Hurricane recovery: The risky ripple effects of rebuilding

Help wanted (and needed)

While there will be plenty of rebuilding to accomplish, the real worry is: Will there be enough help to accomplish it? 

In general, the United States is suffering from a shortage of workers, but the construction industry has been particularly affected. After the 2008 recession hit potential homeowners, and therefore, homebuilders, hard, more than 1.5 million residential construction workers left the industry. Some changed careers. Others simply retired. Many immigrant workers went home and never came back because of tougher immigration laws. Some estimate that the industry has recovered fewer than half of those jobs.

According to a National Association of Home Builders (NAHB) analysis of Labor Department data, there were 225,000 unfilled construction jobs in June. In all, 10,000 to 20,000 workers could be needed to rebuild the homes damaged by Harvey alone, or 10% to 20% of the total number of residential construction workers in the Houston metropolitan area, the organization estimates. And when it comes to contractors seeking out subcontractors — from roofer to mason to HVAC contractors and painters — the shortage can be even more of a problem. In August, the NAHB reported that 77% of builders are facing a shortage of framing crews, while 61% are grappling with a shortage of drywall installation workers and 45% report a shortage of weatherization workers. 

(Source: AP Images)

Hot commodities

Labor isn't the only hot commodity. Hurricanes can cause issues with the supply and demand of raw materials, supplies, and equipment. In today's Global Supply Chain, projects hundreds and thousands of miles from direct impact of the storm have high potential to be affected. In 2005 for instance, following Hurricane Katrina, there was a shortage of resins produced from oil that manufacturers needed to create polyvinylchloride and other vinyl products. Damage caused by Hurricane Katrina in the Gulf of Mexico also disrupted supplies of ethylene and natural gas during the second half of 2005.

The Institute for Supply Management (ISM) recently released a report documenting the potential economic impacts from Hurricane Harvey. The survey found that two-thirds (67%) of responding supply managers believe input materials pricing will be at least somewhat negatively impacted over the next three months. Twenty-seven percent expect that prices will be negatively or very negatively impacted. Further, 56% of respondents believe supplier deliveries will be at least somewhat negatively impacted over the next three months with another 19% expecting deliveries to be negatively or very negatively impacted.

Respondents expect that fuel and petrochemical feed stocks and derivatives could be in short supply three months out. The following key commodities were also cited for their potential to be in short supply over the next three months: Fuel; Plastic Resins; Chemicals; Electronic Components; Feedstocks, Chemicals (raw); Gasoline; Polypropylene; Resin Based Products; Building Materials; Electrical Components, among others.

Related: How insurers and reinsurers track live hurricanes in real-time

Added attention

The stress on labor resources and materials can put added stress on contractors involved in hurricane recovery but can also put added stress on contractors and projects quite a distance away from the storm damage. After all, hurricane rebuilding will be pulling from an already strained labor force and diverting supplies to where they are immediately needed. Such operating conditions require contractors to pay close attention to who they are working with and what materials they are working with, especially the quality of both.

To help our construction clients weather increased activities after the storm, there are a variety of protocols that can help stave off problems both in the short and long-term:  

• Dig deep into the supply chain: It's important to work with trade contractors/suppliers to understand what materials come from or through impacted areas. Effective supply chain management requires drilling down to the lower tiers of the supply chain to understand a material's origin. It's also critical to investigate how delivery dates may be impacted as a result of the storms and rebuilding activities, paying close attention to how your project schedules can support revised dates. If not, consider alternatives to manage disruption to project flow. Now more than ever, it's imperative to follow your material inspection process – be wary of substandard or counterfeit materials. (We all remember Chinese drywall fiasco!) 

• Really get to know your trade contractors: For contractors in hurricane-affected areas, you may already be well aware of the impact of the storms on your local subcontractors. If less obvious, take a proactive effort to respectfully understand the impacts that your Trade Contractor partners may have sustained following the storms and identify what that may mean to them from a supervision, labor, operations, resources, direct cost (i.e. labor and material escalation), and cash flow perspective. This may give your project teams insight into the bigger picture and allow them to more actively manage identified circumstances to prevent problems later. If you don't receive direct information from a Trade partner, pay attention to "early warning signs" of distress – as there will likely be an increase of these as well. During times like these, Trade Partners need support from their GC/CM partners. 

• Don't discount the power of your contracts! Most Owner and Subcontractors contracts provide protections for all parties against the impacts of Force Majeure events. A Force Majeure clause (French for "superior force") is a contract provision that allows a party to suspend or terminate the performance of its obligations when certain circumstances beyond their control arise, making performance inadvisable, commercially impracticable, illegal, or impossible. Once you are aware of potential hurricane-related impacts, we advise our clients to immediately preserve their rights under the contracts by providing required notices. 

Related: New report details financial impact of September's historical natural disasters

Parting thoughts

Rebuilding in all affected locations will require ample resources, materials and close attention to the risks that can accompany recovering from a natural disaster. Longer term, there will be stress on labor markets as well as material availability/escalation —and ultimately subcontractors getting very busy and the associated risks of that cycle.  

We learn best from real and relevant information from sources with boots on the ground — our customers — who are actively involved in recovery efforts or are continuing with their contracted projects but may be feeling the stress of current market conditions. Customer insight is the best way for us to understand the real challenges that are being experienced by your teams so that we can find solutions that work, protecting contractors' operations, profitability and reputations.  

2017 will likely go down as one of the biggest years for natural catastrophe losses ever. And, while we recover from it, we can also certainly learn from it.

Jim Richert (jim.richert@xlcatlin.com) is Risk Engineering Manager in the Subcontractor Default Insurance business of XL Catlin's North America Construction unit.