The escalating cost of property, business interruption and public liability claims across Australia
May 2024
Please note: this discussion paper is provided for general informational purposes only and should not be construed as formal advice of any nature. All data within should be considered approximate and indicative only.
This insights paper follows our first dedicated claims inflation paper two years ago in April 2022, with the next iteration provided to our industry connections in August 2023.
In our previous papers, we largely focused on property claims and detailed the key factors contributing to escalating construction costs. These factors included material and labour shortages, supply chain challenges, increased shipping costs, as well as surges in demand caused by the severity, scale and frequency of natural catastrophes. Largely, the drivers for the rise in construction costs remain the same and you are welcome to go back and read our April 2022 paper here, or the August 2023 edition here.
Crawford is pleased to share with you this latest update which we have streamlined, so you can spent less time getting up to speed. We have brought together a range of credible publicly available data, accompanied by insights ascertained from our Contractor Connection builders and suppliers. We focus on the here and now, facts and figures, to give you an up-to-date sense of construction cost trends at this very point in time.
In addition, we are pleased to share market intelligence from some of our Crawford experts about the reasons for increased costs and challenges across both business interruption claims and public liability matters.
Building Cost Index still outstripping CPI
According to the Australian Institute of Quantity Surveyors (AIQS), the latest available Building Cost Index (BCI) figures show a continuation of previous trends, in that BCI continues to outstrip the general Consumer Price Index (CPI).
Note: The BCI is intended to provide an indication of long-term fluctuations in general building costs in the various capital cities. The figures do not represent any specific type of project, nor are they likely to be indicative of very large or very small projects. The AIQS BCI does not represent work in country localities and remote areas. It is approximate and should be treated as indicative only. It is published by AIQS for interest only and is not intended to be relied upon.
Brisbane & Canberra remain highest construction cost arenas
There has been no change over the past 12 months in terms of the locations where construction costs are highest.
As previously noted, the ACT has historically been one of the highest cost regions thanks to a range of factors including capacity of industry vs demand, freight costs for the majority of materials, as well as general labour costs. The same issues prevail in a number of inland regional areas where there are general shortages of qualified labour and additional supply chain costs.
In early 2023 Brisbane started breaking from the pack to record significant jumps in cost and this has not changed either. This followed a property price boom which can often create an environment where development then follows with confidence. Add to this, the fact that the Queensland building and construction industry has been near or at capacity due to other factors including rebuilding after natural catastrophes, and this has culminated in Brisbane becoming a more expensive place to restore after a loss.
According to independent global construction and property consultancy Rider Levett Bucknall:
"The rollout of significant state government projects (health, defence and corrections) in Queensland is proving to influence the construction market in general; the industry is stretched across all layers (labour, subcontractors, head contractors and consultants) and there do not appear to be sufficient resources to adequately service the projects.
Construction periods are increasing as a result. The cost of labour is rising higher than inflation. As a result, although the rate of increase in construction cost is slowing, there will remain a considerable increase in 2024 and beyond.
All of this before the Olympic infrastructure has started its influence."
....it goes on:
"Construction costs have risen significantly since 2020 (>30%) which has impacted contractors and sub-contractors on fixed price contracts and as a result there has been several significant insolvencies. This has caused a ripple effect through the market, further impacting on contractors that are not insolvent, but the loss of key sub-contractors results in financial stress on their affected projects."
In its quarterly update published in April 2024, Rawlinsons Cost Management had this to say: "As we settle into 2024, it is clear that the single biggest challenge facing the industry at present is a lack of skilled labour. The industry needs to find new ways of enticing people into the industry and providing them with adequate training to enable them to prosper in their careers."
In terms of the outlook for 2024, Rawlinsons said:
"The outlook for the construction industry across Australia in 2024 is a mixture of positive and negative. There is currently a steady pipeline of construction projects throughout all states and territories, which is encouraging. On the flip side there is a lack of adequately skilled workers available within the industry to meet the current and projected demand which will continue to push up construction costs which are already putting a lot of strain on project viability.
"Although interest rates have steadied, they are still at historically high levels. The high cost of finance effects the feasibility of projects from multiple angles. The impact of this is particularly evident in the private sector, with many projects on hold or scrapped completely. Publicly funded projects continue to prop up the industry due to record levels of investment. However, a recent review by the Federal Government of the Infrastructure Investment Program recommended the cancellation of 82 major projects."
