The construction market in the U.S. is in a very real cost spiral, which has serious implications for homeowners and property investors. A Report by Currie & Brown stated that, in 2023, U.S. construction costs increased on average by 4% and were anticipated to further increase by 3-6% in 2024.

Though the trend is evident on a national scale, there is a highly variable impact at the city level. For example, in Chicago, construction costs rose by 3.5% in 2024, while a projected 6% increase was observed in Phoenix. A $10 million project in Phoenix in the year 2023 costs $10.6 million in 2024, while in Chicago the same project runs at a cost of $10.35 million. Cost escalations in other major cities remain similar, including Houston, Miami, and New York, which illustrate rates of increase between 4% and 5%.

These rising costs not only concern builders and developers but also directly impact property insurance. This blog will discuss the various key drivers of rising construction costs, their impact on property insurance, and what steps homeowners can take for their protection.

The Key Drivers Behind Rising Construction Costs

Inflation and Material Costs

Inflation is the leading cause of increased construction costs. Prices of essential construction materials—lumber, steel, concrete—have surged over the past couple of years. Lumber prices, for eg, spiked astonishingly during the pandemic (from $303.40 per thousand board feet in March 2020 to $1,607.50 in May 2021) and have followed stabilization—at levels higher than pre-pandemic including. Demand has driven the price of metals including steel and supply chains have been disrupted around the world. The raw material costs directly affect the construction overhead, increasing the cost of putting up or rehabilitating a home.

Supply Chain Disruptions

The last couple of years have seen unprecedented disruption to the global supply chain from pandemic-related shutdowns to geopolitical tensions. Losses in time for delivery of materials and equipment because of these disruptions have directly affected project costs. For example, delays in construction projects due to shortages of electrical wiring, plumbing fixtures, and even appliances result in higher labor costs and longer project timelines.

Labor Shortages

Huge labor shortages are affecting the construction industry today. The Associated General Contractors of America has indicated that 80% of construction firms are facing difficulties in finding hourly construction positions. With falling wages as companies compete for skilled workers, labor shortages increase construction costs. Labor shortages create inexperienced workers that ultimately lead to inefficiencies and delays, raising overall project costs.

Regulatory Changes

Changes in building codes and regulations—in an attempt to promote energy efficiency and sustainability—have also directed construction costs upwards. Such initiatives are good for the future; however, at present, they usually will call for costlier materials and technologies than before, thus pushing up the cost of construction. For example, the implementation of enhanced energy codes may require high-performance windows or insulation that are more expensive than conventional ones.

How Rising Construction Costs Affect Property Insurance

Increased Replacement Costs

One of the most direct consequences of rising construction costs is increased replacement costs for insured properties. The replacement cost is defined as the amount required to reconstruct or repair buildings to their original state with the availability of new materials and current labor rates. When construction costs rise, the replacement costs, too, climb, thus making it important for insurers to adjust coverage limits so that homeowners are protected sufficiently.

Underinsurance Risks

Due to skyrocketing construction costs, many homeowners can end up underinsured. Underinsurance is the condition in which the coverage limit on a policy is less than the amount it would cost to completely rebuild or repair the structure. Such a condition can expose homeowners financially to disaster funding. Consider a homeowner who bought insurance five years prior with a coverage cap of $350,000. Initially, this sum was adequate for rebuilding. Yet, with escalating material and labor expenses, the present reconstruction price has soared to $400,000. Should a total loss occur, the insurance compensation would fall $50,000 short, compelling the occupier to pay the remainder themselves.

Premium Increases

Rising replacement costs drive up insurance premiums, per insurance principles, which connect rates with rebuilding expenses. Higher construction prices consistently cause increased rates. Homeowners in cities with sharp cost rises, for eg, Phoenix (6%) and Portland (5%), bear significant premium hikes, compared to those in moderately affected ones like Chicago (3.5%). Many major cities exhibited considerable construction cost growth in 2024, with notable increases including:

• Houston (4%)
• Miami (4.5%)
• Minneapolis (4.5%)
• New York (4%)
• San Francisco (4.75%)
• Seattle (4.5%)
• Washington, D.C. (4.75%)

This illustrates the vital need for regular insurance review, so it matches escalating rebuilding expenses.

Extended Construction Timelines

Extended rebuild or repair timelines for properties often result from escalating construction costs. Longer waits for materials or workforce additionally lengthen compensation periods, burdening homeowners temporarily relocated with extra living expenses. Insurance policies typically cover additional living costs, yet if delays surpass those benefits, homeowners must cover extra accommodation expenses themselves.

Trends in Insurance Adjustments

As construction prices continue to climb, insurance firms are altering their policies and pricing methods to address the growing financial risks. The following are some major patterns in how insurers are adapting:

• Inflation-Adjusted Policies: Some insurers offer inflation-adjusted policies so that rising building costs can be addressed. Under these policies, coverage limits are automatically adjusted according to inflation and rising construction costs, which helps mitigate the risk of underinsurance.
• Shift Toward Parametric Insurance: Some insurers are introducing Parametric Policies that payout at the initiation of predefined triggers (e.g., a certain level of storm intensity), rather than traditional damage assessments, speeding up claims but requiring careful policy selection.
• Increased Use of Technology in Risk Assessment: Insurers are using AI, automation, satellite data, and predictive analytics to assess property risks and substantiate premiums. This means better price estimation but could impose larger premiums on certain properties assessed as being high risk.
• Tighter Policy Terms and Exclusions: To curb rising costs, restrictive wording may be introduced, thus reducing coverage for different classes of risks (i.e., limiting payouts for natural disasters, limiting coverage on older homes with out-of-date materials).

What Homeowners Can Do to Protect Themselves

Review and Update Insurance Coverage

Construction expenses vary, and old insurance arrangements might expose homeowners to underinsurance. Annual policy checks ensure that living coverage matches current reconstruction expenses, averting monetary shortfalls. Collaboration with an insurance advisor assists in evaluating a home’s genuine replacement cost and aligning coverage.

Consider Replacement Cost Policies

Opting for Replacement Cost Value (RCV) over Actual Cash Value (ACV) offers better financial security. Actual cash value policies discount depreciation, usually covering less than the actual construction cost. Replacement value policies, despite being slightly costlier, guarantee reconstruction with contemporary materials at prevailing market rates, lessening personal expenses.

Explore Policy Add-Ons

Extra coverage choices may offer more financial stability. Extended replacement value coverage boosts dwelling limits if costs exceed standard coverage. Loss of use insurance aids in financing temporary housing if the property becomes uninhabitable. Ordinance or law coverage covers expenses for conforming to current building codes. These additional features prevent unforeseen financial burdens post-disaster.

Stay Informed on Local Construction Trends

Local labor shortages, supply chain issues, and demand changes affect construction costs. Keeping informed through contractor discussions, regional reports, and insurance updates helps homeowners forecast increasing costs and make necessary policy adjustments. Those in disaster-prone areas should be especially proactive.

Conclusion

Rising construction costs affect insurance policies, therefore raising the chance of underinsurance. Property owners must be proactive, updating their policies periodically and selecting replacement cost terms as well as supplemental insurance add-ons while also staying up-to-date with local developments.

At Gonzalez & Company, we go beyond standard coverage to safeguard your financial security. From protecting against rising rebuilding costs to navigating complex condo association by-laws, we tailor insurance solutions that provide true peace of mind for your personal property. Don’t wait until it’s too late—contact us today to ensure your coverage keeps up with the evolving market and fully protects what matters most.