The new stresses causing contractor failure

 August 14, 2023     UFG Insurance    Surety  Read Time: 5 min


The construction industry has always been tough, but a variety of new headwinds are making it even harder for contractors working today.

It’s no longer just about getting the work done on budget and on time; successful contractors now have to navigate supply chain snarls, hidden and problematic contract language, and more destructive weather. For those companies unable or unwilling to adapt, contractor failure is a very real and frequent occurrence.

As a leading provider of surety bonds for contractors, the team at UFG Surety works hard to stay on top of these risks and help contractors mitigate obstacles where possible because your success is our success. As your company grows and moves on to more complex projects, our team members will be there to provide direction and work with you and your team. 

So what are some of the biggest stress points our industry experts are watching?

1. Labor challenges

It’s always hard to find good help but that problem has become acute for many in the construction field. The construction industry averaged more than 390,000 job openings per month in 2022, according to Associated Builders and Contractors, and that number is expected to grow as the new Bipartisan Infrastructure Law injects another $550 billion into U.S. infrastructure projects in the coming years.

The shortage of many trades, including electricians and carpenters, is pushing wages up across the industry and making it harder to lock down good talent. At the same time, healthcare costs continue to rise, putting contractors under even greater financial pressure as they try to staff up for major projects.

2. Supply chain changes and challenges

The worst supply chain challenges of the pandemic have finally stabilized, but strong demand and material shortages are continuing to push up prices and push out project timelines.

Industry watchers have said they expect prices will continue to rise well above historic norms of 3-5%, while in-demand equipment may take a year or more to receive. That makes it difficult for contractors to estimate and plan projects, which can ultimately impact their future viability.

Even if the materials are available and affordable, the logistics of getting them to the worksite can be daunting. Consolidation in the economy’s supplier base means that materials and equipment often have to travel further to get to their final destination; meanwhile, a truck driver shortage means construction sites in remote areas may struggle to get the equipment they need on time — if at all, Mortenson says

3. Problematic contract language

Not all the headwinds facing contractors have to do with rising costs and shortages. Some of it involves language — specifically the language now finding its way into construction contracts. These can create additional, unforeseen risks for contractors that could ultimately lead to a failure if things go wrong on a project.

There are a variety of clauses and fine points that successful contractors need to be on the watch for, including:

  • Extended warranties. While nearly all project contracts include a guarantee that a contractor will remedy any defective work within the first year, some proposed contracts attempt to extend that timeline to two years or more or shift the responsibility for defective materials from the vendor to the contractor. 
  • Overreaching indemnification or “hold harmless” clauses. These clauses are common and used to assure contract parties that they won’t be subject to liabilities for another’s actions, but some go further and seek to protect the project owner from all liability, even if they’re at fault.
  • No damages for delay. These clauses prohibit a contractor from recovering costs incurred due to a delay caused by the owner or another contractor. The issue is that these costs can include much more than just lost project time, the American Institute of Architects notes — it can also include scheduling costs, higher material and equipment rental costs and so on.
  • “Pay-if-paid” clauses. These clauses are contingent payment provisions that say general/managing contractors only have an obligation to pay downstream or subcontractors when they are paid by the project owner. This shifts the financial risk of a project entirely to those lower-tier contractors.
  • One-sided dispute resolution clauses. Contractors today are frequently asked to sign contracts giving the general contractor or project owner the right to choose arbitration or litigation to solve project disputes. 

4. Increasing weather/disaster challenges

Of all the stresses facing modern contractors, our changing climate is the most complex and unpredictable. The number of extreme weather events and disasters is on the rise, which can impact both construction project operations and overall demand for contracting services.

For example, extreme heat and cold can be dangerous for workers and slow down operations. Working in these environments can also require specialized equipment, incurring more costs and time as crews transport it to the worksite. 

More destructive storms in the Plains and South can compound logistical challenges, tighten labor markets and drive big increases in material costs. Each region has its own unique challenges from wildfires to hurricanes, and climate change is making it more likely these catastrophes will occur at some point.

How your surety agent can help

Construction has never been an industry for those with a low risk tolerance, but these latest trends demand a new approach for many firms. It takes a team of professionals, from construction attorneys to professional surety agents, to succeed in today’s uncertain contracting environment.

A professional surety agent can play a vital role as both an advisor and an educator, helping connect you to the correct surety for your business and other key service providers. They can also help you raise your bonding capacity as your company grows.

A surety carrier with deep knowledge of the construction industry can be the difference when it comes to contractor success versus failure. Here at UFG, we put holistic underwriting and relationships at the center of the surety relationship. Our teams of regional experts and our professional independent agency force are ready to partner with you. 

The information provided is for informational purposes only. Every attempt is made to ensure that the information is accurate; however, it is not intended to replace professional advice. For more information, see Disclaimers & Other Legal Documents.