Build Cost: Getting it right for self build insurance
There is no doubt that self building is a fantastic way to get your dream bespoke home, whatever the build route adopted. Most self builders know the importance of getting the construction phase of their project insured. However, when it comes to the finer details, it can be difficult to know exactly what’s required. In this article we discuss why getting your build cost right when arranging self build insurance cover on your project can make a huge difference to recovering from a serious loss.
Danger of under-insuring your self build project
When completing a self build insurance policy proposal form, your budget (the theoretical build cost) will be prevalent in your mind as it’s what you intend to build the project for. But beware, because this is when you need to think hard about what would happen if you are hit by a serious loss. At Protek, we always ask the customer to provide us with a Professional Reinstatement Cost. That is; the amount of money it would cost to professionally reinstate the project using a main contractor, should it be destroyed by fire say 2 days prior to completion. The reason for this is simple; if the customer insures for their expected build cost, it will be a lot less than the cost of using a main contractor (that is the inherent attraction of self build after all) and not enough to rebuild quickly from a major catastrophe. Sadly this under-insurance problem doesn’t raise its head until a catastrophic loss hits, then the self builder can quickly find themselves without sufficient funds to get the property rebuilt quickly using professionals. Instead they will be faced with the fact that costs have escalated during the build, they may have zero spare financial resources but will need to self build the whole project again on a very limited budget. The problem is exasperated when the project involves an existing structure. A barn conversion will need cover for the professional reinstatement cost of the existing retained elements as well as all the new conversion works and these can be quiet difficult to assess.
All these factors can put a huge strain on the self builder, but are easily averted through professional assessment of the correct reinstatement cost.
How to work out the correct build cost for your sum insured
Your sum insured should be carefully chosen to reflect the gross cost of professional labour and materials together with the costs for site clearance, debris removal and professional fees. If you have a turnkey price from building contractor for your project this will be a good indicator on a new build project, alternatively you could use a build cost calculator from the Royal Institute of Chartered Surveyors (RICS). Before you use the calculator you’ll need to know your home’s external floor area for both upstairs and downstairs: this will give you the rebuilding cost per square metre. There are limits to using the rebuild cost calculator as it doesn’t work on every build method.
If there is an existing element forming part of your project, then this will need to be considered very carefully and its advisable to use a building surveyor who will be able to fully assess the hidden cost of rebuilding – especially if the property is listed.
In some situations a self builders build cost could be as much as 30% cheaper than a professional reinstatement and while Protek self build cover provides an element of automatic increase in sum insured, this can be quickly wiped out as the project goes over budget. For this reason you should reassess your reinstatement cost regularly during the build.
In the grand scheme of things, the effect of reinstatement cost on the premium shouldn’t be your focus. If you suffer a loss and are found to be under-insured by say 50% your claim can reduced by 50% (being the amount of under-insurance) which could result in a bad situation becoming much worse.
It’s important to bear in mind that rebuild costs have absolutely nothing to do with the land value or the market value of a property upon completion. If your mortgage lender asks you to insure for the market value of the completed property, then it’s worth pulling them up on it.
Build cost reality check: A worst case scenario.
Let us assume for a moment that you have taken a work break (or at least some extensive juggling of hours) to build your own home. You are saving money because you have managed the whole project and are using individual trades to do most of the work. You have also been doing a lot of the general labour yourself. It’s now 11 months in and you are getting close to finishing. The kitchen is being fitted and the last of the decoration has been completed. There is a roofing contractor on site dealing with a flashing which isn’t performing correctly, but either way the whole family are excited at the prospect of moving in. Your final stage payment mortgage draw down is imminent and you are looking forward to being able to re-mortgage the property upon completion. Very unfortunately, the roofing contractor knocks over his blow lamp and starts a house fire which, despite your efforts and that of the fire brigade, causes catastrophic damage rendering the property totally destroyed.
Clearly this would be a devastating event, but you will take some comfort from knowing the project is insured for the build cost you stipulated. The problem is, it’s only when you check your policy that you realise the build cost you gave the insurance provider 11 months ago now seems a little low as the project costs have escalated on the project.
The loss adjuster arrives on site to assess the damage and consider the claim. Their job is to get the property reinstated as quickly as possible and this will involve pricing up the reinstatement works. This work will need to be done quickly and will need to be carried out by contractors as you can no longer spare the time to labour or manage because you need to get back to work to pay the mortgage which is now extended. The loss adjusters reserve estimate works out considerably more than the build cost you actually insured the project for initially and despite the fact there is an uplift clause in the policy giving you some flexibility, you are badly under-insured. Unfortunately, there will be insufficient funds to rebuild the property.