CETS461: CONSTRUCTION COST engineers, contractors, and other Scope Definition: Assists in defining the

ENGINEERING TOPIC 3 stakeholders. scope of work for different project phases,

which can lead to better planning and
INTRODUCTION Standardization: Provides a consistent
fewer surprises during construction.
framework for organizing and referencing
Throughout a project's planning, design,
construction work, making it easier to TOPIC 3B
construction, and operations and
understand and compare estimates.
maintenance phases, Cost Estimating is For many owners and developers, the
employed as one of the main tools of Efficiency: Streamlines the process of accuracy of the cost estimation reports is
successful Cost Management. creating detailed estimates by following a vital for assessing a project’s financial risk
structured format. and how well their investment will
After setting an initial budget, it's crucial to
perform in the long run.
validate its assumptions by using Communication: Enhances clarity and
progressively detailed cost estimating reduces misunderstandings by providing a FACTORS INFLUENCING CONSTRUCTION
methods as the design and construction common language for describing COSTS
details evolve. construction work
LABOR - includes all the man-hours that
ESTIMATING FORMATS Documentation: Assists in organizing are worked on the construction project,
project documentation in a way that aligns from supervision by project owner to
The term “estimating format” can refer to
with industry standards. subcontractor apprentice.
various standardized systems for
organizing and presenting cost estimates. UNIFORMAT MATERIALS - include manufactured
products like components, fittings, items
These formats or templates come in UNIFORMAT is a systems-based
of equipment and systems; naturally
various forms, but they usually share some organization of building content.
occurring materials such as stone, timber;
characteristics. Most estimates include
This format is particularly suited to project and backfilling for excavations in
numbered lists showing the materials
planning and early design estimating, as connection with building work
necessary to complete the project
well as, for work and pay schedules during
OVERHEAD & PROFIT - Companies have
MASTER FORMAT construction.
overhead that they need to cover: office
Master Format is a material-based UNIFORMAT classifies building and site rent, contractor’s insurance and employee
organization of building content. related infrastructure in three levels, with wages & costs. When they bid on a
a suggested fourth level of detail project, they also include a profit margin,
Master Format is a standard for organizing so their business can grow
construction specifications and written Developed by the Construction
directions used in many types of building Specifications Institute (CSI) and the FACTORS OF INFLUENCING LABOR COSTS
projects. National Institute of Building Sciences
LABOR FORCE COST OF LIVING - is closely
(NIBS), UNIFORMAT is designed to provide
MasterFormat is widely used within the tied to the demand-supply of labor since it
a consistent framework for organizing
design and construction industry acts as a natural “floor” to the laborer’s
project information, especially in the early
wages
When estimating for Construction stages of design.
Document design phases. LOCAL LABOR DEMAND AND SUPPLY -
1. Structured Cost Estimating
most construction today depends on the
It has a master list of 50 divisions labor force located in the area of the
Early-Stage Budgeting: UNIFORMAT
MasterFormat Overview facilitates preliminary cost estimates by building project
breaking down projects into building
Structure: MasterFormat organizes PRODUCTIVITY - includes matching the
systems and assemblies rather than
construction work into a hierarchical right skilled workforce with the work,
detailed components. This is particularly
structure, with divisions and sections. Each creating an effective project schedule, and
useful during the early design phases
division covers a broad category of work, overseeing the day-to-day craftsmanship
when detailed drawings are not yet
while sections provide more detailed available. FACTORS AFFECTING MATERIAL COST IN
breakdowns. CONSTRUCTION
Consistency: By categorizing costs into a
Divisions: The format is divided into major standardized format, UNIFORMAT helps In order to effectively forecast material
divisions, each corresponding to a ensure consistency in cost estimating cost, both local and global markets for
different aspect of construction. For across different projects and phases. different items have to be looked at.
example, Division 03 covers Concrete, Another impactor is the local building
Division 05 covers Metals, and Division 09 2. Enhanced Communication
code requirements, which can greatly
covers Finishes. impact the materials specified for
Common Language: Provides a
Sections: Within each division, there are standardized framework that improves construction.
