How does labour availability impact reinstatement costs?

Earlier this year the BIBA Conference highlighted underinsurance as one of the industry’s biggest challenges. This is hardly surprisingly given that Aviva’s Broker Barometer survey, conducted before the event, revealed 73% of brokers are concerned their clients are underinsured. Although it’s a problem that can befall all sectors, the statistics are particularly alarming for reinstatement values. In the development of the BCIS Intelligent Rebuild Cost Platform, analysis of a portfolio of 355 commercial properties found the reinstatement value to be £1.17bn underinsured, which we know is the tip of the iceberg.

It tends to be cases in the residential sector that hit the headlines – stories of families who have discovered their policies don’t provide adequate cover to rebuild their destroyed home are, sadly, all too familiar. But no sector is immune from the impact of underinsurance as all buildings require bricks and mortar – whether a library, school or parish – if the worst-case scenario should occur.

It all stacks up

Typically, it’s bricks and mortar that tend to be at the forefront of people’s minds when it comes to reinstatement values. They do, of course, play a large role in the calculation of the Declared Value. Indeed, the large numbers of cases of underinsurance can be explained, in part, by the significant increase in construction costs over the last five years. As we’ve highlighted previously, reduced productivity, material shortages and increased contractors’ preliminaries have all contributed to peaks in materials indexes. Compared with January 2020, in the BCIS Price Adjustment Formulae Indices (Building) Series 3, there was an increase of 86% in the Concrete: Reinforcement index by June 2022, and of 42% in Softwood Carcassing and Structural Members by October 2021. If these kinds of cost fluctuations are not factored in, it’s highly unlikely the level of coverage will align with the expense of restoring a damaged property.

However, the cost of reinstating a building includes more than just bricks and mortar. While the cost of materials has been impacted by the rise in energy prices and challenges in the supply chain – due to the geo-political and pandemic events of recent years – the availability of construction labour has also been impacted. As the sector faces ongoing challenges related to labour supply, it’s vital that insurers include this key variable and consider the implications for the overall cost of reinstatement.

The exodus of expertise

Labour availability in the construction industry has become an increasingly significant factor in determining reinstatement costs. The supply of skilled and unskilled labour directly impacts the timeline, quality, and overall cost of rebuilding projects, making it a critical consideration for insurers. Several factors are contributing to fluctuations in labour availability. Demographic shifts, including an ageing workforce and declining interest in construction trades among younger generations, have reduced the pool of skilled workers. With over one-third of the current skilled workforce expected to retire over the next 10 years, a recent report by the Trade Skills Index revealed that the industry would require up to 1 million new workers to meet the growing demand over the same period.

Additionally, changes in immigration policies and the effects of global events, such as COVID-19, have further strained the labour supply. These trends have led to a growing scarcity of qualified workers, particularly in specialised trades that are crucial for complex reinstatement projects.

There are certain skills and trades that will always need to be factored into the potential cost of a rebuild – the most immediately obvious are bricklaying, roofing (including tiling), carpenters, plumbing and heating, and electrical engineering. Indeed, these skills fall under occupations that appear on the UK government’s list of occupations that are eligible for a Skilled Worker visa, suggesting they’re the main pain points for recruiters.

The latest data from the Hays/BCIS Site Wage Cost Indices also suggests that skilled trades and M&E trades are in particularly high demand, as these have shown the strongest wage growth in recent times – the greatest annual growth in earnings in 2Q2024 was seen in skilled mechanical and electrical trade placements, with pay 14.8% higher than in 2Q2023.

Indeed, some experts describe more traditional or highly sought after artisan skills such as masonry or dry-stone walling and thatching as an ‘endangered species’ especially in the aftermath of Covid with the exodus of expertise.

Cos Kamasho, BCIS Asset Data Manager, says: ‘The exodus of expertise could cause delays to the reinstatement, which could drive up the costs even more because skills shortages can create an increase in demand, resulting in an acceleration of wages. This is further exacerbated by the absence of a decent training pipeline.’

This vacuum is not a new problem in construction. It’s one that the industry has highlighted for years. The closure of specialist building colleges in the UK over the past few decades has compounded the problem of lower numbers of young workers coming through apprenticeships and training courses, as older workers retire. In addition to this, the lack of real wage growth (since 2008) and record rise in insolvencies hasn’t helped the industry’s reputation as a stable one to work in.

The problems labour on

The government has laid out several strategies to address the labour crisis in the construction sector, which is seen as critical for both housing and infrastructure development. This year, Skills England was set up, a new government body to identify gaps and opportunities in the workforce, with the aim of ensuring new projects can meet labour demands without relying heavily on foreign workers. The new government has also committed to expanding training programs in construction, especially in green energy sectors.

