Cost Studies of Buildings

Allan Ashworth, Srinath Perera

• Publisher: Routledge
• Year: 2015
• Print ISBN:
  9781138381964
• eBook ISBN:
  9781317484141
• Topic: Business
• Subtopic: Project Management
• Index: Business

This practical guide to cost studies of buildings has been updated and revised throughout for the 6th edition. New developments in RICS New Rules of Measurement (NRM) are incorporated throughout the book, in addition to new material on e-business, the internet, social media, building information modelling, sustainability, building resilience and carbon estimating.

This trusted and easy to use guide to the cost management role:

• Focuses on the importance of costs of constructing projects during the different phases of the construction process
• Features learning outcomes and self-assessment questions for each chapter
• Addresses the requirements of international readers

From introductory data on the construction industry and the history of construction economics, to recommended methods for cost analysis and post-contract cost control, Cost Studies of Buildings is an ideal companion for anyone learning about cost management.

Section 1
Cost Control

Chapter 1
Introduction

Learning Outcomes

After reading this chapter, you should have an understanding of what this book is about. You should be able to:

• understand the purpose and importance of cost control
• identify the nature of cost advice
• appreciate the nature of construction economics and economic analysis objectives
• appreciate the main components of design method
• appreciate the environmental impact of construction projects

1.1 What this Book is About

Cost Studies of Buildings is about the understanding and application of costs to buildings and other structures. One of its aims is to ensure that scarce and limited resources are used to best advantage. It is about ensuring that clients receive the best value for money for the projects they construct. As buildings have become more complex and clients have become sophisticated and better informed, the techniques and tools available have become more extensive. The use of information communication technologies (ICT) have also provided a new array of possibilities, particularly in the ease of modelling different design and construct solutions.

The book has been divided into three sections for clear understanding of theoretical underpinnings and practice.

1.1.1 Section 1: cost control

The first of these provides a context for the material that follows later. It includes a simplified analysis of the construction industry since building costs cannot be studied in a vacuum but need to be considered within the industry to which they are applied. A more detailed historical study of the industry can be found in The Construction Industry of Great Britain by Roger Harvey and Allan Ashworth (Butterworth-Heinemann 1997). It has also been thought appropriate to include a brief history so far of the subject of building economics. The subject material in general is provided under a number of different titles and descriptors. It has variously been described as building economics, cost planning (although this definition now means something completely different) and cost control.

1.1.2 Section 2: cost information

The second section is about the different sorts of cost information that are required to undertake an effective study of building costs. These include the traditional sources of cost information such as material prices and measured rates for different kinds of construction work, as well as the more applicable cost analyses. Cost information can also come in many guises such as indices of cost, taxation and sources of funding and design data. While the latter is not strictly cost information, the design of a project has a particular influence on costs and the economics of design are influenced by a large number of factors. The importance of research ends this section. Without research the subject remains sterile and innovation in building costs does not take place. Cost innovation comes from many directions, including designers, constructors and manufacturers.

1.1.3 Section 3: cost practice

The third section is concerned with the practice of cost studies. These use a range of techniques that can be applied to each individual project in turn. A selection of these techniques will be adopted for all projects, depending upon the aims and objectives sought by the client. Even in the simplest case some form of early price estimate will be required, but this on its own is insufficient for modern-day clients. The practices being used are constantly being extended and improved, as Chapter 2 will identify. These include a range of cost and value techniques from the inception through to the in-use phase. The whole aspect of the study of building costs has shifted the emphasis towards value for money, sustainability and ICT integration. This shift has included the following:

• Development appraisal
• Elemental analysis
• Application of cost planning
• Introduction of cost limits and allowances
• Educational research and practice
• Alternative procurement systems
• Cost–value reductions
• Whole-life costing
• Value engineering
• Facilities management
• Risk analysis
• Economics of sustainability
• ICT in construction
• The future directions of cost studies of buildings.

Some will attempt to argue that a few of these techniques merely limit expenditure and apply a range of cost control practices, i.e. they are restricted to cost-reduction mechanisms. In practice they do much more through refocusing the design and construction teams by adding value to the project. Some other techniques provide the platform for data integration and collaborative working, improving and innovating in the construction processes, where the ethos of the industry is a smart and sustainable built environment.

1.2 The Purpose of Cost Control

The purpose of cost control can be generally identified as follows:

• To limit the client’s expenditure to within the amount agreed. In simple terms this means that the tender sum and final account should approximately equate with the budget estimate.
• To achieve a balanced design expenditure between the various elements of the buildings.
• To provide the client with a value-for-money project. This will probably necessitate the consideration of a total-cost approach.
• To achieve a balanced cost approach for buildings considering social, economic and environmental impacts.

The client may stipulate the maximum initial cost expenditure, or provide a detailed brief to the design team who will then determine the cost. Most schemes are a combination of these two extremes.

