Estimating and Pricing

Estimating and Pricing KCTang Wed, 17/02/2021 - 23:22

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Note

17 Feb 2021: Term contract edition updated.

17 Mar 2020: Revised.

26 Feb 2020: Minor adjustments made.

17 Feb 2020: Tender price indices links updated.

20 Dec 2014: Moved from wiki.

Cost and price

  1. “Cost” and “Price” are often used interchangeably.

  2. Between the two parties to a transaction, the price quoted by the Seller / Contractor is the cost to the Buyer / Employer.

  3. For the same party, Cost + Profit = Price.

  4. Seller's price = buyer's cost.

Values

  1. Values can be monetary prices or other benefits.
  2. Cost can also include non-monetary costs.

Not a straight line relationship between costs and quantities

  1. ​​​​​​​Total cost vs quantity:
    • The total cost of factory production (and therefore sales of materials and goods) does not increase in proportion to the increase in the quantity produced, since there are some initial fixed costs (e.g. factory, equipment, rental deposits) and recurring fixed costs (e.g. monthly rents, additional equipment when the existing capacity is exceeded) not in proportion to the quantity to be included.
    • The total sales value may also not increase in proportion to the increase in the quantity sold (e.g. bulk discount, delivery vehicle not used to full capacity).
    • The total cost is usually higher than the total sales value initially, but the total sales value must rise up to exceed the total cost eventually for the business to be viable.
  2. Linear items:
    • For linear items, there can be fixed costs which do not change when the length changes.
    • The unit rate per length can decrease if the length is increased without any change to the fixed components.
      • e.g.  length 10 @ rate 4 + number 2 @ rate 5 = 40 + 10 = 50; 50 / 10 = 5.00;
      • while  length 15 @ rate 4 + number 2 @ rate 5 = 60 + 10 = 70; 70 / 15 = 4.67.
  3. Superficial items:
    • For superficial items, the perimeter length increases less rapidly than the increase in the superficial area (300% vs 800% in the table below).
    • The ratio of perimeter length / area decreases if the area is increased.
    • This means the unit rate per superficial area would have the same effect.
    • However, for the same area, the perimeter length can increase considerably if the shape is elongated.
    • The shape is important.
  4. Cubic items:
    • For cubic items, the rates of change of the side area and volume relative to the base area would depend on which dimension is changed.
    • For the same height, the volume increases in proportion to the increase in the base area (i.e. fixed volume/base area), while the side area increases less rapidly resulting in a decrease in the side area/base area ratio.
    • For the same base area, the side area and volume increase in proportion to the increase in the height (as shown in the graph below). Their rates of change are the same (as shown in the table above).
    • If both the height and the base area are increased, the volume/base area will increase, but whether the side area/base area will increase or decrease will depend on the relative rates of changes of the height and the base area.
    • In all cases, the unit cost and unit sales value should therefore not remain constant.
    • The appropriate unit cost and unit sales value should be determined based on the quantity required, and suitably adjusted in case of changes in the quantity.
  5. Impact on unit cost and unit rate
    • Making a unit rate competitive enough to secure sales volume and produce profit is important.
    • Works or sales contracts usually require the unit rates to be fixed even though the quantities may be varied. If the variation is significant, there can be a huge loss or profit. Some contracts permit the adjustment of the unit rates in case of unexpected big changes.
    • The quantity of any item of work can vary between different construction projects and how to estimate an appropriate unit rate is crucial.
  6. Impact on design
    • The relationship of number, length, area and volume is more important for the design of the building form and shape.
    • Whether a building is more economical or expensive than the other for the same floor area and type would primarily depend on the ratios of the numbers, lengths, areas and volumes of the building components to the floor areas, and then on the materials and standards.
  7. Breakdown into more or less items
    • It would be more expedient if less items need to be measured to arrive at the total cost or price.
    • This means that the unit rate has to allow for the costs of other related items not measured separately.
    • However, when the costs of other related items do not vary in proportion to the quantity of the item measured, the unit cost of the item measured would change significant to become unrealistic, then such other related items should be measured separately for costing.
    • Therefore, the unit rates should only be required to include for related items which change in proportion to the quantity measured or for non cost significant ancillary items. Yet, significant changes to the quantity may still make the non cost significant ancillary items to become significant. This is an area for contractual claims.

