Cost & Summation Method

36140 — Cost & Summation Method

Valuation Fundamentals (36100)

Overview

Node 36140 addresses the cost method, also known as the summation method or depreciated replacement cost method, a valuation methodology that derives an opinion of value by summing the value of the land, assessed on an unimproved or site basis, and the depreciated replacement cost of the improvements erected on it.

The method proceeds by estimating the cost of constructing an equivalent modern replacement for the existing improvements, then deducting an allowance for physical deterioration and functional and economic obsolescence to arrive at a depreciated replacement cost, which is added to the assessed land value. It is applied principally to properties for which comparable sales evidence is limited or unavailable, such as specialised, purpose-built, or community and institutional assets not commonly traded on the open market.

This node serves valuers, insurers, and asset owners seeking to understand how the cost method operates as a valuation methodology, complementing the sales comparison method addressed in node 36110 and applied in circumstances where that method cannot be reliably applied.

Scope & Boundaries

This node addresses the cost method, including the assessment of land value, the estimation of replacement cost, and the deduction of depreciation and obsolescence. It does not address the sales comparison method, addressed in node 36110, nor the valuation of specialised assets more broadly, addressed in node 36340.

It does not address the assessment of insured replacement cost for insurance purposes, addressed in the 37000 series, nor the fundamental principles common to all valuation methods, addressed in node 36100. Where the cost method output is used to assess insured value, that is a distinct and separate exercise from the market valuation addressed in this node.

Scope Note

This node describes generally applicable principles of the cost method as at the time of writing. The applicability of the method, and the depreciation and obsolescence allowances appropriate to a given asset, depend on the property type and require the judgement of a suitably qualified valuer.

Key Concepts

Depreciated Replacement Cost

The estimated cost of constructing a modern equivalent of the existing improvements, less deductions for physical deterioration, functional obsolescence, and economic obsolescence.

Physical Deterioration

A reduction in the value of improvements arising from wear, ageing, and the physical condition of building elements relative to a new equivalent.

Functional Obsolescence

A reduction in the value of improvements arising from a deficiency or superadequacy in design, layout, or specification relative to current market expectations.

Economic Obsolescence

A reduction in the value of improvements arising from external factors unrelated to the physical condition or design of the improvements themselves, such as a decline in demand for the type of use to which the improvements are put.

Regulatory & Legal Framework

API/IVSC Professional Practice Standards

Australian Property Institute & International Valuation Standards Council

Set the methodological standards governing the application of the cost method, including the assessment of depreciation and obsolescence.
National Construction Code

Australian Building Codes Board

Informs the construction standards and specifications against which replacement cost is estimated.
Valuation of Land Act

State Valuers-General

(state-based, for example the Valuation of Land Act 1916 (NSW) and equivalent legislation in other states) establishes the statutory basis on which the land value component of the cost method is assessed for rating and land tax purposes.

Practical Application

The cost method is applied principally where comparable sales evidence for the subject property is limited or unavailable.

Scenario	Application	Outcome
A purpose-built aged care facility with no directly comparable sales evidence is valued	The valuer assesses land value separately and estimates the depreciated replacement cost of the specialised improvements	The summed value provides the basis for the valuation in the absence of reliable sales evidence
A community sporting facility on council-owned land is valued for financial reporting	The valuer applies the cost method to reflect the specialised, non-market nature of the improvements	The resulting value is reported in the council’s asset register in accordance with applicable accounting standards
An older industrial building with functional layout deficiencies is valued	The valuer deducts an allowance for functional obsolescence from the estimated replacement cost of a modern equivalent facility	The resulting depreciated replacement cost reflects the reduced utility of the existing layout