multiple sections that detail specific work communication among project
Global Markets
items. For instance, within Division 09 stakeholders, including architects,
(Finishes), you might find sections for engineers, and contractors. Local Material
Gypsum Board, Tile, and Painting
Clarity: Helps in clearly defining and
Numbers: Each division and section is understanding the scope of work and
assigned a unique number for easy costs associated with various building
reference. For example, Division 09 might systems and components. PLANNING CONSTRUCTION BUDGETS
be numbered 09 00 00, with specific
3. Improved Project Planning
sections under it having more detailed
numbers like 09 21 16 for Gypsum Board. Organized Structure: Breaks down a A project budget reflects the financial plan
project into major systems (e.g., of the operations, divided into
Purpose: The MasterFormat system helps
Substructure, Superstructure, Interior responsibility centers, with specific goals
in organizing project specifications, cost
Construction) and components, which aids clearly outlined along with the costs
estimates, and other documentation in a
in organizing project planning and expected to be incurred.
standardized manner. This facilitates
management.
better project planning, cost control, and The primary purpose of having a budget
communication among architects, are as follows:
 - assign financial targets and OPERATING EXPENSES BUDGET manufacturing service centers.
resources to each responsibility This manpower strength
Project operating expenses of
center constitutes the majority of the
accomplishing planned tasks in a given
- to coordinate their activities personnel employed at the project
accounting period can be determined by
- to form the basis for controlling site.
summing up the standard costs of
performance (d) Equipment maintenance and
corresponding work-packages constituting
- make the participant's cost operation staff and workers - It
the tasks.
consciousness instead of covers all categories of manpower
purposeless routine working The standard costs are adequate for both direct and indirect, employed
forecasting the expenditure and in the plant and equipment
The project functional organization is
controlling the costs of work-packages, responsibility
structured into responsibility centers. Each
but these are not sufficient for budgeting (e) Administration staff budget - It
responsibility center is assigned goals in
resources with their cost breakdown for consists of the indirect manpower
the form of the sales budget.
coordinating, communicating and employed in the administration
It is allocated resources in the form of controlling the tasks and overall resources and resources management set-
materials, labor, equipment and budgeted assigned to the responsibility centers. The up, other than already covered by
costs for the assigned goals. And, finally, project operating expense budget details the management personnel,
the project financial plan is presented in the resources and costs planned for supervisory staff and equipment
the form of the master budget which achieving phased objectives. In simple repair and maintenance
summarizes all the budget information like words, it can be termed as an manpower (if not catered
profit and loss statements, balance sheets, 'expenditure budget'. separately). It includes the
capital expenditure budget, cash flow personnel administration staff,
TYPES OF BUDGETS AND SCHEDULES project office manpower, technical
forecasts and performance indicators.
Project expenditure can be divided into staff, and common utility services
The project budget making process goes manpower
two broad categories:
through the following stages:
1. Production-related expenses - the MATERIAL USAGE COST SCHEDULE
(a) Structuring responsibility centres.
production costs budget, which accounts The usage schedule of materials is
(b) Budgeting sales and assigning a
for production-related expenses, includes compiled from usage requirements of
sales target to each responsibility
budgets of each of the production materials projected by the responsibility
centre.
responsibility centers and the services centres. Based on these requirements, the
(c) Budgeting production expenses
responsibility centers who support the following budgets are prepared:
necessary for the fulfilment of
production.
assigned tasks of each
(a) Project materials purchase budget
responsibility centre. 2. Administration-related expenses -
(d) Provisioning for inflation and consists of the general administration (b) Project materials inventory budget
escalation. budget, technical management budget,
(c) Administration materials budget
(e) Forecasting profit and loss, cash and temporary work and common
flow statement and balance sheet. facilities budget. (d) Maintenance materials budget
(f) Preparing a project master
budget. The making of a project expenditure PLANT AND EQUIPMENT EXPENSES
budget starts with identifying the SCHEDULE
schedules required for a certain project.
