BSD 323 – BUILDING SYSTEMS DESIGN

MODULE 8 – FINANCIAL CONSIDERATIONS

LEARNING OBJECTIVES
By the end of this module, you will be able to:
✓ Define the construction cost.
✓ Classify the different financial considerations in construction.
✓ Identify the different influences on construction cost.
✓ Learn and understand about Life-Cycle Cost.
✓ Analyze the importance of Life-Cycle Cost analysis in the construction industry.

WHAT IS FINANCIAL CONSIDERATION?

Financial considerations are financial factors that need to be considered during the planning process before
proceeding with construction.

Construction Cost
The construction cost of a building is usually a dominant design concern.

Construction cost, sometimes referred to as Building Cost or Project Cost, means the total cost 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.

However, the construction contract may include costs that might not in themselves be considered "literal
construction costs," such as fees, profits, and overheads.

Influences on Construction Costs

1. Building Site
One of the primary factors that influences costs is the building site. Waterlogged soils, previous
construction, geological formations and the nature of the rock, native animal species, and the
presence of historical or natural heritage sites are just a few of the things that can affect materials
and labor requirements, delay the issuance of permits, and increase the time needed to complete
the project.

2. Location of the Construction

Similarly, the location of the construction site relative to economic centers can also be significant.
Contractors may have to transport workers and materials a long distance if the site is remote. In a
bustling urban area, the wages may be higher. Furthermore, regulatory requirements may be
stricter, and hence more expensive to fulfill or comply with, at some construction sites than at
others. Lastly, certain construction sites require the completion of feasibility or impact studies,
which are likely to prove expensive.

3. Time-related Aspects
Time-related aspects can also affect costs significantly. Chief among them is the project schedule;
a compressed, labor-intensive schedule will incur higher costs and rush charges. Shorter projects,
especially those with significant penalties for the contractor’s failure to complete the project on
time, are also likely to have more expensive insurance. Also, with a project that you expect to take
years to complete, you will almost certainly have to consider fluctuating market conditions and

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 inflation. Finally, owners inviting bids may notice seasonal variations in bid amounts since
contractors are busier at some times of the year than at others.

4. Size and Complexity of Project

The size and complexity of the project are other major influences on cost estimates. Larger, more
prestigious projects may attract more reputable contractors, or there may simply be fewer capable
of handling the project. Either of these scenarios can escalate project costs.

5. Quality of Plans and Specifications

The quality of plans and specifications are also vital factors, as is the contractor’s relationship with
the project engineer. Construction documents that hint at imprecision will almost certainly result
in higher bids form contractors who want to err on the side of safety. On the other hand, the
project engineer’s reputation can swing costs the other way, since contractors will know that plans
drawn by a reputable engineer are less likely to result in efficiency losses.

COST PLANNING

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

Cost plans may include:

1. Initial cost appraisals, prepared during the feasibility study stage. It might simply breakdown the
overall project budget based on information provided by the client, an analysis of comparable
projects, and the experience of the cost consultant.

2. Elemental cost plans, prepared during the project briefing stage and carried through to detailed
design. This is the total construction cost for the project divided into the main elements of the
work on a percentage basis.

3. Approximate quantities and cost plans, prepared from the end of detailed design through tender.
This is the first attempt to measure the defined quantities from drawings.

It presents a more accurate picture of where costs are distributed.

4. Pre-tender estimates, prepared alongside tender documentation. It is the final estimate of the likely
cost of the works described in the complete tender documents.

It provides a final comparison with the budget and, along with a cash flow estimate, enables the
client to confirm that sufficient funds are available before committing to seeking tenders.

It also gives basis for assessing and comparing tenders when they are returned.

5. Contract sum, agreed with the selected contractor. It provides the first actual, confirmed price. Up
to this point, all cost planning has been based on estimates.

6. The final account is agreed upon once the construction works are completed.

CONSTRUCTION COST ESTIMATE

Construction cost estimates are used to get a general idea of the approximate project cost to complete.
This method used for estimating the actual costs will change as the amount of detail available increases.

Elements of a Construction Estimate

1. Quantity Takeoff
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 Developed during the pre-construction phase, a quantity take-off measures the materials and
labor needed to complete a project.

2. Labor Hour
The labor hour, or man hour, is a unit of work that measures the output of one person working for
one hour.

