Australia’s construction sector continues to face elevated cost pressures more than three years after the initial disruptions of the COVID-19 pandemic.
Gallagher noted that overall construction costs have increased by over 30%, with supply chain disruptions, inflation, and labour shortages contributing to ongoing pricing challenges.
Material costs remain high despite a recent stabilisation of inflation. Key drivers include energy prices, shipping delays, and global supply constraints – affecting the availability and pricing of core construction inputs such as copper, aluminium, bricks, and HVAC (heating, ventilation, and air conditioning) components.
Labour availability also continues to fall short, exacerbating project delays and cost escalations, particularly in specialised trades.
Compounding financial pressures are the impacts of regulatory changes and public concern over building integrity. High-profile incidents, including the Lacrosse cladding fire in Melbourne and structural issues at Sydney’s Opal Tower, have triggered more stringent compliance requirements.
The increased use of certified materials and processes, while necessary for safety and compliance, has added to contractor expenses.
Gallagher said this environment challenges margins for builders and may prompt operational changes such as staff reductions, deferred investments, or cost transfers to clients. These decisions carry implications for insurers, especially concerning claims exposure and project timelines.
Gallagher outlined a range of risk management tactics for builders and insurers. These include:
Streamlining site operations and enhancing procurement planning can also alleviate pressures.
From an insurance perspective, the firm highlighted the value of key policy types such as contract works, professional indemnity, and construction all risks (CAR) coverage. These products can help manage exposures related to theft, weather events, design flaws, and material cost volatility.
Gallagher also recommends reviewing policy language to confirm whether extensions for project delays or inflation-linked material costs are covered.
Insights from the WTW Global Construction Rate Trend Report echo these concerns, noting that insurance premiums globally are being influenced by project valuations tied to material costs.
The report also highlighted a growing demand for infrastructure to support artificial intelligence and data centre development, which is expanding construction activity in several markets.
Labour shortages remain a key global challenge. In North America alone, construction may require an additional half a million workers to meet current demands. Similar trends are evident in Europe, Latin America, and parts of Asia. The use of inexperienced workers is raising concerns about safety and quality assurance, prompting insurers to more closely evaluate projects during underwriting.
