Construction Elements of net project cost

Direct costs are those costs required to conduct operations that result directly in the installation of some component of the physical project, such as applying paint or connecting electrical cables or some other direct production work, such as soil excavation and hauling. The ‘big four’ among the elements of direct cost are labour, materials, equipment and subcontractor work. Sources of cost data to be used in the estimates will be the contractor’s historic cost records, if any, for similar work items. A variety of published cost estimating guides and databases also provide such information, but caution must be exercised to assure the numbers are based on reasonably similar conditions.

Labour

Predicting the cost of labour for a construction activity is probably the most challenging part of the estimator’s job. It has been said that these construction expenses are ‘inherently variable and the most difficult to estimate accurately’ (Clough et al., 2000). Both the productivity – the rate at which personnel complete the work activity – and the cost per hour that must be paid for that personnel effort contain many elements. Productivity varies with the size of the work crew, availability of materials and equipment, weather conditions, effectiveness of supervision, coordination with concurrent operations in the same location and the degree of caution required due to safety considerations. Labour cost per hour is influenced by union agreements and local and national legislation, which provide for such cost elements as insurance, training, holidays, sick days, travel and overtime, in addition to the regular straight time pay rate. To estimate the labour cost for an item of work, one of three approaches can be used. All are based on the idea that the work item will consist of an estimated number of units, or quantity, and the total labour cost will be that quantity multiplied by the estimated labour cost per unit. The particular approach depends on the way the contractor keeps its historical cost records. Consider, for example, the calculation of the estimated labour cost of placing concrete in a castin- place foundation wall 2.5 m high, 0.3 m thick and 20 m long. The total volume of concrete in the wall will be 15m3. (We neglect the slight concrete volume reduction due to the reinforcing steel, as do most cost estimators.)

 If the contractor’s cost records for placing concrete for this type of application are kept on the basis of labour US$/m3, we simply multiply the 15m3 by the historical unit labour cost, perhaps modified to incorporate inflationary cost changes. Thus, if the labour cost is US$ 47.00/m3, the labour cost estimate is simply (15m3)(US$ 47.00/m3) = US$ 705.00.
 Perhaps a better way to keep labour effort records is by labour hours instead of labour dollars.
The argument in favour of this method is that labour hours/m3 of foundation wall concrete  are not likely to change over time, whereas the cost/hour will change as labour agreements are modified. Using the same 15m3 example, suppose the record shows that 2 labour hours are needed to place 1m3 of concrete (either 2 labourers working 1 hour each, 4 labourers each working half an hour or some other combination). If the cost/labour hour is US$ 23.50, the  estimated labour cost of the work item is (15m3)(2 labour hours/m3)(US$ 23.50/labour hour) = US$ 705.00. Note that the US$ 47.00/m3 in the first approach, above, is simply the product of 2 labour hours/m3 and US$ 23.50/labour hour.
 A third approach to this calculation is based on records of ‘productivity’ for the particular work item, where productivity is defined as the quantity installed per unit of input (in this case per labour hour). The productivity in our example is simply the reciprocal of the labour hours/m3. In the second approach, above, the 2 labour hours/m3 translate into a productivity of 0.5m3/labour hour. So, the calculations are (15m3)(US$ 23.50/labour hour)/(0.5m3/labour hour) = US$ 705.00.

The direct cost of labour also includes indirect labour costs (a rather confusing terminology!). These costs are those expenses paid by the employer that are in addition to the basic hourly rates, including employer contributions to various welfare and social security funds, payrollbased insurance expenses, pension plans, paid vacations and apprenticeship programmes. Such expenses can be substantial, often exceeding 50% of the basic hourly rate. Some contractors use a single labour rate, for each labour classification, that includes both basic hourly wage and indirect labour. Others add indirect labour separately. Whichever approach is used, it is essential to include these costs in the cost estimate! We assume, in our 15m3 example, that the US$ 47.00/hour includes indirect labour costs as well as the basic hourly wage.

Materials

The term ‘materials’ includes all physical objects that become part of the finished structure. Thus materials include not only such common and traditional items as soil, concrete, steel, timber, paving, air ducts and electrical cable, but also various pieces of permanent equipment such as conveyors, medical diagnostic devices, bank vaults and kitchen stoves and refrigerators. We emphasise this point because another element of direct cost, equipment (sometimes called plant) is used to refer only to construction equipment deployed to install various elements of the project but not to become part of the completed structure. In the process of assembling its cost estimate, the contractor will receive priced proposals from material suppliers for furnishing many of the materials required in the project. The contractor may supply some of the materials from its own inventory; examples might include a gravel source or a stock of timber purchased in large quantities for use on several projects. Whatever the potential source, the cost will be reduced to a cost per unit to conform to the estimate format, so that the cost for a work item can be calculated as the product of its estimated quantity and its cost per unit. The material cost for our 15m3 concrete example is straightforward; we expect concrete suppliers to propose furnishing concrete meeting this specification on a cost/m3 basis. If the proposed price of timber is given on a volume or area basis (cost per board-foot is common in the USA) and if the quantity of a certain timber item is given as a length measure, some conversion of the price will be necessary. It is important that all material costs have a common basis, such as delivered and off loaded at the jobsite, with no sales tax included. As we shall see in our examples, sales tax is usually added as a single item toward the end of the estimating process.

Equipment

Construction equipment, or plant, is used to move, raise, fasten, excavate and compact the various materials installed on the project. A substantial portion of the cost of highway and heavy construction projects is for equipment, including bulldozers, scrapers, trucks, cranes and compactors. For building projects, the proportionate cost of equipment is less. Equipment may be owned by the contractor or it may be rented or leased for the project. Contractors rent equipment on a short-term basis, often month to month. Leasing is for longer terms of a year or more, with a common provision that the contractor has the option of purchasing the equipment at the end of the lease period. An often-used process for estimating the cost of equipment is similar to that for labour, wherein a work item quantity is multiplied by the estimated equipment cost per unit. If the contractor will use its own equipment, the contractor may have sufficiently accurate unit-cost data in its historical cost database for some of the items, but for others it will be necessary to calculate the cost. This procedure will involve recognising the capital recovery costs, including both acquisition and interest, and the operating costs, including fuel and oil, maintenance, insurance, storage, taxes and licensing. Various contractors differ in their handling of the costs of equipment operators; some include these costs in the equipment category, whereas others recognise equipment operator expense as labour. Whatever the method used and whether the equipment is owned, leased or rented, the calculated cost will usually be on a daily or hourly basis. It will then have to be converted to a cost per unit for the particular work item, based on an analysis of the equipment’s production rate on this item, plus some measure of nonproductive time for which the contractor must pay. Instead of including the cost of construction equipment in each bid item, the contractor may calculate and add a single amount toward the end of the process, almost as an ‘overhead’ item. If a fleet of equipment is expected to be utilised throughout most of the project, this cost, based on hourly, daily or monthly lease or rental rates and the total cost of any owned equipment, will appear as one item on the cost estimate summary.