KWAME NKRUMAH UNIVERSITY OF SCIENCE AND

TECHNOLOGY, KUMASI

DEPARTMENT OF BUILDING TECHNOLOGY

BT 257 INTRODUCTION TO CONSTRUCTION ECONOMICS

[Credit: 2]

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Course Introduction

BT 257 INTRODUCTION TO CONSTRUCTION ECONOMICS

MODULES
1. Economics of Construction Industry and Building Economics
2. Construction Costs, Price and Value
3. Legislation and Central Sources of Finance
4. Design Factors of Geometry.

LEARNING OUTCOMES
Evaluation, Design and Use

Understanding of the total Construction process, the nature of building Economics, and
the important relationships between economics and other subject areas, with emphasis on
principles and Techniques.

Factors governing the supply of and demand for resources and building, feasibility and
techniques of evaluation, types of development and types of client, design factors of
geometry, technology and methodology, cost analysis, cost control and cost planning,
costs-in-use.

References
1) Economics, 4th Edition, by David Begg
2) Property and Construction Economics by Timothy Eccles, Sarah Sayce and Tudy
Smith
3) Building Economics, by Ivor Seeley.
4) Cost Studies of Buildings 4th Edition, by Allan Ashworth

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Table of Content

PUBLISHER INFORMATION .............................................................................................................. II

COURSE AUTHORS ......................................................................................................................... III
COURSE INTRODUCTION ............................................................................................................... IV
TABLE OF CONTENT ....................................................................................................................... V
LIST OF FIGURES ........................................................................................................................... VII

Unit 1 ................................................................................................................................................ 1
ECONOMICS OF CONSTRUCTION INDUSTRY AND BUILDING ECONOMICS ...................................... 1
SESSION 1-1: ECONOMICS OF CONSTRUCTION INDUSTRY ............................................................ 1
1-1.1 What Economics Is ........................................................................................................ 1
1-1.2 Some Economics Concepts ........................................................................................... 3
1-1.3 Further Economic Concepts .......................................................................................... 4
1-1.4 Supply, Demand And The Market ................................................................................. 6
1-1.5 The Construction Industry ........................................................................................... 17
1-1.6 Contractors Plant And Equipment.............................................................................. 24
SESSION 2-1: THE NATURE OF BUILDING ECONOMICS ................................................................ 26
2-1.1 Shelter A Need.......................................................................................................... 26
2-1.2 Clients Requirement ................................................................................................... 28

Unit 2 .............................................................................................................................................. 31
CONSTRUCTION COSTS, PRICE AND VALUE COSTS ....................................................................... 31
SESSION 1-2: COST, PRICE AND VALUE . 31
1-2.1 Economic Cost Has Three Major Facets ..................................................................... 31
1-2.2 Price And Goods .......................................................................................................... 34
1-2.3 Value ............................................................................................................................ 35
SESSION 2-2: CALCULATING COSTS............................................................................................ 36
2-2.1 The Use Of Calculus.................................................................................................... 36
2-2.2 Mathematics Of Total Cost.......................................................................................... 38

Unit 3 .............................................................................................................................................. 42
LEGISLATION AND CENTRAL SOURCES OF FINANCE .................................................................... 42
SESSION 1-3: FINANCIAL INSTITUTIONS ..................................................................................... 42
1-3.1 Sources......................................................................................................................... 42
1-3.2 Financial Institutions/Financial Intermediaries/Non-Bank ......................................... 43
1-3.3 Banks And Building Societies Deposit Taking Institutions ........................................ 44
SESSION 2-3: INVESTORS ............................................................................................................... 44
2-3.1 Property Companies And The Stock Market ............................................................... 44
2-3.2 Foreign Oversees Investors ......................................................................................... 45
2-3.3 Private Individuals/Owner-Occupiers ......................................................................... 45
2-3.4 Joint Venture Partners (Sharing Of Risks And Rewards) ........................................... 45
2-3.5 Government Assistance ............................................................................................... 46
2-3.6 Developers ................................................................................................................... 46
2-3.7 Mortgage ...................................................................................................................... 47

