Replacement Cost Assessment for Insurance Purposes
Insurance valuations in the form of Replacement Cost Assessments are required under Section 85 of the Strata Schemes Management Act 1996. Strata Managers, on behalf of the Owners Corporation, obtain Replacement Cost Assessments to be submitted to the insurer. Replacement Cost Assessments provide the recommended Capital Replacement Value to adequately insure the reconstruction or part-reconstruction of a building in the case of natural disaster or fire. While the cost of the building is the main component of a Replacement Cost Assessment, there are other important costs to consider. These include the cost of professional and authorities’ fees, inflation, demolition, removal of debris and the cost of all work external to the building.
Update Your Strata Insurance Regularly
Under legislation, Replacement Cost Assessments are required to be refreshed every 5 years. However, constant fluctuations in the property market will affect the economy, supply and demand, cost of construction, and more. As an effective risk management strategy, it is recommended to review Replacement Cost Assessments yearly, avoiding the consequences of under or over insuring.
What Do Our Reports Include?
Our database of knowledge and experience built over 27 years around construction costs allowing us to accurately provide comprehensive, but readable, reports that also educate our clients in the process. This ensures our clients have a clear understanding as well as assurance in the quality and value of our work.
Our detailed reports consider the following factors:
- Estimated reconstruction cost as of date of valuation
- Demolition and removal of debris
- Escalation to commencement of construction
- Professional and authorities fees
- Escalation over life of policy
- Capital Replacement Value
- GST Allowance
Why Choose a Quantity Surveyor over a Valuer?
Replacement Cost Assessments are carried out by a qualified individual such as a Valuer or a Quantity Surveyor. Quantity Surveyors are construction cost experts. Valuers are not and may inaccurately include irrelevant costs such as land and market value. Quantity Surveyors are usually involved in projects from conception to completion giving them the experience and knowledge in generating accurate and detailed replacement cost assessments. This is important as it assists in minimising annual insurance premiums whilst maintaining adequate funds to replace part of, or all of a building. Valuers are usually engaged in the post-occupancy stage, with little knowledge about construction processes and costs, generating estimations based on surrounding property data to conclude the value of a property. Only considering the finished product excludes vital building costs in a valuation. As a result, the replacement cost assessment will likely be inflated and not be able to effectively cover the costs for insurance purposes.
- Affiliations with the Australian Institute of Quantity Surveyors (AIQS)
- Degree in Construction Economics or same as endorsed by the AIQS
- Trained to access construction costs of a project
- Affiliations with the Australian Property Institute (API)
- Degree in Property Economics or same as endorsed by the API
- Trained to assess the market value of a property
Based on this information alone, there is a clear distinction on the speciality of both professions. To further illustrate this, consider the following scenario.
A residential apartment block (A) is built in the most expensive street in Vaucluse with impressive harbour views, while the second residential apartment block (B) is built on the parallel street surrounded by other apartment blocks. Let us assume that they are identically built, down to the bricks, roof tiles, level of finishes, built at the same time, etc.
A Valuer will consider the following criteria:
- Position or location e.g., proximity to public transport, shops, and schools
- Aspect and views e.g., one may have favourable Northern aspect in comparison to the other Southern aspect, and one is harbour facing in comparison to behind large trees and surrounding apartment blocks
- Size and shape of the land e.g., one could be larger than the other and have further development opportunity, and the other may be an irregularly shaped lot of land with less potential
- The market value of each property and the building itself
After factoring these calculations, a Valuer would conclude that the replacement cost assessment figure of Building A would be higher than Building B due to its impressive location and surrounds.
In direct comparison, a Quantity Surveyor will consider the following:
- The measurements and billing of quantities
- The rate and the cost per square meter, considering factors such as material supply, material handling, labour, access and the likes. This figure is also based upon years of experience and shifting trends in the construction market. When materials and methods of construction change, so do their associated values. It is a Quantity Surveyors obligation to ensure they remain up to date with the latest costings to ensure the reports they provide are accurate and true
- Method of procurement i.e., the contracts chosen for a project e.g., design and construct contracts, construction management contracts, lump sum contracts and the likes
- Construction program i.e., the construction period and methodology associated with the construction. This includes any site accessibility issues, flat or sloping land, having or not having a tower crane can impact the speed of construction etc.
All the above factors are considered by a Quantity Surveyor when putting together the construction cost for the building. Although the aspect and access to various amenities vary, these two buildings were built at the same time, within the same suburb, and the same materials and handling. Therefore, essentially their construction cost would be approximately the same.