Plant and equipment budget includes all
These schedules are as follows:
The Profit and Loss Statement owning and operating costs of the plant
(a) Manpower expenses schedule and the equipment and vehicles employed
also known as the Income Statement, is a
at the project site. Generally, the
financial report that summarizes a (b) Materials usage cost schedule
manpower like mechanics, operators and
company's revenues, costs, and expenses
(c) Plant and equipment expenses drivers, and the spare parts, repair and
over a specific period, typically a fiscal
schedule maintenance materials are budgeted
quarter or year. It provides insight into the
separately as their procurement is done by
company's profitability by showing how (d) Other direct expenses schedule the personnel and materials departments.
much money the company earned
(e) General and administration expenses The plant and equipment budget can be
(revenues) and how much it spent
schedule broadly divided into the following
(expenses), resulting in either a profit or a
categories:
loss. MANPOWER EXPENSES SCHEDULE
(a) Direct plant and equipment budget
Cash Flow Statement Project manpower expenses schedule
represents the phased manpower costs of (b) Indirect plant and equipment budget
refers to a financial report that details the
inflows and outflows of cash within a the entire project. This budget comprises (c) Administrative vehicles budget
company over a specific period. It shows of the manpower expenses sub-budgets of
how cash is generated and used in all responsibility centers. This schedule can (d) Repair and maintenance budget
operating, investing, and financing be divided into the following categories:
OTHER DIRECT EXPENSES SCHEDULE
activities, providing insights into the (a) Management personnel budget -
company's liquidity and overall cash In addition to manpower, material and
It includes the managers' salaries
management. equipment costs, some responsibility
and their connected expenses.
centers also incur expenditure which can
Balance Sheet (b) Supervisory and site staff budget -
be identified with the execution of
It represents the manpower costs
also known as the Statement of Financial permanent works. The type of such
of the technical supervisors and
Position, is a financial report that presents expenses will vary from project to project.
site staff employed in the
a company's financial position at a specific However, the following are some of the
production and service
point in time. It shows the company’s other direct expenses which need
responsibility centers
assets, liabilities, and equity, providing a budgeting:
(c) Direct labor budget- It cover the
snapshot of what the company owns and direct labour costs of labour (a) Sub-contracted works
owes, as well as the invested capital employed in the production
centers and product
(b) Resources of manpower and centers where applicable) with the tasks Accounts receivable are invoices owed to
equipment which are planned to be hired and resources assigned to each the company that will likely be paid within
from external sources responsibility center. one year and have not been formalized by
a written promise to pay, such as a note
(c) Technical studies like soil investigations (c) Sales revenue budget - It reflects the
receivable. When retention is held, it is
monthly or quarterly financial targets for
(d) Professional fees for the preparation of common practice to divide the accounts
the overall project and its breakdown for
designs, drawings, etc. receivable into two categories: accounts
each production center and other revenue
receivable-trade and accounts receivable-
GENERAL AND ADMINISTRATION earning sources.
retention.
EXPENSES SCHEDULE
(d) Production cost budget - It covers the
INVENTORY
This schedule includes all other indirect production cost of goods sold, and it can
expenses which are not included be further split up into direct costs and Inventory includes materials that are
elsewhere during budgeting. Such indirect indirect costs. These costs can be suitably available for sale or are available and
expenses, which mostly result from arranged so as to bring out the production expected to be incorporated into a
administrative functions, can be broadly cost budget for each responsibility center. construction project within the next year.
divided into the following three main
(e) Project general and administration COSTS AND PROFITS IN EXCESS OF
heads. Each of them can be budgeted
expense budget - It represents the overall BILLING
separately:
site office, administration, and head office
It is also be referred to as costs and
(a) General administration expense budget, arranged in conformity
estimated earnings in excess of billings or
expenses. with the finance heads of accounts and
underbillings. Costs and profits in excess of
the functional needs.