While Kamasho notes that government policies could all have a positive impact on bringing down reinstatement costs, he adds caution that although skills such as bricklaying can be picked up in a few years, they still need supervision. And, as heat pumps, solar panels and other green technologies pick up in popularity and become more widespread, the need for skilled workers who specialise in these areas will increase. There’s already evidence these skills are in short supply. In the run-up to Labour’s election victory, the Chartered Institute of Building (CIOB) called on the government to invest in developing a pipeline of workers with green construction skills that include retrofit, heat pump installation and sustainable modern methods of construction (MMC).

A report from Turner & Townsend in June of this year raised this issue too – highlighting record levels of hourly pay for workers in new green sectors who were picking up £47 an hour, due to the shortage of experts in these areas.

Location, location

Kamasho also highlights that Labour’s push to fast-track planning approvals on urban brownfield sites – which aims to address housing shortages in areas with high demand, such as London and the South-East – could also impact reinstatement costs, potentially on projects in other areas of the country.

In other words, if there isn’t enough local labour because it’s migrated to counties where there’s more consistent work or projects, the added cost of transporting and housing labour could push up reinstatement costs. This is especially true if it takes between six to 12 months to build the house, in terms of the different phases of construction; labour supply challenges aside.

For insurers, these rising costs and delays can translate into higher claims payouts, necessitating adjustments in premium pricing and policy conditions to manage the increased financial risk.

Therefore, it’s important to stay informed about labour market trends and understand their implications to accurately assess risk and set appropriate coverage levels. This can help them better predict potential cost increases and adjust their underwriting strategies accordingly. For example, insurers might need to adjust their models to account for increased labour costs and project delays.

Keep your data up to date

Access to the latest data that aligns most closely to the costs you need to measure can increase the chances of more accurate calculations, as well as helping to make the process more efficient. For example, using data from the BCIS/ABI House Rebuilding Cost Index (HRCI) offers the best protection against inflation because it measures house rebuilding costs. Over the last few years this has had periods of relatively extreme fluctuation – as of September 2024, the index has increased by 42.7% from January 2020. Annual movement peaked at 19.4% in December 2022.

Although the latest data shows housebuilding cost inflation has abated – in 2Q2024, annual movement in the BCIS Private Housing Construction Price Index stood at 0.7%, down from a peak of 15.3% in 2Q2022 – it’s important to use a construction index that most accurately reflects these changes. Using appropriate construction costs, as featured in the 1,100 dwelling models and 650 ancillary models that make up BCIS’s reinstatement data, can help to mitigate the risk of inaccurate assessments, out-of-date valuations, and inflation fluctuations. Providing more reliable, up-to-date data, which reduces underinsurance and can help insurance professionals to reduce their administrative overheads and improve efficiencies, is the driving principle behind our latest service, the BCIS Intelligent Rebuild Cost Platform.

Regulation, regulation, regulation

Looking ahead, the interplay between labour availability and reinstatement costs is likely to evolve, influenced by various long-term trends and emerging factors.

Demographic shifts and ongoing changes in the global workforce are expected to continue affecting labour availability in the construction industry. The ageing workforce and a potential decline in the number of new entrants into the industry could exacerbate existing labour shortages.

Increased regulation and changes to building regulations could also have an impact. As yet, the industry doesn’t know which recommendations the government will choose to implement in the wake of the Grenfell Tower Inquiry Report. But the industry anticipates these changes could filter through to all commercial and residential buildings, regardless of height. For example, several of the report’s recommendations favour tighter regulation on roles that include fire safety engineers. This could incur additional costs, due to training, certification, monitoring and enforcement. It also invites the question – is it possible to scale up these services quickly enough to provide the necessary capacity?

In addition, the pressure for contractors to obtain professional indemnity insurance could also narrow available labour resources – if contractors aren’t willing to become licensed to undertake works on higher-risk buildings.

On the positive side, advancements in technology, such as Modern Methods of Construction (MMC), could offer some relief, potentially improving labour supply in the long term. However, experts have warned they would have to ‘expand considerably’ to have an impact. Although a recent report from Skills England noted MMC’s ‘potential to drive productivity’, it’s not used enough to bring ‘a notable impact.’

Conclusion

It’s clear that underinsurance continues to be a challenge for the industry, in terms of both monetary and reputational impact. According to data published by the Financial Ombudsman Service (FOS), buildings insurance is typically among the most complained about financial products or services – with cases of underinsurance a contributing factor to complaints.

To mitigate the risk of underinsurance, it’s important for brokers and insurers to be aware of the impact of labour availability on reinstatement costs. This can be achieved through using the correct construction cost index and automation tools that draw on multiple data sources to give more accurate reinstatement costs.

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