3. Labor Rate
The labor rate is the amount per hour one pays skilled craftsmen. This includes not just the basic
hourly rate and benefits but also the added costs of overtime and payroll burdens, such as worker
compensation and unemployment insurance. This template will help you keep track of wages and
labor hours.

4. Material Prices
Since the cost of materials is prone to fluctuation based on market conditions and such factors as
seasonal variations, cost estimators may look at historical cost data and the various phases of the
buying cycle when calculating expected material prices.

5. Equipment Costs
Equipment costs refer primarily to the cost of running and possibly renting, heavy machinery, such
as cement mixers and cranes. It is important to note that the equipment in use influences how
quickly you can complete the project, so the use of equipment actually impacts many costs outside
of those directly associated with running the equipment.

6. Subcontractor Quotes
Most contractors will hire multiple specialty subcontractors to complete parts of the construction.
You add these subcontractors’ quotes to the contractor’s total estimate. (It can be helpful to use
a tracker to collect all the subcontractor documentation in one place.)

7. Indirect Costs
Indirect costs are expenses not directly associated with construction work, like administrative
costs, transport costs, smaller types of equipment, temporary structures, design fees, legal fees,
permits, and any number of other costs, depending on the particular project.

8. Profits
In order to make a profit, the contractor adds a margin to the cost of completing the work.
Subcontractors do the same when preparing their own quotes.

9. Contingencies
Since even the most accurate estimate is likely to be affected by unforeseeable factors, such as
material wastage, an estimate will usually have a predetermined sum of money built in to account
for such added costs.

10. Escalation
Escalation refers to the natural inflation of costs over time, and it’s especially vital to take into
account for long-running projects. Some projects have escalation clauses that address how to
handle this inflation.
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 11. Bonds
An owner will usually require a contractor to arrange for the issuance of a performance bond in
favor of the project owner. The bond functions as a kind of guarantee of delivery. The owner is
entitled to compensation for monetary damages up to the amount covered by the performance
bond if the contractor fails to finish the project in accordance with the conditions of the contract.

12. Capital Costs

Capital costs are simply the costs associated with establishing a facility. These include the
following: the cost of acquiring land; the cost of conducting feasibility studies and the pre-design
phase; paying the architect, engineer, and specialist members of the design team; the total cost
of construction, which covers not just materials, equipment, and labor but also administrative,
permitting, and supervision costs, as well as any insurance fees or taxes; the cost of any temporary
equipment or structures that are not part of the final construction; the cost of hiring a
commissioner; and the cost of inspecting the structure when it’s near completion.

13. Operations and Maintenance Costs

More of a concern for the owner than the contractor, one accounts for operations and
maintenance costs during the design phase. Making choices that lower the total lifetime cost of a
building may result in higher construction costs. Operating costs include land rent, the salaries of
permanent operations staff, maintenance costs, renovation expenses (as needed), utilities, and
insurance.

14. Variances
Owners will often allocate construction budgets that are larger than cost estimates because even
good, thorough cost estimates have a tendency to underestimate actual construction costs. This
can happen for a number of reasons.

Creating Bill of Quantities

Contractors who are bidding for a job will create a document called the bill of quantities, which is an
itemized list of the work and materials required for a construction project. Creating a bill of quantities is a
four-step process that used to be done painstakingly by hand on paper and is now usually done with
spreadsheets or specialized software.

1. Taking-off Quantities
Working from the construction documents, a quantity surveyor will measure the tasks and items
of work in a project. This requires scaling dimensions from drawings. One will record these in
standard units such as area, volume, or length. The surveyor will list the number of each item in
the project.

2. Squaring
The quantity surveyor multiplies the dimensions of the component into square area and multiplies
this by the number of times this work item occurs in the construction, thus getting the total
dimensions, length, volume, and area as applicable.

3. Abstracting
Abstracting is the collection and ordering of the squared dimensions. Similar tasks and
components are grouped together. Once you have taken off and squared all items and obtained
their total dimensions, they must be merged. You make deductions for any voids or openings in
the building, such as stairs.

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 4. Billing
This last step simply involves presenting item descriptions and quantities in a structured format,
the bill of quantities. You usually present these in a hierarchy for groups, subgroups, and work
sections.

CONSTRUCTION PRICE AND COST INDICES

Construction price and cost indices are produced for use in estimating, cost checking, and fee negotiation
on public sector construction works.

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

The Building Cost Information Service (BCIS) provides cost and price information to the construction
industry to help estimate the likely cost of construction work.

