LECTURE NOTE

ON
COSTING OF CONSTRUCTION
PROJECTS

PRE 843
CONSTRUCTION MANAGEMENT

(M.Sc) ENGINEERING
MANAGEMENT

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 TECHNICAL TERMS

1. ESTIMATE: An estimate is the anticipated or probable cost of work and is usually

prepared before the construction is taken up. It is indeed calculations or computations of
various items of an engineering work.

2. QUANTITY SURVEY: It is the schedule of all items of work in a building. These

quantities are calculated from the drawing of the building. Thus quantity survey gives
quantities of work done in case of each items, when priced gives the total cost. In short,
quantity survey means calculations of quantities of materials required to complete the
work concerned

3.SPECIFICATIONS : Detailed specifications gives the nature, quality and class of

work, materials to be used in the various parts of work , quality of the material, their
proportions, method of preparation, workmanship and description of execution of work
are required.

4. RATES: The rates of various items of works, materials to be used in the construction
and the wages of different categories of labor (skilled and unskilled) should be available
for preparing an estimate. The cost of transportation charges should also be known. As
far as possible, sanctioned “Schedule of Rates” shall be followed or the rates may be
worked out by the “Analysis of Rates” method.

5. SITE PLAN: It is the plan drawn for a particular construction showing its position
with respect to approaching roads, main bazars, markets and other permanent features in
a populated area. It shows the location of the area under construction with respect to the
other areas and on it generally the names of the owners of areas or property holders
adjoining to it are also denoted. North line is also clearly marked on it.

6. LINE PLAN: Line plan can be defined as the plan of a particular construction simply
showing main features with the help of the single lines of different portions of the
constructions. Details of constructions are not generally shown on this plan. This inside

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and outside dimensions shown on this plan should necessarily be corresponding to actual
dimensions.

7. INDEX PLAN:This is the plan of a particular colony showing the positions of

different houses in single lines their number if any position of roads, schools, market,
hospitals and other features etc. this plan is generally fixed on the entrance, or at exit or
in the central place of the colony, for the guidance of the inhabitants and outsiders.

8. DETAILED PLAN: This plan indicates a plan of a construction drawn to a definite

scale, showing all detailed information required for its execution. Various sections and
elevations are clearly drawn on this plan.

9. CENTRE LINE PLAN: This is actually a layout plan drawn to facilitate the laying
out of foundation lines and other features. It is generally fixed on the entrance or at exit in
the central place of the colony for the guidance of the inhabitants and outsiders.

10. SUPPLEMANTARY ESTIMATE: When some additions are done in the original
work, a fresh detailed estimate is prepared to supplement the original work. This estimate
is called supplementary estimate. It is also accompanied by all the papers as required in
thru detailed estimate.

11. ADMINISTRATIVE APPROVAL: For any project required by the department an

approval so sanction of the competent authority with respect to the cost and work is
necessary at the first instance. Thus administrative approval denotes the formal
acceptance by the administrative department concerned of the proposals for incurring
expenditure.

12. TECHNICAL SANCTION: It means the sanction and order by the competent
authority of the department for the detailed estimate design calculations quantities of
work rates and cost of work. After the technical sanction of the estimate is received the
work is then taken up for construction.

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13. COMPETENT AUTHORITY: An officer or any other authority in the department
to whom relevant powers are delegated by the government (Financial Department).

14. ORDINARY MEASUREMENT BOOK: It is measured book in which entries

regarding the work done or supplies made and services performed are recorded for the
purpose of making payments to the contractors or the labor. Entries in the M.B are
generally recorded by the sectional officers or by any other officers deputed for the
purpose

15. LUMP SUM : Sometimes while preparing estimate for the certain small items like
front architecture or decoration work of a building it is not possible to workout detailed
quantities so far such lump sum items a lump sum rate is provided.

16. PLINTH AREA The built up covered area of a building measured at floor level of
any storey is called plinth area.

17. CIRCULATION AREA: The total cost of construction including all expenditures
incurred plus the cost of external services up to the end of the completion of the work is
called capital cost. It also includes the cost of preliminary works, miscellaneous items
and supervision charges etc.

