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The replacement cost when referred to in real estate describes the total costs necessary to build or purchase a new building to replace an existing one with similar functions.
Sometimes known as replacement cost value (RCV), it is somewhat similar with reproduction cost yet different in critical ways.
Reproduction concerns the complete duplication of a property internally and externally as of a certain date, and replacement cost only accounts for the improvements needed to replicate functional utility of a property.
This should not be confused with functional replacement cost.
This is particularly important for insurer to underwrite policies with adequate coverage that is not excessive. While too much coverage can look attractive to property owners, they can also attract fraudsters.
For example if a building owner intends to purchase insurance for his building against total accidental destruction, he needs to know the replacement cost so that he knows what is the amount to insure the building for. Take note that this amount will probably be higher than market value.
In a different context, lenders with reserve fund account requirements might require borrowers to keep a replacement reserve for anticipated replacement cost of home components like carpets and roofing.