We have previously issued advice regarding the various challenges surrounding building material supply shortages and inflationary pressure. We are now seeing the data emerging on the impact these material and labour shortages are having on real costs and we want to keep our clients updated on the current situation.
In this new report we will cover our experience of the market and associated factors that are contributing to this upward trend in the costs of property repairs.
Statistics vs Reality
We have noticed that there is a widening gap between official, reported statistics around building price increases and the reality we are experiencing. Indices such as the ONS Repair and maintenance output prices suggest that building repair prices have increased by around 5% at the start of 2022. The tender price index and Building cost index have risen by a similar amount but that doesn’t seem to reflect the reality.
There have been some interesting reports from the home improvement sector regarding increasing costs that have been published recently.
- The overall cost of carrying out home improvements increased by 61 per cent between January 2021 and 2022
- The cost of roofing repairs has increased by 91%
- ‘Britons planning to renovate their home this year could face eye-watering bills, as some tradespeople have more than doubled their prices in the last 12 months.
Checkatrade say that they analysed 500,000 real customer reviews to identify the average prices paid for renovations by UK home improvers and found the average person was paying roughly an extra £1,342 for home improvements at the start of this year compared to prices paid at the beginning of 2021.
It is also reported that the big building jobs could be the worst hit, because bricklaying, building work and roofing are recording some of the biggest price rises.
Checkatrade also report that the cost of a general building job rose by 90%, the average roofing job increased by 91% and home improvements involving brickwork, increased in cost by 103%. Employing a plumber is costing an average of 67% more.
Inflation, the rising cost of materials, supply challenges and intense customer demand are all being blamed for the price rises. Global supply chain challenges and transport delays are making it harder for builders to get hold of bricks, blocks, timber, roof tiles, steel lintels, cable trays and trunking, gas boilers and some electrical products - particularly those using semi-conductors and microchips. There are many other reports of specific building material shortages.
Transport costs continue to be higher, with shipping rates still eight to nine times higher than pre-Covid levels and air cargo rates around seven times higher.
In March 2022, wholesale prices for crude oil increased by over 99%, diesel by almost 34% and unleaded fuel by 30% year on year. This follows an existing upward trend since Covid. The concern for construction is that energy use accounts for a third of the sectors manufacturing costs of materials. According to the Construction Leadership Council, price rises of between 5 and 10 per cent have been announced by many manufacturers so far this year, with energy-intensive products having increased by as much as 20 per cent. There is additional pressure following the end of the red diesel tax exemption on 1st April 2022.
With prices being so volatile and unpredictable, a lot of builders are only holding quotes for a few days or only quoting the labour cost, providing budgets only for materials until they pick them up. This means prices are likely to increase during the projects or even between receiving the price and the project starting.
Despite increases in interest rates, uncertainty over a potential recession and even some job security, building contractors are reporting high demand for home improvement work, with some being booked for over 12 months ahead.
What has the home improvement market got to do with insurance repairs?
The residential (includes household property owners) insurance repair market operates in the same space as the home improvement market, with suppliers working across both sectors.
Anything that affects the home improvement market will similarly affect residential insurance repairs.
Insurance repair costs, demand, resource availability and quality are all affected by what is happening in the home improvement market.
If we attempt to ‘over control’ costs, for example by enforcing the use out of date schedules of rates on network suppliers, those suppliers will shift focus to the home improvement market, where there is high demand, rather than risk losing money in the insurance sector.
This is not likely to improve in the short term because the supply of good builders will not increase. We have discussed the shortage of apprentices and the availability of skilled trades previously. We have, in previous papers, also discussed a potential increase in building company failures, so this latest update below from the Official Public Record is pertinent:
Industry sector insolvency findings for England and Wales – Q1 2022
- In the 12 months ending Q1 2022, the construction industry had the highest number of new underlying company insolvencies (3,213)
- The overall increase in company insolvencies in Q1 2022 was driven by a rise in Company Voluntary Liquidations (CVLs), which accounted for 87 per cent of all company insolvencies. The number of CVLs was the highest quarterly number since the series began in 1960
Fewer companies and increasing demand will only feed higher prices.
What can we do to manage the situation?
As alluded to above, relying on a schedule of rates that, even if it was updated a few months ago, is not a viable option. To get the most benefit from a network, we must work with the builders and understand that while they can work to the labour element of a rate, they cannot afford to risk losing money on materials.
One answer could be to allow and agree a percentage increase for the materials element (a good SOR will split labour and materials, so this is possible), depending on the type of work and anticipated duration.
Another might be to tender the labour and plant element and work with a materials budget which is adjusted as materials are secured. Whatever solution is used, the adjuster would be wise to look at how they calculate their reserves for building repairs and take action to ensure that it is as accurate as possible.
One final point
In our last update, we discussed the effect of increasing building costs on an adequate sum insured and how we should calculate the value at risk.
We have noticed that brokers have picked up on this point and warn their customers of the risk of being underinsured due to a sustained rise in construction costs this year. They are advising that as a result, there is an increasing likelihood of significant underinsurance of buildings in the UK.
Mark Coffer of Marrs Insurance Brokers said “We do take our responsibilities seriously and have become more and more concerned at the rising cost in labour, materials and professional fees which has caught out a lot of people. We have now engaged the services of a professional company that provides a desktop survey to give a rebuild cost figure which (importantly) they guarantee as accurate. This service is available to all – we suggest their use to our clientele.”
Underinsurance can have a devastating effect for a policyholder in a claim situation. With reports suggesting that for both residential and commercial property, between 70% and 90% of buildings are insured for the wrong amount (this includes over insurance) and around 75% are insured for 60% of what they should be, the current situation will only make matters worse.
While adjusters can advise policyholders and brokers what the Value at Risk is when dealing with a claim, it could be too late to avoid serious financial impact. Insurers and brokers can have more impact if the subject of an adequate sum insured is discussed before there is a claim.
For more information, please contact Nick Turner: 07736 892148
