Supply, Demand, and the Construction Cost Crisis

COVID-19 has affected the construction industry in several ways, but none are getting more attention these days than the escalating price of materials. Reasons for the rise in costs vary. Reduced production, supply chain disruptions, tariffs on lumber, steel increases, and last year’s wildfires have all added pressure on supply. Additionally, there has been an increase in demand for lumber with people, spending more time than ever at home, remodeling their current home, or building new. Unfortunately, the resulting price increase on materials has been dramatic. According to the Producer Price Index, the price of softwood lumber has increased 83% from March 2020 – March 2021, plywood has increased 53% and steel mill products have increased by 40%.¹ In a recent Congressional hearing, it was reported that the National Association of Home Builders’ data show that overall lumber prices have tripled, translating into a nearly $36,000 increase in the price of the average single-family home.²

The construction industry is also suffering from labor shortages. The cost of labor is rising. There is concern that the most recent inflation data will also impact the industry. These trends are all impacting the replacement cost values of buildings and business personal property along with builders risk projects.

How can you help your insureds navigate these trends?

Builders Risk Projects:

1. Work closely with builders to secure the proper limits.
   Our underwriting team within Property & Inland Marine is familiar with project limit increase requests regardless of the current economy. However, we are seeing a sizeable increase in limit increases that are less to do with change orders and more a result of rising construction material costs. Whenever possible, secure a budget from the builder to help facilitate the conversation of a proper hard cost limit.
2. Connect your builders with resources provided by the NAHB.
   According to The National Association of Home Builders³ (NAHB), nearly half of polled builders are dealing with lumber price increases by including price escalation clauses in their sales contracts. The NAHB provides tools and resources for builders to navigate the lumber price crisis, such as:
• Escalation Clause Contracts for Lumber Materials
• Understanding Appraisal Approaches
• How Builders Are Dealing with Rising Lumber Prices
3. Connect your builders with resources provided by ConstructConnect®
   ConstructConnect® provides valuable resources from economic news, industry trends, bid process and much more.
4. Understand what Cornerstone Complete® offers.
   An insufficient project limit can cause problems in the event of a partial or total builders risk loss. At Great American Insurance Group, our Cornerstone Complete® policy provides the insured with a 5% project escalation and change order protection. We can provide up to a total of 10%, for additional premium, to give your builder extra peace of mind. Per our policy wording, we will pay the actual increase in loss due to increases in the cost of labor or materials or agreed upon contract change orders after policy inception that increase the completed value of a covered project. Keep in mind, this is meant to be a backstop in the event of increasing construction costs. Setting a realistic and accurate limit at policy inception is still the most important method of protection.

Property Coverage:

Agents should be reviewing the replacement cost values for all buildings and business personal property. Insurance to Value is critical in making our insureds whole again at the time of loss.

1. Use valuation tools such CoreLogic® Commercial Express, 360Value® or e2Value® to establish current replacement cost values with your clients.
2. Seek independent replacement cost appraisals from outside appraisal firms, especially for a historic building.
3. Review business personal property values and have discussions with your client’s what it would take to replace that piece of equipment, machinery, inventory, or furniture in today’s marketplace. These discussions are critical for long term client’s whose values have not been increased over the years.

We appreciate the role you play in ensuring appropriate coverage for your clients and we’re happy to discuss any concerns you may have. Please reach out to your dedicated GAIG Property & Inland Marine underwriter for assistance!

¹ Producer Price Index - https://www.bls.gov/news.release/ppi.t05.htm

² Congressional Testimony, House Appropriations Committee - https://www.youtube.com/watch?v=chAS_gI-lag&t=2380s

³ Navigating the Lumber Price Crisis - https://www.nahb.org/advocacy/top-priorities/material-costs/options-for-builders