This piece is by Nick Turner, Head of Surveying, Woodgate & Clark, and it looks at the impact of rising materials and labour costs when it comes to property claims.
Rising material costs have been cited as the biggest risk to increased building repair costs but as financial pressures squeeze businesses, the risk of contractors failing has risen over the same period. The knock-on effect of contractors on networks or insurer panels failing is uncompleted repairs that most builders are reluctant to take over, increased costs and potential for delays and complaints from policyholders. There are however steps insurance providers and their claims partners can take to mitigate those risks.
Construction firms accounted for 17% of all insolvencies in England and Wales in August 2023, according to the Insolvency Service, with 395 registered construction businesses becoming insolvent.
Indeed, in the year to August 2023, the total number of construction firms becoming insolvent was 4,263, a huge 32.5% increase on the 3,218 in 2019i.
The major concern for the insurance sector is that firms providing the range of work required for repair and maintenance (categorised as specialised construction activities) are consistently the most affected by insolvency across Great Britain.
The construction industry is particularly vulnerable to financial difficulty. In particular, cash flow management is a big challenge for many of the smaller contractors and subcontractors that are prevalent in this sector. This has been exacerbated by fluctuating material and increasing labour costs, especially where contractors are on fixed price contracts and agreed schedules of rates, which are a common part of repair contracts.
It is not surprising that in order to mitigate cashflow issues, some smaller contractors move into simpler work and then face increased competition from larger house builders. They may also look for where they can cut back on costs through cheaper/inadequate materials and/or employing cheaper but unqualified staff, impacting the quality of the final repair. Cutting back on environmental credentials might seem like an easy cost saving but this ignores the wider goal to achieve net zero emissions.
Risks to the insurance repair sector:
The rise in construction insolvencies creates a number of challenges for the insurance sector.
The first is cost. As the number of experienced insurance repair contractors reduces, costs will inevitably increase. New entrants are likely to be larger companies with a higher cost base, so they will need to charge more than the smaller companies traditionally involved in the repair market.
The second is quality of repairs. There is possibility that displaced tradespeople from insolvent businesses attempt to take on the work their failed employer was doing but as individuals. While they have the building skills, they are unlikely to have the experience in running a business. This could lead to delays and quality issues in the short term and failure in the medium term.
The third is time. Repairs are likely to take longer to start, due to a reducing pool of skilled resource, especially in times of surge. All contractor networks used by the insurance sector tend to use the same core of repair contractors, with few companies being exclusive. The demand in a surge in work (such as the recent floods) brings additional demand to a reducing pool of resource, inevitably resulting in delays to work starting.
The temptation might be to offer enhanced rates to attract the contractors but that is likely to result in an escalation of costs as the resource pool has not changed.
The cumulative effect is damage to consumer trust at a time when the sector is under increased scrutiny to deliver fair value.
Reducing the risk.
Working with unknown companies presents the highest risk to performance, potential failure and expenditure so should be avoided unless rigorous due diligence is undertaken.
Where existing contractor relationships are concerned, the most effective way to minimise the risk of network contractor failures is to encourage prompt payment and to work with contractor to ensure they have adequate cash flow.
At Woodgate & Clark, our contractor network, Quadrassist is lead by a team of building professionals who know first hand how a good contractor should operate. We not only work in partnership with contractors to manage repairs to the standards our customers demand, we make sure they are paid on time and treat them fairly in recognition of the vital role they play in our business.
It is also sensible to increase financial diligence. Undertake regular checks to reduce the risk of working with suppliers that are likely to fail. Due diligence is essential not just at the outset of the relationship but on-going.
Finally, when relying on the use of networks, understanding which contractors work for other, similar networks is essential to gauge the true capacity of the network they are working with. Any network should have back up (a minimum of more than one contractor) working in any given area and the ability to bring in additional contractors in the event of a failure or surge.
A good contractor network comprises U.K. wide coverage, a mix of skills and capabilities, local contractors who understand the local market conditions and a shared focus on doing a job well and on time because they know they will be paid fairly and squarely. That is precisely the model we work to at Quadrassist and this should protect us, our insurance customers and our contractors from the rise of insolvencies in the building sector.
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