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The rising cost of construction: understanding the impact on insurance
15 August 2022
Now, more than ever, it is important to set and maintain sums insured at the correct level if you are to avoid the risk of underinsurance. Building costs are increasing at an alarming rate.
A number of factors have come together, not least the global pandemic. After an initial delay, the construction industry continued to build during the first lockdown, with suitable, and potentially costly provisions made for working in a Covid-secure manner, which led to increased demand for building materials.
This, combined with the lengthy delays associated with production of materials, has led to demand outstripping supplies with a resultant increase in costs. Add to this the issues arising from Brexit; trade deals under negotiation, the loss of European workers and drivers etc, and a falling exchange rate. Other external influences have come into play, such as the increase in fuel costs and the situation in Ukraine.
Examples of the rising cost of materials
Some items are showing significant increases in cost, natural stone costs have shot up by over 15%1 over the last 12 months, bricks by around 9.5%1 and all things timber are showing an increase in excess of 30% year on year, all of these, of course, used extensively in residential buildings. In all, this has led to building cost inflation running at around 12%1.
And it’s not just buildings. The Retail Price Index and Wholesale Price Index, collated by the Office for National Statistics, are both showing increases of about 13%.
1Building Cost Information Service, PAFI index.
Building Regulations
New Building Regulations came into effect on 15 June. These primarily relate to energy efficiency requirements, such as improved insulation, the inclusion of air source heat pumps and other forms of heat and power, and the requirement for all new builds to install electric vehicle charging points.
Once an accurate sum insured is set, it is important that this is reviewed and kept up to date by a suitable mechanism, which takes the (construction) market conditions and inflation into account. An insurance policy is usually index-linked to protect against inflation, and the House Rebuilding Cost Index2, has been adjusted to ensure compliance with the new regulations.
2 ABI/Building Cost Information Service