Building Replacement Cost

Have you ever been faced with the task of determining the replacement cost of a building? If so, where on earth would you begin? If you are responsible for the reporting of your building value and have not given the process much thought, then you may be in store for a shock if your building experiences a loss. While there is no possible way to know the exact dollar amount to replace your building on any particular day in the future, there is a method to help you estimate the replacement cost value.

It is important to be reasonably accurate when reporting the replacement value of your building for property insurance or self-insurance purposes. From a property insurance standpoint, many insurance policies include what is called a co-insurance clause. If you have a property claim, you must have reported the replacement value of your building within 80% of the real replacement value at the time of the loss in order to be paid the full amount of the claim (less a deductable). The co-insurance clause is not limited to a total loss of the building. The co-insurance clause is in force for any property claim. The clause introduces a penalty that will be deducted from your claim; therefore you become somewhat of an insurance company too (hence the term “co-insurance”) by having to participate in financing the reconstruction. For self-insurers, you need to know how much money to set aside for a property claim, which should be as realistic as possible.

You probably know the construction cost of your home if you had it custom built, but commercial buildings are very different in size and value in that it becomes quite difficult to even begin an estimate. For example, what’s the difference between a 7 million dollar-fire resistive-four story building and a 12 million dollar-masonry noncombustible-six story building? The easy answer is 5 million dollars! When you are subjected to huge numbers it is quite difficult to get perspective of what is realistic and what is outrageous. It may prove useful to break the value down to a more manageable number. We do this by dividing the building replacement cost by the gross building area usually expressed in square feet (e.g. $125 per square foot versus $7 million). We are then able to introduce some parameters to avoid outrageous values. In Texas, standard building replacement cost should rarely be less than $50 per square foot and only occasionally exceed $300 per square foot.  Exceptions to the upper end are those buildings with exceptional equipment, construction, and performance systems. One example may be a LEED (Leadership in Energy and Environmental Design) building with its high construction management costs and redundancy requirements, just to name a few.  Buildings with unique features or buildings that are exquisitely ornamented may easily exceed $300 per square feet. On the lower end, a wood frame shed with limited power and no plumbing, would generally cost no less than $50 per square foot.

The best method to determine the replacement cost of a building is to keep the original construction records, as well as subsequent building modifications, and then adjust the costs for inflation line by line. Labor costs would also need to be included. This method would require a significant time investment, but would result in a reasonable estimate. Your next best option is to hire a professional appraiser to provide an estimate. Be cautious though, even though you are hiring an “appraiser,” be sure you obtain a replacement cost valuation. An appraiser can provide three types of reports: Appraisal Value, Actual Cash Value, or Replacement Cost Valuation. The “appraisal value” of your building is the estimated sales price of the building and the land. The Actual Cash Value of a building includes depreciation. You want a Replacement Cost Valuation to determine an up-to-date estimate of what it would cost to construct your building with like-kind materials in today’s dollars.

What if you don’t have the time for updating the original building cost or budget for a professional valuation? Following, is a ballpark method that saves time and budget at the expense of losing accuracy. The International Codes Council (ICC) is the governing board for the more familiar entity, the International Building Code (IBC).  Many jurisdictions adopt all or part of the IBC and issue a permit for construction.  The cost of a permit is generally based on the expected construction cost of the building. The ICC helps a permit department establish the permit price by semiannually publishing the Building Valuation Data (BVD) which can be found at http://www.iccsafe.org/cs/Pages/BVD.aspx. This publication provides an average replacement cost based on the building’s projected occupancy and its type or class of construction materials.  By including two very important aspects of estimating construction cost, occupancy, and class of construction, a researched and up-to-date value per area is published by a respected entity. Obviously, unless you are a building permit issuer, you are using a document in a way that it is not intended for, but is a resource that can help confirm an estimate of the building reconstruction cost. Keep in mind that the BVD is a national average, and does not include the specifics of your building. So, very high and very low values are included in the published average resulting in less accuracy.

The BVD publication includes a table listing various construction costs per square foot. The first column is a list of 27 occupancies recognized by the IBC. If you experience difficulty in identifying your occupancy, a quick search of definitions and examples on the IBC’s website may prove useful. The top row of the Table lists the class of construction of which the IBC has nine ranging from Class IA-Fire Resistive to Class VB-Wood Frame.  Most people have trouble determining their building’s construction class. To help your efforts, the link here has construction class descriptions and equivalencies to the ISO (Insurance Services Office) construction class system, which should prove very useful in determining your building’s construction class. Your building’s BVD published cost per area estimate is located at the intersection of the occupancy row and construction column.  It is now a simple matter of multiplying this value by your building’s gross area to acquire the estimated construction cost of your building.

Determining a building replacement cost can be a daunting task. The ideal method to determine the cost is through keeping meticulous records or paying for a replacement cost valuation. But if both of those methods are not an option, and you choose to assume the risk of under reporting your building replacement value, you now have a resource to make a ballpark estimate. Remember, you should update your estimate each year since construction material and labor cost will change. So, measure your buildings gross area (not net usable space), and identify the occupancy and construction class to begin your quest for estimating your building’s reconstruction cost.

Stephen T. Greeson, PE, CSP, ARM is a Principal Engineer with Hartford Steam Boiler. Based in San Antonio, he has performed fire insurance property inspections throughout Texas for 25 years. Since 2006, he has worked with SORM coordinating property inspections for agencies in the Statewide Property Program. His group is responsible for conducting fire inspections of buildings, and advising how to reduce fire potential and improve fire protection.