Labor Woes for a Rebounding Construction Market

With construction activity picking up steam all across the nation, insurers are expressing concern over how the construction sector will meet the growing demand for qualified labor. Insurers are concerned not only with the shortage of new workers but also with the aging of the current construction industry workforce across the country.

The insurance industry knows what the construction industry is going through as it also has a graying workforce and experiences difficulty finding new construction insurance specialists, according to industry professionals.

Overall, construction payrolls are increasing, more projects are coming online and the scope of work is increasing. According to Lockton Co.’s construction insurance specialists (see article on page 24), insurance coverage is generally available for both commercial and residential projects and pricing is stable with a few exceptions.

The 2015 outlook is good, as total U.S. construction starts for 2015 are predicted to rise 9 percent to $612 billion, compared with 2014’s estimated 5 percent increase to $564 billion, according to the 2015 Dodge Construction Outlook, published by Dodge Data & Analytics (www.construction.com).

The Dodge report predicts that in 2015:

• Commercial building will increase 15 percent.
• Institutional building will advance 9 percent.
• Single family housing will rise 15 percent.
• Multifamily housing will rise 9 percent.
• Public works construction will improve 5 percent.

Only electric utilities (9 percent decline) and manufacturing plant construction (16 percent decline) are predicted to see drops in construction starts in 2015, according to the Dodge Construction Outlook report.

Rick Keegan, president of the Construction Business Unit at Travelers, says that right now the convergence of two trends – an aging workforce and a shortage of new workers – has the potential to alter a contractor’s risk profile and put pressure on their loss experience.

Matt Chase, executive vice president and head of the construction practice for Pasadena, Calif.-based Bolton & Co., says the shortage of quality labor is the biggest concern he hears from construction companies also.

Keegan adds that while the construction industry is just at the front-end of this challenge, a workforce of older and less experienced workers has the potential for a long-term impact from an insurance perspective.

“We track statistics by industry segment and it shows that in certain segments about 40 percent of construction worker injuries occur during the first six months of employment,” he said. “Worker inexperience and unfamiliarity in construction site hazards really can lead to a significant increase in accidents as contractors try to assimilate new workers. Not only do we see an increase in frequency, the impact on the severity side is pretty significant as well.”

Add to that the rising cost of medical, which now accounts for about 60 percent of workers’ compensation loss costs, and the trend becomes one worth noticing, he said.

At the same time industry data shows that more construction workers are working longer, which means that contractors also have the challenges associated with an aging existing workforce, Keegan said.

“That can result in having injured workers that can be more difficult to medically rehabilitate post-injury and in turn maybe less likely to return to work in the event that they do get hurt,” according to Keegan. The end result is an extended disability period, increased medical costs and even more pressure on a contractor’s workers’ compensation costs and experience.

Long-Term Effects

Workers’ compensation is an early concern, but it is not the only concern.

While construction labor woes tend to initially show up in the workers’ comp line, Keegan says there is a longer-term effect in other contractor coverages.

Concerns over construction defect issues are “absolutely something to watch,” he says, suggesting that quality of work could suffer. “When you think about it from a standpoint of potential construction defect exposures related to the job not being done right – that’s a concern. The tail on that is dramatically longer so it doesn’t show up as quickly,” he said.

Construction specialist Jim Zimmermann, vice president with Dallas-based McQueary Henry Bowles Troy (MHBT) LLP, agrees defects and quality of work are factors to watch going forward, although he says carriers have not shown much interest yet.

“We haven’t seen underwriters dig into the age breakdown of a construction company’s employees, or at least show any real concern for it. With that being said, it certainly could be an issue going forward,” Zimmerman said.

“The biggest frequency of claims comes from employees in the first year of employment, but the claims involving older workers are frequently much more expensive,” he said.

Zimmerman says for older workers the medical costs for injuries are higher, older workers earn more and therefore are paid more in lost wages, and the recovery time from injuries is much longer.

Aside from an aging construction workforce, many skilled workers left the industry during the economic downturn, another reason for the worker shortfall, says Dan Horton, vice president and construction practice group leader for Orland Park, Ill.-based The Horton Group.

“There was a good portion of seasoned workers that retired or went away during those years,” Horton said. “Now the industry has a real challenge … they can’t find enough people to get the work done.”

Zimmerman says that many subcontractors have told his general contractor clients that they could hire five, 10, even 20 more people if they could find the skilled labor they need.

“The work is there; the employees are not,” Zimmerman said.

Another problem, at least in West Texas where the oil and natural gas industries are drawing economic growth, is the competition from other business segments for employees. “There are stories of McDonald’s paying $15 an hour for unskilled crew members in West Texas, so you can imagine the difficulty in finding, compensating at a reasonable level, and keeping truly skilled labor,” he said.

Keegan says while a lot of the attention has been focused on the need for construction craft workers, the same issue exists for construction professional positions as well. “In fact, a lot of the contractors we speak with actually cite filling professional positions – such as project managers, construction superintendents and safety professionals – as the biggest labor challenge,” Keegan said.

Construction Specialists Needed

While the construction industry struggles to fill a shortage in qualified labor today, the insurance industry itself also struggles to fill a shortage of construction insurance specialists, according to some.

“I absolutely believe there is a shortage of young construction insurance specialists,” MHBT’s Zimmerman said. “There are a relatively small number of agents that have controlled the construction insurance and bonding marketplace in many areas of the country, and that’s been for good reasons.”

Zimmerman said many of today’s construction insurance specialists are considered experts in either insurance and/or bonds, they’ve provided quality services to their clients, and they are highly-respected within the industry. “However, speaking very generally, the majority of those agents are closer to the end of their careers than the beginning,” he said. “When those agents try to transition or sell their business, there is often a serious drop-off in service.”

According to Zimmerman, many construction-focused agencies recognized this need years ago and have been hiring and training specialists to take over. “Those are the ones that are going to thrive, not just because they will likely keep the business they have, but because they will win the business from agencies that have not had the same level of employee investment.”

The graying insurance industry provides an excellent opportunity for younger construction specialists to step up, Zimmerman says.

Bolton’s Chase is one example of a younger specialist that has found success in construction.

Chase grew up on construction sites. His father and grandfather owned and operated one of Los Angeles’ largest commercial plumbing contracting firms. While Chase knew the ins and outs of a construction project, he wanted to focus on the business side more than the mechanical side.

“My uncle referred me to Bolton because they wrote his bonds and they had a very good reputation,” Chase said. But Bolton wasn’t the only agency that wanted to hire Chase. His family’s construction business was a perk that came with his new hire, or so he thought.

“But when I met with the president of Bolton – Steve Brockmeyer – out of all the firms I interviewed with, he’s the only one who said, ‘Yeah, we’ll hire you, but you’re not allowed to write your dad’s account for two years. That made me feel like they cared about me. They didn’t want to just hire me because of my dad’s decent sized account.”

That began Chase’s 10-year career at Bolton as an insurance construction specialist where he’s helped grow the construction practice from near zero to about $30 million in written premium.

“I think that if you’re interested in the construction industry and you can relate to the construction buyer, you can be successful at this,” Chase said.

The outlook for construction specialists is good, says Horton, but the challenge for agencies to find the right people will be much greater in the coming years.

“It’s not just an issue of finding new construction specialists for agencies. It’s a huge challenge just trying to attract the next generation of professionals” in general, he says. “If you can figure out how to get young people into an agency first, construction is one of the industries they might specialize in, but it all depends on if the agency can get the next generation into the agency, period.”