The importance of Building Economics: The attitude of Architects towards issues

related to the economics of building at times seems somewhat ambivalent. Most

professionals agree that economic factors are quite important, in fact that they often
influence design decisions more than any other single factor and should be well
understood by the designer.

The Magnitude of the economic issue in Building: Buildings are expensive. Decisions
about investment in building usually involve the largest single-item expenditures most
people have to deal with during their lifetime, even if they are merely renting an
apartment. Initial cost of the building, however, appears quite insignificant when
compared with the costs incurred to operate and maintain a building over a lifetime.

BUILDING ECONOMICS: SCOPE, RECURRING PROBLEMS

What is Building Economics?

Given the importance of building industry in any national economy, there are important
macroeconomic issues that must be studied and would properly fall under the label of
building economics: What are the relationships between construction related segments of
the economy and other fields, and general economic conditions such as those that are
influenced by decisions made by government or Reserve Bank of India? How can and
should areas of vital national importance such as housing be influenced and kept healthy?
Such issues have been studied in other areas, such as political economy, sociology, urban
policy, transportation and regional planning. At the other end of spectrum are concerns of
the practitioners involved with actual and specific building projects, studying construction
estimating, construction management, project management, construction financing, and
real state financing. Economics of various production processes, including transportation
processes, would constitute another complex area in building economics. All these fields
are further divided into areas of concern by building type; the economics of housing, for
example are quiet different from economics of commercial projects such as office
buildings. Shopping centers, or industrial buildings.

Finally, the economics of the process of planning and designing buildings could be seen as
a legitimate subfield of building economics that still is awaiting a systemic treatment, even
though many people have been concerned with issue in practice.

Above arguments show that building economics is far from well defined area of study, and
that it would probably be counterproductive to insist on a concise definition, which would
either exclude some of the concerns mentioned or else turn out so broad and general as
to be of little practical value.

Recurring Building Economic Problems:

There are many different decision and design problems in the realm of building
economics, depending on what is known, assumed or given in a specific situation, and
what answers must be found in that situation.
The following list includes some of typical building economic problems that often are
encountered:

1. Given a solution proposal and established budget, is the proposal within the budget?
2. Given several solutions proposals, which will have lowest initial cost?
3. Given several solution proposals, which will have the best performance (measured in
terms of bost cost and benefits)?
4. Given the program, site, and context conditions, find the best possible (optimal)
solution.
5. Given the program and performance expectations (cost and other measures), which of
several proposed sites is most preferable?

THE ELEMENTS OF INITIAL PROJECT COST: OVERVIEW

The initial project cost is the total amount that must be paid for the planning and
construction of a building project up to a point of completion and occupancy. Adding the
cost of borrowing construction funds to that sum (the interest on the amount borrowed,
and the loadn fees or “discount points”), we obtain the total initial project cost.

Project cost: The initial cost of the project, including all costs incurred up to the point of
completion completion of the building, site, landscaping etc., to have it ready for first
occupancy.

Site cost: The cost of acquisition of the site, also called “land cost”.

Development cost: The cost of developing the site, that is clearing the land, providing
roads, utilities, planning permits, impact fees, and so on. It may or may not include the
fees and profits of the developer, if there is a developer other than the owner involved.

Building cost: The cost of construction of the building itself. However there may be
other construction costs, for example, parking and driveways, runoff control structures,
and so forth, which should be listed separately.

Site work cost: The cost of site preparation and improvements. It includes, for example:
landscaping cost, parking cost- the cost of providing surface parking and driveways
(underground and multi story parking are counted as part of the building, and their cost is
included in building cost); runoff control cost- the cost of providing measures for
stormwater runoff control, such as retention ponds, swales, drainage ditches, and so on;
clearing cost- the cost of clearing the site of trees and shrubs as needed. Other items that
must be considered as separate cost positions as applicable are extensive leveling/cut and
fill work, draining swamps, fences, signage, outdoor furniture, lighting, fountains, pools
and so forth.

Construction cost: Building construction cost and other construction costs on the site
(site work) often are lumped together in one common construction cost position or
construction budget.

Fees: Fees for various professional services, including: Architects and Engineers fees;
legal fees; accounting fees; fees for special consultants services, such as financial
feasibility analysis, marketing, facility programming, and project management, as well as
special surveys, soil test, and, for larger projects, environmental or regional impact
studies.
Cost of permits: The cost of permits of various kinds, including the building permit, tree
removal permit, development permits, permits for sewage disposal, septic tanks, signage,
and so on, as required by applicable regulation.

Carrying charges: The various costs associated with owning, maintaining, and keeping
the site in order before and during construction, including such items as; real state taxes
(property taxes); site maintenance; site security cost, which may include fencing, security
personnel, and temporary lighting. Management and accounting costs, insurance,
temporary utility hookup charges, and the like all would fall in this category, unless
specifically included in the construction contracts for site preparation and general
conditions.

Interim financing costs (Construction financing): Costs that normally consist of

interest charges on the construction loan, “discounted points” or loan fees, and possibly
other fees associated with the process of arranging the financing. At completion of the
building, the construction loan together with any remaining interest will be converted into
the long term mortgage or “permanent financing”.

