Periodic insurance replacement valuations (IRVs) are a critical part of ensuring that owners of commercial, public and residential buildings are adequately insured in the event that buildings are destroyed and need to be rebuilt, a leader in quantity surveying and construction cost estimation says.

During a recent interview, Khaled Moukadem, an associate director of quantity surveying and cost management firm Rawlinsons Cost Management, spoke with Sourceable about IRVs.

According to Moukadem, the importance of IRVs should not be underestimated.

An accurate IRV can help building owners to ensure that they have sufficient insurance coverage to reconstruct their buildings or assets if necessary.

This helps to avoid the situation where owners find that there is a gap between their insurance coverage and their actual rebuild costs.

“It’s important to make sure that the property is fully is covered and insured in case it does get damaged (and needs to be rebuilt),” Moukadem said.

“If there is a fire, for instance, that fully damages a property, you want to make sure that property owners have peace of mind that they have enough money from their insurance to cover the cost in case they have to rebuild it all. Otherwise, it will lead to out-of-pocket expenses.

“So, if the insurance coverage is $30 million and the actual rebuild costs $40 million, there’s a $10 million gap in what the insurer pays and what the building costs to rebuild. So the owner will be out of pocket and may need to settle for something of a lesser value or a downgrade compared with what they had previously.”

Moukadem’s comments come as the cost of demolishing and reconstructing buildings throughout Australia has been impacted by above-average increases in construction costs over recent years.

Over the four years from to June 2020 until June 2024, Producer Price Index data from the Australian Bureau of Statistics indicates that output construction prices for detached housing, multi-residential housing and ‘non-residential building’ (commercial/public buildings) increased by 41.6 percent, 24.9 percent and 26.9 percent respectively.

As a result, whilst IRVs have always been important, the need for building owners to remain on top of this is even more critical at the moment.

Essentially speaking, an insurance replacement valuation is a professional report that provides building owners and managers with an accurate estimate of the cost to demolish and reconstruct a building to its current standard in the event that the building is destroyed or irreparably damaged through natural disasters or other events.

In addition to the actual cost of reconstructing the building, it includes other costs which can be easily overlooked.

These are:

• demolition and removal of debris
• professional fees (for architects, engineers, certifiers and others)
• external works and services (landscaping, paving etc.)
• regional loading where applicable
• development application fees
• cost escalation which may be likely occur either during the period of demolition and redesign or during the period of insurance lapse.

However, it does not include costs such as land, income loss, temporary accommodation, legal fees and contents such as loose furniture, fittings and equipment.

According to Moukadem, potential misconceptions surround IRVs in several areas.

First, whilst IRVs are an estimate of the cost to reconstruct a property of similar standard to their current property, this does not necessarily mean that the replacement building that is considered for the purpose of the valuation will be exactly the same as the current building.

Rather, the valuation will be for a building that offers similar quality and function compared with that of the existing building. However, the replacement building that is considered for the purposes of the IRV will obviously need to be designed in accordance with current building code requirements and will use current materials and construction techniques. As a result, it may have a different look and feel compared with the current building albeit whilst offering similar function.

For example, a six-storey apartment complex that was built ten years ago in 2014 would not have needed to have sprinklers to be installed for fire protection during its original construction as these were only required for complexes of eight or more storeys at that time.

Courtesy of changes to the National Construction Code in 2019, however, sprinkler protection is now required for any apartment building of four storeys in height or greater. As a result, the cost of sprinklers would now need to be considered in the IRV notwithstanding that these may not be in place in the original building.

A second misconception involves confusion around items which are covered within the IRV.

As mentioned above, the IRV does not include costs such as land, income loss, temporary accommodation, legal fees and contents such as loose furniture, fittings and equipment.

However, there have been cases where Moukadem says that clients have been confused about this and have asked about building contents such as items of furniture.

Whilst it is important for clients to speak with their insurers and ensure that contents are covered under their policies, these do not form part of the IRV. Instead, the IRV relates only to the fixed structure of the building and the cost to replace this.

As mentioned above, Moukadem says that IRVs are important to ensure that the amount of insurance coverage is an accurate reflection of the cost to replace the building in the event that the building is destroyed.

Should this not occur, building owners may find themselves in a situation where they are underinsured and the amount of their insurance does not cover the cost to reconstruct their building to the same function and standard as the original building. Should this occur, owners may be forced to either undertake a rebuild which is of a lower quality or function (potentially sacrificing items such as swimming pools or gyms) compared with their previous asset or to incur potentially millions of dollars in out-of-pocket expenses to reconstruct their building to the same standard.

In apartment buildings, this can create particular headaches as different financial situations of various owners may make it difficult to raise additional finance.

On the flip side, IRV’s can also help to ensure that building owners are not overinsured and thus paying insurance premiums which are over and above what is realistically needed.

Here, Moukadem gives the example of what happened in Western Australia, where construction costs actually contracted slightly over the decade from 2010 to 2020 as the impact of the mining boom faded.

Those who simply applied a ‘rule of thumb’ annual construction cost increase of three percent or thereabouts may have found that they were paying a higher insurance premium than would have been necessary to cover the replacement costs of the building.

Successful Strategies

When it comes to IRV’s, Moukadem says that several things are important.

First, it is critical to engage a specialist cost consultant who operates specifically in the construction sector such as a quantity surveyor to undertake the valuation.

According to Moukadem, some strata managers will engage non-construction cost consultants to undertake their IVR.

This, he says, is a mistake. Quantity surveyors and cost consultants who work specifically in construction are aware of current rates, current market conditions and the near-term forward outlook. As such, they are well positioned to provide a full and accurate estimate of demolition and reconstruction costs.

In particular, they are well positioned t consider all of the indirect costs which need to be included in the valuation as referred to above (demolition, professional fees etc.)

This is important as these indirect costs can add up to 50 percent or more on top of the actual cost of construction.

Yet these costs can easily be overlooked where consultants who do not specialise in construction are used.

Next, it is important to include additions which have been made to the original building in the IRV. These could include items such as swimming pools or additional floors which may have been added after the building’s original construction during renovation.

Finally, it is not necessary to undertake a full IRV each and every year if there haven’t been any construction changes to the property.

Instead, a full IVR is needed only around once every five years. In the intervening years, building owners can still consult with cost consultants to obtain an approximation for updates based on escalation costs. This can be done using available index data such as that provided by organisations such as the Australian Institute of Quantity Surveyors.

As outlined in Rawlinsons most recent quarterly insights report, tools such as the Rawlinsons Australian Construction Handbook are used extensively by valuers, quantity surveyors and builders to help to compile an accurate replacement value for building.

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