Reinstatement cost assessments (RCAs), which estimate the anticipated cost of reconstructing a building for insurance purposes in the event of substantial damage or total loss, can be seen by some as a bolt-on to technical due diligence reports. However, they need the same attention to detail on site and in the office because the financial consequences of under- or over-assessment can be significant. Furthermore, a qualified building surveyor's expertise is essential in producing an accurate RCA that is fit for purpose.
In February 2018, RICS published the third edition of its Reinstatement cost assessment of buildings guidance note setting out good practice in this process.
A number of key points from this are set out below, relating to the following areas:
Once terms of business and the scope of services are agreed, it is crucial that surveyors gather as much information as possible so they understand the extent of the property being assessed. Relevant information to support this may include as-built drawings and licences for alteration; these are particularly useful in identifying tenant fit-out works, which are often excluded from assessment.
An area schedule with the gross internal area (GIA)/International Property Measurement Standard (IPMS) 2, or as-built plans that can be scaled up may be useful as well. However, it is advisable that the surveyor takes sufficient site measurements to cross-check the areas provided, or to calculate them if no information is available.
Although it may seem obvious, it is also important that the client is aware when instructing the surveyor that an RCA is not a market valuation.
Most buildings in the UK are insured on what is commonly known as the day-one reinstatement basis, so called because it reflects the likely cost of reconstructing the property the day after it is damaged or destroyed.
The assessment is based on the declared value, which, because it doesn't take the age or condition of the building into account, allows claims to be settled on a new-for-old basis. The declared value should therefore be an assessment of the probable construction cost in the open market, together with allowances for demolition, professional and statutory fees.
The declared value will not typically include a percentage uplift for inflation, which would account for reinstatement being required at any point during the insured year, so the insurers then add an inflation provision to arrive at the total day-one reinstatement figure. This provision takes into account the likely increase in construction costs over the period for designing, planning, tendering and actual reconstruction.
Unless significant alterations are made to the property, it is recommended that RCAs are given an annual desktop review to reflect changes in inflation, with a full reassessment every three years. It is fundamental that the anticipated timescales for redesign and construction are included in the report so that the insurers can take account of them. These must be as accurate as possible to avoid increased insurance repayments or under-coverage as a result of underestimating lead times.
During the site inspection, the surveyor must not only examine the building and assess construction methods, age, finishes and installations, but also consider the surrounding environment, which could hamper demolition and rebuilding. Adjacent buildings and tenants may affect working hours, need specialist or temporary protection and, depending on the proximity to neighbouring properties, require party wall awards to be agreed.
Sites close to a river, train tracks and so on, or those that have difficult access, are situated in areas of heavy pedestrianisation or require works that could disrupt public transport, all present challenges that will affect time and cost as well.
Building costs can be obtained from various sources, including price books and the Building Cost Information Service (BCIS), although the surveyor must exercise professional judgement in applying so-called standard rates. They also need to take into consideration regional differences in construction costs.
The average rates provided by BCIS are useful for the assessment, but those figures must only be used as a guide, and the surveyor needs to use their expertise to assess the detail and specifics of the property, providing costs for elements that are over and above the average building.
Where standard rates may not be directly applicable, the surveyor should consider undertaking an elemental breakdown assessment.
This is particularly useful when assessing unusual or historic properties, as average rates cover a wide range of construction types and will rarely be applicable to these buildings. The surveyor also needs to include allowances for preliminaries and for contractors' overheads and profit in their rates.
Quantity surveyors are often well placed to help with the more detailed elemental assessments, drawing on their knowledge of construction rates and wealth of benchmark data and cost experience. Their knowledge of the expected out-turn construction cost or cost per square metre will help appraise the pricing of specific building elements.
Listed buildings and those in conservation areas will pose unique challenges, and design and construction timescales need to take account of this.
When it comes to listed buildings, the assessment needs to take into account the additional time required to agree works with heritage bodies. Assuming that these works are carried out on a like-for-like basis, detailed or ornate finishes will need to be replicated, and this will also have implications for the development in terms of time and cost.
Building materials play a significant part in demolition timelines as well, and the removal of any material that may be problematic or cause health and safety issues in demolition, such as asbestos, will require additional time and costs. Where there are significant quantities of asbestos in the property, the surveyor may wish to obtain budget costs and timescales for removal from specialists to include in the assessment.
All demolition, design and redevelopment will require input from various consultants such as architects structural engineers and project managers — and potentially party wall surveyors — so appropriate fees need to be included. Because of the complexity of reinstatement works, fees could often be higher than for the development of a new property.
In addition to professional fees, the costs of obtaining planning permission and Building Regulation approval need to be included. Accurate costs for planning permission can be found on planningportal.co.uk.
Although surveyors are proficient at writing technical reports, they must remember that these are likely to be read by someone such as an insurer who has a limited knowledge of property matters, and it is important that the report is clear and concise in conveying its key messages.
It therefore needs to include a section summarising the reinstatement cost, the basis on which the assessment has been made, a description of the property and reference to any restrictions or limitations to the inspection and reporting, such as specific tenants' fit-out items asbestos removal, and certain external works.
The RICS guidance note states that it is important for the surveyor to incorporate declarations and caveats explaining that the report does not give advice or make comment with respect to the property's condition.
Furthermore, it advises that the report should state that the declared value, has no direct relationship to the market value and that the assessment has been prepared for insurance purposes only in accordance with RICS guidance, so it should not be used for any other reason.
Related competencies include: Inspection Insurance