The construction price and cost indices comprise of the following:

1. Tender Price Indices
A tender is a submission made by a prospective supplier (the "tenderer") in response to an
invitation to tender (ITT). It makes an offer for the supply of goods or services. A tender price is
therefore the price supplied by the tenderer to the client for the supply of those goods or services.

The tender price is usually based on information about the project that has been supplied by the
client in the ITT documents.

If the client’s documents do not adequately describe the project, they could lead to unrealistic
tender submissions. When suppliers submit their tender price, it will represent the price at which
they have decided to do the work or supply the goods or services, along with proposals for how
the client’s requirements will be satisfied, if these have been requested.

The tender price supplies will be presented in a way set out in the tender pricing document. A
tender pricing document sets out the way the client wishes to review the breakdown of overall
tender prices provided by the tendering contractors. Because the tender pricing document is
designed to allow easy, like-for-like comparisons between the tender prices submitted by the
various suppliers, It can reveal to the client where the best value for money lies among the
tenderers, identify significant differences, and identify areas where savings can be made or
negotiations undertaken.

2. Resource Cost Indices

Measure the notional trend of input costs to a contractor in terms of increases in the cost of labor,
materials, and plant by applying the BCIS Price Adjustment Formulae Indices (PAFI) for Building
(Series 3), Specialist Engineering (Series 3), and Civil Engineering (1990 Series) to cost models. The
PAFI is based on ONS Producer Price Indices (PPIs). The RCIs are used for budgeting, estimating,
tendering, or paying for construction work.

3. Output Price Indices

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 Measure the project construction prices paid by clients at the point that the work is carried out.
The OPIs are produced primarily to deflate construction output from current to constant prices
and are generally derived from TPIs modeled on sector output in previous quarters.

CAPITAL COSTS AND OPERATIONAL COSTS

In building, especially your own house, money is a very important factor in accomplishing the dream. This
includes costs before the construction, like taxes, land acquisition costs, and fees; and costs after the main
construction is completed, like maintenance and other costs like rents. These can be categorized as capital
costs and operational costs.

Capital costs are fixed, one-time expenses incurred on the purchase of land, buildings, construction, and
equipment used in the production of goods or in the rendering of services. In other words, it is the total
cost needed to bring a project to a commercially operable status and might include:

o Property (like land acquisition) – It is defined as having a legal title to the property.
o Commission – when a building is commissioned, it goes through quality checking, starting, during
the design phase and continuing through the construction and occupancy stages. It is done by
professionals like architects and engineers to make sure that the building functions at its optimal
level.
o Statutory fees – In construction, this fee is related to issues that are set by law, such as planning
applications, building regulations applications, licensing, etc.
o Consultation fees directly associated with the development – refers to the payments to consultants
for their services under the terms of an agreement.
o Project insurance, inflation, taxation and financing

Operational costs are the expenses which are related to the operation of a business, or to the operation
of a device, component, piece of equipment or facility. They are the cost of resources used by an
organization just to maintain its existence.
o Wages – a particular amount of money that is paid, usually every week and sometimes daily, to an
employee, especially one who does work that requires physical skills or strength.
o Utilities – are infrastructure services provided to consumers, or be considered as public and private
services that are important for the normal functioning of society. Utilities are generally considered
to include electricity, gas, water, and communication services.
o Maintenance and repairs – cost for repair of any damage to the building, ensuring it keeps its shape.
o Rent – is the payment made by a tenant to the property owner for the temporary use of land,
buildings, etc.
o General and administration expenses – are incurred in the day-to-day operations of the business and
may not be directly tied to a specific function or department within the company. G & A expenses
include rent, utilities, insurance, and legal fees.
- General expenses pertain to operational overhead expenses that impact the entire business.
- Administrative expenses are expenses that cannot be directly tied to a specific function within
the company, such as manufacturing and production.

WHOLE-LIFE COST (WLC)

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

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This is considered a better way of assessing value for money than construction costs, which can result in
lower short-term costs but higher ongoing costs through the life of the building.

This can also apply to things such as design fees, where saving money on fees at the beginning of a project
can be outweighed by very much higher ongoing costs through construction and occupation.

Order of cost estimating and cost planning for building maintenance works defines WLC as all significant
and relevant initial and future costs and benefits of a building facility or an asset throughout its life cycle
while fulfilling the performance requirements.

