What Is Reproduction Cost?
Reproduction cost refers to the expense 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 claims valuation to calculate the costs involved with the risk of replacing an insured asset with an identical one at the same location.
- Reproduction costs estimate how much it would cost to exactly reproduce an asset or property to exact specifications if damaged or lost, for insurance purposes.
- Reproduction cost is not that same concept as replacement cost, which is the cost of replacing an asset or property and not reproducing it.
- Four main methods - square footage, unit-in-place, quantity survey, and index method - are often used to estimate reproduction costs.
Understanding 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 the 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 3,000 square foot total area of the house to arrive at a cost estimate of $300,000 to reproduce the structure. The square footage method is the one more commonly used by appraisers to estimate reproduction cost.
his 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. You can also use this method by estimating the costs involved in the four main steps (units) to building a house.
As an example, you will need to add the individual cost of the foundation, cost of roof and framing, the cost of mechanical equipment (such as the HVAC system), and the cost of walls and finish work to arrive at a comprehensive reproduction cost. Note that each step is estimated separately and then added to the other costs in the end to come to a full tally.
Quantity survey method
A quantity survey requires breaking down all the components of a building and estimate the cost of the material and installation separately.
The index 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.
Special Considerations: Residential Appraisals
Most residential appraisals or homeowners insurance claims do not use the reproduction cost approach. Instead, sales comparisons usually drive market valuations of these types of properties.
When a reproduction cost approach valuation comes in below market pricing, it can be a sign of an overheated market. Conversely, regular evaluations above market pricing may signal a buying opportunity. An exception is if the property is under-improved or over-improved for its neighborhood. In this case, an accurate estimation of the value of improvements adds to the precision of the determination of value, which is not possible using only the comparable approach.