Newsletter #27: Construction Cost Guideline for Insurance

In estimating the replacement cost of a building, many will refer to a construction

guide such as the Property & Construction Handbook published by AECOM. For
example, the 2014 handbook recommends the following building rates per square
metre for private dwellings (excl. VAT):

- Economic R4 100 - R5 600

- Standard R5 600 - R6 500
- Middle Class R6 500 - R9 400
- Luxury R9 400 - R14 000
- Exclusive R14 000 - R43 100
(Please note that the above rates are outdated and shall serve as an example only as the 2015
edition of the handbook has not yet been published.)

Besides offering an extremely wide cost range per category, the rates indicated in
such guide books usually represent the average expected net building costs in one
province only and may not include additional building services (e.g. electrical
installations, intercoms, air conditioning etc.) or additional site improvements (e.g.
swimming pools, paving, exterior lighting etc.).

Building costs may vary between urban and rural locations and can be significantly
higher in coastal regions; therefore - in addition to the specific building design called
for by the prevailing geological and topographical conditions - it is also necessary to
consider the regional variances in cost.
It is furthermore important to note that - on average - the recommended building
costs escalate by between 6% and 14% during the course of a year.

Additionally, professional fees must be accounted for - these may include the fees of
architects, engineers, project managers, quantity surveyors and supplementary
services. While not all construction projects require all of these professional services,
architects often assume the role of the project manager and charge a percentage for
this on top of their architectural services.
Some may argue that the building plans still would be available in the event of total
destruction, but this is not always the case and we must assume the worst case so
that the client is covered for all eventualities.

The sum insured must also make provision for demolition and rubble removal which
can vary considerably, depending on the building's design and particular location.

It is impossible to accurately predict the escalation of building costs and we strongly

advise against applying a fixed escalation rate for more than two years in a row as it
ultimately will result in a misrepresentation of the true replacement cost. Moreover, it
is recommended that a professional valuation be done at least every three years.

Needless to say, advising clients on the replacement cost of their property bears
liability concerns and an untrained assessor can easily be off the mark by 20% or
more, owing to the multitude of variables to be taken into consideration and with
potentially disastrous consequences for the insured in the event of average being
applied to a claim.
Please look out for next month's newsletter in which we will announce our special
offer on holiday home valuations during the year-end school holidays.

Yours sincerely,

Bjrn Laubscher
Managing Director