The construction industry is facing significant challenges due to rising tariffs and inflation, which are impacting builder’s risk insurance like never before. As material costs continue to fluctuate and supply chain issues linger, both contractors and insurers are rethinking how they manage risks, set prices, and plan projects.
Contractors are struggling to predict costs accurately because of the uncertainty surrounding tariffs. This uncertainty is worsened by inflation, which has increased the prices of materials, labor, and transportation. Brian Cooper, a leader in construction practices at Gallagher, highlighted that being able to anticipate these changes is crucial for successfully completing projects. He noted that price escalation clauses have become a standard part of contract negotiations. These clauses allow for adjustments in payments if material costs rise due to tariffs, inflation, or supply chain disruptions, helping to share the financial burden between owners and contractors.
In recent years, builder’s risk insurance has become more complex. This type of insurance covers buildings under construction, and it must now consider that replacement costs are no longer stable. Projects are also getting larger and more complicated, often involving multiple insurers instead of just one. This shift means that negotiations can be more intricate and there’s a greater chance of gaps in coverage if policies are not carefully coordinated.
Another pressing issue is the valuation of builder’s risk policies. Insurers are keen to ensure that the insured value reflects the real-world costs of completing a project, which can change dramatically due to inflation and tariffs. As a result, insurance carriers are scrutinizing projects more closely before agreeing to provide coverage. There is now more negotiation and planning at the outset, with a focus on environmental risks like wildfires and flooding being addressed early in the project lifecycle.
Contractors are adapting to these challenges by securing materials earlier in the process and negotiating payment terms that allow them to manage costs better. They are also using supply bonds to ensure materials arrive on time and at the agreed price. This strategy provides contractors with leverage over suppliers, helping to keep projects on track.
As financial pressures mount, it’s essential for contractors and project owners to engage in detailed discussions about how they plan to manage rising costs and whether their valuations are accurate. Cooper emphasized that treating builder’s risk insurance as an afterthought is no longer acceptable. Instead, insurers expect to see risk management strategies incorporated from the very beginning of a project.
The ripple effects of tariffs and inflation are reshaping how construction projects are insured, pushing for a more proactive approach to coverage. Insurers are demanding greater transparency, and contractors are responding by embedding risk mitigation strategies into their initial planning. Early discussions with insurers and demonstrating effective risk management are now vital components of the insurance process.
In summary, the construction industry is adapting to a new reality where economic factors like tariffs and inflation play a significant role in project planning and insurance. This evolution requires contractors to be more strategic and proactive in their approach to managing risks and securing insurance coverage.