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Unit 4 .............................................................................................................................................. 48
PERIMETER /FLOOR AREA RATIOS................................................................................................. 48
SESSION 1-4: SHAPE AND SIZE OF BUILDING .............................................................................. 48
1-4.1 Plan Shape ................................................................................................................... 51
1-4.2 Size Of Building .......................................................................................................... 52
SESSION 2-4: HEIGHT OF BUILD .................................................................................................. 54
2-4.1 Storey Heights ............................................................................................................. 54
2-4.2 Total Height Of Buildings ........................................................................................... 55
2-4.3 Circulation Space ......................................................................................................... 57

List of Figures

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Figure 1: Showing three stages of business cycles ...................................................................................... 8
Figure 2: Demand and the market .......................................................................................................... 13
Figure 3: Supply and the market ........................................................................................................... 14
Figure 4: Showing demand and supply curses .......................................................................................... 14
Figure 5: Showing loops between households and firms ............................................................................ 15
Figure 6: Showing Quality-Cost-Time eternal triangle ............................................................................ 19
Figure 7: Maslows needs hierarchy....................................................................................................... 26
Figure 8: Value for Money ................................................................................................................... 28
Figure 9: Showing complex interactions ................................................................................................. 30
Figure 10: Fixed costs and Total costs .................................................................................................... 32
Figure 11: Variable costs and Total costs ................................................................................................ 33
Figure 12: Costs / output ..................................................................................................................... 34
Figure 13: Marginal cost curve ............................................................................................................. 37
Figure 14: Types of polynomials required for accurate representation ........................................................... 37
Figure 15: Showing labour intensive curve with respect to Cost / Output ...................................................... 40
Figure 16: L-shaped floor plan .............................................................................................................. 49
Figure 17: Irregular shaped floor plan .................................................................................................... 50
Figure 18: Square-shaped floor illustrating lowest wall-to-floor ratio ........................................................... 51
Figure 19: Showing comparative floor areas A and B ................................................................................ 53
Figure 20: Showing comparative floor areas A and B ................................................................................ 55
Figure 21: Showing circulation space Total area / Usable Area Ratio ........................................................... 57
Figure 22: Showing circulation space Total area / Usable Area Ratio ........................................................... 58

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 Unit 1
ECONOMICS OF CONSTRUCTION INDUSTRY AND

BUILDING ECONOMICS

Learning Objectives
After reading this Unit, you should be able to:
1. Define Economics and describe the different concepts of
Economics of Construction Industry and Building Economics
2. Identify and explain the various stages in business cycles

Introduction
This unit defines what economics is and how concepts of economics apply to the construction
industry and relates to the building economics.

SESSION 1-1: ECONOMICS OF CONSTRUCTION

INDUSTRY

1-1.1 What Economics Is

Economics is the study of how society decides what, how, and for whom to produce.
Every group of people must solve three basic problems of daily living. There are:
what goods and services to produce,
how to produce these goods and services, and
for whom to produce these goods and services.

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Goods are physical commodities such as steel and oranges. Goods can be stored in inventory.
Services are activities such as massages, barbering, medical services, architectural, quantity
surveying services. Services are non-physical goods that are consumed or enjoyed only at the
instant they are produced. They are not stored in inventory. Economics therefore has also been
defined as the process of ensuring the optimal distribution of scarce resources.

1-1.1.1 Economics as a social science

By emphasizing the role of society, our definition places economics within the social sciences,
the sciences that study and explain human behaviour. The subject matter of economics is human
behaviour in the production, exchange and use of goods and services.

The central economic problem for society is how to reconcile the conflict between peoples
virtually limitless desires for goods and services and the scarcity of resources (labour, machinery
raw materials) with which these goods and services can be produced. In answering the question
what, how and for whom to produce, economics explains how scarce resources are allocated
between competing claims on their use.