​​​​​​​Price build-up

  1. The total price is built-up from:

          Labour costs (​人工費) 

+       Material costs (材料費)

+       Plant costs (機械費)                                                  

          Direct costs (直接費)

+       Site and project overheads (現場及項目管理費)

+       Head office overheads (公司管理費)                       

          Costs (成本)

+       Profit and risks allowance (利潤及風險費)           

          All-in price before value added tax (稅前綜合價)

+       Value added tax (從價稅)                                       

          All-in price (稅後綜合價)                                          

  1. The value added tax here means a tax chargeable upon the net total price before this tax or the gross total price after this tax. Hong Kong does not implement valued added tax. Hong Kong only charges profit tax on the realisable profit annually.
  2. Some of the site and project overheads are not directly related to a particular work item but are commonly shared by more than one item. It is normal to price for these site and project overheads as the Preliminaries. The all-in rate for the work item will then only include the balance of the site and project overheads not included in the Preliminaries.
  3. Profit and overheads are usually allowed for as a percentage of the direct costs. The usual norm for variation is 15%, but it will be very different in competitive tenders. The profit and overheads allowed in the prices for different items can be different.
  4. Some part of the Works may be sublet to sub-contractors. They will include their own overheads in their prices to the Contractor. They may also share to provide some of the site overheads otherwise provided by the Contractor. Therefore, the mark-up on sub-contractors prices for profit and overheads should be less than that on direct labour and materials.

Mark-up and margin

  1. 100 x (1 + 15%) = 100 + 15 = 115:
    • 115 has a mark-up of 15%.
  2.  85 + 15 = 100:
    • 100 has a margin of 15%.
  3. 15/115 = 13.04%:
    • A mark-up of 15% is equal to a margin of 13.04%.
  4. 15/85 = 17.64%:
    • A margin of 15% is equal to a mark-up of 17.64%.

All-in rates and unit of quantity

  1. All-in rate = all-in price / quantity.
  2. Not all the costs are directly proportional to the quantity of the work, it can be a combination of:
    • Costs proportional to volume
    • Costs proportional to area
    • Costs proportional to number
    • Fixed costs.
  3. When the total price for a work item is required to be broken down into quantity and rate, the unit of the quantity to be used should be one which represents the most cost significant variable.
  4. If there are more than one cost significant variable, then the work item should be broken down into more than one sub-item.
  5. It is usual and easier to estimate the cost of a bigger sample quantity of a work item first and divide the cost by the quantity to obtain the unit rate so that:
    • Those costs not directly related to the quantity of the work item can be shared
    • Wastage, laps, etc. which are not measured in the quantity can be allowed for.

Rate build-up

  1. Labour costs:
    • Daily rates to include for:
      • daily basic wage,
      • travelling and meal allowances,
      • allowances for hand tools and personal accessories,
      • allowances for holidays with pay,
      • mandatory provident fund (MPF) contribution,
      • year end bonus,
      • incentive payments, 
      • levies and insurances if not priced separately,
      • etc.
    • ​Time to consider:
      • taking from stores, hoisting, lowering,
      • placing, fixing,
      • non-productive travelling and recess time, 
      • etc.
  2. Material costs:
    • Rates to include for:
      • ex-factory costs, package,
      • export transportation, transit insurance,
      • customs clearance and duties,
      • demurrage, off-site storage,
      • local delivery,
      • off-loading, returning package,
      • etc.
    • Quantities to consider:
      • basic quantities,
      • breakage, damage, theft,
      • wastage (cutting, conversion),
      • unmeasured laps,
      • bulkage, consolidation, shrinkage,
      • etc. 
  3. Plant costs (called "Equipment costs" in civil engineering contracts): 
    • Rates to include:
      • Use of plant (not purchasing of plant),
      • Mobilization, relocation and demobilization costs, if not measured separately,
      • Fuels and consumables,
      • Maintenance and repair.
    • Time to consider:
      • Time used,
      • Unavoidable idling time,
      • Mobilization, relocation and demobilization time, if not measured separately.
  4. Site and project overheads
    • Expenses on site or off-site specifically due to the project, not specifically related to any particular group of work but are commonly shared.
  5. Head Office Overheads
    • Expenses in running the head office, shared between different concurrent projects.
  6. Profit
    • The expected profit with allowance for risks.
  7. Tax if charged based on total price (not in Hong Kong which implements profits tax on the realisable profit annually, not value added tax on turnover).
  8. Rates build-up applicable to measured work as well as preliminaries

