Ferry and Brandon's Cost Planning of Buildings

Richard Kirkham

• Publisher: Wiley-Blackwell
• Year: 2013
• Print ISBN: 9781405130707
• eBook ISBN: 9781118659373
• Edition: 8
• Topic: Technology & Engineering
• Subtopic: Technology & Engineering Research & Skills
• Index: Technology & Engineering

Ferry and Brandon's Cost Planning of Buildings provides a comprehensive introduction to the practice and procedures of cost planning in the procurement of buildings.

The eighth edition of this leading textbook has been thoroughly updated to reflect the significant changes that have occurred in the UK construction industry since the new millennium. Whilst retaining its core structure of the three-phase cost planning process originally developed by Ferry and Brandon, the text provides a thorough grounding in contemporary issues including procurement innovation, whole life-cycle costing and modelling techniques.

Designed to support the core cost planning studies covered by students reading for degrees in quantity surveying and construction management, it provides a platform for understanding the fundamental importance of effective cost planning practice.

The principals of elemental cost planning are covered from both pre- and post- contract perspectives; the role of effective briefing and client/stakeholder engagement as best practice is also reinforced in this text.

In his revisions, Richard Kirkham reflects the many changes in the construction industry in the past eight years: procurement is given prominence early in the book; the changing role of the quantity surveyor and building economist is discussed, as is the crucial role they assume throughout the project life cycle. He emphasises the importance of early and collaborative working in the design team, as well as the impact of whole life-cycle costing.

Phase 1

Cost Planning at the Briefing Stage

Chapter 4

Developers’ Motivations and Needs

4.1 Developers and development

The property boom that has characterised the UK economy since the mid-1990s led to a significant interest in development activity. This pervades commercial and residential as well as public sector building work and is evidence of the growing underlying economic performance of the UK economy. Notably, the increase in residential development activity has been of significant interest. This has emerged primarily as a result of the growing lack of confidence in the performance of pensions and other financial products. This in turn has led to many individuals (or consortiums of individuals) seeking to invest in built assets; the tangible evidence of this is the proliferation of the ‘buy to let’ market, where individuals seek to acquire a portfolio of buildings that can be used to provide an alternative revenue stream through letting. Moreover, the critical shortage of affordable housing in the UK, particularly that suited to first-time buyers, has increased the demand for rental accommodation. This provides one example of the motivation for development.

Whilst the term ‘developer’ (the developer being the person ultimately procuring the building) is now common parlance, it is often the case that this person or organisation is the traditionally defined client or building owner, or in some parts of the world the proprietor. In popular use the term ‘developer’ is often restricted to those who build for profit per se, but this is not correct. Those who build for their own use or for non-profit purposes are equally developers.

All development arises from a consumer demand¹. Classically, there are two elements of consumer demand: opportunities and preferences. The opportunities element considers variables such as the affordability and consumption possibilities. Preferences, on the other hand, considers the utility function, i.e. what does the consumer like, and by how much does the consumer like this good? In terms of property development then, consumer demand may be either of the following:

• direct demand: for commercial property space, for offices, for a town hall or library, etc.
• indirect demand: a demand for something which will require building development in order to satisfy it (e.g. demand for motor travel requires further motorway expansion, and increased demand for aviation travel requires development of terminals and airport facilities).

But the demand must always be an economic one. There must be someone (or a group of individuals) willing to invest or who can be induced to do so. Developers, whether individuals or corporate public or private bodies, will be building:

• for profit, when their approach to cost will be governed by the way in which they expect to receive their reward, usually by leasing or by sale; or
• for use, when their approach will be governed by the actual units of accommodation which they require.

The archetypal example of development for profit is the Special Purpose Vehicle (SPV) that is created in Private Finance Initiative (PFI) procurement. The SPV involves members of the PFI consortium committing equity to a PFI scheme. The SPV is a temporary company formed especially for the project. The SPV will then be supported by sub-contractors who deliver the individual elements of the PFI contract (e.g. construction, soft services, training, etc.). The equity holders in the SPV are simply speculative investors seeking the maximum return on investment. Ordinarily they will have no interest in the function, design and layout of the building, but they will of course have an interest in cost.

4.2 Profit development, social development and user development

In considering cost targets we may distinguish between:

• profit development, where it is intended that receipts from the disposal or use of the buildings will more than cover costs;
• social development, which is usually in the publicly funded sector;
• user development, which covers such projects as a private house, or an office building for an insurance company’s own occupation.

