Material, Labor Price Hikes Driving Increases in Claim Costs

The COVID-19 pandemic is causing a sharp increase in the price of materials and labor and driving increases in property claim costs, experts said during a webinar hosted by ATI Restoration on Tuesday.

“We’ve never seen lumber move this drastically in a short period of time,” said Greg Pyne, vice president of pricing solutions for Verisk’s Xactware.

According to Pyne’s presentation, the price of sheathing materials such as plywood and oriented strand board increased by more than 250 percent from July 2020 to July 2021 and other lumber materials increased by more than 100 percent. Drywall material prices increased by 10.4 percent, interior trim materials 7.8 percent, paint materials by 7.2 percent, carpet by 4 percent and roofing materials by 3.6 percent.

A labor shortage is driving up costs, as well. Pyne said floor cleaning technicians were paid 8 percent more this July than last, remediation supervisors 6.1 percent more, cleaning technicians 7.1 percent more and remediation technicians 5.1 percent more.

“We tend to see 3 or 4 percent in a normal year,” Pyne said. “This year we are seeing more than double that.”

Altogether, a sample basket of materials and labor increased by about 21 percent from July to July, Pyne said.

John Shaw, a senior vice president for Marsh Risk & Insurance Services, said it’s imperative for restoration contractors to be aware of the cost of construction materials in their areas and to communicate with insurers. He said insurers may assist with the process by hiring their own cost-management consultants.

“Insurers are looking at it and trying to forecast what the loss will be as part of their overall reserves they will have to put up for the claim,” Shaw said.

Shaw said contractors should document everything that impacts costs on a daily basis and communicate regularly with insurers.

“Let them know costs are increasing as soon as you know,” he said.

Shaw said he is aware of one large commercial project that was estimated to cost $6 million that came in at $8 million.

“Any delays in the project also impacts the business interruption portion of the claim, which is often the most expensive,” he said. “Keep your insurers involved. Keep your insurers up to speed.”

Shaw said Marsh recommends hiring a construction consultant for large commercial projects.

Pat Harper, director of procurement for ATI, said the rapid rise in material costs makes inventory management more important than ever. He said contractors may be tempted to buy in bulk to make sure they have enough materials on hand, but if they overdo it they risk leaving materials on the shelf, where they may become obsolete before they are put to use. Contractors who buy too little may have to pay extra if they run out of materials and expedite shipments to stay on schedule.

“You got to act quickly on this stuff,” he said. “When something is happening, usually the longer you wait the more you are going to pay.”

On the other hand, Harper warned attendees to be aware of the “bullwhip effect.” He displayed a graphic that showed when material prices rise rapidly, often they drop just as quickly because contractors stock up and only slowly use up their inventory.

“I think I need 10, I buy 20,” he said. “Think toilet paper.”

None of the panelist offered any predictions about when, or if, the current high material prices will start to go down. Pyne said there is one hopeful sign: In the past two months lumber prices have leveled out and there’s been some “downward movement” in the futures market.

But Pyle said guessing about future prices is a “foggy crystal ball.” He said a couple of months ago, it appeared that COVID-19 was under control in the United States, then the Delta variant arrived and infection rates started surging again.

Pyne said generally, it takes more pressure to push prices down than to drive prices up.

“It’s a lot easier to gain weight than to lose weight,” Harper said.