CLASSIFICATION OF CONSTRUCTION PROJECT

Generally speaking, construction project types can be classified into three categories:
(i) Private construction;
(ii) (ii) State construction; and
(iii) (iii) Federal Construction.

1) PRIVATE CONSTRUCTION PROJECTS

The first type of construction project is the Private Construction Project. Put simply,
private projects are projects of every type that are owned, controlled or commissioned by
a private party. Private parties include individuals, homeowners, corporations, other
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business entities, non-profit associations, privately funded schools, hospitals, publicly
traded companies, etc. Anything, in other words, that is not the government. Private
construction projects come in all different shapes and sizes, and this is when it’s useful to
look at the character of the work performed to segment private construction into different
subcategories. These subcategories would include:

Residential Construction: Whenever construction work is being performed to a single-

family residence or a residential facility with (usually) less than 3 or 4 units. If you are
working on an apartment complex this would more likely be considered a commercial
project instead of a residential project. Similarly, if you are working at a condominium,
the work would be residential if upon a single unit, but if on the entire complex or the
common elements, the work would more likely be considered commercial.

Commercial Construction: Commercial construction is the construction of any

buildings or similar structures for commercial purposes. Commercial construction
includes a huge variety of projects including building restaurants, grocery stores,
skyscrapers, shopping centers, sports facilities, hospitals, private schools and universities,
etc.

Industrial Construction: This is a relatively small segment of the construction industry.

These projects include power plants, manufacturing plants, solar wind farms, refineries,
etc. While termed “industrial construction,” it is pretty interchangeable with “commercial
construction.”

2) STATE CONSTRUCTION PROJECTS

Some people get confused by the term “state” when talking about state construction
projects because the term “state” can refer to projects commissioned by a county, city,
municipality, government board, public school board or any other state-funded entity.
The term “state construction” means, therefore, any government funded construction that
is not “federal” – which is discussed in the next section.
State construction projects can take a variety of forms.

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They can be pretty traditional projects like the construction of a public school or
government building (like a court room). These projects can also be pretty sophisticated,
such as the construction of a bridge, sewer line, highways, etc.

3) FEDERAL CONSTRUCTION PROJECTS

Federal construction projects are very similar to state projects. Just like state projects they
can take on a variety of forms: very simple and traditional, and very complex. And the
stuff being constructed can be pretty similar to the stuff constructed by state authority:
courthouses, government buildings, flood control projects, etc.

Major Types of Construction Projects: In planning for various types of construction,

the methods of procuring professional services, awarding construction contracts, and
financing the constructed facility can be quite different. The broad spectrum of
constructed facilities may be classified into four major categories, each with its own
characteristics.

Residential Housing Construction: Residential housing construction includes houses

and high-rise apartments. During the development and construction of such projects, the
developers usually serve as surrogate owners and take charge, making necessary
contractual agreements for design and construction, and arranging the financing and sale
of the completed structures. Residential housing designs are usually performed by
architects and engineers, and the construction executed by builders who hire
subcontractors for the structural, mechanical, electrical and other specialty work.

Level of influence vs. project duration: The residential housing market is heavily
affected by general economic conditions. Often, a slight increase in total demand will
cause a substantial investment in construction, since many housing projects can be started
at different locations by different individuals and developers at the same time. Because of
the relative ease of entry, many new builders are attracted to the residential housing
construction. Hence, this market is highly competitive, with potentially high risks as well
as high rewards.

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Institutional and Commercial Building Construction: Institutional and commercial
building encompasses a great variety of project types and sizes, such as schools and
universities, medical centers and hospitals, sports facilities, shopping centers, warehouses
and light manufacturing plants, and skyscrapers for offices and hotels. The owners of
such buildings may or may not be familiar with construction industry practices, but they
usually are able to select competent professional consultants and arrange the financing of
the constructed facilities themselves. Specialty architects and engineers are often engaged
for designing a specific type of building, while the builders or general contractors
undertaking such projects may also be specialized in only that type of building. Because
of the higher costs and greater sophistication of institutional and commercial buildings in
comparison with residential housing, this market segment is shared by fewer competitors.
Since the construction of some of these buildings is a long process which once started
will take some time to proceed until completion, the demand is less sensitive to general
economic conditions than that for housing construction.