Economics is about Human behaviour yet we describe it as a science rather than a subject within
the arts or humanities. This reflects the way economists analyse problems, not the subject matter
of economics. It is a science because of its disinterested search after truth, which involves the
systematic formulation and arrangement of knowledge and a social science as it is concerned
with the study of human beings living within a society. Economics aim to develop theories of
human behaviour and to test them against the facts.

1-1.1.2 Economics as an exact science

It is not possible for economists to match the Scientist in the laboratory, who is able to
manipulate conditions perfectly and to arrange test cases. Economists live in the real world and
must contend with human vagaries and a chaotic environment. They cannot experiment and the
world is dynamic. Historical data will always be at best an approximation of the current state.

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The world moves on and what has happened in the past may or may not provide good evidence
as to what will hold in the future and it is generally what will happen that interests people,
especially economists. So the past is used as a tool of analysis from which to create models to
use for both an understanding of the present and a guide to the future.

1-1.2 Some Economics Concepts

Many economists recognize two major subject areas:
Micro-economics and
Macro-economics

Micro-economics
Micro-economics is involved with the issues and decisions of the individual person or individual
organization (firm) about particular commodities. Micro-economics examines a number of tools
for explaining and predicting their behaviour with a view to ensuring that scarce resources are
allocated to their best use. It does not look at collective behaviour patterns and their impact on
resource allocation.

Macro-Economics
Macro-economics on the other hand, emphasizes the interactions in the economy as a whole.
It examines resource allocation in respect of the aggregation of a mass of individuals. The
building blocks of macro-economics are:
1. Gross Domestic Product (GDP): this is the value of all goods and services produced in
the economy in a given period such as a year. GDP is the basic measure of the total
output of goods and services in the economy.
2. The Aggregate Price Level: this is a measure of the average level of prices of goods and
services in the economy, relative to their prices at some fixed date in the past. The
aggregate price level tells us what is happening to prices on average. When the price
level is rising, we say that the economy is experiencing inflation. An increase in the
supply of currency or credit relative to the availability of goods and services can also
result in higher prices and therefore inflation.

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 3. The Unemployment Rate: this is the percentage of the labour force without a job.
Labour force people of working age who in principle would like to work if a suitable
job were available. Some of the landed gentry are of working age but have no intention
of looking for work. They are not in the labour force and should not be counted as
unemployed.

There are also two broad economic methodologies in economics:

Positive Economics
Normative Economics.

Positive economics deals with objective or scientific explanations of the working of the
economy. It seeks to understand behaviour and the operation of systems without making
judgements. It takes a commentators stance, seeking to observe and explain.

Normative economics offers recommendations based on personal value judgements. In positive

economics, one would say that inflation is at 25 percent. In normative economics, one would say
inflation is too high. Positive economics seeks to be scientifically neutral.

1-1.3 Further Economic Concepts

Economics has a number of concepts which economists use in developing their theories
Some are:

1. Rationality: Economics assumes a rational world occupied by rationally behaving

individuals. It assumes that individuals act in a reasonable, logical and sensible manner.
When individual behaviour is aggregated into models, behaviour is thus predictable and
plannable.

2. Efficiency: Efficiency is the condition in which the economic system is producing what
people want at the least cost. It is a condition in which no one can be made better off
without making some one else worse off. It represents a time at which resources are
being used optimally.

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3. Scarcity: Economics assumes that all resources are scarce (limited) and that there is thus
competition to obtain them. Economics has therefore also been defined as the process of
ensuring the optimal distribution of scarce resources. Sustainable use of resources is that
which guarantees the existence of these resources for future generations. This has
become a very important debate among economists working in the field of construction.
The issues concern what materials should be used in the building process to balance the
need to reduce construction costs, increase building life and minimize the necessity of
maintenance and running costs during the life of a building.

