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Last edited 14 Feb 2023
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.
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'.
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:
- Initial cost appraisals, prepared during the feasibility study stage.
- Elemental cost plans, prepared during the project brief stage and carried through to detailed design.
- Approximate quantities cost plans, prepared from the end of detailed design through to tender.
- Pre-tender estimates, prepared alongside tender documentation.
- Contract sum, agreed with the selected contractor.
- Final account, agreed once the construction works are completed.
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.
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 are 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 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.
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.
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
- Land or property acquisition.
- Statutory fees.
- Consultant fees directly associated with the development.
- Materials, plant and equipment.
- Fixtures and fittings.
- Project insurance, inflation, taxation and financing.
- Internal costs directly associated with the development.
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.
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.
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:
- Labour, equipment and materials required to complete the built structure.
- Site costs, such as utilities, drainage and so on.
- Landscape costs.
Soft costs might include:
- Land costs.
- Off-site costs.
- Loans, accounting fees and interests.
- Insurances and taxes.
- Public relations and advertising costs.
NB Government Construction Strategy, Final Report to Government by the Procurement/Lean Client Task Group, published in July 2012 states: ‘Construction Costs are defined as total project capital costs including related front end project initiation / development costs - such as consultancy and supply chain fees - but excluding land purchase and in use operational expenditure (which is not to disregard whole life cycle costs that are addressed by specific actions within the GCS but to acknowledge the challenges involved in validating the realisation of whole life cycle based efficiency savings before the end of the current parliament).’
ICMS: Global Consistency in Presenting Construction Life Cycle Costs and Carbon Emissions, 3rd edition, November 2021, published by the ICMS (International Cost Management Standard) Coalition, defines construction costs as: ‘Expenditures incurred as a direct result of construction including labour, materials, plant, equipment, site and head office overheads and profits as well as taxes and levies. They are the total price payable for all permanent and temporary works normally included in construction contracts, including goods or materials supplied by the Client for the Constructor to install.’
- Approximate quantities cost plan.
- Bill of quantities.
- Business plan.
- Capital cost.
- Construction price and cost indices.
- Contract sum.
- Contract sum analysis.
- Cost certainty.
- Cost consultant.
- Cost control.
- Cost information.
- Cost plans.
- Front-loaded costs.
- Life cycle assessment.
- Life cycle costs.
- Elemental cost plan.
- Final account.
- Hard costs v soft costs.
- Initial cost appraisals.
- International Construction Measurement Standards (ICMS).
- Operational costs.
- Outturn cost.
- Pre-tender estimate.
- Price certainty.
- Prime cost sum.
- Provisional sum.
- Tender pricing document.
- Sunk cost.
- Utilising life cycle costing and life cycle assessment.
- Whole life costs.
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