4 significant challenges affecting small and medium-sized construction businesses

The construction industry in the U.K. is facing many unprecedented challenges. From price rises to labour shortages, the struggle to continue providing services while maintaining profitability has been acutely felt across the country. Here, we’ve outlined the top four issues that many small and medium sized construction businesses are currently dealing with and how these impact pre-existing or new construction all risks insurance policies.

Supply chain disruption

Over the past three years, global supply chains have been frequently disrupted. COVID-19 restrictions impacting freight transportation of materials, alongside geopolitical conflict such as the war in Ukraine have resulted in much longer lead times to obtain materials than before the pandemic. Supply shortages are evidenced in government data, which shows a significant decline in the number of brick and concrete block deliveries year on year¹.

This disruption means that some construction projects are taking much longer than anticipated. For construction firms with single project-specific or all risks coverages in place, this can mean that policies need to be extended to maintain cover throughout the build.

Materials costs

Global inflation and supply chain disruptions have had a significant impact on construction materials costs in the U.K. The U.K. government recently reported that the cost of building materials for ‘All work’ had increased by 8.7% in March 2023 compared with March 2022², and 4.7% in April 2023 compared with the previous April³. The materials experiencing the highest percentage increases are screws at 38%, insulating materials at 28% and ready-mixed concrete at 25% respectively⁴. This means that the cost of a construction or engineering project may be significantly higher than previously anticipated, squeezing budgets and profitability.

Materials cost rises can have a marked effect on the sums insured on a construction all risks or engineering all risks insurance policy. Ensuring that the sums insured accurately reflect the project at hand or future projects is very important, as well as partnering with an insurer who provides consistency of cover.

Labour shortages

In the UK, 75% of construction firms are experiencing difficulties recruiting skilled operatives⁵. This looks to be a long-term trend, as the Construction Skills Network has estimated that 225,000 additional workers will be required by 2027 to meet construction demand⁶. An ageing workforce and fewer young people entering the industry, alongside Brexit and rising demand for construction projects have all contributed to this issue.

Similar to supply chain disruption, labour shortages can cause delays to projects as there may be too few workers available to work on a project, or contractors are in such high demand that they are delayed in attending scheduled projects. Again, it may be necessary to extend a construction project’s insurance policy to account for these delays.

New materials

As businesses formulate their net-zero or low carbon goals, some are looking to eco or sustainable materials in their building construction plans. This presents a challenge for construction companies and their workers, as learning how to use and deploy new materials may require extra training. There is also an inherent risk in using materials that are more expensive and not tested fully.

Using these new materials may have an impact on the profit margins of a construction project and may also prompt complexities with insurance policies. Working with an experienced insurer and broker partner to understand and account for the risk is important.

Conclusion

There are many complex issues affecting the construction industry. Supply chain, materials shortages and price increases, labour shortages and incorporating new materials into projects can all affect project cost and profit margins with delays and shortages. Ensuring that your construction all risks or engineering all risks insurance policy has adequate coverage for the sums insured and the policy duration will ensure that your construction operations are covered. It is also important to reassess your estimated contract values regularly and make mid-term amendments or increases if necessary, to avoid the risk of underinsurance.