Commercial property investors and landlords have a long list of obligations to ensure their properties are safe, compliant and ready to let. That’s why, sometimes, it can be tempting to delay or jettison the tasks they deem to be less urgent.
One task that’s sometimes forgotten is the office reinstatement cost assessment. However, given the potential consequences of over- and under-insuring your office, these essential insurance assessments and adjustments are not something to overlook.
Here we explain what a reinstatement cost assessment is, how to calculate building reinstatement costs and why it’s something you’d be wise not to miss.
What is a reinstatement cost assessment?
A reinstatement cost assessment (RCA) is a professional valuation, carried out by a chartered surveyor, that establishes the estimated cost of completely rebuilding your office in the event of total loss or destruction.
An RCA is an evidence-based, structured assessment that ensures your insurance cover reflects the true cost of reinstating the property, including demolition, site clearance and professional fees.
Who is responsible for conducting a reinstatement cost assessment?
As the property owner, you are ultimately responsible for carrying out the reinstatement cost assessment and making sure the building is adequately insured. If you use a commercial property manager, they can arrange the RCA and insurance on your behalf.
If you have a tenant under a full repairing and insuring (FRI) lease, they may be responsible for reimbursing you for the costs of the assessment. However, the tenant wouldn’t usually arrange the RCA. That responsibility still rests with you.
How often should you conduct an office reinstatement cost assessment?
Although it’s not a legal requirement, it’s highly advisable to conduct a RICS-compliant office reinstatement cost assessment every three years. That will involve a building inspection, data collection, benchmarking and the preparation of a formal RCA report by a RICS-qualified surveyor with appropriate expertise.
However, if there are major alterations to the office, such as refurbishments, extensions or significant changes to its contents, it would be wise to commission a new RCA without waiting for the full three-year cycle.
It’s also advisable to conduct annual RCA adjustments to account for the fluctuating cost of building supplies, inflation and changes to the building or its contents. This adjustment can be performed via a desktop evaluation using building cost data and other indices.
Do you need a reinstatement cost assessment?
Should you require expert and independent advice on buildings and contents insurance including reinstatement cost assessments, contact our insurance team at Eddisons. We have undertaken RCA’s on wide and varied portfolios across a range of sectors covering private, public and education.
How to calculate the building reinstatement cost
The RCA determines the cost of rebuilding a commercial property to its original condition and specification in the event of a total building loss. To do that, the surveyor has to consider several factors, including:
- The office’s internal floor area
- Its construction type
- The quality and specification of finishes
- Services (lifts, air conditioning, cabling, etc.)
- External works (landscaping, car parks, roof terraces, etc.)
- Special features, such as complex services and sustainability measures
Once the surveyor has a good understanding of what is there currently, they can then calculate the cost of rebuilding it. That includes:
- Demolition and clearing the site
- Rebuilding the structure and its finishes
- The professional fees of architects, engineers and project managers
- The impact of inflation
- Regional price variations
The surveyor will then produce a report that explains the scope and basis of the assessment, explains any assumptions and exclusions, and includes a final reinstatement cost figure for insurance purposes.
Why reinstatement cost assessments are crucial
As we’ve said, reinstatement cost assessments are not something you should skip, as delaying them or overlooking them entirely can create serious financial and legal risks.
Conducting regular reinstatement cost assessments helps you:
Ensure sufficient coverage
A RICS-compliant RCA gives landlords and tenants the peace of mind that the building has adequate cover if the worst should happen. The assessment is based on transparent methodology and has a clear audit trail. That makes sure your assets are insured for the full cost to rebuild and not just market value.
Protect against underinsurance
The biggest danger of skipping an RCA is leaving yourself with a commercial property reinstatement value that does not accurately reflect the rebuilding costs. If the sum insured is too low, the insurance payout will not meet the full cost of rebuilding the office, leaving you to cover the shortfall.
Avoid overinsurance
On the other hand, skipping an RCA could leave you with an overstated commercial property reinstatement value, leading to higher insurance premiums than necessary.
Account for fluctuating building costs
Construction costs can fluctuate significantly year-on-year, with inflation, regulatory changes and supply chain issues all having an impact. Even three-yearly RCAs can struggle to keep pace with the market, which is why it’s so important to perform annual adjustments.
Reduce tenant-landlord disputes
Under a full repairing and insuring (FRI) lease, the landlord arranges the building insurance and passes the cost on to the tenants. Carrying out regular reinstatement cost assessments helps to ensure the insurance cover is accurate, reducing the risk of disputes over excessive premiums. It also protects against potential claims of negligence or breach of the lease in the event of damage to the building.
How can we help?
At Eddisons, we conduct hundreds of office building insurance valuations every year and provide reinstatement values for lending and insurance purposes. Find out more about our office property services, including commercial and insurance valuations, and get in touch to discuss your goals with our team.
