How Rising Construction and Maintenance Costs Affect Your Insurance Valuation

Construction costs are rising.

Shortages of building materials and labour have increased the price of national residential construction by 7.3 per cent over the past year, the highest annual growth rate in more than 16 years.

Corelogic research director Tim Lawless said the surge in construction pricing had been uniformly driven by an inability to import skilled labour as well as increasing timber costs—notably structural timber, metal products and plumbing supplies.

“There is a significant amount of residential construction work in the pipeline that has been approved but not yet completed,” Lawless said.

“With some materials such as timber and metal products reportedly remaining in short supply, there is the possibility some residential projects will be delayed or run over budget.

“Such a large rise in construction costs over the year, could translate into more expensive new homes and bigger renovation costs, ultimately placing additional upwards pressure on inflation.”

So how does this affect your body corporate?

Building and maintenance costs for body corporates are set to spike.

Master Builders Queensland surveyed its members on material delays and cost increases which found builders reporting significant material delays of up to a month on goods including timber, steel, windows, doors, roof tiles, bricks, electrical equipment and waterproofing insulation.

These are all materials that are commonly used for body corporate repairs. The cost of those items was rising a minimum of 15 per cent across all of those items and in many cases, over 25 per cent.

An even if you can get get materials on time and at a reasonable price, there are issues with finding qualified persons to do the work.

The survey also found delays in builders being able to hire carpenters, bricklayers, glaziers, roof installers, general labourers, plumbers and electricians. Cost increases for these trades were all going up over 15 per cent.

Couples with supply issues, SEQ is expecting unprecedented levels of demand for new projects that is unlikely to slow anytime soon.

On the Gold Coast alone, there are literally hundreds of new developments underway including many massive new towers. That’s a huge drain on workers and resources. Then, the Olympics are coming to Brisbane, further pushing up prices and demand.

As these trends are set to continue for many years to come body corporate committees in QLD will need to adapt and employ strategies that account for rising construction and maintenance costs.

These could include:

  • Minimising the need to get extra quotes – by law quotes are required except in exceptional circumstances. Getting multiple quotes is good practice, However – in these times you may want to reconsider the necessity of gathering up additional quotes when you have perfectly reasonable options on the table
  • Getting organised and book works early – There can be a tendency in strata for allowing to the final OK to commission works be delayed for months while people wait for meetings or look at alternatives. With rising construction costs and tradies booked out these delays could cost you dearly. If you have a quote from a contractor that you think is acceptable, maybe just accept it as you may be better off agreeing to book the works now rather than wait.
  • Stick with reliable contractors – If you have reliable contactors that you have dealt with for years, work closely with them and make sure you get their advice and opinions. Keep them invested in doing good works for your scheme rather than somebody else.
  • Prioritise essential works -consider what jobs actually need to be done and which can be delayed.
  • Getting a new insurance valuation – Rising construction costs affect how much it will cost to replace your building. Strata committees would be wise to instruct a new Building Insurance Valuation to ensure that their schemes are not underinsured.

Insurance Valuations

The Body Corporate and Community Management Regulations requires that a body corporate must be insured for full replacement value, regardless of the original construction cost, to ensure you are properly insured for an insurable event.

There are many additional factors affecting the replacement costs of a strata scheme, these include:

  • Inflation
  • Availability of labour
  • Building costs
  • Quality of finish
  • Shared facilities

This ensures coverage for the building replacement if it is destroyed or damaged beyond repair. The insurance value must cover the amount it would cost to rebuild the entire building, or where damaged; replace elements.

Poor estimation of these costs could result in schemes being under‐insured, and subsequently, owners being unable to afford to replace their building. The small savings made by seeking lower premiums on an under‐insured scheme are heavily outweighed when it comes time to managing your risk and replacing a building.

A rise in construction cost for both materials and labour will affect your building’s insurance valuation and Strata committees would be wise to instruct a new Building Insurance Valuation to ensure that their schemes are not underinsured.