Permanent financing costs: The costs associated with obtaining permanent financing
(usually in the form of a mortgage) for a project. There will be appraisal costs, closing
costs, and again “discount points” or loan fees charged by the lender up front. The
interest on permanent financing will not be counted in the initial cost.

Overhead and profit: Charges which depend very much on the specific ownership
situation for each project, and the relationship arrangements among the owner, developer
(if any), general contractor, and subcontractors. Unless the owner acts as the developer,
there will be overhead and profit charges for any intermediate firm providing the service
of developer.

Equipment costs: The cost of necessary fixed and movable furnitures and equipments. A
further distinction is made between fixed equipment and movable furnishings.

Contingency funds: A certain amount of money that must be set aside for unforeseen
costs that may arise during the planning and construction process. The likelihood of such
costs arising varies from project to project. The contingency funds should be provided at
multiple levels; first at the building construction level and then at the overall project level
within the project cost, for unforeseen costs that may arise in areas other than
construction.

Moving costs: The cost associated with moving the client’s belongings and operations
into the new building. This may include not only the costs of actual moving process but
also the costs incurred because of loss of income during the transition.

Total Initial Project cost: The sum of all initial costs for the project, including interim or
construction financing and up-front permanent financing charges.

THE BASIC CONCEPT OF COST ESTIMATING

COST = AMOUNT X UNIT PRICE

Estimated COST = Estimated AMOUNT (number of units) X estimated UNIT PRICE

ESTIMATING METHODS FOR BUILDING COST

Some of the most important types of methods of estimating initial building cost are as
follows.

Whole Unit Method (Whole Building Method). This is strictly speaking not an estimating
method as such because there is only one unit The unit referred to is whole building – for
example a house ( one family residence) or a school , assuming some standard type and
size. The costs quoted in data sources using this method usually are total initial project
cost, not mere building construction cost, and it is not always clear which of the two
concepts is meant.

Unit of use Method (Order of magniture Estimate). Many building types are characterized
by repetition of units of use or user stations. For example, the size of hospitals often is
expressed in terms of number of hospital beds. Cost then is estimated by using unit price
per bed. Other examples are schools (Student stations), office buildings (Office worder
stations/desks), and even airports, where cost can be estimated by number of boarding
gates and price per gate.

Area Method (Square Foot Method). This is one of the most common estimating methods,
and is based on the unit of total floor area or gross floor area.

Volume Method (Cubic Foot Estimate). The size of project here is measured not in floor
area but by unit of space volume.

Enclosure Method. An issue of principal interest to the Architect is the relationship

between cost and building form. Because neither the area method nor the volume method
is sensitive differences in the geometry of the buildings, a number of efforts have been
made to develop estimating method that do consider the effect of building geometry and
the relationship between surface of building and the enclosed space- hence the name
“Enclosure Method”.

Systems Method. The base unit here is the same as for the area method, but listed
separately for each category of subsystems of the building; for example, structure,
mechanical systems, foundations, and so on. For each system, unit prices are given as Rs
per square meter or total floor area, and also as percentage of area method unit prices.

FINANCING CONSTRUCTION PROJECTS

The Construction Load: A construction loan (also known as a “self-build loan") is a

short-term loan used to finance the building of a home or another real estate project. The
builder or home buyer takes out a construction loan to cover the costs of the project
before obtaining long-term funding. Because they are considered fairly risky, construction
loans usually have higher interest rates than traditional mortgage loans.

Construction loans are usually taken out by builders or home buyers who are custom-
building their own home. They are typically short-term loans, usually for a period of only
one year. After construction on the house is complete, the borrower can either refinance
the construction loan into a permanent mortgage or get a new loan to pay off the
construction loan (sometimes called the “end loan”). The borrower might only be required
to make interest payments on a construction loan while the project is still underway. Some
construction loans may require the balance to be paid off entirely by the time the project
is complete.

If a construction loan is taken out by a borrower who wants a home built, the lender
might pay the funds directly to the contractor rather than to the borrower. The payments
may come in instalments as the project completes new stages of development.
Construction loans might be taken out to finance rehabilitation and restoration projects, as
well as to build new homes.

The Permanent Financing Loan: Mortgage

Mortgage: a legal agreement by which a bank, building society, etc. lends money at
interest in exchange for taking title of the debtor's property, with the condition that the
conveyance of title becomes void upon the payment of the debt.

A permanent loan is defined as a first mortgage on a piece of commercial property that

has some amortization and a term of at least five years. Most commercial permanent
loans are amortized over 25 years. If the property is older than 30-years-old and/or
showing signs of wear and tear, many banks will insist on amortizing their commercial
permanent loans over just 20 years.
In real estate, permanent loans, also known as permanent mortgages, are taken out
shortly after a new or renovated commercial building has been completed. Institutions
that offer such permanent loans include credit unions, banks, and life insurance
companies. While they can be as short as five years, in many cases, commercial
permanent loans amortize over a 15-to-25 year period; 25 years is an especially popular
term.

Often, permanent loans are taken out to repay the short-term (non-permanent)
construction loan used to build the property; this particular variety of permanent
commercial loan is known as a take-out loan.

Permanent loans are a popular refinancing vehicle because they carry very low interest
rates—in fact, some of the lowest, compared with other types of loans for commercial real
estate. The lower rate is available because the lender assumes there will be no special
risks surrounding the transaction: Typically the property in question is fully constructed
and is near full occupancy.

