The Contractors Method Flashcards
What is the contractors method?
The method of last resort!
It is used to value property which does not usually change hands on the Market (specialised properties) such as town halls, police station and churches for the purpose of:
- inclusion in company accounts and other financial statements (asset valuations)
- compulsory purchase
- rating
Where there is no direct / inconclusive comparable evidence
How is the cost of the current building estimated?
The price of the building is based on current building costs which are then depreciated to reflect age, condition, and aspects of obsolescence.
Thus the valuation of such property is derived from the value of alternative sites plus the cost of building. This approach is called the contractors method or contractors test (see also depreciated replacement cost (DRC)
What does the contractors method fall under?
The cost approach- this approach is restricted to special cases
What is the basic form of calculation to determine the gross replacement cost?
Cost of Modern Building £\_\_\_\_\_ Less Depreciation £\_\_\_\_\_ Net Replacement Cost £\_\_\_\_\_ Plus site value £\_\_\_\_\_\_ Value as Existing £\_\_\_\_\_\_
What document can be referred to ?
Depreciated Replacement Cost Method of Valuation for financial reporting 1st Edition 2018
Do not confuse DRC with ?
Reinstatement/ Replacement Cost Assessment for insurance purposes.
When is the contractors method used in practice?
Last resort
When we can’t use any of the four other methods
Why is the contractors method also known as the contractors test?
Because it is a useful check by a valuation derived using another methodology
What is another name for the contractors method or test?
DRC - Depreciated Replacement Cost
What is the basic approach to the Depreciated Replacement Cost Method?
We estimate the gross replacement cost which we then adjust for depreciation which equals the NET replacement cost we then add site value derived from direct replacement
How is the site value derived at under the contractors method?
The site value will be based on the value of comparable sites
