Risk in Context Podcast: Risk management priorities as inflation impacts construction projects

From the skyrocketing price of steel, timber, and fuel to the significantly increased cost of skilled labour, the global construction industry has been hit hard by the current inflationary environment. And as the insurance market adjusts to inflation, insureds are facing higher costs for coverage.

In this episode of Marsh’s Risk in Context podcast, Richard Gurney, global head of construction within Marsh Specialty, talks to Kelly Outram, head of global contractor development at Marsh, and Gaurav Kapoor, the strategy and operations leader for global construction. They look at the different ways in which inflation is impacting the construction industry and projects and discuss actions that contractors and project owners can take to address multiple risks.

Listen here to their engaging and timely discussion and be sure to view the snapshot of the latest domestic figures and market conditions here in Australia below.

Australian construction picture

While it is a huge positive that the Australian construction industry is experiencing high levels of activity, thanks in part to ongoing public and private investment in infrastructure projects, Marsh recognises that the current inflationary pressures present particular challenges and opportunities for our clients. Many are dealing with these issues as they continue to manage pandemic impacts, the spike in energy prices, labour challenges, and supply chain disruptions. 

Surging inflation
In Australia, inflation is growing at its fastest pace in 20 years and the cost of living is front page news. According to the latest data published by the Australian Bureau of Statistics on 27 April, the annual inflation rate surged to 5.1% in Q1 2022 from 3.5% in Q4 2021, surpassing market estimates. And while OECD global forecasts predict the rate of inflation will fortunately moderate going into 2023, leaders in Australia are more cautious. In an extremely rare interview on 15 June, Reserve Bank Governor Philip Lowe told the ABC that he expects inflation may reach close to 7 % by the end of the year and not fall until the first quarter of 2023.  

Rising building and materials costs
The latest Consumer Price Index data shows the construction costs of new dwellings have recorded their largest rise since September 2000, following the introduction of the GST. Price rises were driven by high levels of building construction activity combined with ongoing shortages of materials and labour.  

Meanwhile, new figures from the Australian Bureau of Statistics (ABS) Quarterly Producer Price Index, of March 2022 show that Input prices to the house construction industry rose 4.2%  in the last quarter and 15.4%  over the last twelve months in line with rising costs and increased demand for building materials such as timber, board and joinery (+20.6%) and other metal products (+16.2%).   Notably, Output prices also rose 2.9% in Q1 2022 and 10.1% over the past twelve months, representing  “the largest annual increase since the [ABS] series began”.

Materials supply is again a driving factor. The ABS says that the increased demand for the tightening supply of resources is placing upward pressure on prices across all construction sectors. The quarterly price movements by class were: House construction (+4.9%). Other residential building construction (+1.8%), Non-residential construction (+2.0%).

Contractors operating under fixed price construction contracts evidently face particularly heightened risks of costs blowouts, contract breaches, insolvency and underinsurance in the current environment of increased material costs, supply chain delays and labour shortages.

Labour challenges
Labour shortages are having a significant impact on the Australian construction industry. New property remuneration research shows nearly 9 out of 10 building and construction companies are experiencing a skills shortage^[1] leading many to offer pay rises that are more than double the rate of inflation, just to retain the workers they currently have. And the latest construction costs index report of global consultancy Arcadis^[2], forecasts that by 2023 there will be more than 100,000 unfilled roles in the sector. 

In New South Wales and Queensland, shortages are already clearly evident with huge numbers of trades needed to respond to reconstruction efforts in regions devastated by the recent historic floods. 

Where to from here?
So where does this leave us in terms of insurance? How can contractors and project owners start to take steps to address the multiple risks?  Listen to our podcast above to learn more from our international experts and reach out to your local Marsh advisors today.