(b) Technical management billings occur when the company bills less
expenses. (f) Budgeted financial forecasts - These than the costs incurred plus the estimated
include the profit and loss statement, cash profits or earnings associated with the
(c) Temporary works and common flow forecast and forecast balance sheet. completed work. If the billings are in
facilities expenses. excess of the costs and estimated profits,
BALANCE SHEET
(a) General administration expenses cover the difference is recorded as a liability
management personnel costs, project As recently mentioned, the balance sheet under the billings in excess of costs and
office costs, computer system costs, and is a snapshot of a company’s financial profits category.
costs of resource managing departments assets, liabilities, and the value of the
NOTES RECEIVABLE
like personnel, materials, plant and company to its owner — often referred to
equipment, and finance. as net worth or equity — at a specific Notes receivable includes all invoices due
point in time. Balance sheets are to the company that will likely be paid
(b) The technical management expenses commonly prepared at the end of each within one year and have been formalized
comprise: month and at the end of the fiscal year. by a written promise to pay. (Invoices,
- Technical office staff including short-term loans, or advances to
Three sections: Assets, Liabilities and
designers, quantity surveyors, employees).
Owner’s Equity
draftsmen and certain special PREPAID EXPENSES
categories of workers. Assets = Liabilities + Equity
- Technical office equipment, Prepaid expenses are payments that have
ASSETS
instruments, publications and been made for future supplies and
special stationery. Assets are those resources held by the services. (Prepaid taxes, insurance
- Contracts and sub-contacts company that will probably lead to some premiums, rent and deposits).
preparation administration costs. future cash inflows.
OTHER CURRENT ASSETS
- Designs and drawings preparation
Assets are divided into three broad
expenses. Other current assets are all current assets
categories
- Quality control costs. not recorded elsewhere.
- Project planning and controlling - current assets
TOTAL CURRENT ASSETS
costs. - long-term assets,
- and other assets Total current assets represent the total
(c) Temporary works and common
value of the current assets.
facilities include accommodation, utility CURRENT ASSETS
services, HVAC, roads and fencing, FIXED AND OTHER ASSETS
messing, sports and recreation, etc. Current assets are the most liquid assets.
Current assets are those assets that are Fixed and other assets include assets with
TOPIC 3C expected to be converted to cash, an expected useful life of more than one
exchanged, or consumed within one year. year at the time of their purchase. Fixed
PROJECT MASTER BUDGET
assets are recorded on the balance sheet
Common current assets include:
The project master budget integrates and at their purchase price and with the
summarizes the project functional - cash, exception of land are depreciated for
budgets. At times, the master budget is - accounts receivable, financial purposes.
also referred to as the finance budget or - inventory,
Fixed and other assets include:
profit plan. The detailed working patterns - cost and profit in excess of billings,
are attached as schedules or appendices - notes receivable, - fixed assets,
with the text: - prepaid expenses, - accumulated depreciation,
- and other assets. - net fixed assets,
(a) Project planned objectives - These are
- and other assets.
stated in physical and financial terms with CASH
the plan assumptions and the functional The fixed assets have been broken down
organization of work Cash includes demand deposits (such as
into the following categories: land,
savings and checking accounts), time
buildings, construction equipment, trucks
(b) Organization of responsibility centers - deposits (such as certificates of deposits)
and autos, and office equipment.
It highlights the division of the functional with a maturity of one year or less, and
organization into responsibility centers petty cash.
(and their being further split up into work-
ACCOUNTS RECEIVABLE
 - Land and buildings include all real ACCOUNTS PAYABLE Other current liabilities include all other
property (real estate) owned by current liabilities that are not recorded
Accounts payables are debts that the
the company. elsewhere.
company owes and expects to pay within
- Construction equipment includes
one year that are not evidenced by a TOTAL CURRENT LIABILITIES
heavy construction equipment,
written promise to pay. For construction
such as excavators and dump Total current liabilities represent the sum
companies the monthly bills that they
trucks, and other depreciable of all the current liabilities.
receive from their suppliers and
construction tools, such as
subcontractors constitute accounts
compressors.
payable until the bill has been paid.
