Introduction
In the face of global economic uncertainties and shifting political landscapes, the construction and manufacturing industries are preparing for potential disruptions, particularly as proposed tariffs from the new U.S. administration take shape. While tariffs are designed to protect domestic industries and incentivize local production, their unintended consequences can ripple through various sectors, affecting supply chains and cost structures. For businesses requiring property damage insurance, understanding these potential impacts is crucial to ensuring appropriate coverage limits.
Kroll’s Fixed Asset Advisory Services group provides accurate and comprehensive replacement cost analyses to help clients secure sufficient property damage insurance coverage. New tariffs could significantly alter the framework within which these replacement cost estimates are calculated. In this article, we explore the likely impacts of the proposed tariffs on building and equipment costs and provide insights into how businesses can prepare for these changes.
Tariffs and Their Role in the Economy
Tariffs are taxes imposed on imports or exports between countries, intended to either protect domestic industries from foreign competition or generate government revenue. The current administration has signaled its intent to impose tariffs on a range of imported goods, including raw materials such as steel, aluminum and other construction-related commodities, as well as finished products like machinery, electronics and building materials. These proposed tariffs are likely to have both short- and long-term effects on building and equipment costs, which can directly impact the replacement costs for insured properties.
Increased Material Costs: The Direct Impact on Building Costs
The construction industry is heavily reliant on raw materials such as steel, lumber, copper and aluminum, many of which are sourced globally. Tariffs on imports can drive up their costs. For instance, tariffs on steel and aluminum could lead to a direct increase in construction expenses. Builders and developers may pass these increased costs on to clients, raising expenses for property owners needing to repair or rebuild after a loss.
For insured businesses, replacement cost estimates—based on material prices—may need upward adjustments. Failure to account for these cost increases could result in underinsurance, leaving clients vulnerable to financial shortfalls in the event of major losses. Additionally, volatility in material prices due to tariffs could make it more difficult for insurers and clients to forecast future costs accurately, adding an element of uncertainty to risk assessments.
Increased Labor Costs: A Secondary Effect
While tariffs primarily affect material costs, they also indirectly impact labor expenses. Higher material costs can slow construction timelines, as builders may need to adjust their processes or wait for materials. This delay can lead to increased labor costs, particularly in regions where skilled workers are in high demand. Uncertainty surrounding future tariffs could also contribute to labor shortages or increased demand for specialized skills, further driving up costs.
Labor costs play a crucial role in replacement cost analyses. If labor expenses rise due to material tariffs, the overall cost of rebuilding damaged properties will increase. This is particularly relevant for large-scale projects, where labor and materials together constitute a significant portion of total costs.
Supply Chain Disruptions and Delays
Beyond increasing costs, tariffs can disrupt global supply chains, delaying access to essential building materials and equipment. For example, if a manufacturer of construction equipment relies on parts imported from a tariff-impacted country, project timelines may be pushed back, increasing costs. These disruptions can lead to shortages of specific materials, making them more expensive.
From a replacement cost perspective, supply chain disruptions complicate estimations of rebuild time and material procurement costs. Insurers and policyholders must consider potential delays, especially for large or complex claims where the timely replacement of materials and equipment is critical.
Potential Shifts in the Market for Building Equipment
Tariffs will likely have broad effects on the equipment market. Imported machinery and technology, such as HVAC systems, elevators and other essential building infrastructure, may see price increases due to tariffs on foreign-manufactured goods. Businesses may turn to domestic manufacturers, whose pricing may not match international competitors, leading to cost increases and supply shortages, particularly for specialized equipment.
As market conditions shift, some businesses may delay or scale back capital investments in building equipment, slowing the adoption of newer technologies. For replacement cost analyses, this may result in older, less efficient systems needing to be replaced with more expensive, energy-efficient options, further driving up costs.
The Impact of Tariffs on Foreign Exchange Rates and Replacement Costs
The proposed tariffs could also have significant implications for foreign exchange (FX) rates, which in turn affect replacement costs. If tariffs reduce demand for imports from certain countries, their currencies may weaken due to lower export revenues. A weaker foreign currency makes imports from those countries cheaper when priced in U.S. dollars, potentially offsetting some of the cost increases caused by tariffs.
Conversely, if the U.S. dollar strengthens due to a shrinking trade deficit or a more restrictive monetary policy, foreign materials and equipment could become relatively less expensive. However, currency fluctuations introduce unpredictability into procurement costs, making it harder for businesses and insurers to accurately estimate replacement expenses.
Some countries may retaliate against U.S. tariffs by imposing their own trade barriers or devaluing their currencies to maintain export competitiveness. Such moves could add volatility to material and equipment prices, affecting businesses dependent on international supply chains.
Long-Term Effects: Domestic Production and Innovation Shifts
While some effects of tariffs on building and equipment costs will be felt in the short term, their longer-term consequences could be more profound. If tariffs encourage greater domestic production of raw materials and finished goods, price stability may improve over time. However, reduced competition in certain sectors could stifle innovation and efficiency improvements, potentially leading to sustained higher costs.
For the insurance and construction sectors, this could mean a long-term rise in replacement costs as domestic production inefficiencies drive up pricing. However, if domestic manufacturers leverage new technologies to improve efficiency, some of these cost increases could be mitigated.
Source: https://tradingeconomics.com/forecast/producer-price-index?utm
Conclusion: Preparing for the Impact
The proposed tariffs from the current administration are poised to impact building and equipment costs in ways that could meaningfully alter replacement cost estimates for property damage insurance. Increased material and labor expenses, supply chain disruptions, FX rate volatility, and price fluctuations in equipment could all drive up rebuilding costs. For businesses reliant on accurate replacement cost analyses, staying informed and adjusting insurance coverage limits accordingly is essential.
At Kroll, our Fixed Asset Advisory Services team is committed to providing clients with up-to-date and precise replacement cost analyses. By closely monitoring the effects of proposed tariffs, FX fluctuations, and broader market trends, we help businesses ensure adequate coverage even in uncertain economic conditions. As always, proactive planning and careful risk management are essential to navigating these turbulent times successfully.
We are also a global leader in risk mitigation and business intelligence, offering clients comprehensive solutions in areas including asset advisory, security and financial risk management. With a deep understanding of market trends and a commitment to delivering exceptional insights, we help businesses navigate complex challenges with confidence.
