Replacement Cost of Buildings

replacement-costOver the last two (2) years the cost of Construction has sky rocketed. The price of Structural and Reinforcing Steel has increased by more than 80%, Cement by 10%, Concrete by 30%, and Copper by 30%. Building costs have increased by over 20% in this period. As a result the replacement cost of existing buildings has increased significantly. The amount of construction being carried out and Government employment policies has resulted in a shortage of labour in the Construction Industry resulting in an increase of up to 25%.

The replacement cost of a building is calculated on a total loss situation, as if the building had been totally destroyed and had to be demolished and totally rebuilt. In addition to demolition and reconstruction the costs should also allow for Architects, Engineers and Quantity Surveyors’ fees and Value Added Tax. The costs do not include any allowance for contents such as curtains, loose furniture, area rugs and domestic appliances. A separate insurance policy for contents is required.

It is sometimes believed that the market value of the building, in other words, the price achieved when the property is sold on the open market, is the value for which the property should be insured. This however, is irrelevant as generally the market value of the property has little relationship to the reinstatement value. The market price is for land and building whereas the reinstatement cost is for the building alone.

Most people insure their buildings for the value which they originally paid, usually required by the mortgage lender. They do not change value on an annual basis even though the cost of construction increases every year.

Unless your property is insured adequately, you may be penalized under your policy by having to pay a certain proportion of the reinstatement costs. The importance of having your property sufficiently insured is therefore critical. Where for example the insured sum is only 75% of the total reinstatement cost, you will only receive 75% of the agreed cost of reinstatement, whether the claim is made for partial reinstatement or total loss.

Most insurance is intended to leave the insured in substantially the same position after the damage as before. In order to avoid problems with deductions for wear and tear, you should make sure that your policy is issued on a reinstatement or “New for Old” basis.

It is essential that you reassess your level of cover every year, based on current rebuilding costs, making allowance for any improvements or extensions that you may have made since your last renewal date. As a guide, house costs range between $160 – $450 per sq ft, warehouses/factories – $200 per sq ft and office buildings $550 – $1000 per sq ft. The type of construction and specifications affect the cost of the building.

I would recommend that you have your building’s replacement cost done every 1-2 years by Quantity Surveyors who are members of the Institute of Surveyors of Trinidad & Tobago, the Professional Centre, 11-13 Fitzblackman Drive, Woodbrook.

Michael Samms FRICS

Immediate Past President ISTT