There is also mixed development, incorporating buildings of more than one of the above types. Because the calculations involved in budgeting for all these types of development are similar, it is easy to forget that the basic situations relating to profit development on the one hand, and social or user development on the other, are fundamentally different.

4.3 Cost targets for profit development

The setting of cost targets for profit development (e.g. office blocks for letting or housing for letting or sale) is related to free enterprise economics, and even where there are grants, subsidies, taxation relief and so on to be taken into account, the criteria are simple. Even if some non-quantifiable element, like preserving the environment, has to be taken into account it will have to be assessed against its effect on profit. A calculation will soon show how much the developer can afford to spend under the heading of building costs after other items of expenditure (see Chapter 8) such as land costs, professional fees, etc., have been taken into account. There is some flexibility because the standard of building will partly determine the rent or selling price that can be asked, but this is often dictated by the environment and by the cost of the land. It would obviously not be economic to erect a high-cost luxury building for sale or rent in an unpopular neighbourhood, nor to try a low-cost, low-income development in a fashionable district where land costs are high and there is good income potential.

There is no room for hard luck stories in carrying out profit development, but on the other hand there is the challenge of working in a real situation where time means money. For example:

• early completion of a retail complex may involve substantial extra profits;
• late completion (e.g. after Christmas instead of before Christmas) could be financially disastrous.

4.4 Cost targets for social or public sector user development

In social or user development, the main object of the exercise is the actual provision of the buildings. It becomes very difficult to set realistic cost targets since there is no definite limit at which an individual building ceases to be possible. In public sector building in particular, it is usually possible (though not always politically expedient) to raise whatever sum of money is required for the purpose. Any constraint is usually at a higher level than the individual project, for example, the proportion of the national budget allocated to education may determine the amount to be spent on school building.

Therefore, to determine a reasonable cost for this type of building it is necessary to set artificial limits based on the cost of similar buildings erected elsewhere. The gross floor area is too crude for the purposes of this comparison and so various targets based on user requirements have been established, often by the ministries responsible, so as to ensure a nationwide standard. In the case of schools the unit of cost was the number of ‘cost places’ (a fictitious number of pupils calculated from the teaching space), while for hospitals the number of beds was once the basic yardstick.

These cost targets were usually determined by a set of artificial standards, which had to be adhered to. Although tight in some ways, these usually made exceptions for technical difficulties associated with a particular project. But here we are not in the world of simple profit economics; the early completion of a school or library would usually be a financial burden to the authorities, however welcome it might be to the community.

The cost planning of social development projects, therefore, may resemble the playing of a board game such as Monopoly, where the architect and cost planners try to win according to a set of rules which have little validity in the real world outside. Sometimes the rules may be very crude indeed, for example:

• Money cannot be transferred from one fund to another (so that it is useless trying to save money on furnishings or running costs in order to spend extra on the building).
• Money cannot be spent outside the financial year in which it is allocated.
• No major contract can be let except by competitive tendering on a firm BQ with no allowance for cost fluctuations.
• Any financial considerations other than the contract amount are irrelevant.

In these circumstances the skill in cost planning may consist of loophole designing, to take advantage of the regulations in the same way that a clever accountant takes advantage of the tax laws. An example of this, from outside the UK, occurred when a national system for cost control of flat building gave a greater cost allowance for balconies than the actual cost of providing them. The blocks of flats built during this period can be identified by their lavish provision of unnecessary balconies.

It is recognised by government that unrealistic cost rules lead to bad design, and many far-sighted efforts have been made to do away with the cruder kinds of inconsistency:

• by allowing money saved in one direction to be spent in another;
• by trying to bring the assessment of running costs into the cost comparisons;
• by working out very complex cost criteria for such buildings as hospitals instead of ‘so much per bed’.

These are commendable attempts to get nearer to reality, but while they have undoubtedly led to some improvement they also tend to make the ‘game’ more complicated and the loophole finding more of a challenge to the experts.

It becomes increasingly difficult to avoid the balcony type of inconsistency mentioned above.

The consequence of all this is that everybody can become so preoccupied with trying to meet tight cost targets by clever application of the rules, that they lose sight of the social purpose of the whole exercise. The attempts over the years to get as many houses, flats, schools and hospitals as possible out of the budget, without the consumer checks on satisfactory standards (such as sales or economic rents) which exist in the private sector, have played a large part in creating the massive maintenance programmes with which many public authorities are now faced.

4.5 Cost targets for private user development

This third type of development covers such projects as a private house or an office building for an insurance company’s own occupation. User development incorporates some features of both profit and social development. Because of this it is most important to find out the client’s real cost priorities and get them defined.

