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How Big Is Too Big?

The supply chain story starts around March 2020. Although some countries in Asia and Europe had already gone into lockdown due to COVID-19, the U.S. shutdown accelerated global challenges. The U.S. is the largest importer of goods by dollar value, followed by China. However, much of China’s imports are input material for exports. The U.S. is expected to import over $3 trillion of goods and export $1.9 trillion in 2022 alone.

Granular monthly data shows the sudden and sharp collapse in the import and export of goods around March and April 2020 due to the initial shutdowns and the dramatic fall in U.S and global consumption. With that, construction business work was halted, and project releases therefore were delayed.

Despite the supply chain issues not being 100% resolved yet, we are seeing some of the largest spending budgets in effect to address necessary improvements in the nation’s roadways, bridges, railways as well as needs in the residential and commercial spaces.

Supplies and material price escalation have caused contractors to begin pricing many items with a lot of cushion to help offset the unknowns, and rightly so. We’ve been advising and encouraging our customers to be certain their contracts are reviewed thoroughly to ensure that there are provisions that accommodate for price escalations, supply chain related delays, and completion time requirements. They’ve listened, but a direct result of that is larger contract prices and inflated potential backlog numbers. Putting together the supplies and labor necessary to successfully prosecute a larger than typical average program has become a focus of surety underwriting.

This sudden shift in consumer behavior caught many companies and manufacturers off guard. Restarting assembly lines and procuring input material is a complex affair. Materials that you might normally expect to receive in a few weeks are now taking up to six months to get. It has become almost impossible to determine the future cost. Buying materials and equipment up front, to the greatest extent possible, and storing it has become the norm.

Labor issues have plagued the construction market for several years now, but this has become an even bigger issue. We are seeing subcontractors simply pull out of a job at the early or mid-stages because they realize they simply can’t finish it or they can’t finish it at the price they’ve quoted. Subcontractor risk must be managed aggressively through prequalification, bonding and SDI. The good news is that data now suggests that the manufacturing and availability of goods has started to normalize as labor is available to produce certain types of goods. We anticipate some normalization in the availability of goods in the second half of 2022 due to improvements in shipping. In fact, the cost to move containers is starting to fall slightly. Furthermore, although U.S. labor markets remain tight, health disruptions may be less of a factor.

Working with more sophisticated and financially well-heeled contractors allows a surety to make the leap on supporting larger contracts and programs. It will help get us over the hump when the question arises “how big is too big?”

- Donna Powers, Senior Managing Director-Construction, The Hartford

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