Whole-life costs for a building includes the following:

1. Procurement costs (including land acquisition, design, construction, equipment, etc.)
2. Maintenance and refurbishment costs.
3. Operational costs (including running costs and one-off costs associated with the project such as
change management)
4. Disposal costs

LIFE-CYCLE COST ANALYSIS (LCCA)

Life-Cycle Cost Analysis is the process of evaluating the economic performance of a building over its entire
life. Sometimes known as "whole cost accounting" or "total cost of ownership", LCCA balances the initial
monetary investment with the long-term expenses of owning and operating the building. LCCA is based
upon the assumptions that multiple building design options can meet programmatic needs and achieve
acceptable performance, and that these options have differing initial costs, operating costs, maintenance
costs, and possibly different life cycles. For a given design, LCCA estimates the total cost of the resulting
building, from initial construction through operation and maintenance. For some portion of the life of the
building configurations, LCCA can explore trade-offs between low initial costs and long-term cost savings,
identify the most cost-effective system for a given use, and determine how long it will take for a specific
system to "pay back" its incremental cost.

Factors Affecting the LCCA

It is important to understand how these costs and factors are identified so that expectations are clearly
managed. This information is conceptual in nature and includes Rough Order of Magnitude (ROM) pricing,
budgetary annual costs, and typical life spans.

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 1. Initial Costs
Early in the design process as a building is beginning to take shape (i.e. pre-schematic design) the
design team and/or general contractor begin to conceptualize building systems/components. It’s
common that two to three options are considered and need to be evaluated. The team will
develop some high-level preliminary design criteria to evaluate initial costs.

2. Operating & Maintenance Costs

O&M Costs include the cost to operation as well as costs associated with keeping the system in
good working order, i.e. maintenance costs. Maintenance can also include replacement parts,
preventative replacement parts, routine technician visits, etc. Developing these projected
maintenance costs requires working with local representatives of each proposed
system/component to understand their required upkeep.

3. Lifespan
This is the expected lifespan of the systems or building component. This information is typically
available from manufacturer representatives and engineering team members. Proper budgeting
for O&M Costs can and will increase the life span substantially.

4. Cost of Ownership
This is the total Initial Costs plus O&M Costs over the Life Span of the product. It is important to
recognize that the total cost of ownership does not include replacement costs down the road.
Substantial cost of ownership differences can be witnessed between lower initial cost solutions
with higher O&M costs and smaller life spans and higher up front cost solutions that minimize O&M
costs and last significantly longer.

5. Additional Factors
As mentioned previously, there are extensive considerations beyond LCCA such as aesthetics,
constructability, functionality, and non-monetary implications (such as environmental comfort,
desirability, availability, etc.). These factors are specific to the development team and also include
local code requirements. The development team should consider these factors in addition to the
LCCA factors.

Life-Cycle Cost Analysis (LCCA) Method

The purpose of an LCCA is to estimate the overall costs of project alternatives and select the design that
ensures the facility will provide the lowest overall cost of ownership consistent with its quality and
function.

The first and most challenging task of an LCCA, or any economic evaluation method, is to determine the
economic effect of alternative designs of buildings and building systems, quantify these effects, and
express them in terms of monetary value.

Basic formula for Calculating Life-Cycle Cost:

LCC = IC + CRC – SV + EC + WC + L (OMR) + ELC + DC + OC

(where L is the time period)

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Types of Costs

1. Initial Costs
This is the amount of your initial investment. Initial costs may include capital investment costs for
land acquisition, construction, or renovation and for the equipment needed to operate a facility.

Land acquisition costs need to be included in the initial cost estimate if they differ among design
alternatives. This would be the case, for example, when comparing the cost of renovating an
existing facility with the new construction on purchased land.

Construction costs: detailed estimates of construction costs are not necessary for preliminary
economic analyses of alternative building designs or systems. Such estimates are usually not
available until the design is quite advanced and the opportunity for cost-reducing design changes
has been missed. LCCA can be repeated throughout the design process if more detailed cost
information becomes available. Initially, construction costs are estimated by reference to historical
data from similar facilities.

2. Capital Replacement Cost (CRC)

The number and timing of capital replacements for building systems depend on the estimated life
of the system and the length of the study period. Use the same sources that provide cost
estimates for initial investments to obtain estimates of replacement costs and expected useful
lives. A good starting point for estimating future replacement costs is to use their cost as of the
base date. The LCCA method will escalate base-year amounts for future occurrences.

