The Impact of Construction Inflation Rates in 2024

In today’s turbulent economy, few industries feel the impact of inflation as acutely as the construction sector. Inflation has caused unprecedented material costs, casting a shadow of uncertainty over construction projects, large and small. Alongside material challenges, companies can expect other consequences of the construction inflation rate, such as project delays and increased operational costs.

In this article, we dive into expert insights from Scott Zemberi, director of construction underwriting at Central Insurance. As the construction industry faces escalating challenges in 2024, your company can stay ahead with innovative solutions, strategic foresight, and a comprehensive insurance plan. 

Material Shortages

Scarcity and delays in materials have become commonplace in today’s construction landscape. This creates a dual challenge for construction companies. They face inflated costs and must contend with project delays caused by a long search for materials. This leads to potential financial and customer-relationship strains. 

“The cost of building materials has a big impact,” Zemberi says. A report by the Bureau of Labor Statistics illustrates a significant year-over-year increase in the price of construction materials. The escalating materials prices have become a significant concern for builders and contractors alike. 

However, the issue runs deeper than mere cost. “Sometimes these construction projects take longer than expected because some of the materials are hard to track down and get nowadays,” Zemberi explains. Here are some ways to handle price fluctuations.

Navigating Construction Material Rates

Proactive planning is essential on construction sites to navigate material shortages. Integrating certain technologies and protocols in your workflow can help you stay more informed about shortages and market fluctuations.

Virtual Design and Construction (VDC) Software

VDC merges advanced technologies like Building Information Modeling (BIM) with traditional project management methods. By digitally representing the entire project lifecycle from conception to facility management, your team knows exactly what products and processes are needed.

VDC software is an excellent addition to your logistics plan. It can identify design problems early and prevent last-minute, costly material purchases. In fact, it’s estimated VDC software will save the construction industry up to $100 billion annually by 2025.  

Diversified Supply Chain

Zemberi recommends establishing relationships with a handful of reputable suppliers, giving you alternative options when one supplier can’t deliver. By doing this, you can ensure a reliable flow of materials for your project. It also allows you to adjust to changing markets and unexpected disruptions due to weather or geopolitical conflicts. 

Diversifying your supplier has financial benefits, as can considering contracts with suppliers for bulk purchases. Some materials like lumber, drywall, and concrete are essential for any project. Anticipate shortages by pre-ordering these materials.

Comprehensive Insurance Plan

From an insurance perspective, these costly challenges translate into heightened risks. Insurers take into account the inflation rate for the cost of construction materials, calibrating building limits, deductibles, and other coverage options to ensure they adequately cover potential claims at the start of a new policy term.  

Construction companies should consult their insurance agents to create a personalized and comprehensive risk management plan. “At Central, we’re building a lot of internal expertise and resources for the construction space,” Zemberi describes, “it’s important to get a carrier that understands marketplace issues in the construction industry.” 

Construction companies can lower their insurance premium costs by fostering safer work environments and conducting comprehensive risk assessments. Contact your agent to begin building customized coverage and a personalized plan. 

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Project Delays

As Zemberi mentioned, inflation’s reach extends beyond the cost of materials. Project delays impede progress, increase costs, and strain client relationships, magnifying the challenges for the construction industry.

As inflation drives up costs and increases scarcity of materials, construction timelines become more and more unpredictable. The domino effect is profound: delayed material deliveries disrupt project schedules, leading to increased labor costs, contractual penalties, and client dissatisfaction.

According to a National Association of Home Builders (NAHB) report, over 87% of builders reported shortages of appliances, lumber, plywood, windows, and doors in 2024 that impacted their deadlines. Similarly, the Associated General Contractors of America (AGC) found that 53% of respondents experienced delays due to rising construction, insurance, or labor costs.

Apart from the direct impact on material costs, the inflationary wave is increasing other business expenses. There’s a growing demand from workers for higher wages. Operational expenses, from logistics and transportation to administrative costs like equipment maintenance, are also rising. Construction firms will also find it more expensive to finance their projects as financial institutions are taking a cautious approach with higher interest rates. 

Navigating Delays and Rising Costs

You can take proactive measures to mitigate the adverse effects of inflation on your construction company. Here are some strategies that can help your organization stay afloat in turbulent waters:

Comprehensive Insurance

Your insurance carrier serves as a crucial safety net to protect against inflation’s effects on project timelines. Business interruption coverage can compensate companies for lost income due to delays beyond their control. Builder’s risk insurance covers construction projects for risks such as theft, vandalism, floods, and fires. Pollution liability insurance can protect you against environmental lawsuits that could occur while construction with hazardous materials. 

Learn More: What is Pollution Liability Insurance?

While many traditional insurance coverages can protect you from out-of-pocket costs in an already difficult economic landscape, insurers often provide consultation and risk management services. At Central, we provide expertise and resources tailored to the unique needs of our construction policyholders.

“Construction is our largest commercial lines vertical and our fastest-growing segment,” Zemberi explains, “We’re building expertise to really understand construction clients, contractors, and issues facing the construction space.”

Clear Contracts

Contractual agreements that incorporate clauses to address material cost escalations and delivery delays can protect your company from the financial liabilities of delays beyond your control. In cases of material shortages, Zemberi explains that it is not uncommon for a contractor to make substitutions.

“Maybe the contract between the builder and the contractors does not clearly state what building materials they are supposed to use,” Zemberi says “a contractor could potentially slip in something that’s supposed to be an equivalent product but isn’t.” Lawsuits can occur when a project with inadequate replacements is inspected or someone is hurt due to subpar substitutions.

While liability insurance is an essential shield, it is better to prevent lawsuits in the first place. Ensure clear contracts between project owners and contractors, especially when laying out building material substitutions and how rising costs may affect material choices.

Open Communication

With projects taking longer and building materials and specialty contractors being harder to find, communicating timelines with your insurance agent is crucial. Builder’s risk policies are a great option to cover your building as it’s being constructed. However, project delays can harm your coverage.

“Let’s say you take out a builders risk policy for $3 million, and you start building only to realize because of the cost of building materials, now the value is really $5 million,” Zemberi describes, “Now you’ve got to go back to your insurer and ask them to increase coverage limits to make sure everything is properly insured. Some carriers may not increase your limit at the same rate you agreed to before beginning construction.”

Learn More: Why do I need a Builder’s Risk Policy?

Keep an open line of communication with your insurance agent to prevent unnecessary costs. Include clients and contractors in your communications if timelines change or get longer. Doing so can maintain client relationships so they are not left in the dark and keep contractors updated on the building’s progress so they have clear expectations for their work. 

The Central Difference

At Central, we differentiate through broad product offerings and strong relationships. Our vertical team is focused on construction and dedicated to adding value to our partnerships. Working closely with knowledgeable insurance agents who can assess your specific needs and guide you through finding the right coverage in an unpredictable economic climate is essential.

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