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Contractor's (Cost) Method

The contractor's (cost) method is used for properties:

  • having specialised purposes such as youth clubs, public sector organisations, healthcare providers, military establishments, town councils
  • not regularly bought or sold on the market with correspondingly few comparable properties to derive sales figures
  • which are more influenced in value by their cost over other market forces, partly because of their unique nature which precludes valuing them for commercial use
  • having potential users who would rather construct a new building tailor made to their requirements rather than buy and modify an existing building at potentially greater cost
  • Given the above, the other four methods of valuation (Income, Profits, Development and Comparable) are just not suitable for such properties. This makes the contractor's method the so called "last resort" method.

    As noted, the contractor's method works on the basis that a property's value can be equated to its cost. That is, the cost of the land plus the cost of the buildings upon it equals the value of the property as a whole. Moving to a different site and having a similar building constructed would have little change on the value of the property. This is because no significant market forces exists for the building so its value is likely to be similar whichever comparably sized site is used. In other words, the value of the property is based on its use which instrinsically has no commercial application. Examples of this are fire stations, hospitals and bus depots.

    The basic equation for the contractor's method of valuation is:

  • value of existing property = cost of building + cost of site - depreciation and obsolescence allowances
  • The contractor's method has the following limitations:

  • cost and value of the property do not necessarily correlate fully as there still maybe market forces operating for the property irrespective of its use. For example, the land on which a youth club is located maybe on prime real estate that is more profitable to re-develop for commercial use.
  • difficulty in determining the rate for depreciation and obsolescence allowances

    Related Topics:

  • income (investment) method
  • profit (accounts) method
  • development (residual) method
  • comparable method