In estimating the replacement cost of a building, many will refer to a construction guide such as the Property & Construction Handbook published by AECOM. For example, the 2018 handbook recommends the following building rates per square metre for private dwellings (excl. VAT):
- Economic: R5 000 - R6 300
- Standard: R6 300 - R7 600
- Middle Class: R7 600 - R10 800
- Luxury: R10 800 - R17 000
- Exclusive: R17 000 - R26 000
- Exceptional: R26 000 - R54 000
*Please note that the above rates are outdated and shall serve as an example only as the latest edition of the handbook was not yet published at the time of this writing.
POINT OF CAUTION
It is important to note that these rates 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 above rates exclude VAT as well as costs billed by architects, engineers, quantity surveyors, project managers, land surveyors, etc.
While not all construction projects require all of these professional services, architects often assume the role of the project manager and charge a percentage on top of their architectural services. Some may argue that the building plans are still available in the event of total destruction but this is not always the case. We need to assume the worst case so the client can be covered for all eventualities.
In determining a building’s replacement cost for insurance purposes, one must also take into consideration the cost for demolition works and rubble removal.
Other factors which have an impact on a building’s replacement cost include:
- building design
- geographical location
- topographical location
- underlying geological conditions
- site accessibility
Building costs may vary between urban and rural locations and can be significantly higher in coastal regions. It is for this reason that it is also necessary to consider the regional variances in cost - in addition to the specific building design called for by the prevailing geological and topographical conditions.
Building Cost Escalation
When insuring a building, one must also take into consideration any future fluctuation of construction prices during the insurance period (usually 12 months). This can range anywhere between -5% and +20% depending on a variety of factors such as consumer confidence, competition, fuel prices, materials and labour prices, political events, etc.
Our valuation reports come with a year-on-year building cost escalation forecast as provided to us by the Bureau for Economic Research but it is recommended to obtain an Escalation Rate Update (ERU) on policy renewal which Mirfin can provide for as little as R300 excl. VAT.
Naturally, advising clients on the replacement cost of their property bears liability concerns and an untrained assessor can easily be off the mark by 20% or more, owing to the multitude of variables to be taken into account. This can have potentially disastrous consequences for the insured in the event of a claim being averaged.
For this reason, one of the most vital considerations in appointing a valuer is to check that the valuer has adequate professional indemnity cover – enough to cover the size of the building or complex being valued. For example, if the valuer or quantity surveyor is protected with anything less than R10 million professional indemnity insurance, they should not be offering valuation of residential complexes or large commercial buildings.
A related blog you may enjoy: How we assess a building’s replacement value