4. Resources: Resources are anything provided by nature or previous generations that can
be used directly or indirectly to satisfy human wants. These scarce resources are classed
as:
Land
Labour
Materials/capital
Time
Entrepreneurship

a. Land: The common view is that land is a finite and fixed resource. These days
reclamation of land, e.g., in the Netherlands, Hong Kong is possible but rare.

b. Labour: This as a resource is scarce. In a capitalist economy, people demand

money in return for their efforts as a reward. At certain levels of reward or
wages they are not prepared to offer their services. If more of a particular skill is
needed, then a shortage of appropriate labour will result. This is very important in
the construction industry, in which demand for particular types of labour can vary
radically over a short space of time.

c. Material/capital: Materials and capital are needed for production. Production of

consumer items (food or clothing); or of the built stock.

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 d. Time: Developments are often funded through borrowed money on which interest
is charged. The trading of time for free time can also affect the determination of
labour demands.

e. Entrepreneurship: this is the free enterprise and the private enterprise involved
with the building business investing capital into the construction industry and
managing this industry.

1-1.4 Supply, Demand And The Market

Supply is the measure of the amount of goods that producers will be prepared to bring forward at
any given price. If prices rise for any reason, then, in theory the supply will increase. If prices
fall, producers will decrease their activity.

Demand, in economic terms, must not be equated with need or desire. It relates to the aggregate
level of goods which will be purchased of any product at any given price. Thus, while many
people may have a need for a scarce resource, the economic demand for the product will be
restricted to those who can pay the price. If demand increases, the reaction in a free-market
economy will be two fold. First, and in the short term, the price will rise. This allows suppliers
to make supernormal profits; hence more suppliers will move into the market place to produce
the product in the hope of obtaining similar returns. As the supply increase, demand will be
satisfied and the price will be decreased until supply and demand are once more in equilibrium.
Conversely, if demand decreases, over supply occurs and in the short term prices fall until supply
contracts. Thus, price forms the mechanism by which supply and demand are reflected in the
market place.

In the free market economy, there are no restraints on the operation of the supply and demand
model. Allowing the market alone to allocate resources will mean that those unable to exercise
economic demand will suffer. Governments therefore would normally intervene to assist
especially the sick and elderly and the young in their needs, which in a free market they could
not afford to demand.

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Investment
Investment may be defined as the laying out of money now in order to receive a financial return
(profit) in the form of a future income and /or a capital (money). It is the purchase by firms of
the new buildings, equipment and inventories that add to their capital stock. Investment may be
by individuals or organization, such as banks and financial institutions, to provide capital
required by the corporate sector for business development. It implies the use of time and the
foregoing of consumption. Investment is use of money for future profit: the outlay of money.

The expected size of the future financial return and the length of time the investment is held will
determine how risky the investment is considered to be. Generally, the higher the risk of
receiving a financial income, the higher the rate of return expected by the investor.

Profit
Profit is the financial return on an investment. Normal profit is that which is earned by firms
manufacturing or selling goods in perfect competition with each other. Supernormal profit is
that which is made by monopolies, and which cannot occur in market of perfect competition. To
individual making surplus money available through, for example, the financial intermediaries or
the banks, interest payment may be equated to profit. Profit is the reward for entrepreneurship.

Cycles
It is generally recognized that economics operate in cycles, termed economic cycles or
business cycles these cycles consist of booms and slumps where demand and supply are not in
equilibrium. Too many goods are produced and too many services are offered in slumps; in
booms demand for goods and services outstrip short term supply.

A business cycle consists of three stages:

a) Prosperity stage
b) Recession stage
c) Recovery stage

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 expansion
contraction G
expansion
C
ECONOMIC SIZE

D
B
E

TIME

Figure 1: Showing three stages of business cycles

Recession stage
At point A, the bottom of the slump (or trough), the economy is in recession. Investment levels
are low, unemployment is high, total income and purchasing power decline, inventories go down
and confidence is poor. Price awareness increases and consumers try to get by with less, making
their monies stretch further. However, this makes costs low and creates the opportunity for high
profits. The efficient firms survive the recession and industry is leaner and more efficient.

