Estimating and Pricing

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Note

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.

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:
    1. Costs proportional to volume
    2. Costs proportional to area
    3. Costs proportional to number
    4. 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

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. Consultants' source of data:

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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