By John Wallen, HUB International
Wisconsin’s construction industry is struggling with a host of business roadblocks that can be laid at inflation’s door.
Customer demand is still there but stifled by high interest rates intended to cap inflation. Residential construction has been particularly hit, but commercial developers are deterred by rates combined with lack of clarity over market needs in an era of remote work. Labor and supplies are another point of pain, as inflation keeps those input costs up, requiring multiple “re-do” bidding.
No surprise. Costs of projects are exceeding budgets. Milwaukee’s convention center, for one, is now expected to exceed its initial $420 million budget.
Inflationary pressure has shrunk profit margins as it intensifies the vise on the supply chain that has been tightening since the pandemic. Bottlenecks and shortages are affecting every aspect of a building project.
Among the biggest supply chain hurdles:
The ongoing pressures of inflation have led to a tightening of the industry’s margins. Conditions also have contributed to higher insurance costs – aggravated by extreme weather events across the U.S. that have resulted in catastrophic property losses.
Builder’s risk insurance rates have risen as much as 30% in the past two years and availability and pricing for frame construction has created further cost challenges. Liability insurance costs have almost quadrupled. Large-scale projects in some riskier markets have seen insurance costs jump to 8% of a project’s total cost – versus 2% previously. Compounding the problem is the risk of diminished capacity as insurers are reluctant to take on the sole risk of a single, large project.
It’s leaving some projects underinsured, even as owners and project managers are stymied by 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 is no longer common.
Increasingly, builders are evaluating next steps on pending projects given high costs, the impact on returns and an uncertain market. Despite the difficulties of the current environment, many now find an opportune time to explore new technologies and methodologies that stand to transform the business.
Even without inflationary and supply side pressures, prefabricated construction overall – from roof and floor construction to interior room modules – had been growing in popularity due to a simpler supply chain and cost-effectiveness (among other advantages). The market is expected to grow at a 6.85% rate through 2030 from 2022’s $145.85 billion.
Construction that is 3D printed is also taking off, with interest growing on its strength 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.
© ABC of Wisconsin | All Rights Reserved | Lion Tree Group Site Design | Privacy Policy