Specialized Industrial Construction: Specialized industrial construction usually

involves very large scale projects with a high degree of technological complexity, such as
oil refineries, steel mills, chemical processing plants and coal-fired or nuclear power
plants. The owners usually are deeply involved in the development of a project, and
prefer to work with designers-builders such that the total time for the completion of the
project can be shortened. They also want to pick a team of designers and builders with
whom the owner has developed good working relations over the years. Although the
initiation of such projects is also affected by the state of the economy, long range demand
forecasting is the most important factor since such projects are capital intensive and
require considerable amount of planning and construction time. Governmental regulation
such as environmental protection can also influence decisions on these projects.

Infrastructure and Heavy Construction: Infrastructure and heavy construction includes

projects such as highways, tunnels, bridges, pipelines, drainage systems and sewage
treatment plants. Most of these projects are publicly owned and therefore financed either

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through bonds or taxes. This category of construction is characterized by a high degree of
mechanization, which has gradually replaced some labor intensive operations. The
engineers and builders engaged in infrastructure construction are usually highly
specialized since each segment of the market requires different types of skills. However,
demands for different segments of infrastructure and heavy construction may shift with
saturation in some segments. For example, as the available highway construction projects
are declining, some heavy construction contractors quickly move their work force and
equipment into the field of mining where jobs are available.

The Construction Process is composed of six distinct stages, which are:

1. Concept.

2. Contracts and Bid Documents.

3. Bidding.

4. Construction.

5. Construction Payments.

6. Completion.

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 BUDGET

Budgeting has come to be accepted as an efficient method of short-term planning and

control. It is employed, no doubt, in large business houses, but even the small businesses
are using it at least in some informal manner. Through the budgets, a business wants to
know clearly as to what it proposes to do during an accounting period or a part thereof.
The technique of budgeting is an important application of Management Accounting.
Probably, the greatest aid to good management that has ever been devised is the use of
budgets and budgetary control. It is a versatile tool and has helped managers cope with
many problems including inflation.

DEFINITION OF BUDGET
The Chartered Institute of Management Accountants, England, defines a 'budget' as
under: “A financial and/or quantitative statement, prepared and approved prior to define
period of time, of the policy to be pursued during that period for the purpose of attaining
a given objective." According to Brown and Howard of Management Accountant "a
budget is a predetermined statement of managerial policy during the given period which
provides a standard for comparison with the results actually achieved."

Essentials of a Budget
An analysis of the above said definitions reveal the following essentials of a budget:
(1) It is prepared for a definite future period.
(2) It is a statement prepared prior to a defined period of time.
(3) The Budget is monetary and I or quantitative statement of policy.
(4) The Budget is a predetermined statement and its purpose is to attain a given objective.
A budget, therefore, be taken as a document which is closely related to both the
managerial as well as accounting functions of an organization.

BUDGETARY CONTROL
Budgetary Control is the process of establishment of budgets relating to various activities
and comparing the budgeted figures with the actual performance for arriving at

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deviations, if any. Accordingly, there cannot be budgetary control without budgets.
Budgetary Control is a system which uses budgets as a means of planning and
controlling.

Budgetary control is defined by Terminology as the establishment of budgets relating to

the responsibilities of executives to the requirements of a policy and the continuous
comparison of actual with the budgeted results, either to secure by individual actions the
objectives of that policy or to provide a basis for its revision.

Brown and Howard defines budgetary control is "a system of controlling costs which
includes the preparation of budgets, co-coordinating the department and establishing
responsibilities, comparing actual performance with the budgeted and acting upon results
to achieve maximum profitability."
The above definitions reveal the following essentials of budgetary control:
(1) Establishment of objectives for each function and section of the organization.
(2) Comparison of actual performance with budget.
(3) Ascertainment of the causes for such deviations of actual from the budgeted
performance.
(4) Taking suitable corrective action from different available alternatives to achieve the
desired objectives.

Objectives of Budgetary Control

Budgetary Control is planned to assist the management for policy formulation, planning,
controlling and co-coordinating the general objectives of budgetary control and can be
stated in the following ways:

(1) Planning: A budget is a plan of action. Budgeting ensures a detailed plan of action
for a business over a period of time.
(2) Coordination: Budgetary control co-ordinates the various activities of the entity or
organization and secure co-operation of all concerned towards the common goal.

