How Insurance Costs Make NYC Construction So Expensive

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1:38Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal. And I'm Tracy Alloway. So Tracy, everyone is like very into affordability these days and the cost of living and all that stuff. But I think, you know, there's all kinds of things you can do and whatever. But it seems like one fundamental thing, which is probably true, is whatever we're talking about, whether it's building infrastructure for public transportation, whether it's building offices, whether it's building houses, like there's various costs involved. But one is like just the cost of construction and the cost of construction is very high.

2:11It's hard to imagine affordability improving much on anything. Right. Does that seem fair? Yes, absolutely. Absolutely. I can't really debate that point. But it does seem like construction is this like one area where so many different things come into play. So you have the cost of basic materials, which have gone up, especially since the pandemic. You have the cost of labor, which has also gone up since the pandemic. You have the cost of insurance, which has also gone up since the pandemic. You have regulations, which we've done many, many episodes about the added costs from the permitting process for various things.

2:45It just seems like it's this bucket where you can throw all these different factors in and then get this kind of like reinforces itself and just makes it even more expensive. Yeah, totally. And then, you know, you sort of hit it with the insurance, but also just like cost of financing. Right. Because like as interest rates go high. Yeah, I forgot financing. That too. It's a big bucket. It's a big bucket. And like we know that construction is an area across the economy, not just in New York City, where we talked about it with residential housing. There's a bit of productivity growth. Right. Right.

3:13So like there's been like no productivity growth. According to at least one paper I read, I think it was a Richmond Fed paper. I will have to go back and check. But it's a really unusual industry in the sense that you haven't actually seen. You know, we don't have robots building houses yet. We don't have robots building houses yet. So I don't know. You know, I think we need to learn more. You know, sometimes you see these viral statistics like, oh, the MTA spent 60 million dollars on building an elevator or cost three million dollars to build. Seven million installing those plastic fins on the subway turnstiles.

3:45I'm not even sure that qualifies as construction, but seven million. Millions to build a bathroom, which is not fun if you have little kids. All kinds of things. Anyway, we should do more about why it costs a lot to build and maybe whether there's something that can be done about it. Absolutely. Let's do it. Well, I'm very excited to say we really do have two perfect guests today. We're going to be talking about the high cost of construction, more infrastructure and stuff like that in New York City. We're going to be speaking with Elizabeth Crowley. She's the president and CEO of the Building Trades Employers Association, also known as BTEA, as well as Michael Capasso.

4:18He is the president and CEO of CAC Industries, Inc. So, Elizabeth and Michael, thank you so much for coming on Nodlots. Thank you for having us. Yeah. Thank you, Joe and Tracy. We are grateful for the opportunity to talk today. I represent over 1 ,200 contractors in the BTA who are building our skyscrapers, our subways, building commercial buildings, hospitals, schools, about$65 billion worth of work annually. And tell us about CAC Industries. What's your background, Michael? CAC is a public works heavy highway contractor based in New York City and Queens. We work for the public agencies, Port Authority of New York, Department of Design and Construction, Department of Environmental Protection, MTA, Battery Park City.

5:06Did you do the Highline as well? Yes. That's amazing. How did you know that? I do some research before I come on this podcast. I know a lot of people don't think so, but, you know, a little bit. Okay, let me ask the first question. Let's just get it out of the way. but your organization represents unionized workers, and I think your company is also unionized workers. A lot of people are going to hear high cost of construction in NYC and immediately go to the union factor. What is your response to that? Well, our members are employers, so they're really businesses. We're a business association, and our members are employing over 100 ,000 workers.

5:43And we're proud that we're union contractors. We're the good guys. And there are a lot of non-union contractors out there that are racing to the bottom. We're paying for benefits and wages. And that's just part of the cost of construction. Really, what we're looking at doing is reforming costs that are more controllable, the costs, the hidden costs that go into construction, such as construction insurance. Definitely want to talk about construction insurance and all this stuff. But again, And just on this point of like how much is, quote, hidden cost versus how much is just labor. Maybe, Michael, you could like sort of break down or either one of you break down how we should think about like in a given project, when people see these big numbers, how much should people think about the labor component specifically versus measuring these these other costs?

6:32Yeah, I mean, I would say typically labor ranges 30 to 35 percent of the total construction cost. But getting back to your original statements about union and sometimes people think that raises the cost of construction, I would actually take the counter argument to that. All the public works contracts in New York and the utility contracts are subject to the city or the state prevailing wage laws, which the union's rates are in line with labor law 220, which are in the city contracts. Those are wages and benefits you have to pay the employees. So it's not the union wages that are costing too much money.