Critical Variables for Permanent Financing

In estimating the cost of financing, and assessing the terms of permanent financing
arrangements, the following variables must be considered:

• The amount of the loan, called the Principal.

• The Equity or down payment (Cash equity constribution).
• The Loan to value ration, which expresses the lender’s policy or negotiated offer
with respect to the relationships between the principal and the equity contribution.
 • The length or maturity of the loan, also called the mortgage term.
• The interest rate.
• The size of annual or monthly payments or debt service payments as determined by
the principal, mortgage terms and interest rate together.
• Whether interest rates are fixed or variable (or adjustable). In fixed rate
mortgages, the interest rate remains the same throughout the agreed
upon mortgage term. In variable rate loans, the interest rate can change,
and this then changes the annual or monthly debt service payments.
• If interest rate is variable, how often it can change.
• For variable rate loans, whether there is a cap or limit to how much they might
change.
• For variable rate loans, what considerations determine how rates will change.

Mortage Types:

Fixed rate mortagage.

Variable rate mortagage
Balloon mortage: A mortage that resembles the traditional fixed rate loan with
payments calculated as they would be for long term mortgage, except that the
outstanding balance comes due in three to five years. It must be paid in full, or the loan
must be refinanced at then current rates.

Graduated payment mortage: Arranged for the “young family” a mortgage with
initially low payments that then rise and level off later on, corresponding to the estimated
pattern of increasing earning power of the family.

Growing equity mortgage: Mortgage in which the interest rates are fixed, but
payments are arranged to rise on a schedule, to allow for a rapid payoff over a relatively
short term.

Shared appreciation mortgage: A mortgage that represents one of several attempts to

make the better borrowing position of larger companies (developer or builders, who can
obtain larger loans at lower rates) available to individual buyers. In return for below
market interest rates and payments, buyers agree to share with the lender a certain
percentage of any appreciation of the house upon resale.

THE FUTURE PERFORMANCE OF BUILDINGS: Cost in use; Life Cycle Cost:

Architects traditionally have been concerned with correctly estimating and conrolling
estimating and controlling the initial cost of the buildings. However the initial costs
represents only a fraction of the long term costs associated with owning and operating a
building over its life span. In recent years, more attention has been paid to life cycle cost
analysis, specially since energy crisis of 70s and 80s. Energy costs do play a major role in
the long term costs in use, but they are only one of many cost factors that must be
considered and understood if the architect is to make meaning design considerations. Of
course both initial and future costs must be weighed against the benefits of the building:
are they worth the costs? The benefits are going to occur in future; even if building is sold
immediately after completion, there is delay between initial investment and accrual of
benefits that must be taken into account.
ESTIMATING FUTURE COSTS

Operating expenses. A number of costs that are necessary to operate a building,

maintain it, heal, cool, and service it, and so on, are lumped together as operating costs or
operating expenses. For Example, in a commercial office or an apartment building, a
tenant usually pays for the utility company for electricity, water, gas and so on, used
inside the leased space. But there also will be utility charges for the common areas in the
building, which are paid by the owner and recovered in the rent. Such costs also include,
for ex. Fuel costs, emergency equipments costs, cost of operating elevators and escalators
and of heating and air conditioning public spaces in the buildings; and the salaries of
operating personnel commonly expressed in per square meter expenses.

Utilities. Utility costs cover services provided by the utility company: water, electricity,
gas, sewage tax, garbage collection, and so on. Utility costs for the general operation (e.g.
outdoor and common areas lighting, elevators, etc.) of a multi user rental building must
be distinguished from utility costs that can be attributed to specific rented space and
therefore charged directly to tenants, commonly expressed in per square meter expenses.

Administrative Costs: Includes

Management. The cost of managing the building can vary considerably, depending on type
of building, the tenant turnover rate type of lease and need for advertising, whether
owner performance these duties in house or takes outside help, and so on. These
expenses can be expressed in cost per unit area per year.

Security Costs: These costs include the operation and maintenance, for example, of
electronic security systems and/or services of night security guards or security firms.

Insurance: The cost of insurance coverage for a given building project depends very much
on the nature and use of the building.

Telephone/intercom and other communication charges

Debt Service: Refers to periodic (monthly or annual) payment required to pay back the
mortgage loan for the construction or acquisition of the building.

Taxes: Several kinds of taxes must be considered as part of the cost of owning a building
project. The Main type of taxes are real estate taxes (property taxes), sales taxes or
services, rentals and so on, income tax on the income produced by the project, and capital
gains taxes due on sale of the property.

Repair and Replacement costs:

Renovation, alteration, addition costs:

Miscellaneous Costs and Expenses. Like

Vacancy and Bad Debt Losses.
Contingency allowances for unforeseen expense.

ECONOMIC PERFORMANCE ANALYSIS OF BUILDING PROJECTS

Benefit- Cost Analysis: A cost-benefit analysis (CBA) is a systematic process in which
decisions relating to proposals are analysed to determine whether the benefits outweigh
the costs, and by what margin. A CBA serves as a basis for comparing alternatives
proposals and making informed decisions about whether to proceed.

In terms of proposed developments, evaluating all the potential costs, and comparing
these with possible revenues and other benefits that might derive from a new building, a
developer is able to assess whether the proposal is financially worthwhile or whether an
alternative is needed.

