What is Reproduction Cost
Reproduction cost refers to the costs involved with identically reproducing an asset or property with the same materials and specifications as an insured property based on current prices. Insurers use reproduction cost as a method of valuation to calculate the costs involved with the risk of replacing an insured asset with an identical one at the same location.
BREAKING DOWN Reproduction Cost
Reproduction cost looks at the cost of creating an exact replica, and should not be confused with replacement cost, which looks at the cost of replacing an insured property with one of similar functionality.
Different insurance contracts will insure for a different cost. While some insurers will pay out an amount to purchase a similar asset of same functionality; others will pay out an amount to purchase an identical property. Because these amounts can differ greatly, it is important to know the terms in your own insurance contracts.
Methods for Calculating Reproduction Cost
- Square footage method: This method calculates the cost of construction by multiplying the square footage of the structure by the construction cost for that particular type of building. For instance, multiply a $100 per square foot cost to build the kind of house you’re appraising by the 2,000 square foot total area of the house to arrive at a cost estimate of $200,000 to reproduce the structure. The square footage method is the one more commonly used by appraisers to estimate reproduction cost.
- Unit-in-place method: This method for calculating reproduction cost arrives at a cost by estimating the installation costs, including materials, of the individual components of the structure. So if you know you need 1,000 square feet of sheet rock to cover the walls, you need to find out the cost of buying, installing, and finishing the sheet rock on a per-square-foot basis and then multiply by 1,000 square feet. Another way to apply this method is to estimate the four main steps (units) to building a house. For instance, cost of foundation, cost of roof and framing, cost of mechanicals, and cost of walls and finish work. Each step is estimated separately and then all are added together.
- Quantity survey method: This method requires breaking down all the components of a building and estimate the cost of the material and installation separately.
- Index method: This method requires knowing the original construction cost (without land) of building in question. Multiply that original cost by a number that takes into account the increase in construction costs since the building was built.