Building costs are sky-high – is your insurance up for it?

January 23, 2023

The costs of construction are at an all-time high and aren’t showing any signs of settling down. These soaring construction costs from rising inflation rates, labour shortages and supply chain delays are impacting those in the property market, namely commercial property owners. A report by CoreLogic revealed that national construction costs have increased by 7.3% over 2021. This is the highest annual growth we have seen since March 2005.

While this is welcomed news for the construction industry, commercial property owners are painfully enduring the pinch. With these new challenges hanging overhead, the risk of being underinsured becomes a very real threat for many.

What’s causing the inflation of construction costs?

There are several factors responsible for the current increase in building costs, including:

1. A shortage and backlog in production of supplies due to a halt in manufacturing facilities during the lockdowns

2. Price inflation of building materials, mainly timber and steel caused by material shortages

3. Skilled labour shortage

4. Current state infrastructure projects placing a stronger demand on materials and skilled labour

5. Nationwide construction growth

6. Increase in demand for repair and maintenance works due to recent extreme weather events

7. Rise in energy rates, resulting in production costs of some materials to increase

What does this mean for your insurance?

Unfortunately, when there is a spike in building materials and construction prices, this in turn impacts property replacement value and rebuild costs. For example, if your commercial property was damaged by severe weather and you need to make a claim, the costs to rebuild and repair are likely to be greater than what you had initially calculated when you first took out a policy. The discrepancy between what you are insured for, and the true cost of rebuilding is the culprit that requires property owners and investors to pay the difference between the two sums. It could be a substantial amount considering how steep construction prices are climbing.

Another threat to look out for is supply chain and delivery disruptions, which has caused a significant delay in project timelines. It is important that as a commercial property owner you have a valid indemnity period on your policy to ensure that you are covered up until the job is completed. If you are unsure on how to check this, you can always consult a broker or your insurance provider.

How we can help!

It is crucial that commercial property owners take the time to review their insurance cover to protect their business from unforeseen costs. It’s important to note that insurers are also acting in response to these rising demands. They are likely to revise insurance premium renewals to accommodate the unanticipated costs involved in reinstating the policyholder after a loss. To avoid the risk of underinsurance, we’ll work with you to review your insurance plan and recommend a suitable course of action for your business.

The brokers at EWIB ensures that you are well represented to the insurer and that you get the most out of your deal during these unexpected times. Don’t wait until it’s too late before you act. If you are a commercial property owner, the costs of rising construction prices and its accompanying risks apply to you.

Important Note: All insurance policies have exclusions. Please refer to the Product Disclosure Statement or Policy Wording to decide whether an insurance policy meets your needs.

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