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Contents


Section 1 Introduction

Section 2 Construction Costs

Section 3 Cost Management Techniques
 

Description:  The purpose of this unit is to enable you to evaluate techniques for cost planning for construction projects of different types and to assess the application of cost control techniques in construction projects.

Author:  Gates MacBain Associates


Section 1 Introduction


The main purpose for a company carrying out any work is to make a profit.  In order to do this a number of factors need to be considered to ensure that all aspects that might affect profitability are taken into consideration.  This means that these factors are considered in the assessment of the work and in determining if it is likely to be profitable which will determine if the company wished to tender for the contract. It will also mean planning how the work is carried out and in determining the different techniques to be used in controlling costs during the construction process.

From this it can be seen that the process breaks down into 2 phases
  • Cost planning which assesses the construction costs
  • Control Techniques




Section 2 Construction Costs



Aims and Objectives

At the end of this section you should be able to:
  • Explain the methods of assessing the potential cost of a building.


The construction costs for a project will depend on the size, type of building, standard of finish required, location (costs will vary according to the region in which the development occurs), the economic climate of the construction industry i.e. if there is a shortage of construction work available firms will reduce the amount of their tender in order to try and attract work. If the opposite is the case and there is a lot of work available, firms will increase their tenders, as they will not be too keen to obtain the contract which will stretch their resources, unless it is worth their while financially. In a recession, construction firms can literally buy work in order to keep their workforce and to ensure some cash flow. Whether the rate of inflation needs to be considered will depend on the duration of the contract and the rate of inflation. 

Building Costs can vary between builders/developers. This can be due to the size or purchasing abilities of a company or the discount that it receives from suppliers. 

Professional fees must be added to the cost of construction and these will vary according to the project. In the past, fees were based on a set scale which was a percentage of the building cost, though in the last few years an element of competitiveness has emerged which can result in the professions negotiating their fees. This has resulted in a reduction in the amount paid in professional fees though if a scale is used these can be as little as 8% of the cost of a basic industrial unit to 20%  or more for more sophisticated developments with complex mechanical, electrical and communication services installations.  The preparation of costs will be done by the Quantity Surveyor in order that the client can obtain a suitable building within the cost constraints imposed. 


Methods of Assessing Construction Costs   

The method of obtaining a price for the construction work may be: 

Elemental Cost Analysis.  This is based on historical data from completed projects with the costs broken down into the elements of construction and shown on a metre squared basis. Data for the calculation of costs can be obtained from a number of sources i.e. the Royal Institution of Chartered Surveyors quarterly review of building prices. Cost per unit area.  This is also based on historical data obtained from similar completed projects on a cost per metre squared basis. This information may be obtained from the developers own projects or from other developers. It is an easy method to calculate though it is not very accurate. Best used on simple offices or car parks. 

Approximate Estimating.  This requires a detailed amount of information about the design requirements of the project. Cost can then be obtained by taking off quantities and building up an estimate. Data on costs is obtained from such sources as Spon’s or Wessex (these provide up-to-date pricing information for building work) or from the use of a number of computer software programmes which are now available. Bills of 

Approximate Quantities.   This method is time consuming in comparison to those listed above. The method requires a Bill of Quantities being produced before an estimate can be obtained. It is, however, the most accurate and can be used for tendering.  


Comparison of Costing 

The following will give an indication of the average costs (as a comparison)  per square metre of gross internal floor area for new building work.   

  £/m2
                           Residential  
Private Flats 475 - 650
Luxury Flat 750 – 1050
Speculative Houses 500 – 800
Sheltered Accommodation 450 – 600
   
                             Offices  
Low rise – basic 600 – 900
Medium rise – basic 750 – 1000
High rise - basic 1000 - 1400
With air conditioning add 300 - 900
   
                            Industrial  
Light Industrial – basic 250 – 400
Light Industrial with offices 350 - 550
Workshop 325 – 500
Warehouse 250 - 350
   
                             Retail  
Shop shells 350 – 550
Shop fit-out 450 – 850
Shells in malls 450 - 550 


Websites


Publications

  • Thompson, A (1998) Architectural Design Procedures, Arnold: London (Chapter 9)


Self-Assessment Task

  • Looking at each of the methods of assessing costs discussed in this section, review the type of project where each could be used and their relevance to Building Services contracts.





Section 3 Cost Management Techniques



Aims and Objectives

At the end of this section you should be able to:
  • Explain the options that are available in order to monitor costs on a project.


You will be required to understand the essentials regarding cost management techniques, the purpose of which is to ensure the profitability of any projects.  There are a number of ways that this can be done and to obtain an overview of this start by playing the PowerPoint Presentation Financial Management. One you have done that you should be aware of a number of methods regarding how to monitor cost, which you will need to ensure you understand. 

You should start by viewing the PowerPoint Presentation on Financial Management at the bottom of this section.  


Cash Flow Forecast 

In order to survive a business must, in the long term, make profits from its trading, though equally as important is the flow of cash into the business in order for it to be able to pay the outstanding creditors as they arise. 

The Cash Flow Forecast provides a means of assessing the amount of money coming into and going out of a business over a period of time. It therefore, enables any liquidity problems to be foreseen, and prevents the loss of interest due to having too much money in a credit account earning no money. It also enables the manager to assess if finance is available for any additional expenses that may be required. 

Forecasts may be drawn up for each month showing all out-goings and income for that month. Allowance is made for the period of time between sales and receipt of money so the cash flow should show when the money is expected to be received, not when a sale has been made.   


Additional Information 

The cash flow can also provide information which can be used to help management in assessing a project or the state of a business i.e. the total amount of money spent on a specific item. 

This can be put in as an additional column to total the income and expenditure. The use of spreadsheets is ideal for cash flow forecasts as they calculate all figures and allow ‘what if’ scenarios.  


S-Curves 

These will show the expected finance required for the duration of the project. The S-Curve shows the amount of expenditure and how it is required over the duration of the project. The shape of the curve conforms to an ' S' and shows the gradual build up of expenditure during the early part of the contract as the contractor becomes established on site, this normally reaches a peak at 60% of the contract and then slows down towards the end prior to completion. This is due to the majority of contracts incurring the majority of expenditure in the middle of the contract. 

The S-curve is plotted by showing the cumulative borrowings on a monthly basis; this provides useful information for financial planning and the monitoring of costs. 

S-Curves may also be drawn to show the requirements not only for finance (as shown below) but also for labour or specific materials. Any stage payments received can also be shown which will reduce the requirement. Details on the production of an S-curve can be found in Management Systems for Construction listed below.      























Figure 1: S-curve



Powerpoint  


Publications

  • Griffith A, et al, (2000) Management Systems for Construction; Longman: Harlow (Chapter 3)
  • Harris, F & MacCaffer, R, (2005) Modern Construction Management 5th Edn. Oxford: Blackwell (Chapters 7, 10 & 11) 


Self-Assessment Task

  • Discuss and assess the options available to a building services company in order that it can monitor its cost control for a specific project and the likely selection for given situations.






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