INTRODUCTION TO

CONSTRUCTION COST
WHAT IS CONSTRUCTION COST?

Construction cost means the total cost of the work to the owner of all elements of the project
designed or specified by the design professional including the cost at current market rates of labor
and materials furnished by the owner and equipment designed, specified, or specifically provided
by the design professional.

Introduction to Construction Cost

There are a lot of things to consider in construction. One of the very first things that should
be considered is cost. In reality, the actual cost of construction will only be known when the
construction project itself is finished. But it is best to have an estimation of the possible
construction cost.

Construction cost varies depending on where you are planning to build. Regional variations
in construction cost depending on material availability and possibly local regulations. 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
(soft costs). 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. The “total” construction cost is the sum
of the “building” and “services” costs. Building refers to the construction services and materials,
while services refer to electrical, mechanical, plumbing, and other services.

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.
MAJOR CLASSIFICATION OF CONSTRUCTION COST

Direct Costs of Construction Project

The costs and expenses that are accountable directly on a facility, function or product are
called as direct costs. In construction projects, the direct costs are the cost incurred on labor,
material, equipment etc. These costs for a construction project are developed as estimates by
means of detailed analysis of the contract activities, construction method, the site conditions, and
resources. Different direct costs in construction projects are material costs, labor costs,
subcontractor costs, and equipment costs.

Indirect Costs of Construction Project

The costs, unlike direct costs, is not directly accountable for a particular facility, product
or function. Indirect costs can be either variable or fixed. The main sections coming under
indirect costs are personnel costs, security costs, and administration costs. These costs do not
have a direct connection with the construction project.

TYPES OF CONSTRUCTION COST

1. Fixed Cost

This is defined as the cost spent once for a particular point of time. The purchase of
equipment, machinery, etc. comes under fixed cost assets.

2. Time - Related Cost

Time - related cost is the cost spend for a particular activity for a given duration. The cost
spent on wages, equipment and building rents, etc. comes under this category.

3. Quantity - Proportional Cost

This type of cost will vary based on the quantities. Materials costs are examples of
quantity - proportional costs.
CONSTRUCTION COST ESTIMATE CLASSES

 CLASS 5

 This is known as the rough order of magnitude (ROM) estimate.

 Class 5 estimates are drawn from inadequate information which is about 0 to 2% of the
project definition.
 Class 5 accuracy ranges -50% on the low side and +100% on the high side.

 CLASS 4

 A Class 4 estimate is considered a feasibility study estimate. It is used by organization

heads and construction managers for strategic business planning. A more detailed
approach is required since this will determine the viability of the project. Moreover,
alternative project schemes are evaluated for their economic value.
 Feasibility studies for industrial constructions often require the definition of roughly
around 1 to 15% of the project.
 Class 4 accuracy of -15 to -30% and +20 to +50% on the low and high sides,
respectively.

 CLASS 3

 It is distinct from the first two classes which are prepared in the project initiation stage.
The Class 3 estimate is the actual capital an organization allocates for a specific project.
Hence, it is often termed as the budgetary estimate.
 A Class 3 estimate is developed from a preliminary or basic engineering design (BED).
The engineering phase of the project is 10% to 40% completed. An overview of the
project scope is available along with the expected timeline.
 Class 3 accuracy ranges from -10 to -20% on the low side and +10 to 30% on the high
side.
  CLASS 2

 A Class 2 estimate is known as the bid or tender estimate

 This is the established contract value of the project as agreed by the organization,
contracting parties, and other stakeholders. At this stage, 30 to 70% of the project detail
is completed.
 A thorough work breakdown structure (WBS), project timeline, equipment, and
manpower scheduling, and material take-off are created.
 The accuracy range for Class 2 estimates is -5 to -15% on the low side and +5 to +20%
on the high side.

 CLASS 1

 Class 1 estimates are prepared for specific parts of the project. Subcontracting is the
usual reason for calling a more detailed estimate.
 This estimate forms a new baseline or control from which the bid of subcontractors is
checked. Class 1 estimates are used for evaluating the claims of the contractor.
 Class 1 estimates are accurate -3 to -10% on the low side, while +3 to +15% on the
high side.

TYPES OF ESTIMATES
Preliminary Estimates.

Early in the planning stages, both building owners and designers must agree on an
anticipated cost of the project at bid award. Preliminary Estimates are employed in the early
planning phases of a proposed project to match an owner's needs, expressed as written
programmatic requirements, with budget constraints in order to establish its overall scope (size)
and quality expectations. The WBS recommended at this stage is a systems-based format, where
elements of the building (e.g. exterior closure) are the method of categorization. Estimate
comparisons at this stage are especially valuable in evaluating the feasibility of strategic
alternatives being considered to satisfy current and projected space requirements (e.g. new
construction versus renovation, or lease space). As the design is not fully developed at this stage,
a design contingency is typically included, typically between 10–15%. Issues which need to be
identified at this juncture include method of procurement being considered, location market
factors, specific site constraints or challenges, proposed phasing plans, and start and finish dates.
It is recommended that a formal risk analysis be carried out at every stage in the design, but
particularly in the planning stage when proactive steps can be taken to mitigate identified risks.

