Written by: Griffiths & Armour on: 12 Sep 2022
The Impact of Inflation on the Construction industry and Insurance Considerations
With the current rate of inflation at a 40 year high of over 10%, the construction industry is increasingly feeling the effects of the current economic climate. Challenges triggered by Covid-19 and Brexit, in particular supply chain issues, has resulted in a ‘domino effect’ of issues to be tackled by contractors and developers.
What factors are increasing construction project costs?
Raw material shortages and supply chain issues has a knock-on effect on project costs – from the increase in cost of concrete and steel, the material price index for ‘All Works’ increased by 26.4% in June 2022 compared to the same month last year, meaning contractors and developers are having little choice but to absorb and factor in these ever increasing costs.
Delays in getting materials to site means that contractors remain on site for longer, thus delaying practical completion and potentially resulting in additional insurance costs.
Liquidations within the construction sector indicate the severity of inflation with contractors suffering as a direct result of cost blowouts, supply chain delays and labour shortages. Contractors and developers should be mindful of these challenges and set aside reserves to avoid being left vulnerable by lower profit margins, which may ultimately be out of their control. With insolvencies and administrations on the increase Professional Indemnity Insurance policies and collateral warranties cannot always be relied upon – a Latent Defect Insurance Policy (LDI) is increasingly being considered as a mechanism to provide an element of ‘insolvency protection’ post completion of the build.
How will this impact construction project insurance?
The combination of supply chain issues, delays and inflationary increases in costs of raw materials have a direct impact on insurances. The need to revisit premiums and Policy terms and conditions prior to project start up is more pertinent than ever. Changes to the contract value and longer project durations will ultimately increase premium costs prior to inception and potentially at project completion.
Whilst most Contract Work policies include an inbuilt element of inflation protection, this may no longer be sufficient to deal with the costs to reinstate following a damage event. For example a typical standard Contract Works Policy will include inflation protection at say 115% of the Sum Insured.
However, if a two year project suffers significant damage close to Practical Completion it may be 4 to 5 years after cover inception before the project reaches Practical Completion, and as such the inflationary impact needs to be carefully reviewed and the Sum Insured and/or Policy Inflation Limit needs to be set accordingly to reflect this type of scenario.
Will Latent Defects Insurance be impacted?
The impact of inflation is also relevant to Latent Defects Insurance (LDI) market. With inflationary figures expected to be on a gradual increase and peak at 13% in October 2022, projects that have started, or have yet to start in the coming months should expect to see a significant impact on the reinstatement Sum Insured at Practical Completion.
Developers should be mindful of this and also look to revaluate the LDI sum insured on an ongoing basis to ensure adequacy in the event of a loss during the Latent Defects 10 or 12-year period.
Whilst most LDI policies include an automatic inflation provision this is usually capped at 5% per annum so without regular review the Sum Insured could easily be insufficient. All LDI policies are subject to Average Condition so any under insurance may ultimately impact on any claim settlement.
The Griffiths & Armour Construction team has a track record of securing Construction and Latent Defect insurances, such as the insurance placements for the recent Amazon fulfillment centre for Bericote Properties Limited.
The experienced Construction Team can help you navigate the challenges of inflationary pressures on your Construction Project Insurances. To get in touch with the Construction Team, please click below to submit your enquiry and a member of the team will be in touch.