Last edited 15 Aug 2021

Construction costs



[edit] Introduction

Construction costs form part of the overall costs incurred during the development of a built asset such as a building. Very broadly, construction costs will be those costs incurred by the actual construction works themselves, and on some projects may be determined by the value of the contract with the main contractor.

However, the construction contract may include costs that might not in themselves be considered literal construction costs (hard costs), such as fees, profits, overheads, and so on.

Many projects will also include costs that it is not possible to determine when the construction contract is awarded (such as prime cost sums and provisional sums), and there may be construction works that are awarded by the client outside of the main contract (such as fitting out the interior, minor alterations to the completed works, installation of equipment, and so on).

In addition, the contract is likely to allow for the contract sum to be adjusted as a result, for example, of variations to the works, claims for loss and expense, or fluctuations (a way of dealing with inflation on large projects that may last for several years). It is because of these unknowns that clients are advised to hold a contingency.

As a result, what is considered the actual 'construction cost' of a project must be clearly defined and may not be finally determined until well after the actual construction works have been completed. This is true, even if a contract is described as having a 'fixed price' or 'guaranteed maximum price'.

[edit] Cost planning

Cost plans evolve through the life of the project, developing in detail and accuracy as more information becomes available about the nature of the design, and then actual prices are provided by suppliers.

Cost plans may include:

Other than initial cost appraisals, these all relate to the construction cost of the project (rather than wider project costs that the client might incur, which could include; fees, equipment costs, furniture, the cost of moving staff, contracts outside of the main works, and so on).

Contingencies will tend to be highest in the early stages of the project when there are the greatest number of possible risks, but can generally be reduced as better particulars about the project become available and some risks have passed or been overcome.

[edit] Cost estimates

The method used for estimating actual costs will change as the amount of detail available increases:

Initial cost appraisals might simply break down the overall project budget based on information provided by the client, an analysis of comparable projects and the experience of the cost consultant.

Elemental cost plans might simply be the total construction cost for the project divided into the main elements of the works on a percentage basis.

The approximate quantities cost plan is a first attempt to measure defined quantities from drawings (or to take them off from a building information model). It presents a more accurate picture of where costs are distributed, in particular it draws the attention of designers to those elements of the design that are standard and those that are not and as a consequence may be more expensive.

The pre-tender estimate (PTE) is the final estimate of the likely cost of the works that are described in completed tender documents. It provides a final comparison with the budget, and along with a cash flow estimate enables the client to confirm that sufficient funds area available before committing to seeking tenders. It also gives a basis for assessing and comparing tenders when they are returned.

The contract sum provides the first actual confirmed price. Up to this point, all cost planning has been based on estimates. A bill of quantities is issued to tendering contractors for them to prepare a price for carrying out the works. The bill of quantities assists tenderers in the calculation of construction costs for their tender, and, as it means all tendering contractors will be pricing the same quantities (rather than taking-off quantities from the drawings and specifications themselves), it also provides a fair and accurate system for tendering.

Best practice for the preparation of bills of quantities is set out in the New Rules of Measurement (NRM). The price agreed with the successful tenderer is entered ino the contract as the contract sum. Unfortunately it is fairly common for there to be a significant difference between the prices offered by contractors and the cost consultants pre-tender estimate.

The final account includes any adjustments to the contract sum so that the amount of the final payment can be determined.

[edit] Construction price and cost indices

The complexity of construction projects, the differences in circumstances, duration and level of specification between one project and another, and the continually changing state of the market due to fluctuations in supply and demand, inflation and so on mean that it is impossible to give rule of thumb figures (such as a cost per sq. m) for the likely cost of construction works.

However, a wide range of construction price and cost indices are continuously updated and published to help estimate the likely cost of construction works.

Until 2015, The Department for Business, Innovation and Skills published quarterly construction price and cost indices for estimating, cost checking and fee negotiations on public sector construction projects. The responsibility has since been transferred to the Official for National Statistics (Construction Output Price Indices).

Private sector organisations such as the Building Cost Information Service (BCIS) provide cost and price information to the construction industry to help estimate the likely cost of construction works.

[edit] Capital cost v operational cost

Construction is only a small part of the cost associated with a built asset. There may be land acquisition costs, fees, taxes and so on incurred before construction begins, and management, maintenance and other costs once the project is completed. These may be categorised as capital costs and operational costs

Capital cost are associated with one-off expenditure on the acquisition, construction or enhancement of built assets and might include:

Operational costs incurred in day-to-day operations might include:

[edit] Whole-life cost

Whole-life costs consider all costs associated with the life of a building, from inception to construction, occupation and operation and even ultimate disposal.

This is considered a better way of assessing value for money than construction costs, which can result in lower short-term costs but higher ongoing costs through the life of the building. This can also apply to things such as design fees, where saving money on fees at the beginning of a project can be outweighed by very much higher ongoing costs through construction and occupation.

[edit] Life cycle cost

Life cycle costing (LCC) provides a methodology for the evaluation of combined capital, operating and end-of-life costs of a range of construction project alternatives, to ensure long-term value is delivered.

[edit] Hard costs v soft costs

Often referred to as 'brick-and-mortar costs', hard costs refer to the cost of physical construction. Soft costs refer to those costs that, unlike hard costs, are not instantly visible or tangible, and are not directly related to labour or building materials.

Hard costs might include:

Soft costs might include:

For more information, see Hard costs v soft costs.

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