7:10They're in line with all the rules and regulations of the city and state. When we think about union wages and why maybe there's this misconception, yes, compared to people that are not paying union wages, these people are paying good, honest wages and benefits for the work they put in during the day. There are people who cut corners who don't pay that fair market rate, which is where that kind of concept comes from. And look, there's a lot of cost to the delays. And when we look at our government leaders now, we have a new mayor in the city of New York who believes that we should pay baristas$40 an hour.

7:47So when Mike talks about the cost of union labor, it's not much more an hourly rate. And these are inherently dangerous jobs. But we have a mayor that wants to build more abundantly, wants to cut the time it takes to build. So the land use process from two years down to under six months. And we support that. And the stars are aligning also with the governor. You know, she has an ambitious plan to build a new subway or railway from Brooklyn to Queens. We haven't built like that in like over 100 years. She's in her budget going after environmental review. I mean, environmental review should only take a few months.

8:26You can see that process sometimes take well over a few years, some bad cases, five years. And so what we're doing here as an industry leader, the BTA, we're looking to reform insurance costs so that we can not only build more abundantly, build faster, but bring down the cost. And this is a substantial cost. We found out from a recent report that nearly 10 % of construction costs are wasted in New York as opposed to any other state, even expensive states like California. The cost of insurance is only about 2 % for the total project cost. Well, we're spending upwards of 10%, 12%. Definitely want to talk about insurance.

9:08But you said something interesting there that just reminded me. You said delays add to the cost pressure. This might be a dumb question. But why is that? because I think back to like my own home construction projects. If I have a contractor and he says this is going to take six weeks, but then he gets caught up on another project and it ends up taking eight weeks, the cost usually doesn't go up. It's just frustrating for me because I have to live in a construction site. Also, I want to say my contractor knows I have a podcast. He's a very good contractor. Delays rarely happen. So thank you very much.

9:39But why would that cause additional expenses? Well, just sheer time. I mean, what can be controllable? certainly the land use process. Before representing the BTEA, I was a New York City council member, so I served for nine years. And a quick case, by the time it goes to the local community board, the borough president's office, and then comes to the council with the best lobbyists happens within two years. And so if the mayor could get that narrowed down and the council speaker is also pledging to reduce the time to a window of less than six months, that's 25 % of the average. And so that's significant time saved.

10:17That's something that we should be able to control. And if our government leaders want to control it, that's real reform. I'm not surprised at all to hear about delays, particularly environmental review. People talk about this. Let's actually talk about it a little bit more granularly. So you get some project that you want to do. I don't know, maybe something with a highway or something like that. And you have some timeframe or some window that you think you could get this done. And then we always hear, delays, right? What drives the delays? Who intervenes and what are the processes by which like these calendars get very extended?

10:49There could be design errors or omissions in the bid documents. So when you actually go out to commence construction and do your preliminary work, the drawings don't match up with actual field conditions, which then result in changes to the contract. And that process can be very lengthy. So not only have to document the changes. You then, as a contractor with one of the public agencies, need to negotiate those changes, then get it approved. Depending on what the agency is, it could be with the controller's office in the city of New York, or if it's at the MTA with the board or whoever approves it at the MTA.

11:24And all those steps take time. While those delays are being incurred, contractors are then experiencing indirect overhead costs that are assigned to the project while no productive work. Explain that. What are these indirect overhead costs? Project managers, project supervision, safety directors, quality assurance personnel. So their salaries and their fees continue to run. You can't reassign them to another project while they're waiting. Correct. They're assigned to a project. You don't know when those processes will come to an end. So it could go very expeditiously. It could be delayed longer depending on how complex the changes are.

12:03So that project staff sits there in theory underutilized. And then, as is our contractual right, we will file a claim with that contracting agency for those additional costs. Coupled with that, and I don't know how these costs are calculated, the agency internally also has those same costs for the people on those projects, whether in-house staff or through third-party consultants, a combination of the two. So those costs all get compounded while these changes happen. One of the last projects I funded as a council member was to pay for turf in a park, just like a running athletic field replacement, simple replacement.

12:45It was funded fully in the budget. I left the council in 2017. They only cut the ribbon on that project being fully completed just in 2024. So what happened in those seven years? What are they studying? You buy the turf, you stick it on the ground, you're done. How would you describe what happened in those seven years? field replacement. Then the contractor came out to the site. There was a lot of surface repair underneath that needed to happen, underlying, you know, just, you know, uneven surface or something like that. They sent it back. I had to go back before design review council. I mean, it really is something so small and so simple that shouldn't even cost as much as it does, gets to leave for far too long.

