Who profits when construction projects stall?
You’d think a stalled construction project would be bad news for everyone, but that’s not the case. Yes, the workers lose their jobs, developers run out of money, and contractors have a hard time keeping everything afloat, but even with these massive losses, there are those that profit.
When construction is delayed, it’s frustrating, but more than that, it’s expensive. You have legal disputes, shortages of materials, and financial setbacks that can put the project on hold for months or even years. During that time, contractors and investors will try to do the impossible to keep things going, but then there are those who make more money the longer the projects stall.
Some consider delays a win and they turn someone else’s problem into a major payday. Who are they? How do they do it?
Let’s find out.
Who benefits when construction comes to a halt
The construction contractor takes the hit, and so do workers, developers, and investors. But then there are those that may not be causing things to slow down, but they’ve mastered the way of taking advantage of it.
1. Insurance companies
They’re in the business of managing risk, so when delays happen, they’ll find ways of protecting their interests first. If you’re a developer or a contractor, you’ll pay hefty premiums for policies like builder’s risk insurance and liability coverage if you expect to have financial protection when things go wrong. But when they stall, no insurer will rush to pay out the claim. They’ll drag out the process, dispute coverage terms, and look for any loopholes to avoid the big payout. The longer the claim is taking to process, the more money the insurance holds onto, and the more interest they earn on premiums.
As you can imagine, this “tactic” will put an insane amount of financial strain on contractors and developers who are counting on insurance to keep the project alive.
2. Law firms and legal experts
Every construction project has permits, contracts, and regulations. When things don’t go as planned, you’ll need a legal team, and they won’t work for free. If there’s a delay, you can expect a dispute over the contract, claims for liability, and zoning issues that will need a lawyer to sort things out. The longer the case drags on, the more billable hours the lawyers will rack up. Regardless of the case, law firms make money from the uncertainty and confusion that inevitably come with stalled projects.
The worst thing is that developers and contractors can spend even years locked in legal battles, and lawyers on both sides are the ones benefiting the most.
3. Financial institutions and lenders
You need funding for a construction project, so you turn to a private lender or a bank. But when that project stalls, the financial institutions are not losing money because the loan agreement doesn’t pause. Interest keeps accumulating and you still need to make payments.
In some cases, the lender will even charge a penalty fee if you miss a deadline or renegotiate loan terms in a way that gets more profit for the bank. The longer your project drags on, the more money lenders can make through interest and fees. You, on the other hand, sink deeper and deeper into debt.
4. Bonding and surety companies
Surety bonds are required for many construction projects and they act as financial guarantees that contractors will do what they’re obligated to do. But don’t think for a second that bonding companies will rush to help if a project stops. They’ll pay claims under certain circumstances, but they’re also pros at limiting payouts through clauses in contracts and legal defenses.
In a lot of cases, you’ll have to pay huge fees upfront, but once they’re the ones having to make the payment, they’ll delay and try to reduce them as much as possible. Some of them will even find ways to shift liability back onto contractors and developers and make more money while the project stands still.
Conclusion
The worst part of all this is that delays in construction spread through the entire economy. When workers lose their jobs, you have less money circulating in the community, consumers are spending less, and the support programs for the government are under a lot of strain. Cities and municipalities will also feel the effects because there’s less business growth and there’s less taxes collected from property development.
Worst case scenario? A stalled project turns into an abandoned project and leaves behind an unfinished structure that becomes a financial black hole for the developers and an eyesore for everyone else. Over time, this makes construction riskier and riskier to get into, and future investors will look elsewhere, so it becomes a whole cycle.
There’s a way to prevent this, of course, and that’s through a change in policies that will make disputes get resolved quicker and that will limit financial loopholes so that some people out there don’t profit from the misery of others.