Construction costs are moderating, but the pressure on insurance valuations remains

Australia’s construction market has moved into a more measured phase following the exceptional cost escalation experienced between 2021 and 2023. While material inflation has stabilised and contractor pricing is becoming more predictable, construction costs remain materially above long-term historical averages. 

For insurers, property owners and risk professionals, the key issue is no longer simply the pace of construction inflation. It is understanding where capacity constraints, infrastructure investment and regional market conditions could continue to influence replacement costs, repair durations and reinstatement outcomes.

A capacity-constrained market

Construction activity remains strong, supported by major infrastructure, health, transport and residential projects. At the same time, elevated financing costs are influencing private-sector development decisions. The market is increasingly constrained by the availability of skilled labour and contractor capacity rather than a lack of demand. 

Table 1: Key economic indicators — Q2 2026

Source: Rawlinsons Market Insight, July 2026.

The labour market is particularly significant. Major infrastructure programs are competing directly with residential and commercial projects for skilled resources, contributing to wage growth, reduced tender competition, longer project durations and lower contractor capacity. These pressures are expected to persist through 2027. 

Escalation is easing, but location matters

Construction cost escalation is forecast to remain elevated across Australian capital cities during 2026, with meaningful variation between markets.

Table 2: 2026 construction cost escalation forecasts

Source: Rawlinsons Market Insight, July 2026.

The spread between markets reinforces the importance of location-specific assumptions when assessing replacement values. National averages may not adequately capture reconstruction risk in areas where infrastructure investment, contractor availability or local supply constraints are placing additional pressure on pricing. 

Infrastructure investment is reshaping the market

Australia has approximately $242 billion of public infrastructure projects planned over the next five years. This significant pipeline is sustaining construction activity while intensifying competition for skilled labour and contractor capacity, with an estimated workforce shortfall of 141,000 workers. 

The pressure is being felt across the country. In Queensland, investment in 2032 Olympic infrastructure, health projects and transport improvements is driving demand, while Victoria’s pipeline includes the Suburban Rail Loop, Airport Rail and other metro projects. Western Australia continues to see activity through hospital programs and Housing Australia Future Fund developments, while defence and AUKUS investment is contributing to construction demand in South Australia. 

For insurers, the implications extend beyond construction pricing. As major infrastructure projects compete with residential, commercial and insurance repair work for the same skilled trades and contractors, capacity constraints can contribute to longer repair and reinstatement timeframes and increased claims costs. 

Materials are stabilising, but supply chain risks remain

Material cost escalation has moderated considerably, with traditional structural steel and timber supply chains largely stabilising. However, cost pressures remain across copper, electrical equipment, PVC products, precast concrete, reinforcement steel, aluminium systems and façade components. Fuel, freight and transport costs also remain exposed to ongoing geopolitical uncertainty. 

Despite improving material conditions, the broader risk environment remains elevated. Labour availability, contractor capacity and financing costs are all assessed as high-risk, reflecting the capacity constraints continuing to shape the construction market. Fuel and freight volatility is rated moderate to high, while material availability and broader supply-chain risk are considered moderate. 

This shift is significant for insurers: while material availability has become more predictable, workforce and contractor constraints remain key sources of cost and delivery risk, with the potential to influence both repair costs and reinstatement timeframes. 

What does this mean for insurers?

The insurance repair market continues to experience upward cost pressure despite improving material availability. Labour shortages, wage growth and constrained contractor capacity are increasingly the dominant factors affecting claims costs, response times and reconstruction programs. 

At the same time, the direct impact of global factors on Australian construction pricing has so far remained relatively moderate. Conflict-related tender pricing impacts are generally estimated at 2%–5%, with fuel and freight volatility presenting the most significant areas of risk. 

This reinforces a broader point: while geopolitical events can amplify volatility, Australia’s underlying construction cost pressures continue to be driven primarily by labour availability, contractor capacity and infrastructure demand.

Looking ahead

Construction cost escalation is expected to moderate further through 2027, with annual escalation forecasts generally sitting between 4% and 6% across most capital cities. However, a return to pre-2020 cost conditions is considered highly unlikely. 

For insurers and property owners, this makes regular valuation reviews increasingly important. Declared sums insured need to reflect current replacement costs, local market conditions and the potential for longer reconstruction periods, particularly in capacity-constrained regions.

The market may be becoming more predictable, but it is not becoming static. Understanding the difference between national trends and local conditions will remain critical to making informed decisions about risk, valuation and claims.

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