Relevant context for the coming years
Other major Australian infrastructure projects (including the defence building, Western Sydney Airport, and Melbourne's suburban rail loop) are expected to put added pressure on the construction sector. In addition, there is the federal government's highly publicised housing goal which targets 1.2 million new homes by 2029. BuildSkills Australia was established by the federal government to work with industry to find solutions to the workforce challenges facing the construction, property and water industries. It said in March (which made front page news in the Sydney Morning Herald and The Age) that Australia would need an increase in residential construction workers from 590,000 to 680,000 in order to meet the housing goal. This illustrates just how much pressure will be on the building sector in the coming years. Read more here: Australia skills shortage preventing Labor’s housing goal (smh.com.au)
This month (May 2024), in commenting on Australia's 1.2 million new homes target, the Chair of the National Housing Supply and Affordability Council noted: "Even if we fixed all the other problems, we still wouldn't have enough construction capacity given the number of people in the sector, the very low productivity, the lack of innovation." Read more here: Australia to miss target of 1.2 million new homes by 2029, according to State of the Housing System report - ABC News
According to the Rider Levett Bucknall 4th Quarter 2023 Australia Report, construction cost escalation has stabilised from the peak levels of 2022, but remains a significant concern for the sector.
The Producer Price Indexes published by the Australian Bureau of Statistics (shown in the below graph) illustrates the cost of building materials over the past 15 quarters. This tells us:
While timber has typically been the biggest mover in recent times, it appears to now be plateauing.
Metal and concrete/ cement are the only materials which have recently decreased in price.
All other materials are still rising, albeit at a lower rate than what we saw in the prior year.
Contractor Connection Builder Survey
Throughout March 2024, and for the second time in the past 12 months, we surveyed members of our Contractor Connection Managed Repair Panel. We asked them for their insight and lived 'on-ground' experience with regard to availability of materials and the cost of tradespeople.
Availability of key building materials
When we compare the survey results from August 2023, with the most recent survey this year, it tells us that:
The availability issues remain unchanged when it comes to brick supplies, electrical appliances, hot water systems & plumbing, hardware, kitchen supplies, flooring, cement, and bathroom supplies. Our members are reporting delays of between one to four weeks for these materials.
Paint has not been problematic to source and that remains the case today.
There has been an improvement in being able to quickly access plastering products, glass and roof sheeting compared with August last year, although minor delays are still being experienced.
Cost of tradespeople
More of our Contractor Connection panel members are reporting that the cost of engaging the following types of tradespeople has increased since August last year:
Tilers
Plasterers
Bricklayers
Joiners
Painters
Legend: Blue = March 2024 Red = August 2023
Since August 2023, most members have not seen costs increases with:
Plumbers
Carpenters
Office Staff
Site Managers
Roofers
Estimators
When it comes to Electricians, our survey did not show any clear trend. Our members appear to be having very mixed experiences when it comes to the cost of electrical labour.
We also asked our Contractor Connection panel members...
Q: Are you currently experiencing any labour shortages from the trades listed?
The results below indicate that builders are feeling more challenged around carpenters and tilers compared with six months ago, while things have eased when it comes to getting access to roofers.
Q: Rank the below challenges to your business in order of severity.
These latest results were consistent with our results of August 2023.
"Unfortunately, there is widespread evidence of building companies, which made significant losses on fixed-price contracts during the inflationary period, now attempting to recoup those losses by excessively inflating prices (quotes are often double what they should be).
Even for insurers that have existing builder panel arrangements in place, this trend reinforces the relevance of considering the use of Contactor Connection on regional claims where no panel builder is allocated.
It also highlights the importance of effectively managing a panel to ensure national panel builders are not simply subcontracting to excessively-charging private builders without properly scrutinizing costs."
Jacob Hughes, Building Validation Team Leader, Crawford Contractor Connection.
Market intelligence from our team to yours ...
Disagreements now common about the level of projected business growth in the context of BI claims
Insights from Crawford Forensic Accounting Services
"The substantial spike in construction costs, that occurred after Cyclone Seroja in Western Australian in 2021 and the mass flood events in Northern NSW and Queensland in early 2022, has moderated considerably. However, the knock-on effects are still being felt.
A significant concern is on longer tail claims, which arose during those above mentioned events, but where the price surge was not reflected in recommended Reserves. This has resulted in claim cost increases late in the claim life. In instances where reinstatement was delayed, this situation is exacerbated and has led to compounded growth in reinstatement costs. Our contacts across the market are reporting that as final settlements are calculated, some nasty surprises are on the way.