The Process:
• Clarify clients objectives
• Examine distribution of costs and benefits over time.
• Form the Benefit cost ratio.
• Having repeated steps 1 through 3 for all alternatives, compare them and select the
solution with the highest BCR, provided it is at least 1.0
•
Incremental Analysis: When several alternative solutions that must be evaluated are
reasonable close together in their expected cost, the evaluation can use any of the
measures of performance survey to arrive at the best choice.
Then the question arises, is the difference in performance between solution A and B worth
the difference in costs between them? Could the cost difference have been allocated to
some other investment venture with even better results?

The Process:
• Describe the alternatives to be compared.
• Select the measure of performance on the basis of client objectives, establish
threshold level of performance that should be achieved, not only by each solution
but also by the increment of cost between solutions.
• Establish the performance of all alternatives with respect to the chosen measure.
• Arrange the alternatives in order of the amount of investment or cost required.
• Eliminate all solutions from consideration whose performance is lower than the next
lower cost solution, respectively.
• Among the remaining solutions, establish the difference in cost between each
solution and the next more expensive one, as well as the difference in performance
between the two solutions.
• Examine the performance of cost increments. If the incremental performance is less
than the established minimum performance threshold , the question should be
raised of whether cost difference should be invested in a different way that would
insure achieving at least the minimum performance- even if the performance
achieved by the more expensive solution itself still is above the threshold.

Life cycle cost analysis:

The purpose of LCCA usually is to compare different competing solutions. The typical
situation for the application of LCCA is that of deciding which of several subsystems
involving energy should be installed. Such as heating, cooling and air conditioning
systems.
For example, innovative energy conserving technologies often carry a higher initial costs
than conventional systems and it must be determined where long term savings are worth
higher cost.

Rate of Return Analysis.

TYPES OF LEASE ARRANGEMENTS

The real estate market distinguishes a number of different lease arrangements, according
to what the tenant and owner are paying, respectively.

Gross lease : A gross lease is a type of commercial lease where the tenant pays a flat
rental amount, and the landlord pays for all property charges regularly incurred by the
ownership, including taxes, utilities and water. Most apartment leases resemble gross
leases.The term "gross lease" is distinguished from the term "net lease".

A net lease is a real estate lease in which the tenant pays, on top of his rent, one or
more of the following expenses: property taxes, property insurance premiums or
maintenance costs. There exist three basic types of net leases. A single net lease requires
the tenant to pay only the property taxes in addition to rent. With a double net lease, the
tenant pays the property taxes and insurance premiums. A triple net lease, also known as
an NNN or net-net-net lease, requires the tenant to pay rent plus all three additional
expenses.

In a traditional lease, the landlord retains the responsibility for paying property taxes,
insurance premiums and maintenance costs. He covers these costs by building them into
the rent he charges his tenant. For example, if the yearly rent is $10,000 and he estimates
the additional costs to be $3,000, the effective rent he charges the tenant is $13,000
annually. While traditional leases are more common than net leases, they present more
risk to the landlord, who must absorb any unexpected increases in the extra expenses. For
this reason, some landlords prefer to employ a net lease of one kind or another, shifting
some or all of this risk to the tenant.

Single Net Leases

Single net leases are the least common type of net lease. Less risk is shifted to the tenant
as only the property taxes (and not the insurance premiums and maintenance costs) are
his responsibility. Even though the tenant is responsible for paying the taxes in a single
net lease, most landlords prefer that the payment pass through them so they know the
taxes are paid on time and in the correct amount.

Double Net Leases

Double net leases are especially popular in commercial real estate. The tenant pays
property taxes and insurance premiums in addition to rent. All exterior maintenance costs
remain the responsibility of the landlord, who pays for them directly. In larger commercial
developments, such as shopping malls and expansive office complexes, landlords typically
assign taxes and insurance costs to tenants proportionally based on the amount of space
leased.

Triple Net Leases

The triple net absolves the landlord of the most risk of any net lease. Even the costs of
structural maintenance and repairs must be paid by the tenant in addition to rent,
property taxes and insurance premiums. When maintenance costs are higher than
expected, tenants under triple net leases frequently attempt to get out of their leases or
obtain rent concessions. To preempt this from happening, many landlords prefer to use a
bondable net lease, which is a type of triple net lease stipulating it cannot be terminated
before its stated expiration date and the rent amount cannot be altered for any reason,
including unexpected and significant increases in ancillary costs.

The Economic problem: Economic theory deals with the law and principles which govern
the functioning of an economy and it various parts. An economy exists because of two
basic facts. Firstly human wants for goods and services are unlimited and secondly
productive resources with which to produce goods and services are scarce. In other
words, we have the problem of allocating scarce resource so as to achieve the greatest
possible satisfaction of wants. This is the economic problem. It is also called economizing
problem. The economic problem arises from the two basic inter related facts:

 Man's unlimited desire for the goods in the aggregate, and

 The limited capital, natural and human resource available to a society for the production
of goods in aggregate.

