It is important to correctly assess what the cost of your likely works will be. But this isn’t always as easy as it sounds.
It is important to make sure that the rebuild cost of the existing structure is accurate. You should also take care to make an accurate estimate of the cost of the works.
What should you include when calculating the cost of the works?
The cost of the works should include all of the labour and materials you propose to bring to the project, whether those are the subject of a single contract or a number of smaller contracts with individual tradesmen. If you are purchasing the materials direct and project managing their use and installation you should ensure that they are included within the cost of the contract.
Works costs always need to include an amount for debris removal related to the works, the professional fees you incurred in putting the project together and VAT.
It is important to correctly assess what the cost of your likely works will be. But this isn’t always as easy as it sounds.
For example, if your project is £300,000 but you have neglected to include debris removal costs of 15%, professional fees of between 10 and 12% and VAT at 20%, the actual cost of your project would be £455,000. This would mean that your works section of the policy was approximately a third under insured. The effect being that for every £100 of your claim only £66 will be paid.
How to avoid the risk of under insurance
If you are uncertain what the cost of the works is likely to be, we can arrange the insurance on a declaration basis. This means that we will take your estimate of the works at the start of the project to be just that, and adjust the premium at the end of the project to reflect the actual amount that was spent.
In this way you will never be under insured because it is accepted at the start of the project that you will be making a declaration and paying a premium for the actual amount of works at the end.
It is true to say that in the vast majority of projects the anticipated costs exceed the estimate by a factor of between 20% and 30%. Some projects – due to problems with ground conditions or the existing structure – could be more than double the original estimate.
If you are uncertain what the cost of the works is likely to be, we can arrange the insurance on a declaration basis.
If you do not opt for a declaration basis of insurance, you should make sure that you update your works sum insured as and when you breach the agreed limit under the policy.
It’s worth bearing in mind that the larger the project the more risk there is of under insurance, and the bigger the pure cash effect of under insurance is likely to become.