ESTIMATING, COSTING AND BUILDING SPECIFICATIONS

– AR L2330

Principles of economics as applied to buildings

Factors affecting the cost of a building
 INTRODUCTION TO BUILDING ECONOMICS

ECONOMIC ACTIVITY
Basic concept – any activity (legally permitted) which shall result in building
activities to serve people for which the people are ready to pay the price
directly or indirectly by buying or hiring the spaces can be treated as an
economic activity.

BUILDING ECONOMICS

Building economics is concerned with production and consumption and services

and the analysis of commercial activities –
As it is related to architecture and building activity – all types of buildings for all
types of functions by the builders (production) and consumption i.e., the ones
who either buy or hire those buildings for various functions with the services
offered by professionals like architects, planners, engineers etc.
 BASIC TERMINOLOGIES IN BUILDING ECONOMICS
Resource
In economics a resource is defined as a service or other asset used to produce goods
and services that meet human needs and wants.
Classical economics recognizes three categories of resources, also referred to as factors
of production: land, labor, and capital, and sometimes the entrepreneur are
specifically identified as a fourth entity.

Goods and services

Economic good is a physical object like natural or manmade (artificial) goods.

1. Natural goods : Sources like land, water, air, natural stones, sand basic raw
materials to be converted to manmade materials to be used for construction of
buildings.
2. Manmade goods : Product like mosaic tiles, tiles of all stones, ceramic tiles, wall
finishes, doors/windows/woodwork, electrical materials, water supply and sanitary
pipes and fittings etc, harnessing solar power, A/C plants, heating, cooling etc.
Ends – scarce means
The scarce means like land, building materials, and allied services result in failing to
meet the demand in housing sector.
Economics itself has been defined as the study of how society manages its scarce
resources.
 PRODUCERS AND CONSUMERS
PRODUCERS:
Producers are individuals, builders, contractors in private sector or governments state
or central.

Primary producers are those who produce the raw materials like :
 wood, stones,
 basic raw materials for production of building materials.
Secondary producers are those who are engaged in production of materials like:
 cement, procure sand,
 metal, steel, aluminium,
 various other materials to be used in building construction.
Tertiary producers are those who carry out the following functions:
 Transportation
 Banking
 Architects and Engineers etc who offer services, insurance agencies for buildings,
educational institutions, who train professionals.

CONSUMERS:
In good old days, there was barter system with no profit motive. Present days, the
medium of exchange is money which is used in so many forms for buying and selling
for all activities.
 ECONOMICS RELATED TO BUILDING INDUSTRY
The study of Economics can be broadly classified into two categories:

1. Micro Economics
2. Macro Economics

Micro – Economics

It is a small part of whole economics which deals with individuals, their needs,
their behavior, individual firms and its activities. This deals with studies like
incomes, capital spending on building, individuals who are engaged in various
products for building construction.
“Micro-economics is also called Price Theory.”
Macro – Economics

It deals with aggregates and averages of entire economics like national income,
aggregate products, aggregate outputs, total employment, total consumption,
savings and investments, aggregate demand, aggregate supply, general level of
prices. Here it also studies how these aggregates are fluctuating and affecting the
economic growth of the country.
“Macro Economics is also called Income Theory.”
The exchange of information between buyers and sellers about factors such as price,
quality and quantity happens in a market. Construction is made up of a diverse range of
markets, as the industry comprises a large number of relatively small firms.
markets in which construction firms operate.

Mesoeconomics:

The sectoral approach is referred to as

Mesoeconomics (means intermediate from
the Greek word mesos). The study of any
specific sector or industry inevitably falls
between the conventional microeconomic and
macroeconomic categories.

To obtain a comprehensive understanding of

efficient and sustainable construction
economics, it is advisable to embrace three
perspectives:
 A broad macro overview of the economy,
 A specific sectoral study of the industry, A model for construction economics
 A detailed microanalysis of the individual
The BASIC ECONOMIC PRINCIPLES that underpin construction projects are:

 Supply: factors affecting supply; supply curves; changes in supply

 Demand: factors affecting demand; demand curves; changes in demand;
demand elasticity
 Markets: determination of the market equilibrium; shortages and scarcity and
their effect on price; price determination; changes in price; opportunity costs;
consumer choice; price mechanism; the four Ws (where, what, why and when)as
applied to a construction product
 Types of business: sole trader; partnership; public limited company; private
limited company; partnership; housing associations; non-profit-making
organizations.
Parties Involved in Supply:

 Architects and Designers : Provide specialist advice concerning structural,

electrical, mechanical and landscape details. Identify key specifications
 Project Manager : Manages project in detail. Liaises between the client
 and the construction team.
 Cost Consultant : Prepares bills of quantities, cost plans, etc.
 Main Contractor : Manages work on site.
The ECONOMIC RESOURCES required to
complete a typical Construction project:

 Land: types; factors affecting price;

factors affecting availability; location
 Capital: specific capital; capital goods
 Labor: demographics of the working
population; factors affecting
availability; mobility of labor; factors
affecting labor efficiency; the quality
of labor; skills;Incentives
 Entrepreneur: as risk taker; land
developers; property developers;
private investors; need for
knowledge and foresight of the
market
 Finance: types; availability; sources,
eg. EU finance, mortgages, venture
capital, loans, lottery funding,
reinvest profits, shares
 KEY DETERMINANTS OF INITIAL COST

1. Project Specification
2. Location
3. Form of Contract
4. Site Characteristics
5. New Build or Improvements
6. Tax Liabilities
7. Timescale
8. Inflation
1. The Project Specification:
 The specification defines the physical attributes of a project.
 Generally, the more detailed the specification and the larger the project,
the more expensive it will be.

