How soaring construction costs could be impacting your insurance
Australia’s construction sector is continuing to boom with growth in the sector exceeding expectations. According to recent forecasts released by ACIF, this can be attributed to the spread of COVID-19 being brought under control and a range of policy measures providing strong stimulus and recovery to the economy. The increase in demand seen over the last 18 months, especially in the residential construction sector has led to a labour shortage with the cost of labour increasing substantially. This combined with a shortage of materials such as timber, fittings and piping has driven the cost of construction up across the board.
Corelogic has released figures suggesting an increase of residential construction costs of 1.4% from March to June this year alone, with a 4% increase to costs over the last 12 months. Says Tim Lawless, Research Director at Corelogic, “With the surge in dwelling approvals over the past 12 months, Australia’s residential construction sector is working through the early stages of what is set to be an extended period of heightened construction activity.”
“The substantial pipeline of residential construction work is likely to keep both building materials and trades in short supply for an extended period of time. I think we can expect housing construction costs to rise more significantly over the coming year as supply chains grapple with ongoing shortages. Higher construction costs will inevitably flow through to higher costs for new homes and renovations.”
These increases to construction costs have broader implications for insurance, potentially leaving property owners and construction professionals underinsured.
Bellrock has observed material and labour shortages impacting project completion times with construction projects taking substantially longer to complete on average. Furthermore, where projects are taking longer to complete there can be an escalation in building costs during the construction period. Such escalation is usually insured by a construction policy however can be limited to 5% to 20% of the original contract value. Should such escalation of costs exceed the insured amount this could leave contractors exposed to additional uninsured costs to recomplete works following an insured loss. Contractors should review their policies to ensure that they have sufficient cover for escalation during the construction period.
For commercial and industrial property owners there are issues in relation to the suitability of their insured values. As rebuilding costs increase, property owners face potential underinsurance in the event of a partial or total loss of their property. Many commercial property insurance products contain co-insurance provisions which severely penalise insureds for under-declaring the value of their property and enable insurers to reduce claims payments as a result. Where there is a significant shift in values mid-way through your insurance contract there may be a need to revisit the values declared to ensure they remain adequate. Engaging a building valuer is the best way to ensure rebuilding values accurately reflect current building values. Whilst valuations do come at a cost, they can provide peace of mind that values remain accurate. There are also online tools available to check current square metre costs of construction which may reduce the financial burden of undertaking valuations.
For homeowners there is an issue in relation to their insurance cover and whether the insured value noted in their policy will cover the cost of rebuilding their property in the event of a loss. Policy holders declare the rebuilding value of their property annually at renewal, and often insurers will automatically increase the rebuilding value in line with the consumer price index. However, in the current environment construction costs are increasing at a faster rate than the CPI. This could potentially leave homeowners underinsured following a total loss.
It is important that you carefully review insured value on your policy and ensure that you are confident that the value declared will enable rebuilding of your property. Use of rebuilding calculators such as Corelogic SumSure are available free of charge to enable you to review your values. Taking the time to ensure your building is adequately insured should form part of your annual renewal process.
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