13:28And we need real reform in city government. I believe government leaders are finally addressing this as an impediment to building abundantly, really. Yeah. So this just reminded me, this is something else I wanted to ask, but when you mentioned site reviews, is there something unique or sort of inherent about the way New York City is laid out and built and its geography that also makes it more expensive? I'm thinking like in Manhattan, obviously we have crowded buildings. Is some of Manhattan on reclaimed land? I can't remember now. Well, Battery Park City is all reclaimed land. There we go. Reclaim land.

14:02And it's mostly an island with few ins and outs, right? So I imagine there are some restrictions on how much material you can actually get into the city. Does just the physicality of the city make it more expensive? Yeah, all that's built into the contract costs. So when we're getting vendor quotes for different types of materials that will go into a construction project, most of the manufacturing base is not within the five boroughs, right? So it's coming either from upstate, out on Long Island, New Jersey, maybe Pennsylvania, southern New Jersey, you have the cost of that transportation into the five boroughs, right?

14:38So if you're a vendor who's manufacturing somewhere in central Jersey, well, you probably can make multiple deliveries within the state of New Jersey, where maybe that same freight carrier can only make one delivery a day into the five boroughs. By the way, Ken Burns' brother, he made a great documentary about in New York. It's like a 10 hour, 11 hour documentary. And there's a whole section on the speed with which steel got from the Bethlehem steel mill to build the Chrysler building or something like that. It's just an unbelievable logistics. I imagine it'd be a little bit slower today.

15:30UKG. Their HR, pay and workforce management tools help business leaders empower their people. Because when work works, everything works. Learn more at ukg.com slash work. Hello, I'm Stephen Carroll. I'm in Brussels, where many of Europe's biggest decisions get made. And I'm Caroline Hepker in London. We're the hosts of the Bloomberg Daybreak Europe podcast. We're up early every weekday, keeping an eye on what's happening across Europe and around the world. We do it early so the news is fresh, not recycled, and so you know what actually matters as the day gets going. From Brussels, I'm following the politics, policy and the people shaping the European Union right now.

16:10And from London, I'm looking at what all that means for markets, money and the wider economy. We've got reporters across Europe and around the globe feeding in as stories break. So whether it's geopolitics, energy, tech or markets, you're hearing it while it happens. It's smart, calm and to the point. And it fits into your morning. You can find new episodes of the Bloomberg Daybreak Europe podcast by 7 a.m. in Dublin or 8 a.m. in Brussels, Berlin and Paris. On Apple, Spotify, YouTube or wherever you get your podcasts. Let's get to insurance and all of that stuff. You even brought us a nice report.

16:48Reading material. Scaffold law, economic impact, which evidently, even though on the cover of the report has a picture of a scaffold, is not about scaffold. Not just about scaffold. Not about scaffolds per se. Per se. But what is the scaffold law and why is this like an important priority of yours? Well, look, if a worker was to fall off the scaffold, then the scaffold law would apply. And it's to any height related injury. A New York contractor, a New York City contractor is held 100 percent liable. And in 49 other states, it's comparable negligence. So what we found through that economic impact study was that every$100 million that is wasted on frivolous claims, when you look at reinvesting that into the economy, there's$140 million output.

17:36And that amounts to about$55 million in wages and over 600 jobs. And we look at big projects like the president wants to build Penn Station that's estimated to be$7 billion in cost. If we were to put comparative negligence on that project, we could save over$500 million, half a billion dollars. So just so we understand the difference between comparative negligence and absolute liability. So if I'm a construction worker working on a skyrise or something and I'm not wearing my helmet and I fall off a 60 story building, I would be dead. But let's assume that I get injured. You'd probably be dead if you were wearing your helmet too.

18:14I would probably be dead. All right. If you were wearing your helmet too. A three story building. Yeah, okay. Or one story. Okay, but I'm not wearing my helmet even though my employer says I should be wearing a helmet. And then I, you know, file a claim. The absolute liability rule basically says that you can't divide blame between the company and the worker. Is that right? So instead of being 90 % at fault for my own injury because I wasn't wearing a helmet and I got a head injury, the company is now 100 % at fault. That's absolutely right. And in other states, they do comparative negligence.

18:48And it's really driving up the cost of insurance, so much so that insurers don't even want to write insurance in New York anymore. The market's limited. Tell us about the insurance market for you, because this is a good thing for us. So, I mean, there's zero purchasing power. Contractors make a significant investment in safety. I promise you there's nothing more important to the contracting community than for every employee to go home safe to their family, loved ones, or whoever that may be at the end of the day. I know everybody cares about that. But when we go to renew our insurance every year and the large insurance carriers look at what this market for them is considered one of the or the least favorable market to write insurance, so much so that carriers don't even want to write insurance in this market anymore.

