Yvon RUDOLPHE

Yvon Rudolphe is a professor, PhD student researcher and coordinator of OCVI2 at the Ivanhoé Cambridge Chair in Real Estate at ESG UQAM. He acts as a facilitator for master’s students in their research in real estate concentration. He is currently a student on a PhD in science, technology and society as part of research on the impacts of innovations in the value of sustainable buildings. He is also a member of the training committee of the Ordre des évaluateurs agréés du Québec.

Cost of new construction or reconstruction: what is it?

October 3, 2021 - When it comes to determining the insurance premium based on the insurance value of a building (for insurance purposes), the broker or insurer will require his client to provide the cost of "reconstruction". Indeed, this premium is established according to the risks which are attributable to the building and the premises, but also according to the cost of reconstruction. We obviously understand that after a disaster we have to rebuild the damaged places, but the concept goes far beyond reconstruction. Indeed, the cost of reconstruction is impacted by contingencies and difficulties in restoring the inventory to its original condition. Think for example of the work involved in replacing a broken ceramic tile, on the wall or the floor, it goes without saying that this also involves the replacement of other tiles around, damaged by the work.

 

COST OF NEW CONSTRUCTION OR RECONSTRUCTION?
 
According to the new wording of article 1073 of the Civil Code of Quebec, the legislator wanted to limit the risk related to the collective heritage by calling on experts who are members of a professional order. Indeed, very often, the cost of "reconstruction" was established, for example, by the builder (or the promoter) according to its construction cost, whereas it is not a question of building from scratch, but to reconstruct from existing elements taking into account contingencies. There is therefore an important difference between these two concepts.
 
The cost of "new construction" and the cost of "rebuilding" are used for separate purposes. They therefore constitute two paradigms of different values, namely the "new construction" for the purposes of a market value and the "reconstruction" for the purposes of an insurance value. Several variables differentiate these two concepts. In the case of reconstruction, it is greater contingencies, following a disaster, that increase the cost.
 
According to information from CoreLogic, a company specializing in cost databases for insurance purposes, it sets out the various perspectives and contingencies. Here are a few :
 
ECONOMY OF SCALE
 
When a contractor constructs several buildings at the same time, the material can be purchased and delivered in larger quantities as needed, whether it is for structural lumber or plumbing fixtures. If you buy a large number of tubs, for example, the suppliers will be competing and may offer you substantial discounts.
 
When you buy a single bath, especially if it needs to be comparable to the one that was destroyed, it will usually cost a lot more than if it had been part of a large purchase. This is true for almost every component of a building, and that factor alone could add several thousand dollars to the cost of reconstruction over the cost of comparable new construction.
 
WORK ON A TOP DOWN VERSUS BASE
 
New construction is erected from the bottom up, while repair (or reconstruction) is often the reverse. Repairing a building that is not completely destroyed often means having to remove the roof and rebuild from top to bottom; it involves a more intense work process and requires more manpower time.
 
DEMOLITION AND REMOVAL OF DEBRIS
 
New construction is normally set up in open ground requiring some brush clearing, grading, or other minor site preparation. Reconstruction, for its part, is carried out from a partially or totally destroyed structure occupying the work site. While part of the structure may still stand, it will be unusable and will require demolition and complete removal.
 
The site may need to be intensively cleaned up following a fire. For example, the soil may be contaminated, the foundation may have been damaged beyond possible repair. Therefore, a lot of effort is usually required even before the first concrete pour or the first nail driven.
 
USE OF LABOR
 
When a builder starts multiple projects, even if they are not all located in the same area, the workforce for all trades can be managed and used more efficiently. For example, if a building is not ready for wiring, the electrician can often work on another building. When a single building is being rebuilt, this effective planning is rarely possible. Labor usually accounts for the largest share of the cost of constructing a building.
 
INFLATION
 
Rarely do all sectors of the economy react to inflationary pressures at the same speed. The cost of building materials, especially wood products, often increases faster than other products, and significantly faster than general inflation rates, such as the Consumer Price Index (CPI).
 
ACCESS TO THE SITE
 
In the case of new construction, there is usually no landscaping, which allows easy access to the site. Construction materials can be routed directly from any side of the structure as needed.
 
However, when it comes to a reconstruction between existing buildings, there are usually trees, shrubs, flower beds, lawns, fences, and similar obstructions that restrict access. Materials often have to be unloaded further and manually transported to where they are needed. This factor is aggravated if the site is on sloping ground. The impact on labor costs can be imposed