The content of economic theory: There has been a lot of controversy among economist
about the true content of economic theory or its subject matter. The subject matter of
economics or economic theory has been variously defined. According to Adam Smith
economics enquires into the nature and causes of the wealth of nations. According to
Ricardo, economist studies," how the produce of the earth is distributed." That is,
economics deals with the distribution of income and wealth. According to Marshall,
economics is a study of mankind in the ordinary business of life and it examines that part
of individual and social action which is connected with material requisites of well being.
According to Pigou, economics studies that part of social welfare which can be brought
directly or indirectly into relationship with the measuring rod of money. Professor Lionel
Robbins defines economics as a study of the allocation of scarce resources among
competing ends or uses. Each definition of economics given above is incomplete and
inadequate since they do not indicate the true scope and subject matter of economics.

The following are the main questions which have been raised by the economists from time
to time. It is worth remembering that all these fundamental questions arise because of the
basic problem of scarcity confronting an economy.
 According all of the available productive resources being fully utilized by the economy,
or are some of them lying unemployed and unutilized?
 What goods are produced and in what qualities by the productive resources which are
employed?
 How are the different goods produced that is what production method are employed for
the production of various goods?
 How is the total output of goods and services distributed among the member of the
society?
 Are the productive resources being used efficiently?
 Is the economy's productive capacity increasing, declining or remaining static overtime?
The six questions listed above have been the concern of economic theory from time to
time. All of them arise from the fundamental problem of scarcity.

Major economic problems: In view of the scarcity of means at our disposal and the
multiplicity of ends we seek to achieve, the economic problem lies in making the best
possible use of our resources so as to get the maximum satisfaction in the case of
consumer and maximum output or profit for a producer. Economic problem consists in
making decision regarding the ends to be pursued and goods to be produced and the
means to be used for achievements of certain ends. From the definition of economic
problem we can derive the following fundamentals problems which an economy has to
tackle.
(1) What to produce: The first major decision relates to the quantity and the range of
goods to be produced since the resources are limited we must choose between different
alternative collections of goods and services that may be produced. It also implies the
allocation of resources between the different types of goods e.g. consumer goods and
capital goods.

(2) How to produce: Having the decided quantity and type of goods to be produced we
must next determine the techniques of production to be used e.g. labour intensive and
capital intensive.

(3) For whom to produce: This means how the national product is to be distributed, i.e.
who should get how much. This is the problem of the sharing of the national product.

(4) Are the resources economically used? : This is the problem of economic efficiency or
welfare maximization. There is to be no waste or misuse of resources since they are
limited.

(5) Problem of full employment: Fullest possible use must be made of the available
resources. In other words, an economy must endeavor to achieve full employment not
only of labour but of all its resources.

(6) Problem of growth: Another problem for an economy is to make sure that it keeps on
expanding or developing so that it maintains conditions of stability. It is not to be static.
Its productive capacity must continue to increase. If it is an under-developed economy. It
must accelerate it process of growth.

BUILDING ECONOMICS INTRODUCTION AND BACKGROUND

Building economics emerged as a distinct field in the mid-1970s induced by the so-called
energy crisis. decades later, it is still in its infancy. The economics profession does not
recognize it as a field in its own right even though building is one of the most important
activities in any economy.

The “built environment" is the term used to describe buildings, works and other
modifications which the human race makes to the natural environment. Shelter costs most
households, firms and other organizations significant proportions of their income or
revenue and also creates a substantial proportion of their wealth. Since developing and
sustaining the built environment is such a large userof resources and creator of wealth, it
is not surprising that these activities have a considerable impact on the functioning of the
national economy.

The scale, quality and distribution of built facilities effects the level of efficiency with which
producers of goods and services operate and the quality and shape of the environment in
which we live. Annual national expenditure on the built environment is substantial. Most of
the built environment already exists, but annual construction modifies it and can make a
profound difference over several decades.

Once constructed. built facilities may last for many years, sometimes centuries. Individual
developers can generally have little conception of the way in which their development
contributes to changes in the built environment, or of what its economic or social
consequences will be in he long run. The economics of buildings attempts to remedy this
lack of knowledge ay integrating and analysing both economic and social interests over
the life-cycle Of the facilities concerned.

The objectives of practising economists and building economists are different. Put simply,
mainstream orthodox economics is the study of how people and society choose to employ
scarce resources'(which may have alternative uses) to produce and distribute various
goods, services and factor incomes. Building economics is conventionally said (by UK
based practicioners) to be about helping clients to achieve frequently mentioned, but
rarely defined ‘value for money’ from their new or rehabilitated buildings. This is
sometimes misunderstood to be about cost minimisation. In fact in both public and private
sectors it maybe said to be about maximising the difference between the cost of the
building to the owner, and its value, either in use or exchange. It could be argued that
these two objectives are not compatible.

We have now come to a point where we can formulate a definition:

Building Economics is about economizing the use of scarce resources

throughout the life cycle of a building. The most "Economic" building is the one
that provides the values required at the lowest cost.

The three key words in the discipline are Life-cycle. Value and Cost. Indeed it could be
said that it is the relationship between these three concepts which distinguishes building
economics from related disciplines. For instance. while there have been subjects which
deal with these issues separately (ie.Construction Economics, Valuation, Quantity
Surveying etc.) there has been no other subject which has tried to integrate them in a
logical. theoretical and yet practical way - until now that is.

