Replacement Cost Reports/Insurance Valuation Reports
Purpose of a Replacement Cost Report/Insurance Valuation Report
The purpose of a Replacement Cost Report/Insurance Valuation Report is primarily for insurance purposes. This report, independent undertaken, would assist in forming the basis of the ‘sum insured’ (including costs associated) to cover the building in the event of total loss (excluding contents).
It should be noted that ‘contents of a property’ are not included in a Replacement Cost Report/Insurance Valuation as this responsibility solely sits with the individual property owner as they are best to have the knowledge of their own belongings and their value.
Other Industry terms
Replacement Cost Estimates are referenced differently across different industries. They include:
- ‘Replacement Cost Estimates/Reports’ used according to the Australian Institute of Quantity Surveyors (AIQS)
- ‘Insurance Replacement Valuation’ used by Owners Corporations
- ‘Insurance Replacement Cost Reports’
The above terms relate to the same report that has the same purpose.
Sum Insured and Inclusions
A Replacement Cost Report/Insurance Valuation Report, professionally undertaken by an appropriate expert, would include for appropriate costs and allowances to arrive at an overall figure that would adequately cover the total replacement/cost of a building in the event of total loss and destruction. This is generally referred to as the ‘sum insured’.
This ‘sum insured’ amount would, therefore, include all costs that would be incurred in replacing the building including:
- Cost making the damaged building safe, demolition and site clearance.
- Professional and authorities’ fees relating to the demolition on the same site.
- The estimated cost of constructing a similar building on the same site.
- Professional and authorities’ fees relating to the new building.
- Allowance for escalation in the costs up to the “disaster date”.
- Allowance for escalation in the costs up to completion of the new building.
Reasons for adequately Insuring a Building:
– Owners Corporation (formerly Body Corporate) properties require adequate insurance in the event of total loss. Owners Corporation Managers are obliged, as stipulated by the Owners Corporation Act 2006, to have all common property buildings insured (and updated every 5 years – minimum).
– Appropriately insuring a building is vital, as doing so assists to safeguard all invested parties in the event of total loss.
– Most noteworthy, inadequately insured either under or over can have cost implications.
– Being ‘under underinsured potentially be the worse of the two situations. In this instance, there would be an inadequate amount of funds available to reinstate the property.
– Yet, being ‘over insured’ would result in overpayment of premiums year on year.
How Often Should the Insured Sum/Sum Insured be Reviewed?
According to the Institute of Quantity Surveying (AIQS) recommends regular periodic review, with Replacement Cost Reports usually carried out on a three-year cycle.
- First-year – Measured estimate is prepared and priced at current rates
- Second or third year – Estimated costs are reviewed and adjusted for increases in escalation, adjustments made for any improvements advised by the building manager etc.
- Fourth-year – Re-measured estimate is adjusted for any improvements and re-priced at current rates.
Reinstatement Cost/Building Cost (the main component of a Replacement Cost Report/Insurance Valuation)
A replacement cost assessment includes for and is directly related to the reinstating of a building. The main component of such an assessment includes the building component i.e the direct ‘reinstatement building costs’. Or as listed in the sum insured section ‘Estimated cost of constructing a similar building on the same site’. What the reinstatement cost IS NOT. It is not the ‘market values’ or figure based on ‘comparable sales data’. IT IS and solely the construction-related costs of the building. The building reinstatement costs/construction costs include such things as costs associated with material, plant, equipment and labour.
Quantity Surveyors as Appropriately Suited to Provide Replacement Cost Reports/ Insurance Replacement Cost Reports
Firstly, a Quantity Surveyor is a degree qualified and building & construction industry experienced professional that assists in the financial planning, monitoring, assessing and delivery of construction projects.
They are appointed to represent the client in order to monitor, report timely and accurate data and provide assistance on cost savings and cost improvements for the successful delivery of construction projects to and under budget.
Financial planning and monitoring building & construction projects are usually gained from working on projects of all sizes. Tasks involved would include measuring, quantifying, pricing and estimating these built environment projects.
Quantity Surveyors work is often relied upon by governments, authorities, banks, other financial institutions and developers etc. On the other hand and on a smaller scale their work is also relied upon by property investors.
Through the duties of financial monitoring and guidance of building & construction projects consequently they too have databases of actual costs (not limited to material, plant, equipment and labour for the construction costs of a building), building rates and data that would assist in providing an adequate undertaking of a Replacement Cost Reports/Insurance Valuation Reports.
As detailed above they are regarded as the building and construction cost expert. A profession solely dedicated to planning, monitoring, quantifying, pricing and estimating the built environment. They have the qualifications, skills and experience to use their knowledge and cost databases of similar projects to arrive at an adequately insured sum amount in the form of a Replacement Cost Reports/Insurance Valuation Reports.