Consultants' source of data

  1. Tenderers when tendering will get their cost data by making enquiries with their prospective sub-contractors and suppliers.
  2. Consultants may make enquiries with prospective contractors, sub-contractors and suppliers for cost data but may only be able to obtain some indicative budgetary prices which may differ from that obtained under circumstances of real business opportunity and competitive tendering.
  3. To evaluate whether tender prices received are reasonable market rates, other cost data not received for the same tender would need to be used to compare.
  4. Consultants would therefore rely more on past cost data for cost estimating and for evaluation of tenders.
  5. Consultants would know the rates and prices in tenders received but would not normally know the costs, profit and overheads in the tenders. It does not really matter when the Consultants are interested more on the all-in rates. The details of costs, profit and overheads are only essential when handling claims.
  6. When estimating composite rates covering more than one work item, the quantity ratios of the constituent work items would be important.
  7. Rates:
  8. Quantity factors and ratios:
    • Cost Analyses of Other Projects
    • Analyses by sampling.

Adjust for time differences

  1. There can be up or down fluctuations of costs and prices over time. When using past cost data for the present or future work, adjustments should be made for the time differences.
  2. Indices for adjusting for time differences:
    • Cost indices – reflecting labour and material costs
    • Tender price indices – reflecting prices of work
    • Consumer price indices – reflecting general consumer prices not just for the construction industry.
  3. Cost indices and tender price indices can change at different rates. Cost indices can rise but tender price indices may fall in case of severe competitive market lacking work.

Index references

  1. Census and Statistics Department - Index Numbers of the Costs of Labour and Materials used in Public Sector Construction Projects
  2. Census and Statistic Department - Average Wholesale Prices of Selected Building Materials
  3. Architectural Services Department - Building Works Tender Price Index
  4. Architectural Services Department - Building Services Tender Price Index
  5. Rider Levett Bucknall Construction Cost Update Hong Kong
  6. Arcadis Quarterly Construction Cost Review Hong Kong and China

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Factors affecting construction costs

Factors affecting construction costs KCTang Sun, 28/03/2021 - 15:00

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Note

29 Mar 2021: Full stops added.

2 Mar 2021: Revised.​​​​​​​

17 Mar 2020: Created.​​​​​​​

Generally

  1. Cost factors may be asked from different perspectives at different stages:
    • Feasibility study before choosing site:
      • What type of development?
      • Which country and place to invest and develop? 
      • Why cost differently between countries, places and sites?
    • Planning and design after fixing site:
      • What design, provisions, types, standards of the whole and its components?
      • Why cost differently?
    • Tendering:
      • Why tender prices so different?
    • Construction:
      • Why original contract sum changes?
  2. Cost factors generally:
    • Some factors affect the quantities, and therefore the total cost.
    • Some factors affect the unit cost per area or unit cost per length (e.g., roads, rails, tunnels, bridges, etc.). 
    • Some factors affect the unit rate per quantity of work.
    • Price changes during the post contract stage are excluded here.
  3. Think and brainstorm:
    • The factors can equally apply to other industries or commercial or even social sectors.
    • Common sense knowledge is to be applied.
  4. Classify systematically:

    • There is no absolute answer to "which classification is the best?".
    • A systematic classification should help people think further systematically in the future and present the more relevant factors systematically depending on the perspective and stage.

(3 and 4 added, 2 Mar 2021)

No fixed prices

  1. One important thing to learn is that there is no fixed (constant) set of unit prices in any economy, as evidenced by the many factors suggested.
  2. Free market economies operate on free market competition of the prices. They would only regulate prices for using government services and some public utility services.
  3. The mainland, China used to fix a constant set of unit prices (by issuing standard price books) with moderate periodic inflationary adjustments but when foreign materials and equipment using foreign currencies are involved, the price fluctuations can become serious. After opening up the market, the mainland has admitted significant free market competition though some measures to regulate the prices are still implemented.
  4. Hong Kong operates as a free market economy. Therefore, there is no fixed set of unit prices for construction works. An exception to this is that Hong Kong Government publishes Schedule of Rates for term contract works. See notes at the end.