4.6 Cost targets for mixed development

This type of development is a mixture of profit and social development, with perhaps some user development. The cost of some of the buildings, or perhaps a proportion of the total cost, would be met by social funding and the rest is intended to make a profit. A common example of this type is a town-centre development incorporating shops and public amenities. The same remark about clients’ priorities applies as in the previous case.

4.7 Cost–benefit analysis (CBA)

In order to overcome some of the difficulties previously outlined, and to justify the public expenditure, the techniques of cost–benefit analysis were developed. Such analyses attempted to quantify all factors, including the various social benefits and disadvantages, and were widely used in connection with traffic and airport schemes and with hospital building. Cost–benefit analysis might be applied, for instance, to a proposal to carry out works to remove a sharp curve and speed restriction on a section of the railway network. The cost of the work could be offset by the saving in fuel, and against the wear and tear on equipment caused by braking and re-acceleration. However, it is possible that on these grounds alone the project might not be feasible. On the other hand, if the curve is removed it might save two minutes each on a million passenger journeys a year; 30,000 man-hours are worth something, and if they are priced and included among the benefits the scheme might now be justifiable in relation to the national economy.

This is all very well, but the railway company is going to incur the costs and is not going to receive the financial benefit of the 30,000 man-hours, so organisations in their position cannot be expected to take this sort of exercise seriously. In addition, there are the problems of attaching money values to things, that cannot be quantified. As an illustration of this, what is the value of a human life? One approach would be to work this out on the basis of the financial contribution that the individual person is expected to make to the economic life of the community, so that a surgeon might be worth hundreds of thousands of pounds while an unemployed labourer might have a negative value. Even on practical grounds this right-wing approach is obviously unacceptable; if you attempted a Cost–benefit analysis of a geriatric hospital on this basis you would find that it would be cheaper to let people die and build a mortuary instead! Or, as another less extreme example, a ring road could be justified that saved a few minutes for ‘important’ people while wasting the time of humble pedestrians.

It was therefore customary to take a notional figure representing the worth of an ‘average’ person. There was little wrong with this except that such figures, being notional, were conjured out of thin air and could be used in practice to ‘prove’ that a politically desired result was the right one. As an example, suppose a traffic improvement scheme was going to cost £100,000 a year and was estimated to reduce road accident deaths by three per year. If you cost a life at £50,000 the scheme would obviously be worthwhile; if you cost a life at £20,000 it wouldn’t be. This is not just a theoretical objection. In 1988 the UK Department of Transport arbitrarily doubled the value for a human life used in its calculations, for political purposes; this simple stroke of the pen increased the benefit expected from its road schemes by an average of 4.5%, although nothing in fact had changed. If you remember that the reduced number of deaths will be a guess anyhow, you can see that this sort of exercise is not really worth very much, and the more complicated it gets and the more social benefits that are quantified, the more questionable is the result.

A further difficulty is that by reason of the type of people undertaking these studies, the values assigned to non-quantifiables tend to be those of the cultured middle class; the relative values of preserving the environment as against providing local employment, for instance, might not be those which a working family living in the area would choose.

Cost–benefit analysis in its extreme form is now largely discredited, but its successor in the public domain, option appraisal, draws upon its techniques. Option appraisal can be applied to any proposal for public investment, and involves the appraisal of all possible options (including the do-nothing option). Cost–benefit analysis is used to evaluate those aspects that have a clear money value, both of a capital and recurrent nature, but intangibles are merely assessed and shown separately. It is left to the administrators to make the subjective decisions, knowing the financial outcome of the more tangible parts of each option.

4.8 The client’s needs

All building clients will have a set of needs (we shall look at methods for identifying and reconciling these needs in Chapter 5), some of which are more important to them than others. We have to look at these carefully because it is common to be told, for instance, that a low cost is required, or that time is important, without these very basic requirements being defined in more detail – and it is the detail that decides the best way of tackling the project. So we shall now look at the main time and money requirements that the client may have, and the different forms each may take, remembering that some clients may have more than one requirement under each heading.

4.8.1 Time requirements

• No critical time requirements. This ...

Table of contents

• Cover
• Contents
• Title page
• Copyright page
• Preface to Eighth Edition
• Preface to First Edition
• Nomenclature and Acronyms
• Acknowledgements
• About the Authors
• About the Contributors
• Introduction
• Phase 1: Cost Planning at the Briefing Stage
• Phase 2: Cost Planning at the Design Stage
• Phase 3: Cost Planning and Control at Production and Operation
• Appendix A: BCIS Elemental Cost Analysis
• Appendix B: Discount Rate Tables
• Index