France: Rise of costs in construction and claims management expected post-confinement

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Following talks with various organizations and unions within the construction sector, the French government published in April a “Guide to health safety recommendations for the business continuity of construction in the midst of the COVID-19 coronavirus pandemic,” in order to enable business continuity for the French construction sector during lockdown.

Protective measures

This guide lists protective measures as well as health safety protocols which construction professionals are expected to abide by when managing claims after the COVID-19 lockdown is lifted. Nobody knows exactly for how long these measures will be in place, but we are talking several months at the very least.

These – extremely strict – rules mean that businesses must implement significant measures. For instance, under normal circumstances, professionals travel to a site by groups of two or three; each is now required to travel individually. This begs the question: does the company have enough business cars available? Should workers use their private car and be reimbursed for subsequent travel costs?

Another example is material (brushes, tools, etc.). The guide prescribes the equipment must no longer be collective (i.e. a common toolkit), but instead each worker must have his/her individual equipment, requiring businesses to acquire more material.   

An 8% to 15% increase

These measures have an impact for businesses – more time spent on the construction sites, more material to be purchased, as well as extra travel costs. Together, all these elements most likely will cause prices to soar in the construction sector, particularly for renovation work in relation to a catastrophe claim; hence this issue will also impact insurers. Our research indicates that the rise in costs may vary between 8% and 15%. These are significant numbers for insurers, whose technical results are crucial to their financial health.  

Thus, we have carried out a study on this matter, with the support of other members of the Fédération des Sociétés d’Expertise.

There are two parts to consider – smaller and larger projects. On one hand, you have small sites, where the workers generally operate alone, and which constitute some 75% of our activity with insurers. These may be claims for water damage, requiring refurbishment work such as painting or replacement of wall and/or floor coverings. Our group’s conclusion shows an expected 9% to 11% justifiable increase to the quote, including:

  • Equipment (brushes, tools, some 3% of a project’s unit costs): 50% increase, thus 1.5% of total
  • Supplies (paint, wallpaper, flooring, masonry, and various other raw materials, 27% of project costs): 5% increase, thus 0.5% to 1% of total
  • Services (administration and customer relations, 12% of project costs): 30% increase, thus 5% of the total
  • Labor (by far the biggest percentage of a project’s costs, 58%): 7% increase, which includes an added 30 minutes of work per day to clean up, establish protective measures and various other safety protocols. This adds another 4% to the total project costs for a site.

It is conceivable that some businesses may arbitrarily overcharge, thereby taking advantage of the current ambiguity.

On the other hand, these extra costs could reach 12% to 15% on larger projects. These are claims with various services involved, different sites to coordinate, and so on. The situation is more complex in these cases, because more safety rules must be put in place and coordinated in terms of social distancing and teamwork. This means extra delays, which in turn impact the budget of these big sites.

Another issue of course is who will absorb the extra charges? Will businesses have to cover these increases, and thus squeeze their margins? Or will it be up to the clients, knowing that quotes had already been made and accepted by both parties?

Some argue that the cost surge will exceed 20%; as construction experts, we believe this is a significant exaggeration. That being said, there is potential for many companies to be driven out of business due to the COVID-19 crisis. As a consequence, prices would soar dramatically.

Supply and demand

There is another element that further complicates this discussion: the impact the pandemic is having on supply and demand in the construction sector.

It is still too early to assess how many organizations have been affected. Many construction businesses in the French market are quite small and include, for example, a painter, a drywall specialist. These small and medium-sized enterprises (SMEs) are fragile, and many could very well file for bankruptcy. Quite logically, prices tend to increase more and more as the supply is scarcer.  This trend could intensify the aforementioned cyclical increase.

Conversely, the argument could be made that given the anxiety of the current environment, policyholders – individuals and professional organizations alike – might be more cautious and reluctant to undertake repair projects. A decrease in demand would thereby lead to a fall in prices.

It is worth reminding that, at this point in time, we still lack the necessary hindsight to predict both how many businesses will weather this crisis – in the construction sector and other service areas generally associated with insurance – and to predict how the market, individuals and professionals will react when it comes to repair projects.

How much time?

Nobody knows exactly how long the protective measures and health safety protocols will remain in place. However, it will be at least six months. It is difficult to predict how much impact – if any – the following elements might have over time: changes in supply and demand, or the summer period, usually synonymous with slower activity for the construction sector in general.

As a result of the health safety measures, construction professionals need to rethink work habits and set up new patterns for the next few months; all of which could also last longer and thus, significantly change the entire sector.

All of this remains unclear since we are only in the early stages of deconfinement. Sedgwick remains engaged in the conversation and ready to provide guidance to our clients, no matter the outcome. Contact us in the comments section if you are in need of our support. 

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