Recovery stage
Output rises and job opportunities increase as these efficient firms that are able to withstand the
recession take advantage of both the loss of less efficient competitors and the increased profit
levels. Confidence in the economy increases and capitalists are tempted by the profit levels to
increase production.

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Prosperity stage
The economy passes through point B in a vicious cycle in the boom to point C, the peak of the
boom. During the period of prosperity, relatively few people are unemployed and total income
and purchasing power would be high. After adjusting for inflation there should be real economic
growth for the total economy. Observers believe that consumer incomes rise faster than the
prices for goods and services so that consumers feel optimistic and spend more freely, therefore
further stimulating the economy.

At this point over-confidence has taken over, speculation on increasingly unlikely projects
causes financial loss and bankruptcy, and banks (and other lenders) start to act extremely
conservatively in lending and in calling in of loans. This crisis of confidence in a vicious circle
of self-fulfilling prophecies of doom and gloom causes the economy to collapse in a slump (point
D) to a new trough (point E), where the process begins again. Consider the new trough (E) is at
a higher growth level than the previous one (A), as the next peak (F) above the one before (C).
Thus the economy grows over time.

Theory of the Market

A market is a set of arrangements by which buyers and sellers are in contact to exchange goods
and services.
Some markets (shops and fruit stalls) physically bring together the buyer and the seller.
Other markets (the Stock Exchange) operate through intermediaries (stock brokers) who transact
business on behalf of clients.
A market is defined by the number of buyers and sellers operating in it. The following market
types are commonly recognized:
Pure / Perfect Competition
Monopoly
Oligopoly

Perfect Competition
In a perfect competition, a large number of sellers sell an undifferentiated product.
Each seller is so small compared to the market, that it cannot influence the market.

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 There are so many producers producing the same good, that is, they produce homogenous
goods, so a single producer cannot influence the industry,
There is free entry - you can join production at any time.
There is free exit you can leave production at any time.
Each seller controls a very small percentage of the total market and since the product is
homogenous, it must be sold at the market price.
For example, a cocoa farmer does not decide his price; he only takes the price as given. If
you leave farming no one cares.
- rice, corn, sugar sellers
- products can easily be substituted

Stock Market
- many participants
- knowledge of prices
- prices adjust in relation to supply and demand

Indicators
a. multiplicity
b. homogeneity
c. perfect knowledge
d. economic rationality
e. no barriers

Monopoly
It is opposite pole to perfect competition. A monopoly exists when there is only one seller of a
product. Monopolies are controlled by taxes.
- A single producer / seller; has control over the goods and services and decides the
prices or the quantity to produce
- He can practice price discrimination
- No free entry, there are barriers to the market - ECG, GWCL

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Barriers could be capital, specialist knowledge in construction
- client selection procedures
- collusion between firms

Indicators
- Only one seller
- 100% sales by one seller
- unique product - no substitutes
- price competition - not important
- may dictate terms

Oligopoly
There are only a few producers therefore each companys market share is a high percentage of
the total market. (Few sellers, therefore they have impact on prices and the competition). Each
brand would have a unique characteristic; however, they could be substituted easily. Therefore
sellers cannot ignore each others actions. An example is the beer industry in Ghana.

Oligopolies think about secure profit and not maximizing profit. If all the sellers come together,
they operate like a monopoly - they form a cartel. Oligopoly is an imperfect competition. There
are so many sellers but they do not produce identical goods or there are substitutes. The goods
can be differentiated to change the price.

Monopolistic competition
There are a number of sellers. Many sellers sell similar but not necessarily identical products.
Each firm has differentiated its products somewhat and therefore has some degree of control over
the price it can charge. Sellers practicing monopolistic competition find that both price and non-
price competition is important. For example, stores, cosmetics.

