Replacement cost is a built-asset question: what would it reasonably cost to reinstate the insured or assessed improvements, under the stated assumptions, at the relevant date? The answer can be very different from both historic construction cost and market value.
At a glance
- Rebuild cost can extend beyond the direct building works.
- Site constraints, current codes and post-loss conditions can materially affect reinstatement cost.
- The correct scope depends on the insurance policy or purpose of the assessment.
What the assessment is trying to capture
The core is the cost to reconstruct the relevant building and associated improvements to an equivalent functional standard, subject to the agreed basis of assessment. For insurance purposes, the policy wording ultimately determines what is covered.
Land value is not a reconstruction cost, and the assessment is not intended to predict what the property would sell for.
Costs that may sit outside the basic build rate
Depending on the scope, allowances may be required for demolition and debris removal, professional consultants, authority fees, external works and services, temporary works, escalation through design/tender/rebuild periods and applicable taxes or statutory costs.
Moneysmart specifically warns that underinsurance can arise when extra costs such as demolition, site clean-up, asbestos removal, council fees, architect and surveyor services are omitted.
Why a simple $/m² calculator can miss the mark
Generic calculators are useful screening tools, but unusual construction, high-end finishes, heritage requirements, sloping sites, constrained access, bushfire or flood requirements and specialist services can make a property materially different from a typical benchmark.
The Insurance Council of Australia also notes that rebuilding may need to comply with changed local regulations or building standards, particularly in hazard-prone locations.
When to review an assessment
Review the position after major extensions or refurbishment, significant specification changes, a material change in site conditions or regulation, or when an older assessment no longer reflects current construction costs. For insurance, Moneysmart recommends checking cover at least annually and after renovations.
A professional assessment is particularly useful where the building is non-standard or the consequences of underinsurance are significant.
Information that improves the assessment
Current drawings, areas, photographs, specifications, refurbishment history, site constraints, heritage or planning information and details of external works help reduce assumptions. The assessment should clearly identify what is included, excluded and allowed for.