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How we assess a building's replacement cost

Insurance is often considered a grudge purchase.

That is, until it is time to lodge a claim.

The same can be said of a legally prescribed valuation for sectional title schemes. Bodies corporate only appreciate its value when their claim is paid out in full without any insurer dispute. In addition, a building valuation is expected to be prudently done but low-priced.

That is why we apply the “rate-per-square-metre-on-plan” method as opposed to assessing a building’s replacement cost by breaking it down into its various components. The latter method is typically employed by quantity surveyors and is significantly more expensive.

Construction costs

The replacement cost per m² (for insurance purposes) is inclusive of building services such as water, electrical wiring, air-conditioning, etc. However, it excludes the cost of site infrastructure development, outside parking, professional fees, demolition and rubble removal, VAT and future escalation of building costs.

While offering a quicker and more convenient estimation of construction costs, the rate-per-m² method is still a complex exercise that relies on detailed and accurate information obtained through a physical site inspection. It can be very misleading to evaluate different buildings' construction costs by comparing their individual rates per m² without considering the individual attributes affecting the construction cost.

The following key factors determine construction cost:

  • Wall-to-floor ratio: Buildings come in many different shapes and sizes. While both may be identical in floor area, a square building will have less total wall area than a rectangular building.
  • Floor-to-ceiling height: A house with a high ceiling will have a higher total wall area than a house with a low ceiling.
  • Internal subdivisions: The number of internal walls and partitions contribute to the total wall area; it therefore has an impact on the overall cost of a building.
  • Construction areas: Buildings with large low-cost areas such as parking, access corridors and balconies are not comparable with buildings that do not have such areas.
  • Building levels: A multiple-level building requires reinforced walls and foundations.
  • Grade of finishes: It stands to reason that there is a considerable difference in cost between a hardboard countertop and a granite countertop. The same applies to doors, windows, flooring, fittings and other hardware.
  • Standard of workmanship: The construction industry offers various levels of craftsmanship, ranging from certified artisans with formal training to casual labourers with hardly any training or supervision.
  • Plumbing and electrical installations: The number of plumbing installations such as bathrooms and toilets can be a significant costing factor. The same applies to electrical installations such as geysers, motorised gates, air conditioners, etc.
  • Topography: Erecting a building on a sloped site is costlier than a building on level terrain.
  • Site works: Boundary walls, retaining walls, paving, external lighting, swimming pools, koi ponds, decks and tennis courts are not included in the building rate per m² and must be costed in addition to the buildings.
  • Regional variances: Construction costs for upper class residential buildings in coastal regions tend to be 10 - 15% higher than in Gauteng owing to a greater demand for building materials, labour, and plant & equipment.

For a professional insurance valuation, contact Mirfin for a free quote.

Read our next blog: Why it's wrong to insure the market value of your house.