Making the decision to build or renovate a property can be complex. Construction projects big or small have always required careful planning, complex decision-making, and other considerations like costs, contracts, consents and insurance cover. The current economic environment, both in New Zealand and overseas has had a major impact on the construction industry. This is something that every construction project should be factoring in, and whilst most of us are likely aware of labour and material cost increases, it is also very important to make sure that you have the correct insurance coverage, not just at the start of a construction project, but for the duration.
Ever-increasing construction costs
According to Property research firm Core Logic's Construction Cost Index (CCCI), which measures the rate of change in construction costs, building costs have increased at their fastest rate on record in the first quarter of 2022). The annual growth rate also hit an all-time high of 7.3 percent, eclipsing the previous record of 6.9 percent in 2017. According to Corelogic’s report, these sharp increases can be attributed to a surge in new building consents, along with the demand for materials outstripping the supply.
These record increases are occurring due to rising prices of materials, including timber, metal and other structural products, coupled with growing wage costs within building firms. Despite some optimism on labour shortages decreasing as borders re-open and new construction demand tails off due to increased costs and rising interest rates, construction costs are expected to remain elevated throughout 2022 and the trend will likely continue into 2023 as well. https://bit.ly/3EB51I6
Construction costs and delays can impact your insurance cover
When undertaking a construction project, you will arrange a contract works insurance policy. This will cover the work in progress at the site, material transported to the site and material stored away from the site. The cover will also protect against accidental damage prior to completion, up to the practical completion date and often during the defects period.
As with all insurance, it is very important to check you have the correct insurance coverage. It’s just as important to set the right sum insured value for contract works insurance as it is for completed residential or commercial buildings, particularly in the current economic environment.
Almost all construction risks policies have allowances for variation to the contract price due to increases in the cost of labour and materials during the course of construction and during re-construction, however these are standard limits and may not be adequate in today’s environment.
For instance, a 5% inflationary increase may not be adequate for a construction contract starting today and scheduled to finish in 12 months time. Insurers are usually open to negotiating higher limits – you just need to ask your broker to assist you. It will do no good to find out you are inadequately insured at claim time.
Many construction projects are suffering delays due to labour and materials shortages and in some cases construction may stop altogether. Construction policies will not continue to provide cover should there be a total or partial stoppage of work for a specified period. You need to talk to your broker to ensure cover continues.
Making sure you are covered now and in the future
We would always recommend that an independent “valuation” is obtained at the end of the building contract to determine the correct sum insured for the completed structure. Using the final construction cost figure to inform the property’s value relies on the past rather than setting a sum insured for the future.
Making sure that you have the correct sum insured values for your insurance can be complex. Speak with your local BWRS broker to ensure you have the right protection for your construction project, home or any other property you own.