How to Navigate Evolving Construction Contractor Risks in EMEA

How to Navigate Evolving Construction Contractor Risks in EMEA
June 19, 2024 12 mins

How to Navigate Evolving Construction Contractor Risks in EMEA

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Contractors in EMEA face an array of risks they must mitigate or transfer while managing the complexities inherent in major construction projects.

Key Takeaways
  1. Evolving regional and global risks introduce volatility into construction projects, in turn putting pressure on contractors.
  2. Contract structures that share risk among project participants are critical in this environment, as are solutions like parametric insurance and climate modeling.
  3. Making better decisions starts with finding the right risk advisor and getting ahead of risks.

Construction contractors in EMEA are faced with significant emerging challenges due to volatility on the global stage. Interest rates, inflation, as well as capital and material costs are only adding to this pressure. Economic slowdown or slow recovery are top concerns for both contractors and the construction and infrastructure industry as a whole.

At the same time, contractors must manage typical project-related risks, including maintaining job site safety and attracting talent to limit the impact of workforce shortages.

Top 10 Risks for the Construction Industry
  1. Economic Slowdown/Slow Recovery
  2. Failure to Attract or Retain Top Talent
  3. Workforce Shortage
  4. Cash Flow/Liquidity Risk
  5. Commodity Price Risk/Scarcity of Materials
  6. Cyber Attacks/Data Breach
  7. Major Protect Failure
  8. Political Risk
  9. Aging Workforce and Health Related Issues
  10. Regulatory/Legislative Changes

Source: GRMS 2023

Three Notable Challenges Facing Construction Contractors

Volatility in the near-term is a cause for concern for the construction and infrastructure industry. Geopolitical and macroeconomic challenges can impact project spend, lengthen lead times for building materials and increase prices, while labor market pressures introduce additional challenges for contractors.

  • Geopolitical Risks

    Conflicts in Ukraine and Gaza, upcoming elections in the U.S., and other geopolitical challenges are putting pressure on supply chains and costs in construction projects. The Russia-Ukraine conflict had an immediate impact on construction through the building materials market. Metal prices spiked in February 2022 to reach record highs in the weeks following the conflict’s commencement. With raw materials prices elevated, tender pricing and costs in ongoing projects were affected.

    Between the time a bid is submitted and the time materials are ordered, the price of that material can increase substantially. Before COVID-19, contractors would typically pass on that risk to their suppliers and subcontractors, but in most cases that is not possible anymore. Therefore, the risk now relies almost entirely on the main contractor.

    Meanwhile, supply chain disruptions have been ongoing since the conflict in Ukraine began. Risks related to supply chains have a particular impact on large infrastructure projects because these often involve turnkey project contracts known as engineering, procurement and construction (EPC) contracts under which private contractors agree to provide design and source materials in addition to construction. EPC contracts typically have strict timeframes and budgets, both of which can be threatened by supply chain disruptions and delays. This can result in considerable financial liabilities for the EPC contractor.

  • Macroeconomic Conditions

    Interest rates and capital and materials costs remain persistently high. Higher interest rates make it more expensive for governments, real estate developers and other project sponsors to obtain new project financing. When development activity slows, construction demand follows suit.

    As a result, there are concerns about a reduction in the number of projects being carried out over the next few years in parts of EMEA, specifically in middle market residential and commercial construction. High interest rates and the elevated cost of building materials are deterring developers from investment or causing projects already commissioned to be canceled as they are no longer profitable.

  • Labor Market

    Despite economic uncertainty, demand for construction workers remains high in parts of EMEA. In the United Kingdom, a decline in construction output for 2023 is forecasted to be followed by a return to growth in 2024 through 2027. In turn, the Construction Skills Network estimates that 225,000 additional workers will be required to meet construction demand.1

    In the EU, the construction industry is increasingly reporting labor shortages, which are now nearly three times the level observed 10 years ago. Policies like the EU Green Deal and National Recovery and Resilience Plans are setting environmental targets that require investment in construction. Estimations indicate that the green transition could lead to the creation of up to 2.5 million additional jobs overall by 2030. To meet this growing demand for labor, construction companies will need to have access to a qualified workforce.2

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Contractors face headwinds due to shortages of labor, elevated costs of materials and a high interest rate environment. Sustainable risk sharing mechanisms between upstream and downstream parties are key to maximize project delivery and meet demand.

Donais Deetz
Director, Construction & Infrastructure, EMEA

Getting Ahead of Risk

With many contractors operating on tight profit margins, insurance products that provide certainty of claim payment and liquidity upon a loss occurrence are key. A risk management and risk transfer strategy that prepares them for a volatile environment will likewise be critical.

Contractual review is an important component of getting ahead. At the outset of a project, contractors should work with partners who understand the project, from location to associated risks. They should examine the contract method to see what risks are assigned to the contractor compared to other stakeholders and identify if a risk could be transferred to the insurance market.

Key contract issues include:

  • Scope creep
  • Delay and disruption
  • Payment disputes
  • Design and specification issues
  • Health and safety risks
  • Force majeure events
  • Indemnification clauses

“Collaborative or alliancing type projects are being discussed in EMEA with more traction in the UK. Risk is shared among project stakeholders with a ‘no blame’ approach,” says Jon Chapman, Aon’s Construction and Infrastructure practice leader for EMEA. “However, these do bring about insurance issues, like identifying the trigger on a professional indemnity policy.”

As part of the risk transfer process, contractors and other construction stakeholders are also exploring tools to identify potential near- and long-term risks, such as the climate’s effect on their projects. Advanced catastrophe and climate models can help the industry anticipate and address the threats posed by natural disasters and climate change. Parametric insurance can also help protect against climate and catastrophe-related risks, offering contractors and building owners agility, efficiency and flexibility in the face of growing extreme heat conditions that have escalated risks, delays and costs for the construction industry in EMEA.

Four Steps to Mitigate Emerging Contractor Risks in EMEA

Contractors can use the following strategies to manage risks head-on and get ahead of the many challenges associated with operating in a volatile environment:

  1. Evaluate contract structure with a focus on required insurance and risk assumptions, such as whether the contractor is responsible for site conditions.
  2. Determine liquidated damages or other delay costs that contractors may be responsible for and use risk transfer tools like parametric insurance to address this exposure.
  3. Find the right broker — with experience in construction risks — to create a program that best fits the contractor’s risk appetite.
  4. Implement risk control measures to ensure job site safety.

Learn more about how contractors can manage interconnected risks through effective risk mitigation and tailored insurance solutions.

Aon’s Thought Leaders
  • Jon Chapman
    Practice Leader, Construction and Infrastructure, EMEA CEO
  • Donais Deetz
    Director, Construction & Infrastructure, EMEA
  • Tariq Taherbhai
    CCO, Construction and Infrastructure, Global Industry Specialties

General Disclaimer

This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

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