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The Role of the Market and Prices
Three systems exist and they are:
1. Command/planned
2. Free Market
3. Mixed economy

Command Economy (Planned Economy)

A command economy is a society where the government makes all decisions about production
and consumption. A government planning office decides what will be produced, how it will be
produced, and for whom it will be produced. Detailed instructions are then issued to households,
firms and workers. (Socialism/communism)

Free Market Economy (Free enterprise Economy)

This is a system (Capitalism) in which governments do not interfere. Individuals in free markets
pursue their own interests, trying to do as well for themselves as they can without any
government direction or interference.

The idea (of Adam Smith) is that individuals pursuing their self interest would be led as by an
invisible hand (prices) to do things that are in the interests of society as a whole. The system
helps to make the WHAT, HOW and FOR WHOM decisions.

The Mixed Economy

In a mixed economy the government and private sector interact in solving economic problems.
The government controls a significant share of output through taxation, transfer payments and
the provision of goods and services such as defence, and the police force. It also regulates the
extent to which individuals may pursue their own self interest. Most countries are mixed
economies though some are close to the planned/command economies and others are much
nearer the free market economy.
Planned Economy there are other motives apart from efficiency.
Free Market Economy is the control is by price.
According to Adam Smith price is the invisible hand that decides the economy

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Price
In free market economy every thing has a price. The price of the product is mage up of the
following.
the price of the labour is the wages or salaries
the price of the land is the rent
the price of the capital is the interest
the price of the entrepreneur is profit

Anything that people are prepared to pay a price above the cost of production will be produced.
The Free market is more powerful than government. This is because, what to produce is
decided by the price mechanism. And as long as people can pay above the amount used for
production people will want to produce them. Further, what to produce is influenced by the
people who would want to minimize cost and maximize profit. It is the quality of goods is going
to stay the same producers will go for the cheapest possible way of production. Cheapest
would be implying what would be most efficient. How to produce? This answered
considering Efficiency. You pay the minimum to get the maximum benefit. For whom to
produce: Price mechanism says if you have money go for it.
Price

Output (Quantity)

Figure 2: Demand and the market

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 Price
S

Output
Figure 3: Supply and the market

Price

Supply

P1

Demand

0 Q2
Output (Quantity)

Figure 4: Showing demand and supply curses

The price at which goods will be sold will be at price Pl, because intended supply is equal to
intended demand. Q1 is then the realized supply, as manufacturers will produce Q1 amount of
goods and consumers will buy Q1 amount of goods. The price is always at equilibrium where
supply equals Demand, so that everything that is produced is bought. Perfect competition exists.

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The Firm
A firm is an organization that combines and organizes resources for the purpose of producing
goods and services. Firms are the primary producing units in a market economy. The household
is the consuming unit in the economy. They provide economic resources, land, labour, capital,
entrepreneur.

Only the firm is able to determine what to produce, how to produce and for whom to produce.
The major issue of concern to a firm is its profit, as without profit it cannot invest for the
future.
Firms are profit-maximizers, that is, to seek to ensure that their profits are at the
maximum possible value. These days some firms are profit-satisfiers, that is, seeking to
satisfy all stakeholders.
An individual firm is unable to determine the selling price for its goods. This price is
given by the market.
Profit is determined simply by the mass of goods (or services) sold and the efficiency of
the firm in relation to the efficiency of competing firms. {in the perfect economy)

Spending on goods and service

Goods and Services

Households Firms

Services of Productive Factors

Factor Income
Figure 5: Showing loops between households and firms

Consider the figure above (figure 5).

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Inner Loop: Circular slow between firms and households
- households supply the services of factors of production to firms. Households own
the labour, capital, land.
- Firms use the factors to produce goods and services for households.

Out Loop: flow of payments

- firms pay factor incomes to households (wages, rents, profits)
- firms receive revenue from households spending on goods and services that the
firms produce.
A centrally planned economy could arrange the transfer of resources on the inner loop without
the use of markets, prices or payments.