(Section added, 2 Mar 2021)

Reasons for variances in unit rates in the same city

  1. Even for work items of the same description, the rates can be quite different between projects due to various reasons.
  2. Design:
    • Functions
    • Materials and construction
    • Standard.
  3. Site location:
    • ​Transportation
    • Restrictions.
  4. Construction:
    • Project size
    • Extent of mechanization
    • Extent of standardization
    • Extent of repetition
    • Extent of pre-fabrication
    • Volume of bulk purchasing
    • ​Workmanship
    • Weather
    • Extent of safety measures
    • Extent of environmental protection measures.
  5. Economic environment:
    • Level of market competition
    • Exchange rates
    • Time differences.
  6. Contractual:
    • Degree of contractual risks
    • Harshness of contract terms
    • Payment terms
    • Degree of design liability and statutory submission obligations
    • Extent of warranties.
  7. Human factors:
    • Consultants’ attitude
    • Owners and occupiers’ attitude and co-operation
    • Tenderers’ pricing strategy in distributing the costs, profit and overheads differently across different work sections.

(Section added, 2 Mar 2021)

​​​​​​​Country (assuming putting a done design to a different country)

  1. Different planning and design regulations.
  2. Different environmental requirements.
  3. Different tax requirements.
  4. Planned economy or free market economy.
  5. Significance of government intervention.
  6. Different purchasing power of local currencies.
  7. Availability of foreign currencies.
  8. Availability of local supply of labour, materials, plant and management.
  9. Degree of reliance on foreign supply of labour, materials, plant and management.
  10. Different requirements on holidays and restriction on working hours.
  11. Different productivity of local labour.
  12. Different extent of availability of public roads and utilities.
  13. Different degree of ease of evacuation of existing occupiers.
  14. Significance of corruption.

Site location and conditions

  1. Extreme climatic conditions: hot, cold, frozen work period, typhoon.
  2. Seismic zones.
  3. Existing status of use: greenfield or brownfield.
  4. Existing type of use: urban, rural or agricultural.
  5. Existing site topography: flat, hilly, mountainous, offshore, etc.
  6. Ground conditions: soft, rocky, reclaimed, submerged, swampy.
  7. Obstructions underground and above-ground.
  8. Availability of public roads and utilities.
  9. Ease of evacuation of existing occupiers.
  10. Congested site or sufficient space for storage and maneuvering.

Planning and design

  1. Functional type of the building or civil engineering construction.
  2. Class and standard of the construction.
  3. Planning and design regulations for different sites and constructions.
  4. Environmental requirements.
  5. Structural form of the construction (brick, reinforced concrete, steel, timber, composite).
  6. Plan shape of the construction. (Different elevation area to floor area ratios. Square building costs less than rectangular building on external elevations.)
  7. Storey height. (Storey height will affect the vertical elements of the building both internally and externally. Higher storey height will increase the volume of the building to be heated or cooled, and therefore HVAC services.)
  8. Number of storeys. (Different shares of the roof and ground slab and beam costs. Need to have staircases for non-single storey buildings. Need to have lifts and refuge floors for tall buildings.)
  9. Height of the construction. (Heavier loading on taller buildings.) 
  10. Orientation of the construction. (Thermal transmission on external surfaces. Use of sunlight.)
  11. Impact on neighbouring properties.
  12. Extent of provision of construction components.
  13. Functions, materials and quality of components.
  14. Extent of site works and external works shared by the main construction (affecting unit cost per area or length).

Economic environment

  1. Stability of economy.
  2. Forecast of cost fluctuations.
  3. Level of market competition.
  4. Exchange rates and their changes.
  5. Time differences (if compared between projects at different times).

Construction 

  1. Project size.
  2. Period of construction and its reasonableness.
  3. Ease of transportation.
  4. Access restrictions.
  5. Changing labour, material and plant costs over time.
  6. Extent of plant required and availability of plant.
  7. Availability of supervisory staff.
  8. Extent of hoardings, covered walkways, scaffolding required.
  9. Extent of temporary works required.
  10. Extent of safety measures required during construction.
  11. Extent of environmental protection measures required during construction.
  12. Extent of mechanisation.
  13. Extent of standardisation.
  14. Extent of repetition.
  15. Extent of pre-fabrication.
  16. Volume of bulk purchasing.
  17. Workmanship expected.
  18. Weather which may be encountered.
  19. Availability of temporary water and electricity.