THE ECONOMICS OF BUILDINGS: PRINCIPLES

Building economics is concerned with identifying optimal allocations of resources for

building owners and developers. However, optimal allocation for an individual vis a vis one
project will not necessarily lead to an overall optimum across his or her portfolio of
investments, nor will such a local optimum have any direct bearing on the optimal
allocation for a society. To put it more simply, decisions regarding the achievement of
economy in the built environrnent must be taken very carefully due to the vast array of
complexities that go to make up this environment.
In my view, the two main difficulties that arise when attempting to make economic
building decisions are those of heterogeneity and subjectivity. No two buildings are the
same and peoples needs and tastes in buildings vary greatly. Clearly, this presents
problems in attempting to formulate generic techniques for attaining economy across the
building realm.We will retum to this point later.

The word investment has already been mentioned. This is a very important subject in the
study of building economics, for buildings are largely investment goods which are a
constituent of real capital. For this reason, the theory of investment and the theory of
capital are inextricably linked to the principles of building economics. However, these
theories do not give the full picture. As noted by Bun: “Thus far building economics has
applied standard investment decision criteria to buildings as a special class of capital
assets. However, this approach is largely ad hoc and the theoretical foundation is still
lacking”. He continues to say (and I agree with him) that without a clear link to economic
theory, building economics will neither develop beyond a narrow domain of project
evaluation (including capital budgeting and cost benefit analysis) nor gain recognition as a
field of economics proper. While there are many texts on the techniques of building
economics, there are very few on the underlying principles.

CONCLUSION

The fragmentation of the building professions, the building process, and the built
environment is one of the fundamental problems affecting the building industry today. The
underlying interconnections require systematic analysis. Building economics may not
remedy all that ails in the building industry, but it may be used to diagnose what is
happening around us. An economic understanding of building activity as a whole is a
precondition for further improvements in economizing the use of building resources. One
of the main tasks of building economics is to explain the economic causes and
consequences of human action, as manifested in the built environment. Building
economics provides a unifying framework for the study of building as a rational and
purposeful human activity.

Buildings undergo continual alterations as they are adapted to the needs of their owners.
In tum, these needs evolve in a response to continually changing economic conditions. As
these changes cannot be fully foreseen, buildings must be designed and constructed so
they may be adapted to a wide range of conditions that may be encountered in the
underlying economic process.

The contribution of the economist so far to the problems of the building process has been
small and mainly in the field of the macro-economics of the construction industry. Other
large areas which should interest the economist are the economics of planning, of design,
of sites and of maintenance. Economists have barely touched the realm of the built
environment, although it should be an area in which they could give substantial help. After
all it possesses all the ingredients (i.e.scarce resources, altemative uses and a wide area
of choice) which makes economic analysis useful.

Division of Economics – Microeconomics and Macroeconomics, its Subject

Matter, Scope and Importance Nature of economics: scope and method:
The subject matter or the study of economics has been divided by modern economists into
two parts:
Microeconomics and Macroeconomics.

These two terms were first coined and used by Ragnar Frisch. The term microeconomics is
derived from the Greek word mikros, meaning ‘small’ and the term macroeconomics are
derived from the Greek word makros, meaning ‘large’. When we are analyzing the problem
of the economy as a whole it is macroeconomic study while on analysis of the behaviors of
any particular decision- making unit, such as a firm and industry, a consumer, constitutes
micro economics. Micro economics is also called Price Theory and Macro-economics is
called Income theory.

Economics

Micro economics Macro economics

(i) Market economy Different policy measures to solve the major
economic problems
(a) Theory of demand (consumption) Economic problem-poverty, unemployment,,
(b) Theory of production and cost inequalities in income and wealth, inflation
(a+ b=Theory of product pricing) and deflation, etc.
(ii) Theories of distribution/Factor pricing
1. Rent
2.Wages
3.Interest
4.Profit

(iii) Welfare economics or Economic Polices- Monetary, Fiscal Pascal,

Theory of economic welfare Industrial, trade, etc.

When we are analyzing the problems of the economy as a whole it is macroeconomic study.
While an analysis of the behaviour of any particular decision- making unit, such as a firm and
industry, a consumer, constitutes micro economics.
Micro- economics is also called Price Theory and Macro-economics is called Income theory.
Micro-economics: Micro-economic theory studies the economic actions and behaviour of
individual decision- making units and small group of individual units such as consumers,
resource owners and business firms, various industries and markets. We discuss how the
various cells of the economic organism, that is, the various units of the economy such as
thousand of consumers, thousands of workers and resource suppliers in the economy do their
economic activities and reach the equilibrium states. When we speak of micro-economics,
what we mean is that it is some small part or component of the whole economy that we are
analyzing.
we may study an individual’s consumer’s behaviour, or that of an individual firm or what
happens in any particular industry. In micro-economics, we study the price of a particular
product or a particular factor of production and not the general price level in the country.
 Similarly it is demand of an individual or that of an industry that is studied and not the
aggregate demand of the entire community. Likewise, income and employment, etc. are
studied.
A noteworthy feature of micro- approach is that, while conducting economic analysis on a
micro basis, generally an assumption of full employment in the economy as a whole is made.
On that assumption, the economic problem is mainly that of resource allocation or of theory of
price.
The four out of six basic questions earlier listed fall within the domain of micro-economics
Importance and uses of micro-economics:
Micro- economics occupies a vital place in economics and it has both theoretical and practical
importance. From the theoretical point of view,
It explains the functioning of a free enterprise economy.
It tells us how millions of consumers and producers in an economy take decisions about
the allocation of production resources among millions of goods and services.
It explains how through market mechanism goods and series produced in the
community are distributed.
It also explains the determination of relative prices of the various products and
productive resources.
It also explains the conditions of efficiency both in consumption and production and
departure from the optimum.
As for practical importance, micro-economics helps in the formulation of economic
policies that will promote the welfare of the masses.
Micro-economic analysis is also usefully applied to the various applied branches of
economics such as Public Finance, International Economics.
Limitations of micro-economics:
Micro- economic analysis suffers from certain limitations.
It cannot give an idea of the functioning of the economy as a whole. An industry may be
flourishing, where as the economy as a whole may be languishing.
It assumes full employment which is a rare phenomenon at any rate in the capitalist world.

