2 ADJUSTINGTODAY.COM If the recent past is any guide, calculating this limit will have to account for the likelihood of escalating cost increases as well as heightened cost volatility. Whether a limit is sufficient may well depend on fleeting circumstances in construction markets. To say this is no easy task is to understate the obvious, especially when risk professionals have no direct control over the two most important factors in disaster recovery: construction costs and demand surge for construction and related services. Cost Calculations The 2020s opened with an “unprecedented surge in construction costs,” according to Clarion Partners, a real estate research and investment firm. According to Clarion, costs for various metal components increased from 40 percent to more than 60 percent from March 2020 through September 2021. Over the same period costs for lumber, plywood, sheet metal, milled aluminum and plastic components all increased by a quarter to a third. Increased costs for building materials came as construction wages increased at an accelerating rate, reflecting a persistent shortage of skilled construction workers. Clarion reports that construction wages rose 5.8 percent from September 2020 to September 2021, nearly triple the 10-year annual average of 2.2 percent.1 Estimating the effect of increased construction costs on insurance claims is complicated by the volatility of material prices due to supply chain disruptions in the wake of the COVID-19 pandemic. Recent experience with natural disasters has produced a heightened awareness of the impact of “demand surge” on insurance adequacy. Demand surge is generally understood to be a sudden and temporary increase in costs for construction and related services following a catastrophic event.2 While risk professionals share a general understanding of what demand surge is, there is far less consensus on how the elements of demand surge — labor, materials, equipment and financing — can be identified and measured for their cumulative impact on losses. CoreLogic, a leading property data firm, estimates that demand surge can add 30 percent or more to reconstruction costs, but the added costs can fluctuate greatly from location to location and event to event.3 WHAT TO WATCH FOR Do reconstruction cost estimates account for cost increases and volatility?
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