By: Wes Rose and Sarah Metcalfe

Introduction

Despite construction inflation settling in the years immediately following the COVID-19 pandemic, construction inflation is again increasing across Australia.¹ In addition to construction inflation increases, we are also seeing an increase in the quantum of construction claims.

Various factors are contributing to this, including labour shortages, the ongoing shortage of certain construction supplies impacted by global conflicts, construction insolvencies, and a soft insurance market. In this article, we look at how these challenges are impacting the quantum and resolution of construction-related claims and how they can be tackled.

The current status of construction cost inflation in Australia

Construction expenses continue to rise at a rate faster than general consumer prices², with construction cost escalation being a primary driver of claims inflation in Australia.³

The following table sets out construction cost inflation across Australia for the last three-year period. The table highlights that the upward construction cost trend is particularly pronounced in Brisbane and Perth, “where demand, freight challenges and labour shortages are compounding cost pressures”.⁴

Source: Global Construction Cost Performance – ICMS 2024, Turner & Townsend

The ongoing volatility of supply costs, availability of materials, and labour shortages are key contributing factors to high construction cost inflation. While the cost of some supplies, such as timber and steel, has declined since 2022, other costs, such as cement, have increased significantly over the same period.⁵ Australia also faces a rise in fuel and raw material costs due to the ongoing conflicts in Ukraine and the Middle East.⁶

The cost of transporting goods to Australia is passed down the chain, and these transportation costs have increased following insurers either raising war risk premiums or excluding cover for conflict-related incidents altogether.⁷ These market conditions are causing an increase in marine-related insurance and prompting ships to re-route to avoid conflict areas.

Availability of supplies is also a real problem. A survey undertaken by Crawford⁸ showed that while sourcing some materials such as cement, plastering products, hot water systems, plumbing, and hardware has improved since August 2023, almost all other essential building materials are experiencing delays and shortages.

On the labour front, it is estimated that there is a shortage of some 90,000 construction workers in Australia.⁹ This situation is unlikely to change over the short term, with the Federal Government planning to reduce the number of skilled worker intakes from 26,260 places in 2024–25 to 20,350 in 2025–26.¹⁰

This plan, if implemented, will only deepen the labour shortage problem, particularly where the Federal, State and Territory governments are heavily committed to investing in infrastructure and residential projects across the country. Take the National Housing Accord as an example, under this scheme, governments have committed to building 1.2 million homes by mid-2029.

In addition, low unemployment rates are driving up labour costs in Australia¹¹, and high consumer inflation means there is sustained pressure to raise salaries¹², with wage growth expected to reach 6% this year.¹³

The factors contributing to increased quantum of construction claims

The answer to this is multi-faceted. While construction inflation for the reasons summarised above is a contributing factor, it is by no means the sole cause.

Construction-related insolvencies are rising nearly 21 percent year-on-year in Australia.¹⁴ In 2024, 3,217 construction firms went into administration, and this number is expected to grow in 2025. There has been an increase in insolvencies of subcontractors and SMEs, which often operate on thin margins and are highly exposed to material and labour cost fluctuations.¹⁵ These insolvencies can have a domino effect, resulting in project delays and incomplete work.

The soft insurance market is also playing a part. In Marsh’s Construction Insurance Market Update 2025, Marsh reported premium reductions of between 5 and 15% in the first half of 2025, including a decrease of 5% in contract works premium and 10% in construction professional indemnity. A competitive insurance market means underwriters are more willing to offer terms they wouldn’t offer in a hard market and either increase or remove sub-limits altogether.

We are seeing broader coverage terms that are unexpected. On contract works policies, this means unexpected claims for loss by principals under a broadly worded extension for “cost of maintaining normal business operations” might cover losses that wouldn’t ordinarily be covered under policies written in a harder market. In turn, the cost of the claim to insurers is going to be higher than it would have been under a similar policy only 12 months ago before the market softened.

Trade and remedial contractor availability is also impacting the cost of claims. Because of the trade and remedial contractor shortages, these contractors are often tendering for work in a less competitive market. This leads to inflated tender pricing (although contractors could legitimately say in response that they are simply building genuine risk factors into their prices). The high occurrence of natural disasters in Australia feeds into this problem. It means an already reduced pool of contractors and trades are in demand not only for new projects but by insurers for re-construction work following disasters such as floods and fire.

In addition to these issues, we are seeing policyholders and claimants in the construction sector become more sophisticated in their claims for loss. Private claims preparers are being used more often by policyholders and claimants, including contractors and developers. This can tend towards higher claims for cover both under first-party policies and in claims against insured sub-contractors and consultants. Insurers in turn are then required to invest in lawyers to interrogate claims of loss to ensure losses being claimed are covered losses or properly flow from the alleged wrongdoing.

The ways insurers can mitigate against these risks

Whilst some of the factors influencing construction cost inflation and increased quantum in construction claims are likely to be around for at least the next few years, there are some ways in which insurers can mitigate against these increased costs and exposures:

• At the underwriting stage, interrogate QA, QC and risk exposure (including upstream and downstream exposure on projects) of proposed policyholders.

• Interrogate claims for loss through the use of loss adjustors, lawyers and careful review of documents supplied in support of claims.

• Source multiple quotes for rectification works.

• Work quickly to interrogate, assess and determine claims or disputes involving insured claims.

We acknowledge Madison Martin, Paralegal and her research contribution to the article.