Macro-economics: Macro-economics is concerned with aggregate and averages of the entire

economy, such as national income, aggregate output, total employment, total consumption,
saving and investment, aggregate demand, aggregate supply general land of prices, etc. we
study how these aggregate and averages of the economy as a whole are determined and what
causes fluctuation in them.
Macroeconomic deals also with how an economy grows. It analyses the chief determinants of
the economic development and the various stages and processes of economic growth. Utility of
macro-economics:
The macro-approach is useful in several ways.
1. It is helpful in understanding the functioning of a complicated economic system.
2. It gives a bird’s eye view of the economic world.
3. It is of the utmost significance for the formulation of useful economic policies for
the nation.
4. It also occupies an important place in economic theory in its pursuit of the
solution of urgent economic problems.
Thus, we are able to study the economy in its dynamic aspect. Limitations of
macro-economics:
Macro-analysis has limitations of its own.
 Individual is ignored altogether; it is the individual welfare which is the main aim of
economics.
 It overlooks individual differences. E.g. general price level may be stable, but the
prices of food grains may have gone spelling ruin to the poor.
Thus, according to the views of the economist today, the subject matter of economics
includes.
 Price theory (or micro-economics)
 Income and employment theory (or macro-economics) and
 Growth theory
Hence, broadly speaking, economics may be described as a study of the economic
system under which men work and live. It deals with decisions regarding the
commodities to be produced and services to be rendered in the economy, how to
produce them most economically, distribute them properly and to provide for the
growth of the economy.

Scope of economics: Scope mean sphere of study. We have to consider what economics
studies and what lies beyond it. The scope can be studies through 4 important parts.
Subject matter of economics.
Whether economics is a social science?
Whether economics is a science or an art?
If economics is science, whether it is positive science or normative science.
Subject matter of economics:
Economics has subject matter of its own. Economics studies, only one aspect of man’s life
and work. It only tells us how a man utilizes his limited resources for the satisfaction of
unlimited wants. He must spend the money and time to derive maximum satisfaction. This
is subject matter of economics.
Economic activities- It we look around we see that farmers, doctors, traders, teachers, etc. do
their work. They are all engaged in what is called an economic activity. We may say
that when man is engaged in economic activity, he is busy in earning money. He needs
money to satisfy his wants. A man wants food, clothes and shelter. To get these things he
must have money. To get money he must work or make an effort. Efforts lead to satisfaction.
Thus wants, effort, satisfaction sum up the subject matter of economics. When one want is
satisfied another one crop up or some wants occur after some period of time and again
man has to satisfy that want he has to make some effort.
 Thus, we can say that subject matter of economics is:
Consumption – Satisfaction of wants
Production – Producing the things or creating utility.
Exchange – Various markets, forms, buying and selling and how prices are
determined i.e. money credit, banking, etc.
Distribution – sharing of all that is produced or share of profit among all factors i.e.
workers, land lords, businessman, capitalist, etc.

(b) Is economics a science?

Economics is not only a science but also an art. It is a science in its methodology and an art in its
application. It has a theoretical aspect and is also an applied science in its practical aspects.
Science is a systematized body of Knowledge. A branch of knowledge becomes systematized
when facts are collocated and analyzed to find out a relation between cause and effect. It lays
down general principles which help to explain things and guide us. It is to be called science.
E.g. Nitrogenous fertilizer increases rice field.
Economics is also an art which is also a systematized body of knowledge. An art lays down
percepts or formulae to guide people who wants to achieve a certain aim e.g. removal of
poverty, increase in rice production. It is also both an art and a science. Thus scope of
economics is very wide indeed.
It is now agreed that economics is a fully fledged science. In fact, it is in no way less than
other sciences.
(c) Economics is a social science:
Economic is primarily a study of man and not of wealth but it does not study man who has
renounced the world. It studies human being but it does not study them as isolated individuals
living in forests or in mountain caves. It studies man living in organized society, who live in
society affecting society from their action and themselves exposed to social influences
economics has their to study social behavior, i.e., behavior of men in groups. Exchanging his
goods for those of others, influencing them by his action and being influenced by them in
turn. Thus, he depends on them and they depend on him. Economics thus a social since as it is
concerned with the behavior of an individual living in a group.
(d) Positive science or normative science:
In discussing the scope of economics, we have also to consider whether economics is a
positive or a normative science.
Positive science explains why and wherefore of things that means their causes and effect. A
normative science discusses the rightness or wrongness of the thing. Economics is both a
positive and a normative science, e.g. per capita income of a country is less and poor persons are
becoming poorer and rich persons becoming riches. Whether it is a good sign or bad? If it is bad
then what should be done, etc. So economics is positive as well as normative science (what is
and what ought to be)
A positive science only explains What is and normative science tells us what ought to be, i.e.,
right and wring of a thing positive science describes, while normative science evaluates, when we
say, for instance, that the businessmen, while making decisions, use profit maximization as the
criterion it is positive economics, but, when we ask “ought they use this criterion “, we enter the
field of normative economics.
We have to consider whether economics can pass moral judgment (normative science) or
simply explain “why” of things (positive science) Economics is, therefore, both a positive and
a normative science.