On the business interruption claims front, there is an unfolding dynamic centred around the level of projected business growth in the current volatile market. We are seeing similar cost overruns on business interruption claims stemming from reinstatement periods being longer than initially forecast.
Although now abating, with general inflation surging over the past two years, it has led to surges in revenue (and costs) for many businesses. The combination of post-covid trading patterns where turnover has surged, added to a price hiked environment, means we are seeing arguments for substantial trends in business growth, sometimes argued at 25% growth or more.
There is no doubt that after many years of comparatively stable growth in many businesses, there is far greater volatility and more room to argue for substantial growth trends. Where excessive growth trends are being argued, this is making it much more challenging to agree business interruption losses.
It is important to note that Crawford generally agrees that a growth trend is appropriate, but we rarely agree to the same extent argued by some claimants. A recent claim I reviewed is case in point; we are perfectly agreeable to a growth trend of about 10%, but the claim preparer is chasing 25%+. The impact of such differences is substantial, often running to hundreds of thousands of dollars."
Graham Peters, National Executive Adjuster/ Head of Class Actions
The cost of settling public liability claims
Insights from HBA Legal
"There are quite a number of factors contributing to the steep rise we are seeing in the cost associated with casualty cases. I have one client in which 48% of claims are now considered large claims (ie claims over $150k). It was nowhere near that level just a few years back. Some of the reasons for the increases in claim value include:
1.Cost of living and inflation: the cost of medical care and treatment for which plaintiffs are claiming in casualty cases has increased. Doctors are being forced to charge more to compensate for the increased cost of doing business. And while these costs have gone up, Medicare reimbursements on those amounts have remained static. The situation is the same when it comes to the cost of domestic assistance and home maintenance which are all costs that feature in personal injury claims.
2.Health system delays: it is taking longer for plaintiffs to receive medical treatment. We are seeing people on waiting lists for much longer and this prolongs the time it takes to settle claims. The evidence becomes stale and new evidence needs to be obtained. The longer a claim takes to settle, the more it ends up costing.
3.Cost of living pressure and increased community knowledge of the claims landscape: with the amount of information publicly available on the internet with just a few clicks of a button, claimants are becoming much more knowledge about their rights. This is driving more people to seek the help of lawyers to maximise compensation which, in turn, increases costs. Where previously “simple” claims might have been handled and then subsequently settled before lawyers became involved, we are now seeing higher rates of engagement of lawyers by claimants, and increased litigation of claims which historically could be resolved by the TPA or internal claims departments before having to be defended in Court.
4.Systematic challenges: in some jurisdictions, the threshold for certain heads of damage are indexed, yet costs caps and penalties are not. Therefore, there is more incentive for lawyers to encourage their clients to pursue litigation for a “good case” as there is less risk that their recoverable costs will be capped. This is a significant shift from five to ten years ago where costs were capped on many more claims because the value of the claim was much lower. The difference can be tens of thousands of dollars. A recent case on point was slip and trip matter where the plaintiff’s lawyers costs, up to the point of a settlement conference (not including disbursements), were around $230,000.
5.”No win no fee”: these types of fee agreements tend to encourage plaintiffs to “roll the dice” even when there is fairly strong evidence in support of the defence. Whilst these types of fee agreements have been in place for decades and are nothing new, our experience is that we are seeing more enthusiasm from plaintiffs to run these types of cases to trial."
Iona Sjahadi, Partner & National Practice Group Leader (Casualty & Commercial)
Other risk factors in the construction sector
Insights from our Construction & Engineering unit within Specialty Loss Adjusting
"The lack of skilled labour in the construction industry is not confined to any one country; it’s a global problem right now. But, within Australia, the lack of current housing availability, in terms of owning or renting, is creating issues because even if Australia could entice skilled labour from overseas, the lack of available housing means there is very little chance of being able to house that overseas labour. Housing approval rates recently decreased to their lowest levels since 2012, falling by 10.4% in Q3 2023. This will remain a significant problem in planning new major projects, which in turn will drive longer construction periods and therefore increase risks associated with those projects. The high cost of financing projects within the private sector, brought about by high interest rates and inflation over the past few years, is placing pressure on contractors to reduce potential delays. Unfortunately, what that can lead to is structural defects that are not being fully investigated and properly remediated. Therein lies the risk because those defects won't reveal themselves until much later. What I’m describing is especially notable in traditional construction contracts where the developer or principal is responsible for the design. This can lead to situations where that developer is not willing to delay the project to fully investigate the cause and may instead implement a remedial solution that does not fully address the failure mechanism. Insurers seeking to apply an exclusion, such as market standard defects wording “DE” (UK CAR Group defect exclusion) or "LEG” (London Engineering Group defect exclusion), can be left with a situation where their appointed experts are not able to fully investigate cause in instances where remedial repairs have already commenced, or are left with identifying a different cause or causes to that considered by the developer or contractor, to which a remediation solution has already been adopted. Design and Construct contracts are also prone to significant risks associated with a lack of resourcing by the professional consultants engaged by the contractor. Adequate resourcing by professional consultants, in particular engineers, can often only be achieved where there is less budgetary constraints on professional fees.
