Replacement Cost Estimates

A topic of interest to many property owners is the issue of replacement cost values or estimates for base building insurance calculations. With increasing insurance premiums and construction costs, it is becoming imperative that the replacement estimate is accurate.

Until recently, property valuation professionals (valuers) have prepared these reports, but this profession and the insurance industry have become increasingly concerned as to their liability and qualification of their figures. BMT & ASSOC believe a quantity surveyor with construction cost expertise is the most appropriately qualified professional to estimate the replacement cost of buildings, as opposed to a valuer, who is an expert in the prevailing market sale price of buildings.

There are three possible outcomes from inaccurately estimated replacement costs:

• Through having undervalued insurance replacement estimates of property, the owner runs the risk of significant losses in the event of a major disaster such as fire or earthquake;

• If the replacement value is over stated, additional premiums will result; and

• If underinsured and in the case of partial loss, the insurer may only pay that percentage of under-insurance leaving the building owner to meet the shortfall.

When determining the replacement cost of a building many issues need to be considered, including but not limited to:

• The costs associated with the demolition and removal of debris and asbestos following the event, including the associated consultant fees;

• The cost of constructing the building considering updated planning constraints and building codes;

• The cost of consultants fees, builders margins and all preliminaries; and

• Construction Cost Escalations need to be considered for the periods of;
  
  

  1. Assessment of damage and claim finalisation;

  2. Lead time of planning;

  3. Design and documentation;

  4. Calling of tenders and tender evaluation;

  5. Construction and fit out period; and

  6. Time lapse between policy renewal dates.

It is imperative that all buildings be adequately insured in the event of their partial or total loss or destruction. Specialist building replacement cost advice is highly recommended to ensure all aspects of building construction have been taken into account in determining a building's replacement cost. BMT & Assoc can provide specialist advice to assist you to determine the replacement cost of residential, commercial, and industrial buildings, together with special use projects.