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Contractor risk review 2022

The report shows new challenges emerged in 2021 and 2022 that tested contractors and put pressure on their operating margins, including record rates of inflation.
Watching Team of Workers

27/10/2023 · 5 minute read

UK Contractor Risk Review 2022

Marsh Specialty’s Contractor Risk Review 2022 (CRR) analyses the risks most commonly identified by the UK’s largest publically-listed contractors.

The report shows new challenges emerged in 2021 and 2022 that tested contractors and put pressure on their operating margins, including record rates of inflation, rising interest rates, stretched supply chains, shortages of skilled workers, and the Russia-Ukraine conflict.

These risks differ significantly from those included in the 2021 CRR, when the immediate impacts of the COVID-19 pandemic and acute Brexit uncertainty dominated.  

Here, we explore several risks from this year’s report and discuss how they are affecting businesses in the construction industry. While the report is built on risks cited in UK contractor annual reports, many of these challenges are being experienced by contractors worldwide. 

Read the Contractor Risk Review 2022 in full

Inflation

Inflation was a major global challenge in 2021 and 2022. As lockdowns around the world were lifted, there was increased demand for products – particularly consumer goods and materials. Then, the Russia-Ukraine conflict drove energy and commodity prices higher, further increasing inflation in the UK and beyond.

By April 2022, the construction material price index had risen by 25.2%, year on year, according to the UK’s Department for Business, Energy, and Industrial Strategy. In September 2022, with inflation at a 40-year high, construction businesses reported that their customers were putting new work on hold, forcing them to stop both buying materials and hiring staff.

Contractor insolvency

As an industry, construction experienced the highest number of insolvencies in the 12 months ending in the second quarter of 2022, according to the Insolvency Service. Construction company insolvencies accounted for nearly one-in-five (19%) of all insolvencies in England and Wales during the period. Of the 3,665 failures, the vast majority were liquidations and closedowns.

Worker shortages

Access to EU workers tightened when freedom of movement ended in January 2021. According to the Construction Skills Network, the UK may require an extra 225,000 workers by 2027 to meet the demand. In addition, construction has an ageing workforce, with a large proportion of workers between 50 and 65. While labour shortages have a lower profile than inflation and materials shortages, some firms have said it is a more pressing problem.

Environmental, social, and governance (ESG)

The construction sector is responsible for 40% of global energy consumption and 33% of greenhouse gas emissions, according to the World Economic Forum. In 2021, the UK government set the world’s most ambitious climate change target to reduce emissions by 78% by 2035, compared to 1990 levels.

Additionally, it has included a 10% minimum weighting to ESG objectives in government procurement tenders.

This focus on contractor ESG attainment in its appointment decision-making is increasingly being adopted by project owners and developers, giving contractors a growing financial incentive to improve their ESG achievements.

Of course, embedding ESG is more than a bottom line consideration, and many contractors are actively adopting ESG principles to seek a competitive advantage in terms of staff attraction and brand reputation.

A more universal or standardised set of ESG measures and reporting is widely expected to be implemented across the global construction industry in the future.

With increased visibility and the pace of change of legislation, regulation, and procurement processes showing no sign of abating, companies should be mindful of how ESG might affect their businesses and be in a position to adapt to these changes.   

ESG Risk Rating

Marsh’s award-winning ESG Risk Rating is a complimentary self-assessment that enables companies to measure their ESG performance, identify related risks for improvement, and gain access to risk and insurance benefits.

Learn more about the ESG Risk Rating tool

Modern methods of construction (MMC)

In 2022, the UK government issued an updated version of its Construction Playbook. First published in 2020, the playbook is a guide to sourcing and contracting public works projects and programs. The update provides government departments, and arm’s length bodies, with MMC guidance and encourages them to set targets for projects using MMC.

However, projects incorporating these features are more challenging to cover, especially in a constricted insurance market.

This has been exacerbated by the UK acting more slowly than other nations to adopt MMC, meaning UK construction insurers have less experience with the methods themselves, are less familiar with the risks associated with the methods, and have limited claims data. This has resulted in underwriters generally taking a cautious, conservative approach to projects that use modern methods.

Fortunately, moves are being made to improve the insurability of MMC. Last year, Marsh collaborated with Cambridge University’s Centre for Sustainable Development to develop an alternative risk assessment framework to support insurers’ ability to identify and evaluate the risk attributes specific to MMC.

Health and safety

Around 40,000 people in the UK construction industry develop a musculoskeletal disorder (MSD) each year. In 2022, the Health and Safety Executive (HSE) launched a campaign to combat serious aches, pains, and strains, announcing 1,000 inspections to be carried out in October and November to assess how workers moved heavy or bulky materials.

According to the HSE, construction has the largest burden of occupational cancer among the industrial sectors, accounting for over 40% of occupational cancer deaths and registrations, with past exposure annually causing more than 5,000 occupational cancer cases and about 3,700 deaths. The most significant causes are asbestos (70%), followed by exposure to silica (17%), paint fumes and associated risk (6% to 7%), and diesel engine exhaust (6% to 7%).

Mental health is a significant concern within the sector. Every working day, on average, two construction workers take their own lives, while one in four reports having suicidal thoughts. Although mental health awareness is increasing, more than 50% of UK construction employees work for companies with no mental health strategies.

Contractors are taking measures to improve worker wellbeing. These include reducing the use of gig-economy contracts throughout the supply chain, resulting in greater certainty for employees’ working hours. Companies are also partnering with mental health charities and services to encourage workers to open up about their mental health and to provide support for those who need it.

Cyber crime

Activities such as intellectual property theft, espionage, and extortion cost UK businesses an estimated £21 billion a year. In 2022, construction was identified as the number one industry in the UK targeted by ransomware and malware.

The threat is so acute that in March 2022, the UK’s GCHQ National Cyber Security Centre issued a digital guide for the construction industry. It is the first industry-specific guide issued by the intelligence and security body.

Common cyber threats facing the industry include spear phishing (email or electronic communications scams targeted at a specific individual, organisation, or business), ransomware, and supply chain attacks. The increase in popularity of smart buildings has triggered a rise in siegeware, which targets a building’s control systems.

Contractor risk review 2022: Top 10 risks analysed

Marsh Specialty’s Contractor Risk Review 2022 analyses the risks most commonly identified by the UK’s largest contractors.

Explore the report

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