- Trucks and autos include pickup
trucks and automobiles used by When retention is withheld from the
office and field personnel. subcontractor payments, it is common OWNER’S EQUITY
- Office equipment includes all practice to divide accounts payable into Owner’s equity is the claim of the
depreciable office equipment and two categories: accounts payable trade company’s owner or shareholders on the
furnishings such as desks and and accounts payable-retention. assets that remain after the liabilities are
computers. paid. Owner’s equity may also be referred
BILLINGS IN EXCESS OF COSTS AND
ACCUMULATED DEPRECIATION PROFITS to as net worth. Owner’s equity is
recorded differently on the balance sheet
The losses in value to date of the fixed Referred to as billings in excess of costs for corporations, sole proprietors, and
assets are recorded as accumulated and estimated earnings or overbillings. It is partnerships.
depreciation. The depreciation method the opposite of costs and profits in excess
used in financial statements may be of billings. This occurs when the company For corporations the owner’s equity is
different from the depreciation method bills more than the costs incurred plus the commonly broken down into three
used for tax purposes. The depreciation estimated profits or earnings associated categories: capital stock, retained
taken for a fixed asset may never exceed with the completed work. If the costs and earnings, and current period net income.
the purchase price of the asset estimated profits are greater than the - The capital stock represents the
billings, the difference is recorded as an initial investment in the company
NET FIXED ASSETS
asset under the costs and profits in excess by the shareholders
The net fixed assets equals the total fixed of billings - The retained earnings represent
assets less the accumulated depreciation. prior accounting period’s profits or
NOTES PAYABLE
The net fixed assets is also known as the earnings retained by the
book values for all of the fixed assets or Notes payable includes all debts that will corporation to invest in company
the value of the fixed assets on the likely be paid within one year and have operations rather than be
accounting books been formalized by a written promise to distributed to the shareholders.
pay - The current period net income
OTHER ASSETS
represents the profits or losses
ACCRUED PAYABLES
Other assets include assets not elsewhere incurred during the current
classified. Common other assets include Accrued payables refer to amount owed accounting period.
inventory that will not be sold within a for supplies and services that have not
year, investment in other companies, and been billed. They include accrued taxes,
the cash value of life insurance policies. rents, wages, and employee vacation time
that have not been paid. (Accrued
TOTAL ASSETS
payables, accrued taxes and accrued
Total assets represent the total value of vacation)
the current, fixed, and other assets.
CAPITAL LEASE PAYABLE
LIABILITIES
Capital leases must be recorded as a
Liabilities are obligations for a company to liability. Capital leases include all leases
transfer assets or render services at some that are non-cancelable and meet at least
future time for which the company is one of the following conditions:
already committed to. Loans and warranty
(1) the lease extends for 75% or more
reserves are common liabilities.
of the equipment or property’s
Liabilities are divided into two broad useful life
categories: (2) ownership transfers at the end of
the lease,
- Current liabilities and
(3) ownership is likely to transfer at
- long-term liabilities
the end of the lease through a
CURRENT LIABILITIES purchase option with a heavily
discounted price, or
Current liabilities are those liabilities that (4) The present value of the lease
are expected to be paid within one year. payments at market interest rates
Current assets are usually used to pay exceeds 90% of the fair market
current liabilities. Current liabilities value of the equipment or
include: property.
- accounts payable, WARRANTY RESERVES
- billings in excess of costs and
estimated earnings, Warranty reserves are funds set aside to
- notes payable cover the foreseeable cost of warranty
- accrued payables, work. Many homebuilders should be able
- capital lease payments, to forecast their expected warranty costs
- warranty reserves, based on past warranty experience.
- and other current liabilities.
OTHER CURRENT LIABILITIES