How to determine a building’s insurance value
When determining the insurance value of a building, it is important to consider all the relevant factors.
The Africa Property & Construction Cost Guide 2018 – published by AECOM, the globally renowned infrastructure firm – is a very helpful guide when estimating a building’s replacement cost.
This guide recommends the following building rates per square metre (excluding VAT) for private dwellings:
Economic
Standard
Middle class
Luxury
Exclusive
Exceptional
R 5 000
R 6 300
R 7 600
R 10 800
R 17 000
R 26 000 – R 54 000
Note that these costs do not account for site improvements such as perimeter walling, fences, gates, driveways, guard houses, garages, carports, store rooms, staff quarters, swimming pools, etc. The costs also exclude VAT and all professional fees such as architects, engineers, quantity surveyors, project managers and land surveyors.
Costs to consider
Not all construction projects require such a broad range of professional service providers. The architect on the project will often assume the role of the project manager for an additional fee.
When determining a building’s replacement cost for insurance purposes, the cost of demolition works and rubble removal must always be included. Other factors that will have an impact on a building’s replacement cost include building design, geographical location, topographical location, underlying geological conditions and site accessibility. Building costs often vary between urban and rural locations, and can be significantly higher in coastal regions.
Future fluctuation of construction prices during the insurance period (usually 12 months) should also be considered. This can range anywhere between -5% and +20%, and depends on a variety of factors such as consumer confidence, competition, materials and labour prices, fuel prices and political events.
Liability cover
Owing to the myriad of variables that need to be considered when assessing a building’s replacement cost, an untrained valuer can sometimes be off the mark by 20% or more. When a claim is averaged as a result of an incorrect valuation, it can have disastrous consequences for the insured. For this reason, it is vital that the appointed valuer holds adequate professional indemnity cover. For residential complexes or large commercial buildings, the valuer will need professional indemnity insurance of at least R10 million.
When all these factors are taken into account, an experienced and capable valuer will be able to determine a reliable building replacement cost, ensuring comprehensive insurance cover for the insured.
A related blog you may enjoy: How we assess a building’s replacement value.
