Increase in large-scale projects adds to construction risks

Construction “megaprojects,” generally defined as $1 billion or more, have proliferated in recent years as sectors from technology to manufacturing undertake ever-larger endeavors, industry sources say.

These projects bring with them large-scale risk management and insurance challenges, such as completing large insurance placements while facing increased input costs.

The number and frequency of $1 billion-plus construction projects has multiplied, sources say.

Ed Totten, Philadelphia-based profit center head, excess liability construction, for Axa XL, a unit of Axa SA, said that five to 10 years ago, large-scale construction projects occurred at a rate of four or five per year.

“Now, you see three to four per quarter” across industries including technology and manufacturing, Mr. Totten said.

“Data centers are huge,” he said. With the added cost of the technology hardware and cooling equipment necessary for such facilities, “they get to a billion dollars really, really quick,” he said.

The automotive, aerospace and chip manufacturing sectors are also active in large building projects.

“We are seeing a record number of billion-dollar projects. In fact, we probably see a billion-dollar project a week, if not every two weeks,” said Patrick McBride, Dallas-based head of construction property for Zurich North America.

In addition to data centers, the manufacturing sector, including electric vehicle manufacturers, electric vehicle battery manufacturers and the broader semiconductor sector, together with the demand for artificial intelligence and cloud computing, are driving the growth, Mr. McBride said. “That’s really seen a massive boost,” he said.

According to the U.S Census Bureau, construction spending in October was estimated at a seasonally adjusted annual rate of $2.174 trillion, 0.4% above the revised September estimate of $2.165 trillion, and 5% above the October 2023 estimate of $2.071 trillion.

During the first 10 months of this year, construction spending totaled $1.815 trillion, up 7.2% from the $1.693 trillion for the same period in 2023, according to the Census Bureau.

“We have definitely seen the increase in the megaproject,” said Rob McDonough, New York-based U.S. construction practice leader for Marsh LLC. He noted “the onshoring initiative with chip manufacturing facilities” as well as the electric vehicle sector and large infrastructure projects, including airport and rail.

In addition to physically larger and more complex projects, inflation and input costs have driven up the value of many larger projects, Mr. McDonough said.

Since February 2020, construction costs have risen almost 40%, according to Mr. McDonough.

“The values of projects are getting larger because of inflation; things like labor and other input prices are just more expensive. A job that might in the past have been $700 million is now well over a billion, just with inflation and the increase in input prices,” he said.

As the projects get larger, individual lines of coverage extended by insurers have shrunk, sometimes from as much as $25 million to as little as $10 million, leaving more work to be done to put together ever-larger coverage towers. Sources emphasized that there is enough capacity in the marketplace for project owners and others to complete placements, albeit with more effort.

“It’s definitely more work to stitch together the towers, but there is plenty of capacity,” Mr. Totten said, adding that line sizes have been reduced.

“Years ago, you could put up $25 million chunks. Those $25 million chunks have been cut down to $10 million chunks,” thus a $100 million tower will now require more participants.

“So, there is definitely that strain; a little bit more work on the brokers’ part,” Mr. Totten said, adding that larger projects could require multimillion-dollar coverage towers.

Marsh’s Mr. McDonough said brokers are doing more in order to complete coverage towers, in some cases tapping global capacity from London or Bermuda markets for the largest projects.

Data and analytics are also part of the calculus, according to Zurich’s Mr. McBride, as some project owners opt to purchase insurance limits based on projected maximum losses rather than a project’s total value.

“So, a lot of these buyers aren’t necessarily buying the full total insurable value of the project, typically because estimated maximum loss scenarios are something less than that,” Mr. McBride said.