1.3 The Importance of Cost Control

There has in recent years been a great need for an understanding of construction economics and cost control, particularly during the design stage of projects. The importance of this is due largely to the following:

• The increased pace of society in general has resulted in clients being less likely to tolerate delays caused by redesigning buildings when tenders are too high.
• The client’s requirements today are more complex than those of their Victorian counterparts. A more effective system of control is therefore desirable from inception up to the completion of the final account, and thereafter during costs-in-use.
• The clients of the industry often represent large organisations and financial institutions. This is a result of takeovers, mergers and some public ownership. Denationalisation has often meant that these large organisations remain intact as a single entity. There has thus been an increased emphasis on accountability in both the public and private sectors of industry. The efficiency of these organisations at construction work is only as good as their advisers.
• There has been a trend towards modern designs and new techniques, materials and methods of construction. The designer is able to choose from a far wider range of products and this has produced variety in construction. The traditional methods of estimating are unable to cope in these circumstances to achieve value for money and more balanced designs.
• Several major schemes in the UK and abroad in construction and other industries have received adverse publicity on estimated costs. Even after allowing for inflationary factors, the existing estimating procedures have been very inadequate (see Chapter 14). It is not a valid diversion to suggest that projects in other industries such as the Nimrod Early Warning System, Concorde or space exploration have produced considerably more inaccurate estimates than those in the construction industry. The ICT sector, though advanced in technology, continues to produce estimates that are most inaccurate.
• Contractors’ profit margins have in real terms been reduced considerably during the past decade. This has resulted in their greater cost-consciousness in an attempt to redress possible losses.
• There has, in general, been a move towards the elimination of waste, and a greater emphasis on the use of the world’s scarce resources. This has necessitated a desire for improved methods of forecasting and control of costs.
• There is a general trend towards greater cost-effectiveness, and thus a need to examine construction costs not solely in the context of initial costs but in terms of whole-life costs, or total-cost appraisal.
• World recession has generally produced a shortage of funds for capital purposes and construction in general. This has been coupled with high inflation and interest charges, resulting in the costs of construction soaring to high levels. Although the relative costs compared with other commodities may be similar, the apparent high costs have resulted in greater caution, particularly on the part of clients.
• More than ever before, cost professionals the world over now have the necessary tools and techniques required to produce estimates with greater accuracy, and have the means of control of costs. Therefore there is greater expectation of achieving better cost control in construction projects.

1.4 Cost, Price and Value

The terms cost, price and value will represent different interpretations to different people. Their particular meaning generally lies in the context in which they are being used. It must also be remembered that much of the terminology used in the construction industry has a special interpretation appropriate only to this industry. Cost, to the building contractor, represents all those items included under the heading of his expenditure. His price is the amount charged for the work he carries out, and when this is received it becomes his income. The difference between the two is his profit. Cost is therefore reasonably clearly defined within this context. It relates largely to manufacture, whereas price relates to selling. The term ‘cost price’ really means selling at cost. The price, however, that the building contractor charges the building owner for doing the work is to the latter his building costs. The Building Cost Information Service (BCIS) was designed and developed on the basis of the building owner’s costs. These are in reality the tender price from building contractors. A tender price index therefore attempts to measure the building contractor’s prices (the building owner’s costs) whereas a building cost index measures the building contractor’s costs. Although there is some relationship between the two, they are not identically correlated.

It is not surprising, therefore, to realise how easy it can be to confuse these two terms if used incorrectly. To adapt the famous quotation, ‘one person’s [builder’s] price increase is another person’s [building owner’s] cost increase’.

Value is a much more subjective term than either price or cost. In the economic theory of value, an object must be scarce relative to demand to have a value. Where there is an abundance of a particular object and only a limited demand for it, then, using the economic criteria, it has little or no value attributed to it. Value constitutes a measure, therefore, of the relationship between supply and demand. An increase in the value of an object can therefore be obtained through either an increase in demand or a decrease in supply.

Aristotle identified seven classes of value that are still relevant to our modern society. These classifications of value can be summarised as: economic, moral, aesthetic, social, political, religious and judicial. These bear some resemblance to the way in which we identify building life, as shown in Table 17.2. Economic value may be seen as the more objective consideration, since it is measurable in terms of money. The remainder are seen as being more subjective. Maximum value is assumed to be found when a required service or function is attained and when the cost of providing that service or function is at a minimum. Value in this context can be measured objectively, but any solution found through such a procedure risks sub-optimisation. Any increase above the required level of either service or function, for a small extra cost, would often be perceived by clients as better value. A more meaningful approach when applied to the built environment considers the following four components that when aggregated combine to ...

Table of contents

• Cover
• Title
• Copyright
• CONTENTS
• Preface to the sixth edition
• Acknowledgements
• Abbreviations
• SECTION 1 COST CONTROL
• SECTION 2 COST INFORMATION
• SECTION 3 COST PRACTICE
• Index