Tuesday, 16 November 2021

Construction Outlook 2022 - Top 10 risks facing the industry

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The construction industry has been navigating a challenging landscape due to the economic slowdown caused by the COVID-19 pandemic. The sector has historically been highly sensitive to economic cycles that have been compounded by government-sanctioned lockdowns, leading to the delay, suspension and cancellation of projects around the globe.

Initially, the pandemic disrupted all types of construction, but 18 months in, the impact is diverging. Commercial construction activity in industries that have thrived during the pandemic, including technology, distribution, life sciences and healthcare, has rebounded — and even accelerated. Meanwhile, construction activity in more discretionary sectors including retail and hospitality, are yet to return to anywhere near pre-pandemic levels.

The industry is confronting substantial risk from a shortage of materials and talent due to mobility restrictions caused by the pandemic. This risk is compounded by the uncertain pace of recovery. Evidence that the pandemic is under control — such as proof of high vaccination rates with high-efficacy vaccines — is needed to gain support and accelerate deployment of investments.

According to Aon’s 2021 Global Risk Management Survey, The top 10 risks facing the construction industry are:

  1. Economic slowdown
  2. Commodity price risk, scarcity of materials
  3. Cash flow / liquidity
  4. Business Interruption
  5. Accelerated rates of change in market factors
  6. Cyber risk / data breach
  7. Workforce shortage
  8. Capital availability
  9. Damage to reputation / brand
  10. Pandemic risk / health crises

Key issues for the construction industry

The COVID-19 pandemic is a defining event, and most of the construction industry’s top risks, including scarcity of materials, liquidity risk and workforce shortages, flow from it.

According to Tshepo Mofubetsoana, Aon South Africa’s Senior Broker in its Construction, Engineering and Renewable Energy Division, these risks are a reality, especially when construction locations are far from large population centres. “In some African countries, scarcity of materials as well as workforce shortages are a challenge. Specialised machinery and equipment are in short supply and if they are available, the job sites are often so remote that it is nearly impossible to get the necessary resources there. But the continent is developing and as infrastructure grows, so does construction acumen and the adoption of materials that are locally available,” says Tshepo.

The construction sector’s exposure to cyber risk also increased due to knowledge workers accessing less secure home networks during the COVID-19 pandemic, requiring companies to increase investment in security infrastructure. Protection against cyber-attacks and protection of intellectual property will be particularly challenging as the industry increases its adoption of disruptive digital technologies.

“Technology such as 3D printing and drones, for example, allow for vast areas to be mapped – accurately - which in turn allow for more precise designs. Historical data and new technologies converge in the big data space, catapulting the construction industry into the eye of the cyber-risk storm, making it crucial for the industry to address the risk,” says Tshepo.

Underrated Risk

“Climate change seems to be an underrated risk given that large infrastructure projects — power plants, ports, roadways and railways — could be hugely affected by extreme weather events,” says Koketso Shabalala, Senior Broker in Aon South Africa’s Construction, Engineering and Renewable Energy Division.

“Extreme weather events such as super storms and veld fires in drought-stricken areas add an additional layer of risk to a project that affects timelines, costs and exacerbates workforce risk. Weather pattern modelling is crucial to navigate ideal timing on projects and mitigating the increased risk that comes with delays,” explains Koketso.

Concerns over geopolitical tension as a result of ongoing government-sanctioned lockdowns and the resulting economic hardship, necessitates a review of business continuity planning in the face of political unrest. “Putting processes in place to navigate major supply chain disruptions, safeguard lives and property and reduce the risks to business continuity as far as possible is crucial,” says Koketso.

Facing challenges on the horizon

Many industries are entering a “K-shaped” recovery to the pandemic, with different parts of the economy recovering at different rates. “It is important to take stock of how the industry was affected and how processes can be adapted or changed to find a more streamlined approach in future,” says Tshepo.

“Central to this, is changing processes, for example, adopting the use of prefabricated items to allow for less people on site in addition to a ‘plug and play’ approach, that reduces time spent on site. The pandemic is also likely to affect the type of buildings that are being built, debating whether open-plan offices are still viable and affecting the flow of buildings to allow for social distancing,” Koketso explains.

Amid growing global complexity, the convergence of risk factors and increasing integration among coverage lines, participants in the construction industry will need to consider risk in a multidimensional fashion rather than by line of coverage. Leading firms have already adopted this approach and have seen better outcomes as a result. This is where the insights of an expert broker who specialises in the construction sector is invaluable in aiding organisations to combine traditional and more innovative risk mitigation strategies to improve performance and make better decisions.

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About Aon

Aon plc(NYSE: AON) is a leading global professional services firm providing a broad range of risk, retirement and health solutions. Our 50,000 colleagues in 120 countries empower results for clients by using proprietary data and analytics to deliver insights that reduce volatility and improve performance.