Basic terms and concepts:

Goods: Human wants are the starting point of all economic activities. Man needs to satisfy
various warts. There are two things with which he can satisfy these wants: Goods and services
Goods means the commodities that we use. Goods or commodities are almost always concrete,
material and tangible, e.g., land, houses, furniture etc. Anything that satisfies a human want
is called 'good' in economics.
Services refer to work that a person may do. Services are not tangible or concrete.
Kind of goods:
Free goods- Those goods which exist in plenty and we can consume as much of them as we like
without any payment. E.g. air, sunshine etc. We do not have to pay for using them.

Economic goods- Those goods which are scarce and can be had only on payment. They are
limited, manmade and payment has to be made in order to get them. In economics we are
concerned only with the economic goods because only in their case the question of valuation or
payment arises.
The destination between economic goods and free good is not permanent.

Consumption goods- Those goods which directly give satisfaction, they are used by
consumers to satisfy their wants directly. They are also called the goods of the first order or the
final goods e.g. food, clothing, pen, ink, etc. Consumer's goods are the end of whole
process.

Capital goods- are those which help us to produce other goods, e.g. tools, machines, etc. They
are called produces goods, or goods of the second order. They satisfy our wants indirectly,
because they produce those goods which then satisfy our wants.
Intermediate goods- These goods are in between consumption goods and capital goods. They are
the raw materials used in the production of consumer goods.
Material and Non-material goods- Material goods are land, building, furniture etc. Non material
goods are not tangible. Various kinds of services fall under this category. But, some of the non-
material goods are scarce and transferable e.g. goodwill of business. It can be
bought and sold.

Marginal utility:
M.U. can be defined as the change in the total utility resulting from a one unit change in
the consumption of a commodity per unit of time
Or
M.U. has been defined as the addition made to the total utility by the consumption of the last
unit considered just worthwhile.
In other words, it may be defined as the change in total utility resulting from a unit change in
the quantity of the commodity consumed.
The following formula may be used to measure it.
Change in total utility
Marginal utility (MU) = -----------------------------
 Change in quantity consumed
Marginal utility analysis:
There are different approaches known to the economists to the theory of demand and the
oldest among them is the marginal utility. The marginal utility analysis explains the
consumer's demand for a commodity and derives a law of demand which shows an inverse
relationship between the quantity demanded and the price of the commodity. That is it states
that as price falls, demand is extended, and vice-versa.
Basic assumptions: The following are the main assumptions on which M.U. analysis is based.
Cardinal measurement of utility: M.U. analysis assumes that utility can be measured and the
exact measurement can be given by assigning definite numbers such as 1, 2, 3, etc. That
is it is assumed that utility is a quantifiable entity. This means that a person can express
the satisfaction derived from the consumption of a commodity in quantitative term.
Utilities are independent: The utilities of different commodities are independent of one
another. That is, the utility of one commodity does not on any way affect that of another.
In other words, the satisfaction derived from the consumption of one good is the
function of that good alone and is not affected by the consumption of another. Thus
according to this assumption, the utility of various goods are additive i.e. separate utility
of the various goods can be added to obtain the total sum of the utilities of all goods
consumed.
Constant marginal utility of money: Marginal utility of money remains constant even
though the quantity of money with the consumer is diminished by the successive
purchases made by him.
Introspection: Marginal utility analysis also assumes that from one's own experience it is
possible to draw inference about another person. This is self-observation applied to
another person.

Meaning of demand: When a person desiring is willing and able to pay for what he desires,
the desire is changed in to demand.
Demand is always at a price." The demand for anything at a given price is the amount of it
which will be bought per unit of time at that price."
To speak of demand without reference of price is meaningless.
Also, the demand is always per unit of time, per day, per week, per month, per year.
"By demand we mean the various quantities of a given commodity or service which consumers
would by in one market in a given period of time at various prices, or at various incomes, or at
various price of related goods" (Bober).
Types of demand: Three kinds of demands may be distinguished.
Price Demand;
Income Demand; and
Cross Demand
Price demand: refers to the various quantities of a commodity or service that a consumer
would purchase at a given time in a market at various hypothetical prices. It is assumed that
other things, such as consumer's income, his tastes and the price of inter-related goods, remain
unchanged.
Income demand: refers to the various quantities of goods and services which would be
purchased by the consumers at various levels of income. Here we assume that the prices of
commodity or service as well as the prices of inter-related goods and the tastes and preference
and desires of consumers do not change.
Cross demand: means the quantities of good or service which will be purchased with reference
to change in price not of this good but of other inter-related goods. These goods are either
substitutes or complementary goods.
Of these types of demands, price demand is the most commonly spoken one.