2. Location: Location affects project costing via institutional factors and

through geographical realities.
Institutional Factors
 Consents procedures in particular may be more arduous in some
countries, affecting the time it will take to successfully implement a
project.
 Where major projects are likely to be strongly opposed on environmental
grounds, more cost may have to be allowed for environmental mitigation
measures.
Geographical Factors
 Construction and material costs, land costs and design standards vary
widely across the areas because of the varying distances from suppliers,
climate and weather conditions, and general market conditions.
 Generally, the more remote a project is, the more expensive it will be
because of the cost of transporting construction materials and equipment
to the site.
 In an urban location, land costs are usually much higher.
3. Form of Procurement/Contract

 The form of procurement and contract used by the project sponsor can
alter the estimated cost of a project.
 Cost savings may be made by means of lump sum contracts although
these are usually marginal in relation to the total project costs.
 DBFO contracts, which seek to transfer most of the risk of cost over-run
from project sponsor to contractor, may in some circumstances yield
savings.

4. Site Characteristics

 A site can be affected by soil and drainage conditions and access

restrictions which can affect the original cost estimates.
 The amount of excavation, piling and foundation activities required are
particularly affected by poor ground conditions.
 Where there is uncertainty about ground conditions, accurate project
costing cannot be achieved unless a soil survey is undertaken.
5. New Build or Improvements

 Generally, the construction of new infrastructure is more expensive than

improvements to existing infrastructure, or the refurbishment of buildings.
 This is primarily because the “non-building” costs such as land purchase,
foundations, services provision etc. do not have to be included when simply
upgrading existing structures.

6. Tax Liabilities

 An organisation will be liable to pay tax on its purchases. Some

organisations and types of project are not liable to pay taxes, e.g. Local
government projects and infrastructure for public use .
 Some public or quasi-public sector companies, voluntary and private sector
organisations can be liable and these tax costs can have a significant impact
on gross construction costs.
7. Timescale

 Generally, the longer a project takes, the greater the project costs will be.
 Project timescales are dependent on the specification of a project.
 Usually, the larger a project is the longer it will take to implement.
 Also, a project which involves non-continuous phases is usually more expensive
than one undertaken without interruption because of the additional costs involved
in re-mobilising plant and contractors.

8. Inflation

 The longer the expected construction period, the more account will need to be
taken of expected inflationary price increases over time.
 Initial cost estimates will need to allow for the value that will need to be paid at
the time the project actually goes ahead.
 FACTORS WHICH CHANGE THE COST OVER TIME

1. Poor Project Management

2. Design Changes
3. Unexpected Ground Conditions
4. Inflation
5. Shortage of Material & Plant
6. Exchange Rates
7. Inappropriate Contractors
8. Funding Problems
9. Land Acquisition Costs
10. Force Majeure
 FACTORS TO BE CONSIDERED WHILE COST PLANNING

1) Similar Construction Projects: For the construction estimate, the best reference will
be similar construction projects. The final cost of those similar projects can give the
idea for the new construction project cost calculation. The final cost of past project
needs to be factored with current construction cost indices.

2) Construction Material Costs: Construction material cost consists of material cost,

Quantity of material, shipping charges and taxes applicable if any. So, it is important
consider all these variations while calculating construction material cost.
3) Labor Wage Rates: Labor wages varies place to place. So, local wage rate should
be considered in calculation. If the project has to be started after several
months of estimating the project cost, the probable variation in wage rates has
to be considered in the calculation.

4) Quality of Plans & Specifications: A good quality construction plans and

specifications reduces the construction time by proper execution at site without
delay. Any vague wording or poorly drawn plan not only causes confusion, but
places doubt in the contractor’s mind which generally results in a higher
construction cost.

5) Reputation of Engineer: Smooth running of construction is vital for project to

complete in time. The cost of projects will be higher with sound construction
professional reputation. If a contractor is comfortable working with a particular
engineer, or engineering firm, the project runs smoother and therefore is more
cost-effective.

6) Regulatory Requirements: Approvals from regulatory agencies can sometimes

be costly. These costs also need to be considered during cost estimate.
7) Insurance Requirements: Cost estimation for construction projects should also
need to consider costs of insurance for various tools, equipments, construction
workers etc. General insurance requirements, such as performance bond, payment
bond and contractors general liability are normal costs of construction projects. In
some special projects, there can be additional requirements which may have
additional costs.

8) Size and Type of Construction Project: For a large construction project, there can be
high demand for workforce. For such a requirements, local workmen may not be
sufficient and workmen from different regions need be called. These may incur
extra costs such projects and also for the type of construction project where
specialized workforce is required.

9) Engineering Review: Sometimes it is necessary to carry out technical review of

construction project to make sure the project will serve the required purpose with
optimum operational and maintenance cost. This review cost shall also be added
to the project cost.

10) Contingency: It is always advisable to add at least 10% contingency towards the
total project costs for unforeseen costs and inflation.
THANK YOU…!!!