The Construction Valuation Assumptions That No Longer Hold True

A construction project can become underinsured long before anyone realizes it. Not because of a major loss or market disruption, but because the value of the project itself has quietly changed over the course of the build.

Traditionally, construction insurance has been placed against a project value established before work begins, with escalation provisions intended to account for moderate increases along the way. But as projects become larger, more complex, and take longer to complete, those original assumptions are increasingly being tested.

”Today’s projects are more complex, more interconnected, and often remain under construction for years,” explains Rob Herron, Vice-president of Construction at CNA Canada. “With more variables and longer timelines, the likelihood of meaningful change increases throughout the life of the build.”

While inflation and material costs continue to attract attention, some of the most significant changes affecting a project’s insured value happen quietly after construction begins.

Design revisions, procurement changes, schedule extensions, and evolving regulatory requirements can all drive up the cost to rebuild, repair, or complete a project without anyone revisiting the insurance.

As those changes accumulate, project values established at placement can gradually fall behind the actual exposure long before anyone reviews the policy, potentially leaving projects underinsured.

Beyond Inflation

Inflation may be the most visible pressure on construction projects, but it’s rarely the only reason valuations change, Herron explains.

Many of the most significant changes occur gradually as a project evolves. One design revision can trigger procurement changes. Procurement delays can extend the construction schedule, increasing labour costs, equipment rentals, and project supervision. Additional engineering, regulatory, or compliance requirements can introduce further costs, while competition for skilled contractors may increase labour expenses on larger projects.

“When we think about a change order, we often think it’s just one change,” says Herron. “But on a large project, there may be hundreds of change orders, and it’s the cumulative effect of all those changes over the life of the project that makes it different from the one that was originally insured.”

When Valuation Gaps Appear

The valuation gap often remains invisible until the moment it matters most.

Herron points to an example of a project that may begin with an estimated value of $100 million but ultimately costs $125 million to complete because of the cumulative effect of design changes, procurement delays, and extended schedules.

“If the insurance limit no longer reflects the actual exposure, there may not be sufficient coverage to fully rebuild the damaged work,” says Herron.

The financial implications can extend well beyond repairing physical damage. Delays following a loss can increase financing costs, postpone project completion, and reduce expected revenue. Meanwhile, contractual agreements between owners, contractors, and subcontractors determine who ultimately bears any uninsured portion of the loss.

“In many cases, the valuation gap becomes apparent only when the project is completed and actual costs are reconciled, or when a significant claim forces everyone to compare the original assumptions against the reality of the loss,” says Herron.

Keeping Valuations Current

While contractors remain the experts on their projects, brokers can play an important role by challenging assumptions as work progresses, Herron says. “Regular conversations about budgets, procurement delays, change orders, and schedules can help determine whether project values and insurance limits still reflect the exposure.”

Working with construction projects across Canada, CNA’s underwriters are often able to identify emerging trends and share those insights with brokers, helping clients anticipate potential valuation issues earlier. 
 

“There isn’t much we haven’t seen over the past few years,” says Herron. “We work closely with brokers, share what we’re seeing across the market, and focus on practical solutions. Where appropriate, we can also build additional flexibility into coverage by increasing hard-cost allowances, helping clients maintain a buffer as construction costs change.”

Today’s construction projects involve more moving parts than ever before, many of them outside anyone’s control, Herron adds. “Regular touchpoints between insurers, brokers, and their clients become increasingly important to help keep project values and insurance coverage aligned as the build progresses.”