Construction costs are rising. This means that projects are becoming more expensive – and that’s if everything goes as planned. The surge in buildings costs also means that insurance coverage limits may need to be raised. If limits are not increased, you might find that you don’t have enough coverage if something goes wrong.
Here’s a look at why construction costs are rising, how it impacts insurance coverage, and what property owners can do to manage the situation.
How Much Are Building Costs Rising?
The biggest price increases have been seen in lumber costs. The National Association for Home Builders says that lumber prices have surged more than 300% since April 2020. This increase in materials costs has caused the price of a new single-family home to rise by almost $36,000.
Although lumber prices have seen the most extreme price surges, other costs have gone up, as well. Construction Dive says that an Associated Builders and Contractors analysis revealed an increase of 15.6% for iron and steel prices between January 2020 and January 2021. These price increases have set off a domino effect, resulting in increased costs for everything from steel studs to drywall and vinyl siding.
Skilled Labor Shortages Add to the Problems
The construction industry has been reporting concerns over skilled labor shortages for a while now, but these difficulties appear to be increasing.
The Q1 2021 Commercial Construction Index from the U.S. Chamber of Commerce says that 85% of contractors report moderate to high levels of difficulty finding skilled workers. This is an increase of 2% since the fourth quarter of 2020. Additionally, 46% of contractors have a high degree of concern about whether their workers have adequate skill levels, an increase of 10% since the fourth quarter of 2020.
The skilled labor shortage can have a significant impact on daily operations. The reports says that, among contractors who are dealing with skilled labor shortages, 61% experience challenges meeting project schedule requirements, 59% put in higher bids and 34% turn down work.
This is an issue of supply and demand. Right now, the demand for skilled construction workers is high, and the supply is low. This is resulting in higher bids. It may also result in delays. This can lead to more price increases, on top of the buildings materials price increases happening now.
Why Are Building Costs Increasing?
Inflation means that some degree of price increase is to be expected, and right now, economists are talking about high global inflation rates. However, there is more to the story of rising building costs. Several factors have contributed to the extreme surges happening now.
Wildfires take some of the blame. The National Interagency Fire Center says that wildfires burned more than 10 million acres in 2020. In 2019, wildfires burned about 4.66 million acres, and in 2018, wildfires burned about 8.77 million acres.
Supply chain issues have also been a problem. In March 2021, the Suez Canal was blocked for six days when a massive containership became lodged in the waterway. According to the BBC, about 12% of global trade goes through the Suez Canal each day, so this blockage had a significant impact on the supply chain.
Congestion at ports and subsequent delays have also caused supply chain problems. In April 2021, Business Insider reported that 21 ships were waiting for a spot to open at the Los Angeles and Long Beach ports, and some ships had been waiting for weeks. The problems have been going on for a while, and they reached a peak in early February. The trend of mega containerships, which take longer to unload, as well as an increase in consumer demand, may be contributing to the congestion.
Lumber tariffs are also being eyed as contributing to the rising costs. The U.S. Chamber of Commerce has recently suggested doubling the tariff on Canadian lumber, raising it from 9% to 18%. According to Fortune, home builders have expressed dismay over the idea.
The COVID-19 pandemic is likely exacerbating many other issues, including supply chain and labor shortage problems. The Q1 2021 Commercial Construction Index from the U.S. Chamber of Commerce says 80% of contractors have reported project delays because of COVID-19.
The National Association of Home Builders says that a record number of builders reported material shortages in a May 2021 survey. More than 90% of builders said they were experiencing shortages of appliances, framing lumber, and oriented strand board. Other shortages were also widespread.
How Does This Affect Coverage Limits and the Coinsurance Clause?
Between rising materials costs, labor shortages, and supply chain issues, construction projects are costing more. Your property valuation and insurance coverage must adjust accordingly.
Higher insurance limits may require higher insurance premiums. Considering all the other rising costs and the impact that this has on budgets, property owners may balk at paying more for insurance. However, failing to do so may make things much worse in the long run.
All construction projects face risk, including property damage, breach of contract and bodily injury liability. Appropriate insurance can cover these risks, but only if the limits are high enough. If prices have increased and your insurance coverage limits have not increased to match, you may find yourself in a tight spot if you ever need to file a claim. If the loss is more than your limit, you could end up having to cover the difference out of pocket.
Furthermore, some property insurance policies include a coinsurance clause that is triggered by underinsurance. If your property is underinsured and you suffer a loss, the insurance payout will be subject to an underreporting penalty.
What Should Property Owners Do?
According to Bloomberg, lumber prices are expected to drop by the end of the 2021. If this happens, it should provide some relief to contractors and property owners. However, events like the COVID-19 pandemic, massive wildfires, and the Suez Canal blockage can impact building costs in unpredictable ways.
Given the extreme price fluctuation and unpredictability, property owners need to verify that they have up-to-date valuations and the correct level of insurance coverage.
Here at Hotchkiss Insurance, we have a dedicated team to monitor changes in the construction market and make sure that you have the correct level of insurance coverage. Contact us to review your commercial and personal property insurance policies.