David Boots, National Technical Head, Construction & Engineering/ National Executive Adjuster
Being in business with a claims management provider, focused on the right things, is critical to your success...
Mitigating the risks of claims inflation
A systematic approach to managing every aspect of the claims journey is helping Crawford clients get a firmer grip on claims inflation costs.
Never before have we seen so many independent factors combining simultaneously to drive claims inflation. In these unprecedented times, Crawford’s focus on claims management efficiency has never been more valuable to our clients.
The economic environment and the disruption stemming from factors including COVID-19 have created a string of knock-on effects that mean claims are not only more expensive, but also can take longer to settle.
Property damage costs have surged, as hampered supply chains have restricted available resources and led to a spike in the price of many building materials. Sums insured are sometimes proving inadequate, leading to disputes or difficult conversations between insurers and their clients about reinstatements, policy limits and indemnity periods.
While there are some aspects of inflation beyond the insurance industry’s control, at Crawford, we see opportunities to control the cost of the claims process through proactive management. At the core of our approach is technology, managing all the services needed to work towards efficient restoration and an unerring focus on ensuring policyholders receive the optimal response to a loss.
Decisions we make on deploying the right adjusters and contractors at the right times are critical to the duration and cost of the claims cycle, and the customer experience. From the first notification of loss, automation plays a valuable role in claims segmentation and resource allocation.
Applying a laser focus to every aspect of the customer’s step-by-step experience of a claim, we are constantly innovating to streamline and accelerate the process. For example, we partner with insurtechs to use 3D modelling and imaging to speed up property claims.
A key tool in combatting claims inflation is our managed repair solution, Crawford Contractor Connection. It enables claims managers or insurers to deploy resources quickly and efficiently, as needed, by assigning contractors centrally from a pool of professionals, reducing supply-chain risk.
Contractor Connection’s great value is in building the right partnerships for us to deliver to clients. All the contractors are vetted, and the network enables them to connect directly and efficiently with the policyholder. It’s a system that breeds trust.
The benefits of the managed network model are significant, particularly in this inflationary environment. Work that might have taken weeks to get done can now sometimes be done in a few days. Dealing with trusted partners results in greater consistency and reliability, producing more accurate estimates, better timeline management and fewer errors, revisions and return visits. It reduces expense and accelerates restoration.
Claims spend during the restoration process is another area in which proactive claims management can mitigate the effects of inflation. Actions that can help to control costs include responding quickly to estimates, which may be valid for only a few days in a volatile pricing environment; enhancing scrutiny of the scope of work in estimates; and using multiple suppliers and transport options when possible.
Innovation is a way of life at Crawford. The challenges of inflation provide further motivation to us, as we continue to reimagine the claims ecosystem for the benefit of our insurer clients and their policyholders.
About Crawford & Company
Working with Crawford means staying ahead of claims challenges with innovation that moves you forward and specialised experts at your side, at every stage of the claims journey.
We are known for constantly uncovering new solutions to make handling claims easier and more cost-effective.
For over 80 years, Crawford has been trusted by brokers, insurers and corporations. We are the world’s largest publicly-listed claims management business, operating across 70 countries.
Today, Crawford is the only provider in Australia to offer services across the entire claim lifecycle – from ‘first notification of loss’ through to litigation when necessary, and everything in between:
Property Loss Adjusting
Specialty Loss Adjusting (complex property; commercial; marine; liability; construction; power & energy; forensic accounting)
Catastrophe Response
Cyber Incident Response
Managed Repair (Contractor Connection)
Building Consultancy, Quantity Surveying, Forensic Engineering (CRD Building Consultants & Engineers)
Third Party Administration (Crawford TPA)
Legal Services (HBA Legal)
Key contacts
At Crawford, we are committed to restoring lives, businesses and communities impacted by losses around the world.
Given the range of inflationary pressures our clients are experiencing, that commitment extends to working with you to help manage claims costs more effectively via a range of expertise, technologies, platforms and networks across our organisation.