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(3) Control: Control is necessary to ensure that plans and objectives are being achieved.
Control follows planning and co-ordination. No control performance is possible without
predetermined
standards.

Thus, budgetary control makes control possible by continuous measures against

predetermined targets. If there is any variation between the budgeted performance and the
actual performance, the same is subject to analysis and corrective action.

Advantages of Budgetary Control

The advantages of budgetary control may be summarized as follows:
(1) It facilitates reduction of cost.
(2) Budgetary control guides the management in planning and formulation of policies.
(3) Budgetary control facilitates effective co-ordination of activities of the various
departments and functions by setting their limits and goals.
(4) It ensures maximization of profits through cost control and optimum utilization of
resources.
(5) It evaluates for the continuous review of performance of different budget centers.
(6) It helps to the management efficient and economic production control.
(7) It facilitates corrective actions, whenever there is inefficiencies and weaknesses
comparing actual performance with budget.
(8) It guides management in research and development.
(9) It ensures economy in working.
(10) It helps to adopt the principles of standard costing.

Limitations of Budgetary Control

Budgetary Control is an effective tool for management control. However, it has certain
important limitations which are identified below:
(1) The budget plan is based on estimates and forecasting. Forecasting cannot be
considered to be an exact science. If the budget plans are made on the basis of inaccurate
forecasts then the budget progamme may not be accurate and ineffective.
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(2) For reasons of uncertainty about future, and changing circumstances which may
develop later on, budget may prove short or excess of actual requirements.
(3) Effective implementation of budgetary control depends upon willingness, co-
operation and understanding among people reasonable for execution as lack of co-
operation leads to inefficient performance.
(4) The system does not substitute for management. It is more like a management tool.
(5) Budgeting may be cumbersome and time consuming process.

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Example 1

A contractor has inserted a rate of N28,000 per m2 to build columns for a retaining wall.
The quantity was 5760m2 based on 240 pillars 3m long and 8m high. The project
engineering issued a variation order reducing the retaining wall to 160 pillars, i.e. 3840m 2
after the materials had been ordered but before the work started on the construction of the
wall.

(i) Determine the original rate

(ii) Determine the final rate
(iii) Determine the revised rate for the columns based on the 3480m2.

For the varied work, making necessary assumptions (8% site overheads per 10% head
office overheads, profit and risk). The contractor has informed the engineer that in
pricing the item, he allowed for a purpose-built steel material 3m × 8m at a capital cost of
N 60,000,000.

Solution:

(i) First, we will have to analyse the original rate based on 5760m 2, that is N
28,000.
The less 10% head office overheads and profit can be determined by dividing
28,000 by 110 and then multiplying the answer by 100.

∴ Less 10% head office overheads and profit = ( 28,000

110 )
×100=N 25,454.55 k

Again, the less 8% site overheads can be determined by dividing N 25,454.55 k

by 110 and then multiplying the answer by 100.

∴ Less 8% site overheads = ( 25,454.55

110 )
×100=N 23,569.03per m . 2

Therefore, the net rate for material, i.e. purpose-built steel material can be determined by
dividing the capital cost by the initial quantity.

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 60,000,000
That is, = N 10,416.67 k per m2.
5760

Therefore, the original cost can be determined by subtracting the net rate of the purpose-
built material from the calculated (Less 8% site overheads).

That is, original cost = N 23,569.03per m2 −¿ N 10,416.67per m2 = N 13,152.36 per m2.

(ii) Now that we have analyzed the original rate, we can build up the rate for the
varied work using the same approach as above.

The final rate can be determined by dividing the capital cost by variation order
quantity and adding the result to the original rate.
60,000,000
That is, =N 15,625per m2.
3840

∴ the final rate = N 15,625per m2 + N 13,152.36 per m2

= N 28,777.36 per m2.

(iii) The revised rate can be determined as follows:

(a) Add 8% site overheads of the final rate to the determined final rate value.

That is, (0.8 ×28777.36) + 28777.36 = N 31,079.57/m2.

(b) Add 10% head office overheads and profits to the result in (a) above.

That is, (0.1 × 31079.57) + 31079.57 = 34,187.53.

∴ The revised rate (or new rate) = N 34,187.53/m2.

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