The word ‘uncertainty’ is once again making its way to the forefront in 2025, if it ever truly faded. The convergence of ongoing global economic and political instability, supply chain issues, and fluctuating demand patterns suggests that construction costs may rise this year.
Construction Cost Inflation Forecasts
According to the Office for National Statistics, construction inflation in the UK showed some moderation towards the end of 2024, after the sharp cost hikes driven by the pandemic recovery and the war in Ukraine. However, the outlook for 2025 points to a return of significant cost pressures. Industry experts estimate that construction inflation could be as much as 3% to 6%, depending on several key factors:
- Energy Prices: Energy costs, while more stable compared to their 2022 peaks, remain vulnerable to new volatility, especially with the ongoing political tensions throughout the world. Materials like cement, steel, and brick, which require substantial energy for production, are particularly at risk of price hikes..
- Labour Shortages: The UK construction sector is still struggling with a shortage of skilled labour, worsened by Brexit and an ageing workforce. To attract and retain skilled workers, wages are expected to rise, contributing significantly to overall construction cost inflation global supply
The Issue of Underinsurance
Currently, many properties are underinsured, with buildings covered for only 63% of their correct reinstatement value. This shortfall continues to pose a significant challenge in the insurance sector.
The impact of rising construction costs on the UK insurance market has been profound, particularly in terms of building sums insured. In 2022, underinsurance levels peaked, affecting 83% of UK properties during a period of unprecedented construction cost inflation and material price increases.
Since then, improvements have been made, and the rate of underinsured buildings has decreased to 76%. However, this still leaves many property owners vulnerable to substantial claims.
To address the risks posed by construction inflation and underinsurance, insurers, brokers, and property owners should focus on two main strategies:
Regular Valuations: It’s crucial for policyholders to obtain professional valuations of their properties regularly, ensuring that the sums insured reflect current rebuilding costs. This should be a standard part of the renewal process.
Education and Awareness: Policyholders should be aware of the dangers of underinsurance and the impact of rising construction costs. For further information please feel free to contact Haden Welbeck.