Intermediate Estimates.

After proceeding with a preferred course of action, Intermediate Estimates are employed
at various stages of project design development to maintain accountability for initial budget
projections and as a means of evaluating competing alternative construction assemblies, systems,
and materials. On large projects it is common practice for an owner to employ a construction
manager or professional estimator to continually update project estimates and provide feedback
on budget impacts of decisions on major design elements. The estimates will typically still be in
a Uniformat systems WBS , however a summary/conversion may also be provided in CSI
MasterFormat. The risk assessment should be updated and a contingency factor calculated
depending on the outcome of the risk analysis. As the design progresses and risks are mitigated,
the design contingency can typically be reduced.

Many owners employ Earned Value Analysis cost management practices as the design
progresses, to determine if the project is on track according to both schedule and budget. This
can be as straightforward as tracking costs across building systems (e.g. the mechanical system)
or can be more mathematically based to forecast the final outcome of the project.

Final Estimates.

As the design is completed a detailed pre-bid estimate can be prepared. At this stage the
design contingency would typically be reduced to zero: however, in some instances, there will
still be risk surrounding the project, which would make it prudent to still include a small bidding
contingency. The estimate should be organized in the same WBS as required of the bidders,
which typically is CSI MasterFormat. This then allows for a comparison of the final estimate
with the bids received and can aid in negotiating with the lowest bidder. In addition, having the
final estimate and bids in the same format facilitates developing cost databases for use in
planning future projects. This typically means taking a CSI bid and re-sorting the data into a
Uniformat WBS.

ESTIMATING METHODS
Project Comparison Estimating or Parametric Cost Estimating is often used in early planning
stages when little information is known about the program other than overall project parameters.
This method is sometimes called a "preliminary" or "ballpark" estimate and has no better than
15% to 25% accuracy. Project comparison estimating uses historical information on total costs
from past projects of similar building type. For example, the number of beds in a hospital, or
number of spaces in a parking garage, or number of courtrooms in a courthouse can form the
basis of a project comparison estimate by comparing them to similar scope projects recently done
in the same geographic region. This estimating method requires the assumption of an
approximate gross area for the proposed work and a sufficient historical record of similar
building types. The greater the number of prior project combinations for which scope and prices
are known, the easier it is to perform Project Comparison Estimating.

Square Foot and Cubic Foot Estimates are another method of developing both preliminary and
intermediate budgets based on historical data. This method is effective in preparing fairly
accurate estimates if the design is developed enough to allow measurement and calculation of
floor areas and volumes of the proposed spaces. There are several historical databases available
to support this method of estimating providing unit costs ($/S.F. & $/C.F.) that are adjusted
annually and many of the large estimating firms maintain their own databases. More accurate
estimates made with this method make adjustments and additions for regional cost indices, local
labor market rates, and interpolation between available cost tables. Further adjustments may be
made to account for other unique aspects of the design such as special site conditions or design
features being planned. In addition, the estimate can develop overall "core and shell" costs along
with Tenant Improvement build-out costs of different space types, allowing for relative ease of
determining the impact of changes to the program. Estimates made with this method can be
expected to be within 5% to 15% accuracy.

Assembly and Systems Estimates are intermediate level estimates performed when design
drawings are between 10% and 75% complete. Assemblies or systems group the work of several
trades or disciplines and/or work items into a single unit for estimating purposes. For example, a
foundation usually requires excavation, formwork, reinforcing, concrete—including placement
and finish—and backfill. An Assembly and Systems estimate prices all of these elements
together by applying values available in assemblies cost data guides. These guides are based on
historical databases, typically organized in MasterFormat. Estimates made with this method can
be expected to be within 10% accuracy.

In Unit Price and Schedule Estimating, the work is divided into the smallest possible work
increments, and a "unit price" is established for each piece. That unit price is then multiplied by
the required quantity to find the cost for the increment of work. This calculation is often called
"extending". Finally, all costs are summed to obtain the total estimated cost. For example, the
cost to erect a masonry wall can be accurately determined by finding the number of bricks
required and estimating all costs related to delivering, storing, staging, cutting, installing, and
cleaning the brick along with related units of accessories such reinforcing ties, weep-holes,
flashings, and the like. This method of estimating provides the most accurate means of projecting
construction costs, beyond which accuracy is more likely to be affected by supply and demand
forces in the current market.