Contractual

  1. Procurement method.
  2. Degree of contractual risks.
  3. Harshness of contract terms.
  4. Payment terms.
  5. Degree of design liability and statutory submission obligations.
  6. Extent of insurances, bonds and warranties.

Tenderers' ability and perception (causing differences in tender rates)

  1. Labour, material and sub-contract costs which can be sourced at the time of tendering.
  2. Availability of plant.
  3. Availability of supervisory staff.
  4. Availability of expertise.
  5. Availability of sufficient cash flow or reliance on loans.
  6. Reasonableness of the period of construction.
  7. Consultants’ attitude.
  8. Owners and occupiers’ attitude and co-operation.
  9. Tenderers' profit expectations.
  10. Tenderers’ pricing strategy in distributing the costs, profit and overheads differently across different work sections.

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Profit, margin, markup, wastage, bulkage and shrinkage

Profit, margin, markup, wastage, bulkage and shrinkage KCTang Sat, 21/03/2020 - 01:25

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Note

21 Mar 2020: Created.

Simple approach

  1. When we face with the above terms, what should be the mathematical formulae to handle them and how can we remember the formulae?
  2. Instead of using x, y and z to represent the formulae, it would be easier to derive the formulae based on some simple numerical values using 100 as the base.

Cost, price, profit, margin, markup

  1. cost + profit = price.
  2. profit markup % = profit / cost x 100%.
  3. profit margin % = profit / price x 100%.
  4. Given profit markup and price, how to get the cost?
  5. A long way:
    • Cost + cost * profit markup % = price
    • Cost * (1 + profit markup %) = price
    • Cost = price / (1 + profit markup %) = price x 100 / (100 + profit based on 100)
  6. A quicker way:
    • If cost = 100 and profit markup = 15%, then profit = 15 and price = 115.
    • This means, cost = price x 100 / 115.
    • If cost = 100 and profit markup = 10%, then profit = 10 and price = 110.
    • This means, cost = price x 100 / 110.
    • To conclude, if profit markup = P%, then cost = price x 100 / (100 + P).

% wastage

  1. If a finished qty of work of 100 requires a material qty of 120. The qty wasted is 20.
  2. Should the wastage be 20/100 = 20% or 20/120 = 16.67%?
  3. Both can be correct depending on which is used as the base.
  4. However, in pricing, when the payment is based on the finished qty, the qty wasted should be borne by the finished qty. 
  5. In the above example, the addition to cover the qty wasted is 20/100 = 20%, so the wastage should be 20%.
  6. If a 3 x 6 finished board requires a 4 x 8 uncut board, the wastage to be allowed is (4 x 8) / (3 x 6) - 1 = 32/18 - 1 = 77.78%.
  7. To conclude, the wastage to be allowed
    = qty wasted / finished qty 
    = (qty used - finished qty) / finished qty
    = (qty used / finished qty) - 1.
  8. The denominator is the payable qty (finished qty).

% bulkage (excavation)

  1. How to allow for the extra volume to work on if payment is based on the volume before bulking?
  2. Bulkage or bulking factor = volume after bulking / volume before bulking.
  3. Volume after bulking = volume before bulking x bulkage.
  4. The addition to cover the extra volume is volume before bulking x bulkage. This should be simple.

% shrinkage (concrete, mortar, plaster, screed) or % compaction (soil backfilling)

  1. How to allow for shrinkage if payment is based on the quantity after shrinkage?
  2. If shrinkage = 20%, for each 100 qty, qty shrunk = 20, qty left = 80.
  3. The addition to cover the qty shrunk = 20/80 = 25%.
  4. If shrinkage = 30%, for each 100 qty, qty shrunk = 30, qty left = 70.
  5. The addition to cover the qty shrunk = 30/70 = 42.86%.
  6. If shrinkage = S%, then the addition factor = S/(100-S).
  7. The denominator is the payable qty (qty left).

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