Hurricanes hit the construction industry
INSIGHT ARTICLE |
Hurricanes Harvey, Irma and Maria did profound damage to lives, property and businesses when they hit Texas, Florida, Puerto Rico and the U.S. Virgin Islands in rapid succession. In the aftermath, the storms are being blamed for the loss of 33,000 jobs in September,[i] ending a seven-year record of continuous growth. The economic impact of the storms is grim, with early estimates of $150 billion in damage from Harvey and Irma combined; Maria’s impact on Puerto Rico has been estimated at upwards of $95 billion in damage.[ii]
Demand for commercial construction was already high throughout the United States and its territories before the storms hit. According to the Commercial Construction Index, most contractors anticipated healthy profit margins in 2017.[iii] But recovery, repair and rebuilding efforts in the wake of the storms are putting pressure on local building contractors and construction managers to quickly purchase materials, attract workers and sign on to projects—even as prices rise and qualified personnel are increasingly hard to find.
Provided their businesses in the affected areas are operational, construction companies will face a number of challenges in the coming months.
Labor shortages, multiplied
When Harvey, Irma and Maria made landfall, their effect served to aggravate an already significant issue for the construction industry generally: namely, the shortage of skilled workers. According to the National Association of Home Builders (NAHB)/Wells Fargo monthly index of the housing industry, the most significant problem facing builders is the cost and availability of labor.[iv] The issue has grown into a concern for 78 percent of builders in 2016, up from only 13 percent in 2011.
The Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey supports the builders’ concerns: In July 2017, total separations in the industry were greater than hires, a sign that employees are confident enough in the market overall to leave their current jobs in pursuit of new opportunities. A bump in the need for construction workers in Texas, Florida and other hurricane-ravaged areas will draw workers away from other regions and only serve to intensify the labor shortage problem. The NAHB estimates that as many as 20,000 construction workers will be needed in Texas alone.
In order to attract and retain qualified workers, builders have been raising average pay higher than the overall national average. In 2016, average construction wages grew 10 percent higher than all other private sector hourly wages.[v] Average hourly earnings increases for production and nonsupervisory employees continued through September 2017.
The hurricanes put many regional workers out of commission, a difficult, albeit temporary, circumstance. But it serves to make the search for qualified employees more problematic, however, and builders are having to extend their timelines to complete projects.
Adding to the workforce concerns of builders and contractors across the country are the immigration policy proposals coming out of Washington. These plans could accelerate the decline of immigrants coming into the industry that began about a decade ago. According to the National Bureau of Economic Research, 1.1 million undocumented workers—a number roughly half the population of Houston—were employed in construction at the end of 2016.[vi] If removed from the country, a path the administration has suggested it would pursue, the construction industry could see an 8 percent decline in production over the long term.
Whether employees—documented or not—are moving due to policy changes, the hurricanes, more attractive compensation packages or some combination, shifts in the construction workforce will likely hit smaller contractors the hardest. These companies often employ a high percentage of transient workers and, if immigration policies coming out of Washington force them to leave or the promise of better-paying jobs in hurricane-ravaged areas beckons, these companies may not be able to find enough local talent to replace lost workers on their projects.
Productivity and prices
One industrial contractor in Texas had its four plants shut down for three weeks after Harvey devastated the area. The first two weeks alone were spent helping employees repair their homes after they were damaged by flooding caused by the storm.
Although some contractors in Houston experienced shipment delays as their suppliers recovered, the supply chains were running normally within a few weeks of the storm. But as local home and commercial builders began to assess the damage inflicted by Harvey, the increased demand, coupled with the short supply, drove prices up for roofing, drywall, lumber and other materials. These increases were in addition to the already rising costs resulting from new tariffs imposed on wood from Canada.
Because the damage to homes, buildings and infrastructure in Puerto Rico and the U.S. Virgin Islands is so extensive, the amount of supplies needed there could lead to shortages elsewhere. Delays related to the hurricanes could force builders to revise their forecasts for the year.
Business interruption insurance
Builders may not know whether or not their insurance policies cover them for business interruptions that come with hurricanes, but it is important for them to understand exactly what is covered and how coverage is triggered. Those who did not have this type of insurance may never be able to open their doors again. Even those with coverage should be aware that their policies may not cover them completely for interruptions associated with hurricanes. This is because many claims must meet very specific criteria or be excluded from coverage.
Many policies have provisions that, for example, dictate that evacuation orders—typically made before a hurricane makes landfall—must be made by a civil authority in order to trigger a claim. Policies also may require a 72-hour period to elapse before a claim is payable.[vii]
Moreover, interruption insurance on commercial properties may not cover lost income for delays caused by flooding. Some areas in Texas experienced more than 50 inches of rain as Harvey surged through the area; Maria dumped more than two feet of rain on parts of Puerto Rico in just over 24 hours. The financially strapped National Flood Insurance Program does not offer business interruption coverage. Small- and medium-size businesses may be able to expand interruption coverage for future events, but that may be little consolation to them now.
In late September, however, legislation was enacted to allow employers with a trade or business that was rendered inoperable by one of the storms to claim a tax credit equal to 40 percent of the wages paid to an employee (up to $6,000 of wages) whose principal place of employment was in a disaster area. The credit applies to wages paid during the period the business remains inoperable.
If the hurricanes or other natural disasters have affected your business, here are some resources you may find useful:
- Disaster relief and recovery: It’s about controlling your business when circumstances are beyond your control. Gain insights on the challenges and opportunities of rebuilding your business after a catastrophic event. We also track the regulatory relief issued for major U.S. disasters, so you don't have to search for it.
- Labor and workforce trends: An aging workforce, a tight labor market and the shifting nature of employee preferences are having an effect on the middle market. Gain an understanding of the trends and opportunities of these ongoing challenges facing industries across the board.
[i] “U.S. Economy Lost 33,000 Jobs in September” (Oct. 6, 2017) Wall Street Journal
[ii] Disis, J. “Hurricane Maria could be a $95 billion storm for Puerto Rico” (Sept. 28, 2017) CNN Money
[iii] Commercial Construction Index (Q3 2017) USG Corporation and U.S. Chamber of Commerce
[iv] NAHB/Wells Fargo Housing Market Index (Dec. 2016)
[v] Slowey, K. “Construction adds 14K jobs as employers boost wages, weekly hours amid labor shortage” (Aug. 8, 2016) Construction Dive
[vi] Ehrenfreund, M. “The potentially severe consequences of Trump’s deportation plans” (Nov. 14, 2016) The Washington Post
[vii] Hurtibise, R. “Check fine print: Business interruption insurance harder to claim than many think” (Sept. 29, 2017) Sun Sentinel