Underinsurance among Australia’s homeowners, which spiked last year as the cost of building materials inflated, is likely to have now increased to beyond 90% of policyholders, the Australian Institute of Quantity Surveyors (AIQS) says.

AIQS says commercial construction has been hit by a “perfect storm,” under pressure from both local material shortages and significant global supply chain impacts from the war in Ukraine.

AIQS tells insuranceNEWS.com.au this caused underinsurance, in which the sum insured is inadequate to meet the policyholder’s needs, to spike last year and is likely even more prevalent now.

A survey by Canstar on behalf of the Insurance Council of Australia had last year indicated that 83% of home and contents policies in Australia did not fully cover property rebuilding costs.

“Given the impacts currently being experienced within the Australian construction industry, this percentage of underinsurance is likely to have now risen to above 90%,” AIQS NSW Chapter President Marty Sadlier said.

AIQS says continued volatility in commercial construction is likely next year and contracts should be re-considered with rise and fall clauses, which have been “largely overlooked” for two decades. These clauses allow a fixed-price or lump sum contract charge to increase or decrease in accordance with fluctuations in supply prices and wages growth.

“Two stage contracts can be beneficial in the current environment,” AIQS Executive Board Member Simon Squire said.

"This can provide greater cost certainty as contractors are able to price a project with an informed understanding and potentially lead to cost savings for the client and reduce risk of delays.”

A sharp rise in costs has hit builders in 2022 on top of disrupted supply chains, labour shortages, and surging demand encouraged by government grants.

Going forward, it is vital to ensure a dynamic budget that reflects the level of price certainty, and can be adjusted throughout the process if needed, Mr Squire says.

“A rise and fall clause would be an advantage to make sure there is protection for both the client and contractor, including the use of potential dead bands which clarify price movement responsibility between the client and contractor.”

Reinforcement materials had jumped to $2400 a tonne by April, Mr Squire said, from $1330 in mid 2020.

“While pricing may be settling into a new high norm, the focus is now shifting to certainty of supply and delivery. Even if you’ve budgeted for higher prices, you can’t always guarantee product availability,” he said. “Shipping rates may be easing but certainty in delivery is now the issue.”

Facades, structural steel, and mechanical and electrical equipment are all mostly procured overseas, and looking ahead, AIQS says preplanning and making early payments to lock-in shipping times to get products into Australia will foster certainty.

The short-term outlook was for "continued volatility and multiple fractured trajectories,” before an expected easing in the market, while rising inflation globally and China’s efforts to return to pre-pandemic production levels could have further “surprising impacts that we just can’t forecast,” Mr Squire said.

Use of a Certified Quantity Surveyor at project inception could aid cost clarity, AIQS says.