Contractor / Cost Approach to Valuation

1. Introduction:
- Used this method where properties rarely change hands such as
church , school, libraries and etc.
- This method determines the capital value of a property by
relating its value as a whole to the value of constituent parts – l
and building cost.
- Also called as the Depreciated Replacement Cost (DRC) basis
- This method of estimating the replacement costs of the building
and adding to them the value of the land
- Method:
Value of the Site ( direct capital comparison)
Plus Cost of Building
Equals Total Value of Property
Less Depreciation for Deterioration and
Obsolescence
Equals Value of Existing Property

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 Contractor / Cost Approach to Valuation
2. Value of Site:
The DRC basis requires the valuer first to assess the market value of
the land in its existing use. This is often difficult to do due to the
specialist nature of the land use. The bets approach is to value a notional
replacement site in the locality reflecting its likely planning permission.
3. Cost of Building:
Effort to obtain the construction cost as accurate as possible by referring to
the reliable resource for rate.
4. Deterioration :
all building deteriorate from physical use and weather. In carrying the DRC
valuation it is assumed that the value of the existing building will be less a new
replacement because of physical deterioration. Reflecting this in the valuation
is best done by considering the expected design life and reducing the cost in
proportion to the age/remaining life.
5. Obsolescence:
Obsolescence can be considered under three headings:
Economic Obsolescence : arising from the changes in economic factors
e.g. fuel cost, exchange rates, subsidies
Functional Obsolescence : technical advance
Environmental factors : in relation o the surrounding area and local and 2
national planning policies
 Contractor / Cost Approach to Valuation
6. Alternative Use:
The property or site would have a different value for an alternative use
and planning permission is likely to be granted for that use then
Alternative Value should also be provided for client’s information. This
is often the case when the property may have significant development
potential.

7. Example : please refer to the given notes for detail