3. Residual or Salvage Value (SV)

The residual value of a system (or component) is its remaining value at the end of the study period
or at the time it is replaced during the study period. Residual values can be based on value in place,
resale value, salvage value, or scrap value, net of any selling, conversion, or disposal costs. As a
rule of thumb, the residual value of a system with a remaining useful life can be calculated by
linearly prorating its initial costs.

For example, for a system with an expected useful life of 15 years that was installed 5 years before
the end of the study period, the residual value would be approximately 2/3 (= (15-10)/15) of its initial
cost.

4. Energy Cost (EC)

Operational expenses for energy, water, and other utilities are based on consumption, current
rates, and price projections. Energy costs are often difficult to predict accurately in the design
phase of a project. Assumptions must be made about use profiles, occupancy rates, and
schedules, all of which impact energy consumption. At the initial design stage, data on the amount
of energy consumption for a building can come from engineering analysis or from a computer
program.

5. Water Cost (WC)

Same with energy cost, operational expenses for energy, water, and other utilities are based on
consumption, current rates, and price projections.

6. Operating, Maintenance & Repair Cost (OMR)

Sometimes, fuel and utility costs are included in this type of cost. Although it may sound similar to
maintenance costs, operational costs refer to the charges incurred with running the asset itself.
This is like to include items like fuel and utilities, IT services, taxes, and so on.

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 Non-fuel operating costs and maintenance and repair (OMR) costs are often more difficult to
estimate than other building expenditures. Operating schedules and standards of maintenance
vary from building to building; there is great variation in these costs even for buildings of the same
type and age. It is therefore especially important to use engineering judgment when estimating
these costs.

7. End-of-Life Cost (ELC)

You should think about end-of-life costs, also known as disposal or demolition costs, which may
include the charges associated with removal or scrapping.

8. Depreciation Cost (DC)

It is also important to consider the extent to which the asset’s value depreciated over its usable
life to determine the total cost of the asset.

9. Other Costs (OC)

If any, this refers to contract administration costs, financing costs, employee salaries and benefits,
and so forth.

APPLICATION
LCCA can be applied to any capital investment decision in which relatively higher initial costs are traded for
reduced future cost obligations. It is particularly suitable for the evaluation of building design alternatives
that satisfy a required level of building performance but may have different initial investment costs,
different operating, maintenance and repair costs, and possibly different lives. LCCA provides a significantly
better assessment of the long-term cost-effectiveness of a project than alternative economic methods
that focus only on the first costs or on operating-related costs in the short run.

HARD COST VS SOFT COST

Hard costs are often referred to as brick-and-mortar costs." Hard costs refer to the cost of physical
construction, such as foundations, superstructures, interior finishes, labor, equipment, drainage, and so
on. Hard costs, being ‘tangible’, tend to be relatively easy to estimate but vary significantly according to
the project type. For example, a complex facility such as a hospital will tend to have higher hard costs per
square meter than an office building.

Hard costs are pretty simple. But they make up the majority of the costs of a project, usually estimated at
around 70% of the total construction cost, but can vary depending on the governmental approval process
and the complexity and scale of the building and site.

Examples of hard costs:

- Building structure: this includes all labor and materials required to complete the structure.
- Site: includes all underground, aerial, water systems, drains, fire, paving, etc.
- Landscape: The hard costs related to landscaping work include the grass, lawns, trees, shrubs,
etc. that are related to landscaping.
- Contingency: It is a reserved amount of money covering all estimated unforeseen conditions that
might affect the construction process.
- Change order: it might include the building structure item in the hard costs.
- Overhead: these are the costs associated with doing business, like staff, management,
formalities, utilities, tools, and safety.

Soft Costs are those costs that, unlike hard costs, are not instantly visible or tangible, and are not directly
related to labor or building materials.
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Unlike fixed equipment, which is classified as a hard cost, moveable furniture and equipment are classified
as soft costs. This includes items such as computer equipment, telephone systems, and so on. Costs that
can continue post-completion, such as maintenance, security, and other upkeep-related fees, are also
deemed to be soft costs.

Example of soft costs:

- Fees
- Land costs
- Off-site costs
- Loans, accounting fees and interests
- Insurances, permits and taxes
- Public relations and advertising costs

References
https://www.youtube.com/watch?v=2vzOp9cJ0uI&t=34s
https://www.studocu.com/ph/document/icct-colleges-foundation/building-system-design/cec222-building-system-
design-financial-consideration-report-outline/30324090
https://www.youtube.com/watch?v=1EBFCrG2S8w

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