Understanding the Consequences of Construction Inflation

Understanding the Consequences of Construction Inflation

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Over the past four years, inflation, labor shortages and the increased cost of materials have resulted in historically high construction costs across the United States. These historically higher costs can have a significant impact on property insurance. When looking at your operations, construction inflation can have a number of negative consequences for property owners looking to insure their buildings, including:

  • Higher property premiums: As construction costs rise, property owners can expect to pay higher premiums for their insurance.
  • Coverage gaps: If a property owner's insurance policy is not updated to reflect the current replacement cost of their property, they may be underinsured in the event of a loss.
  • Difficulty getting repairs or replacements: If a property owner's building is damaged or destroyed, they may have difficulty getting repairs or replacements due to the high cost of materials and labor.

Typically, we’ve seen inflation adjustments to property replacement costs were relatively modest. As evidenced by the chart below, if a property owner started with reasonable initial replacement costs and applied a 2-4% inflation factor annually, that would have sufficiently adjusted replacement costs through 2018.

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But over the past five years, the surges in construction costs have been extraordinary. As with most unanticipated changes to a historical norm, these events usually result in corrective actions being implemented to mitigate the emergent issue. As many businesses discuss consolidating office space, or even return to work policies, there are several actions that companies and property owners can do to protect themselves from the effects of construction inflation:

Know your numbers and keep them current

Once you have good baseline for the replacement costs, it is of utmost importance to use appropriate cost indices and forecasting future cost growth to account for the difference in your baseline costs and inflation’s impact annually on those costs.

Review your insurance policy

Make sure that your insurance policy is up to date and that it covers the current replacement cost of your property.

Set realistic expectations

Your insurance policy is not a capital construction fund. Make sure you have a good understanding of your policy and what is and is not covered. If you’re unsure of what your policy covers, our team can help.

Explore Enhanced Ordinance & Law Coverage

Most insurance policies pay for the property you have in place at the time of the loss, not what you would like to build after the loss. If you have older buildings, explore purchasing additional Ordinance and Law coverage.

Consider inflation guard insurance

Inflation guard is a type of insurance rider that can help to protect you from the rising construction costs.

By taking these steps, you can protect yourself from the financial impact of construction inflation and be adequately covered in the event of a property loss. Our industry experts at CBIZ can help you evaluate your company’s policy. Connect with a member of our team and gain access to more resources here.


This article was written by Ron Acebal, National Director in the tangible asset practice of CBIZ Valuation Group. Ron’s consulting expertise includes the design, development and implementation of property valuation solutions, including customized data collection programs, for various types of entities.


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Over the past four years, inflation, labor shortages and the increased cost of materials have resulted in historically high construction costs across the United States. These historically higher costs can have a significant impact on property insurance.

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