have never been busier, as they know their costs going in and their timelines are shorter. Though this construction innovation continues to grow, it has been slow to catch on in the mid-west and seems to be focused more on new built residential construction.

With current construction insurance market conditions, underwriters will focus on the best projects with the best controls and job-site protections, those projects will earn the best insurance rates. Especially when capacity is limited, underwriters pick and choose where they deploy it. Best-in-class players are at the front of the line.

Three ways to start:

1. Sharpen those valuations for projects and equipment. It’s tough to grapple with rising inflation, supply chain delays and conversion rates. Closely read all contracts and share them with brokers to ensure appropriate valuations — and the associated insurance coverages — are accurate.
2. Your workforce is your future. Benefits should be both cost-effective and attract and retain workers. Pay is always important, but health plans and financial wellness programs are big draws for millennial and Generation Z workers.
3. Find a good partner. Work with a broker who understands your needs and can help you design a risk mitigation strategy and provide risk management and claims advocacy resources that secure the best coverage and reduces your total cost of risk.