A reinstatement cost assessment (RCA) is an appraisal conducted by a surveyor as a means of establishing the hypothetical cost to reconstruct a building from scratch. This cost would be to reconstruct the property to modern day building regulations but keeping the visible exterior and standard of fit-out in the interior more or less the same.
The purpose of the RCA is to ensure that the property has the appropriate level of insurance. The RCA therefore has a direct impact on the insurance premium for any given property – a matter that is close to the hearts of landlords, leaseholders and property board directors alike. Below are some of the common questions regarding RCAs and how they work.
How is the ‘Reinstatement Cost’ actually calculated?
Briefly, a surveyor would measure the building using ‘International Property Measurement Standard 2’ which is broadly analogous to the old ‘gross external areas plus balconies’. They obtain a ‘building footprint’ for each level of the building which often varies floor-by-floor. The surveyor examines the building components both externally and internally, and on every façade, and they make reasonable assumptions based upon their knowledge and experience of buildings over what the superstructure, frame and hidden structural composition of the building will be.
The surveyor then carries out an ‘elemental take-off’ which is quantity-surveyor speak for adding up roughly what all the different parts of the building would cost in a fair market. This forms the basis of a ‘raw calculation’.
The surveyor then updates their raw figure forward from the year and financial quarter the data originated, to whatever quarter of whatever year we are in at the moment, e.g. Q4 2018 to Q3 2021, using a measure of inflation called the ‘Tender Price Index’.
The surveyor then adds on demolition costs, planning and statutory fees, VAT on these elements and derives the final ‘Declared Value’ (DV).
Aside from the ‘bricks and mortar’ cost of rebuilding, what else goes into the calculations?
An RCA provides you with a ‘Declared Value’ (DV) that also includes the costs of demolition, professional fees (e.g. surveyors, structural engineers), statutory authority fees, VAT and other costs that could be relevant when rebuilding or reinstating.
How often should an RCA be done?
The RICS October 2018 guidance note recommends a “major review” is carried to a building’s reinstatement cost “every three years or earlier should significant alterations be made” with annual adjustments made “to reflect inflationary effects”.
Our interpretation of the RICS guidance is to conduct a full RCA (site survey) every three years, with desktop reviews on a yearly basis. You may wish to rely on index linking of the DV imposed by your buildings insurer or instruct your surveyor to carry out a desktop review of the latest full RCA.
What effect does the DV have on the insurance premium?
The insurer for your buildings will calculate the premium paid for each building by applying a rate (percentage) multiplied by the DV.
e.g. DV (£5,000,000) × 0.1% = £5000.
To this premium of £5000, insurance premium tax (IPT) is added, which is currently 12% for buildings insurance. The premium the client pays is £5600.
If terrorism insurance is applicable, the same DV is multiplied by a different rate (percentage) to calculate separate terrorism insurance premium.
e.g. DV (£5,000,000) × 0.04% = £2000.
IPT is also applicable to terrorism premiums, so the £2000 becomes £2240.
So you can see that the higher the DV, the higher the premium, everything else remaining equal.
What is the difference between the Declared Value (DV) and Sum Insured, and which is given in the RCA report?
The Declared Value (DV) is the full reinstatement value which is calculated by your surveyor conducting the RCA. The DV is the figure presented in the RCA report.
The Sum Insured (SI) is set by the insurer for the building, not the surveyor. The SI is the DV plus a provision for inflation which is typically 20% to 50% of the DV.
For instance, a DV of £5,000,000 as calculated by your RCA surveyor would become an SI figure of £6,500,000 after a 30% uplift as applied by the insurer.
For the purposes of an RCA, you only need to think about the DV.
What are the potential consequences of failing to organise regular RCAs?
In short: underinsurance or overinsurance. A building may be insured for too high a DV, meaning the landlord, leaseholders or tenants (or all three) are paying too high a premium. This is overinsurance.
If the building is insured for too low a DV, then the insurer may pay a claim out in proportion to the underinsurance. They will exercise the ‘average clause’ in the policy wording. For instance, a building insured for £1 million that should be insured for £1.5 million is therefore 50% under-insured. In this scenario, an insurance claim for say £14,000 would only yield a pay out from the insurer of about £9,333, leaving the policyholder (e.g. landlord/freeholder/RMC) to pay the difference.
If the DV is found to be inaccurate, what are the potential implications?
Similar to the consequences of failing to organise RCAs regularly, a DV that is too high will mean the contributors to the insurance premium are paying too much, and that could result in a claim against the landlord/freeholder. And if the DV is inadequate, underinsurance results, which may severely affect a pay-out from the insurer in the event of a claim.
It is not only crucial to have a reinstatement cost assessment carried out; it is equally important to ensure the surveyor appointed is suitably qualified. RCAs are a specialist area of surveying.
If my building has a claim, will the insurer check the DV before processing it?
Irrespective of the value of the claim, the insurer may check the DV. For larger claims, the loss adjuster will almost certainly check the DV and report to the insurer if they believe the DV is too low. Remember that if the DV is too low, the insurer may apply the ‘average clause’ and pay out the claim pro rata. In the worst case scenario, the insurer may attempt to repudiate the entire claim.
If a building lease requires a “fire insurance valuation”? Is this the same thing as an RCA?
Yes — this is a term used by older leases and some lenders to emphasise the original purpose of buildings insurance — to cover against the risk of fire. Not a lot of people are familiar with this term though, and we would not recommend using it or asking for it.
Is the DV related to the market value of the building?
No. The value that a property is worth for sale is usually a very different number to its rebuild cost. For instance, a block of flats in central London with a DV of £4 million may command a market value of well in excess of £10 million.
Conversely, there are buildings in parts of country that would cost more to reinstate than their market sale value such as a converted mill or warehouse, or a listed building.
How would the reinstatement cost of a building with timber balconies or cladding be decided?
This would be the same as any other building: the surveyor would allow for the equivalent replacement with a contemporary material that meets current building regulations.
Do RCAs include all plant and equipment in a building, such as a communal boiler system or a lift?
Yes, if it’s a fixed item to the building, then it’s included. Generally what tends to be excluded is items such as furniture, moveable items, and anything that could conceivably form part of the ‘contents’ of the building as these tend to be separately assessed. In commercial buildings, the surveyor is sometimes asked to exclude commercial fit-out beyond ‘Cat A’.
If a lower ground floor flat builds an extension, will that affect the DV and should I commission a new RCA?
Whilst an internal flat refurbishment may marginally affect the DV of the whole building, an extension to a ground floor flat will definitely have an effect, pushing the DV upwards. The extension would have required the necessary permissions and as part of that consent process, the cost of a new RCA ought to be borne by the leaseholder in question, unless the RCA was due in any case. It is possible that the landlord will insist on a recalculation of the insurance premium apportionment or indeed the service charge appointment as a whole, given the lower ground floor now enjoys a larger floor area. If, however, a new storey is developed on top of an existing block of flats, then a re-apportionment of the service charges will be certain.
Do listed buildings require a different approach when doing an RCA?
Listed buildings cannot be valued accurately using the generic ‘functional unit rate method’ which many surveyors use on simpler rectilinear estate housing. Specialist period construction techniques data is not readily available in pricing books or databases. For instance, you won’t find cost data on thatching in SPONS pricing book or on the BCIS. But if the surveying firm undertaking the RCA has experience in the listed building sector they may have their own unpublished ‘in-house’ data on a variety of period construction techniques and be able to make informed judgements on the reinstatement costs of just about any historic or period building technique.
We would like to thank Earl Kendrick for supplying the content for this article.