Construction companies poised for post-Covid growth

The global construction market is set for a sustained period of strong growth, post-Covid-19, driven by government spending on infrastructure and the transition to a net zero society, says a new report from Allianz Global Corporate & Specialty (AGCS).

The report, Managing the new age of construction risk, explores both acute and long-term risk trends for the construction sector. While growth is predicted, it forecasts radical changes in design, materials and processes, and a transformation of the risk landscape, as the industry moves to build more sustainable buildings and infrastructure, conducts upscaling of clean energy facilities, and adopts modern building methods.

These challenges, it warns, will add to currently stressed supply chains that are already navigating shortages in materials and labour and rising costs, and which come against the backdrop of years-long tight margins in the industry.

“Covid-19 has brought about a new age for the construction industry,” says Yann Dreyer, global practice group leader for construction in the global Energy & Construction team at AGCS. “While construction projects continued during the pandemic, and further growth is to come, the overall environment has changed fundamentally.”

According to the report, the strong outlook for the sector is based on a number of factors, including rising populations in emerging markets and significant investment in alternative forms of energy, such as wind, solar and hydrogen, as well as power storage and transmission systems. In addition, the shift to electric transport will require investment in new plants and battery manufacturing facilities, as well as charging infrastructure.

Construction projects will also focus on buildings that are expected to improve their carbon footprint, as well as improved coastal and flood defenses and sewage and drainage systems in many catastrophe-exposed regions in response to more frequent extreme weather events.

Governments in many countries, it says, are planning major public investments in large infrastructure projects to both stimulate economic activity after the pandemic crisis and to drive the low-carbon transition.

The expected boom is expected to bring challenges, in addition to benefits, however.

In the medium term, sudden surges in demand could put supply chains under additional pressure and exacerbate existing shortages of materials and skilled labour. This may cause schedule and cost overruns. In addition, many in the industry may need to accelerate the implementation of efficiency and cost-control measures if profit margins have been impacted in the Covid-19 economy.

The enhanced sustainability and net zero focus will strongly influence the traditional risk landscape in the construction sector. According to the UN Environment Programme, buildings and the construction industry account for 38% of all energy-related carbon dioxide emissions. In order to cut carbon emissions, existing buildings will need to be refurbished and repurposed.

Additionally, new materials and construction methods will need to be introduced in relatively short periods of time. This will bring an increased risk of defects or may have unexpected safety, environmental or health consequences.

“Huge investments in green energy will mean larger values at risk, while the rapid adoption of prototype technology, buildings methods and materials will require close cooperation between underwriting, claims and risk engineering in-house, as well as between insurers and their clients,” says Olivier Daussin, construction underwriting lead in AGCS’ global Energy & Construction team.

Ultimately, modern building and production methods have the potential to radically transform construction, transferring more risk offsite and incorporating greater use of technology. Modular construction, for example, provides many benefits such as controlled factory-based quality management, less construction waste, a shorter construction timeline and reduced disruption to the surrounding environment. However, it also raises risk concerns about repetitive loss scenarios.

“There is an increased risk of serial losses with modular and prefabricated methods as the same part could be used across several projects before a fault is discovered,” Daussin explains.

At the same time, digitalization of construction creates cyber exposures which engineering and building companies need to strengthen their defences against. Today, the numerous parties involved on a construction site are interconnected through various shared IT platforms, which increases their vulnerability.

Cyber risks can range from malicious attempts to gain access to sensitive data, to disruption of project site control and associated theft, to supply chain disruption, to potential corruption of project design data, resulting in delays and ultimately reputational risk for parties involved.

Construction sites also need to give more consideration to mitigate the impact of climate-driven events as well as water damage from any source. AGCS has seen some surprisingly large losses from leaks from pressurized water or fire systems that go undetected or occur out of business hours, on weekends or during periods when site personnel are not present. Water leak detection and monitoring systems can help reduce the frequency and severity of water damage, mitigating expensive repairs and project delays.