Each method of estimating offers a level of confidence that is directly related to the amount of
time required to prepare the estimate (Fig. A). Fig. B illustrates an example of regression
analysis used to develop a project comparison estimate. The scattered points in the figure show
the combinations of overall project size and cost. The line shown is the "best fit" of a linear
relationship between size and construction cost and may serve to predict a preliminary budget.
The distances between the line and the points give a visual impression of the statistical
confidence of the estimate.
 Fig. A: Relative accuracy of estimate types.
Courtesy of: From Concept to Bid...Successful Estimating Methods by John D. Bledsoe

Fig. B: Project relative accuracy of estimate types.

Courtesy of: From Concept to Bid...Successful Estimating Methods by John D. Bledsoe
Major Construction Contract Types

 Competitively Bid Contracts

 Negotiated Contracts / Cost-Plus Contract

Competitively Bid Contracts

A competitively bid contract, the most widely used format of contract. For a number of
reasons, almost all contracts that involve public funds are awarded using competitively bid
contracts. It is used because it yields a low and competitive price that ensures taxpayers that their
money is being equitably and cost-effectively disbursed. The two main categories of
competitively bid contracts are (a) the lump sum contract (also called stipulated sum contract)
and (b) the unit-price contract.

Stipulated-Sum Contracts

A lump-sum or stipulated-sum contract is one in which the contractor quotes one price,
which covers all work and services required by the contract plans and specifications. In this
format, the owner goes to a set of firms with a complete set of plans and specifications and asks
for a single quoted price for the entire job. The stipulated-sum form of contract is used primarily
in building construction in which detailed plans and specifications requiring little or no
modification can be developed. Public contracts for buildings and housing are typical candidates
for lump-sum competitively bid contracts.

Unit-Price Contracts

In contrast to the lump-sum, or fixed-price, type of contract, the unit-price contract allows
some flexibility in meeting variations in the amount and quantity of work encountered during
construction. In this type of contract, the project is broken down into work items that can be
characterized by units such as cubic yards, linear and square feet, and piece numbers (e.g., 16
window frames). The contractor quotes the price by units rather than as a single total contract
price. For instance, he or she quotes a price per cubic yard for concrete, machine excavation,
square foot of masonry wall, and the like. The contract proposal contains a list of all work items
to be defined for payment.

Negotiated Contracts / Cost-Plus Contract

The negotiated contract is the second most widely used contract format. This form of contract is
also referred to as a cost-plus contract, although this refers to the method of payment rather than
the nature of the selection process. The contractor is reimbursed for the cost of doing the work
plus a fee. In this type of contract, the contractor risk is greatly reduced because the requirement
of completing the work at a fixed price is not present. The owner has the flexibility to select the
contractor based on considerations other than lowest price quotation. This format is not well
suited to public projects in as much as favoritism can play a major part in determining which
contractor is selected. Negotiated contracts are most commonly used in the private sector, where
the owner wants to exercise a selection criterion other than low price alone. It is used only in
special situations in the public sector as it is open to abuse in cases in which favoritism is a
factor. Large and complex projects have durations of anywhere from to 2 to 3 up to 10 years. For
such cases, cost-plus contracts are the only feasible way to proceed. Therefore, negotiated cost-
plus-fee contracts are used almost exclusively for such complex long-duration projects.

ESTIMATING FORMATS
 MasterFormat
 Uniformat

MASTERFORMAT

 MasterFormat is a material-based organization of building content.

 MasterFormat is a standard for organizing construction specifications and written
directions used in many types of building projects.
 MasterFormat is widely used within the design and construction industry when
estimating for Construction Document design phases.
 It has a master list of 50 divisions

UNIFORMAT

 UniFormat is a systems-based organization of building content.

 This format is particularly suited to project planning and early design estimating, as well
as, for work and pay schedules during construction.
 UNIFORMAT classifies building and site related infrastructure in three levels, with a
suggested fourth level of detail.
 Uniformat Level 1 Categories

 A SUBSTRUCTURE
 B SHELL
 C INTERIORS
 D SERVICES
 E EQUIPMENT AND FURNISHINGS
 F SPECIAL CONSTRUCTION AND DEMOLITION
 G BUILDING SITEWORK
Difference between MasterFormat and UniFormat
Reference:
1. Rebosa, M., Construction Cost in the Philippines, 2021
2. Mishra, G., The Constructor, 2014
3. Spain, Bryan, Spon's First Stage Estimating Handbook, 3rd Edition, Taylo and
Francis, Londong and New York, 2010
4. Halpin, Daniel, Senior, Bolivar, and Lucko, Gunnar, Construction Management,
5 th Edition, Wiley, 2017
5. S.Cullen, MRICS, Cost Estimating, 2020
6. Cost Estimating Requirements Handbook, 2011