1.5.3.1.1. Reproduction and Replacement Costs. The appraiser must recognize the distinction between reproduction cost and replacement cost.67 Reproduction cost is the present cost of reproducing the improvement with an exact replica; replacement cost is the present cost of replacing the improvement with one having equal utility. If the cost approach is applicable, the appraiser may use either the reproduction or replacement cost method, but must account for all forms of depreciation appropriate under the particular method chosen. In developing the cost estimate, the appraiser must account for all direct and indirect costs associated with constructing the improvements. Direct (hard) costs include the labor and materials required to construct the improvements. Indirect (soft) costs include such items as architectural and engineering design fees, legal fees, costs of permits and other similar expenses associated with obtaining approvals, and designing and overseeing the construction of the improvements. 

If a national cost-estimating service is used, the appraiser should ensure that the most similar improvement type is selected and that all adjustment factors such as locality adjustments developed for the service are properly accounted for. If the appraiser may place considerable weight on the cost approach to value in reaching a final opinion of value, a contractor or professional cost estimator should be retained to assist in developing the reproduction or replacement cost estimate.

67 See Section 4.4.3.3.