19:39And if they do, deductibles are really high. Rates are really high. So on a percentage base of revenue, we're talking about 5, 6, 10x other states with much higher deductibles. So now contractors carry the cost of those deductible payouts in their bids, which goes into these public work bid numbers. So that's where you exponentially see the higher cost of construction. But it actually, take it a step further, all the subcontractors and vendors that are going to be working on our jobs also have the same problem. And typically the subcontractors are smaller contractors by either volume or revenue or employees.

20:25So they're typically paying a higher premium on a percentage basis. So those numbers are also baked into our contract pricing. Yeah. Our report, really, when we say contractors in New York are paying 10 % of total construction costs to insurance, that's 500 % more than other states. Where in other states, it's only about 2%. And then, as Michael mentioned, the subcontractor, they get hit the worst. On average, if you're a concrete subcontractor or a steel painting contractor, you're paying 15 % to 20 % of your total volume of work, and it's unsustainable. So New York is the only city or only state, city, state that still has this law in place.

21:07Is that right? Yes. What happened in other states when we saw it go away? So the last state to reform the so-called scaffold law, absolute liability standard, was Illinois in 1995. So this is 140-year-old law. It's antiquated. It's broken policy. Even both the Democrats and the Republicans, when you speak to them one-on-one, they know this is fail policy. And the interesting thing, Illinois, the number of fatalities declined after they put a comparative negligence model in. So those that say it's a, you know, you have some trial lawyers, then they really, it is a catch count for the trial. That was going to be my next question.

21:52So if everyone agrees that this is an antiquated law, who's actually standing in the way? We're definitely going to get an email after this episode. And they're like, your guests are totally biased. It's going to be from some lawyer. And they're like, come on and do a follow up. But this raised the question, OK, the law has been around for over 100 years. So why not? I mean, like, I can understand that that might raise. Yes. OK, New York is going to be a higher cost state. That doesn't explain the surge per se. Has something changed in the last 5, 10, 20 years? I mean, New York used to do a lot more building or used to build a lot.

22:27Has something changed such that the law has more teeth or bites more than it did? I mean, again, you talk about the disappearance of certain insurance carriers. The law existed 50 years ago, right? Right. When I first started my business a little over 30 years ago, you know, insurance was an add-on on the bid where you didn't really focus about it. We're talking about 1%, 2 % of the contract price. And that held true maybe up until even 10 years ago. And in the last 10 years, we've seen a significant rise in the cost of insurance. And I think it directly correlates with frequency of claims, third-party claims, payouts of those claims, and how either a judge or jury awards damages in those cases.

23:16There's been well-documented cases of staged construction accidents on sites. What Michael said is absolutely true. In New York, for scaffold laws, the bodily injury claim settlements for scaffold laws are six and a half times the average of other claim settlements. The sheer volume has been increased by tenfold. But we're talking about in 15 years, and that's why these insurers are leaving. You know, why now? Why do we think we have a real opportunity? not just because we have this economic impact report that shows us exactly how much we're spending, because government leaders are finally talking about the fraud and abuse that's happening.

23:56Our governor and her state of the state last month called on insurance reform for the automobile industry. Now, half of the consumers in the state are car owners, right? They're driving. They could relate to us paying so much more. But we're paying 50 % more in car insurance compared to every other state. But our contractors are paying 500 % more. And the governor had touched upon fraud and abuse, just like Mike said. The governor says we need to address that. We need to lower litigation costs. And mind you that these are auto insurance claims that are much, much less than the scaffold law claims.

24:33And we need to fix this. We need reform. So this is a step in the right direction. And we're really focused on reform in Washington right now. There's movement there. There's a lot of support on this big federal infrastructure package that's a part of a surface reauthorization transit bill that gets reauthorized every five years. It pays for big projects like a Second Avenue subway or major roads and highways, bridges. And it's a must-pass bill. And we think that we'll see reform there first. And we're very hopeful that reform will come soon in Albany. How would you actually go about reducing litigation costs?

25:11Because my assumption is as long as you're doing like a jury process, it's going to be pretty expensive unless you go to something like arbitration. Yeah, well, the litigated costs, one would say it goes to jury. But all of these insurance companies right now are just afraid to get that far in New York State. So they settle pretty quickly. One insurance company, Tresman Insurance, they filed five different RICO cases in recent years. Probably I've heard them say that they invested over$16 million to do personal investigations to stop fraud and abuse. And they say that because they were able to get so many claims dropped by showing the fraud that there were bad actors, they saved over$2 billion.