By JON TELLEKAMP

The construction industry is no stranger to tough challenges.

But right now, rising interest rates and inflation are making it even harder to get projects off the ground – or keep them on track. From tighter margins to supply chain hiccups, the pressure is on.

Let’s break down what contractors are up against, how they’re adapting and the trends shaping the future of construction insurance.

The biggest insurance challenges construction companies are facing right now

The current economic climate is hitting the construction industry on multiple fronts. Higher borrowing costs are making it harder for developers and project owners to move forward, which means more delays and, in some cases, project cancellations.

Meanwhile, the price of essential materials like steel, lumber and concrete has gone up significantly. That either squeezes contractors’ already thin profit margins or forces them to pass those costs along – neither of which is ideal.

To add to this, imported materials are more expensive, and supply chains are still feeling the strain. For example, higher costs on steel and aluminum have made budgeting more difficult and introduced even more uncertainty.

And let’s not forget the labor shortage. We’re seeing fewer skilled workers available, especially as experienced tradespeople retire and younger workers look to other industries. That drives up labor costs and slows down projects. It’s a perfect storm that could hold back innovation and growth if it’s not addressed. I think overall, commercial development is expected to slow down.

How our clients are dealing with these inflationary pressures

The good news is that many contractors have seen some version of this before, so they’re not coming in blind.

One of the big moves we’re seeing is more flexible contract terms. Contractors are pushing for clauses that account for inflation and sudden spikes in material or labor costs. That gives them a buffer and helps protect profit margins on lump-sum projects.

They’re also sharpening their cost forecasting. By using historical data and current market trends, they can better predict what’s coming and build that into their budgets – with contingency funds to handle the unexpected. Relationships matter, too. Strong ties with subcontractors and suppliers can lead to fixed pricing or long-term agreements that lock in costs.

Subcontractor Default Insurance is getting more attention as well. With the financial pressure everyone’s under, the risk of a subcontractor defaulting is higher. SDI helps shield contractors from the financial fallout and keeps projects moving.

The price of essential materials like steel, lumber and concrete has gone up significantly. That either squeezes contractors’ already thin profit margins or forces them to pass those costs along – neither of which is ideal.

The kinds of projects our team is seeing right now

Data centers are booming, thanks to AI and the demand for cloud services. Take the $2 billion AI data center project in Utah as an example. It’s massive, and it’s just one of many. The U.S. government is even exploring federal sites for future data center builds, especially for AI development. The Department of Energy recently announced a “request for information” seeking input from data center developers, energy developers and the broader public. The DOE has identified 16 potential sites that are positioned for rapid data center construction, including in-place energy infrastructure with the ability to fast-track permitting for new energy generation such as nuclear.

We’re also seeing a lot of momentum in healthcare construction. Since being stretched to the limits during COVID, hospitals and medical facilities are expanding to meet rising demand and improve patient care. It’s not just about adding space. It’s about future-proofing infrastructure.

Then there’s infrastructure more broadly. Mega-projects are still going strong, but they come with their own set of complications. Meanwhile, the push to bring manufacturing back to the U.S. is encouraging. We’ve seen a number of new factory projects. One manufacturer of construction equipment recently made the decision to double the size of a factory in San Antonio, Texas. Seeing more will depend on a lot of factors impacting manufacturers like increased operating costs and more expensive building supplies.

Legislation like the Infrastructure Bill and Inflation Act previously introduced opportunities. We’ll have to see how those projects will be impacted going forward.

Trends or tech developments are changing how contractors work

Technology is changing the game. Tools like Building Information Modeling give us more accurate digital representations of projects, which improves risk assessment. Drones are helping with site inspections. IoT devices give us real-time updates on what’s happening onsite.

Technology is helping contractors reduce their risks in many ways which of course, helps improve their risk profile. It’s also helping construction insurers, like AXA XL, analyze these risks more thoroughly and quickly to develop better insurance solutions. Consider how we can use AI-predictive analytics models. By analyzing large data sets, we can predict risks more accurately and build tailored policies.

But as everything goes more digital, it’s important to realize that cyber risk increases. As a result, cyber liability coverage is becoming more important for contractors. To help our construction clients, AXA XL’s cyber insurance team developed a special endorsement that adds very specific construction tech risks to our existing cyber insurance policy.

Jon Tellekamp is chief underwriting officer, construction in the Americas, at AXA XL.