Reconstruction Costs: The Underlying Basis for Replacement Cost Estimates

Reconstruction costs are the underlying basis of the replacement cost estimate and include labor, materials, and equipment costs needed to rebuild a structure. These costs are highly localized and often fluctuate, requiring constant monitoring. Below are some important facts to consider when explaining the basis for replacement cost estimates and factors that influence changes.

Reconstruction, not New Construction Costs

Replacement cost estimates are based on reconstruction costs, which can be significantly different from costs associated with new buildings construction. Typically, reconstruction costs are higher than new construction costs for the following reasons:

Inability to plan projects - Property reconstruction requires the building to be re-built to the original condition and the scope of work is not known until the building needs to start. Each project is different making it difficult to plan ahead or leverage previous experience.
One-off projects - Reconstruction contractors never know when the next job will start. This makes it difficult to plan work agreements with subcontractors and buy materials in bulk, which can reduce costs.
Site accessibility - In reconstruction environments, contractors often need to work around landscaping or near-by structures, making site access more difficult and costly.

The Localized Nature of Reconstruction Costs

Just like real estate market values, property reconstruction costs are highly localized. The replacement costs for two similar properties in a state, or even a ZIP Code apart can be very different. The chart clearly demonstrates how overall reconstruction costs change at different rates, and even direction, for four metropolitan areas in the United States since 2007.

Reconstruction Costs for Historic Homes

Residential reconstruction has changed significantly over the years. Many breakthroughs in building materials and construction techniques have reduced building costs. However, the replacement cost estimates is expected cost to rebuild a structure with like kind and quality materials on its original site. As such, replacement cost estimates for historic homes need to reflect the costs to rebuild a home using building materials and construction techniques that are not common today. This typically results in higher replacement cost estimates for older homes.

For example, prior to 1940, plywood was not available. Exterior walls and roofs were sheathed using 1x8 material installed in a diagonal pattern to provide the structural value, resulting in both high materials and labor costs. In 1960, the development of pre-engineered trusses decreased materials and labor costs for roof construction. 360Value uses these examples and countless others to assume different types of windows, doors, moldings, exterior siding, and other building materials for replacement cost calculation.

Factors that Influence Changes in Reconstruction Costs

Keeping a continuous eye on reconstruction cost data is critical as there are many factors that can move costs up or down. Following are several factors that influence reconstruction costs:

Supply and demand for labor and materials - Factors including new construction, personal and corporate finance, and optimism or fear of future economic conditions, all influence supply and demand of reconstruction labor and materials costs.
Catastrophes - The sudden need for materials and labor after a hurricane or earthquake can have an immediate and lasting impact on localized reconstruction costs. Furthermore, catastrophes in areas where materials are produced can impact the supply of materials, impacting reconstruction costs.
Localized labor practices - Changes in union labor contracts, prevailing labor wages, and non-union labor rates need to be tracked and incorporated into pricing for the affected areas.
Emerging building methods and materials - More and more construction is utilizing green technology. Solar energy, water conservation methods, highly insulated walls, and other energy efficient materials and building techniques are becoming more common. These new methods and materials impact reconstruction costs.
The cost of energy - Changes in crude oil, electricity, and other energy factors can influence production, transportation, labor costs, and petroleum based materials such as asphalt shingles, vinyl siding, and carpeting.