Hidden Figures: The Rise in Construction Costs and Insurance
In its most recent construction cost review, BCQS International noted that between 2020-2022 construction costs (covering all properties categories) rose across the Caribbean within the range of 13-30% subject to territories reviewed. Curacao experienced the lowest increase of 13.10% and Anguilla the highest at 29.99% with Barbados averaging a 16% rise in costs over the three years.
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Barbados has long been considered a high-cost jurisdiction largely because most materials used in construction must be imported which in turn attract high rates for duties and taxes. In 2020 residential construction costs on average ranged from BBD$220 – $800 per square foot (/sf) for standalone homes, these costs now range from BBD$255 – $800 per square foot, with properties categorised as “luxury” exceeding BBD$1,000 per square foot.
The rising cost of construction not only impacts potential borrowers looking to build their dream home, or renovate their existing property, but also the cost of insurance. This is especially a concern as we experience the effects of climate change (increased number and intensity of severe weather systems each year). With the increase noted in Fig. 1 above, a 2,500 sq. ft. home constructed in Barbados in 2020 at a cost of $625,000 (BBD$250 / sq. ft.), will now cost $725,000 (BBD$290 / sq. ft. = BBD$250 *1.16) as illustrated in Fig. 2 below. If the house is insured for BBD$625,000 today and a total loss occurs with a quote of BBD$725,000 received for the rebuild, the insurer will only provide compensation for a portion of the cost as the property would be considered underinsured i.e., $625,000 / $725,000 = 86% insurance coverage. This means the homeowner will have to find additional funding for the remaining balance.
Given the rapid increase in construction costs just within the last 3 years it is key that insurance coverage accurately reflects what it will cost to replace a property. One way to do this is to obtain periodic Insurance or Reinstatement Cost Valuations which consider not only the basic construction elements – plant, materials, and labour, but also the costs associated with demolition and removal of materials from the site, professional fees, and taxes (VAT) to be incurred during the replacement process, and external items such as pools, decks, fencing, landscaping etc.
Considering the current political and economic climate – regionally and globally, construction costs may well continue an upward trend. It is therefore key that insurance coverage is always maintained in line with current construction costs.