Why do firms exist?

1. Organize resources to produce or make profit
2. Cost of production is cheaper if firms exist than they do not exist.
Taxes are charged between firms and not within firms, so when it comes to the
firm you do not pay individual taxes within the firm.
Firms internalize costs.
Saving costs can also be seen in:
- it saves the firm and the workers the additional cost of having to
renegotiate contracts whenever there is a production target if the firm did
not exist.
- Even though you can internalize cost to reduce cost, it is not advisable to
expand and expand because there will be too much idleness.

Contractor as a Firm
A Contractor as an Entrepreneur is the one who combines all the other resources (land, labour,
capital, materials, and machines/equipment to produce under a firm in the Construction Industry.
General Contractors, as firms, operate in the competitive environment to obtain work. They
normally tender for work on terms of price, although, factors other than money, such as track
record and quality processes may form part of the client decision making process. They not only

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compete for the work they execute, but also compete for resources to do the work. General
Contractors compete around the market price.

Professional services firms

Professional service firms are a unique category of firm. Professional firms are not profit
maximizers but are profit-satisfiers. Most do not seek profit for its own sake but see themselves
as a vocation, serving the public interest and working at interest, which they skillfully and
enjoyably complete. Profit merely serves the purpose of ensuring that the firm survives and all
employees are paid appropriately. They operate under professional codes and ethics. These
codes and ethics inhibit market activities. Market forces are restricted through the use of scale of
fees.

1-1.5 The Construction Industry

Construction is the process of building. It is the means by which property is usefully created in
the built environment (villages, towns and cities). It includes not just new buildings but the
conservation, maintenance and redevelopment of buildings in accordance with economic and
social requirements. An Industry is a branch of manufacture or trade. The Construction Industry
is thus a branch of economic activity whose purpose is to build by fixing parts together and by
managing this process.

The projects undertaken by the industry are very wide ranging, but can be classified by work
type under two main headings:
a) Building
b) Civil Engineering

Projects may include: erecting and repairing buildings of all types, constructing and repairing
roads and bridges, erecting steel and reinforced concrete structures, other civil engineering works
such as laying sewers, gas or water mains, etc.

The Construction industry encompass such widely differing sizes of jobs such as the replacing of
a roofing sheet, or changing of a door hinge to the building of a multi-storey office block or

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motorway. In size of firm again there is a great variation between, at the one extreme, many sole
traders who concentrate mainly on local maintenance work, to the other extreme of national
organizations whose turnover is measured in billions of cedis.

In addition there are Design Consultants involved with the Architectural, Quantity Surveying,
Engineering aspects of construction; and material supply, plant hire, etc. at the periphery.
The industry can be divided into six parts.
Clients and developers
Professions
Contractors and Sub-Contractors
Operatives
Materials
Contractors plant/equipment

Clients and Developers

These are persons or organizations/firms that are the principal beneficiaries of the project.
Generally, the clients have significant authority regarding scope definition and whether the
project should be initiated and/or continued.

They are responsible for employing professionals to design and build the project, and for
strategically planning the project and designing the brief. The client requirements are normally
summarized as follows:
1) Quality: - the building must satisfy the needs of the client in terms of space, comfort,
aesthetics and function. In other words the building must perform otherwise the designer
has failed in his/her design function.
2) Time: - The building should be available for use on the specified completion date, that is,
at the time it is required.
3) Cost: - The final cost of the building should be very close indeed to the original estimate
given to the client and that the building should be maintainable at reasonable cost.

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 Obtaining a balance between these three (3) elements, QUALITY, TIME COST, normally
called the Eternal Triangle, gives value for money.

Figure 6: Showing Quality-Cost-Time eternal triangle

Client Objective:
1. To invest in building/construction
2. To achieve a reasonable value for money invested.

Roles of the client:

gives design brief
arranges finance
a) chooses the design and construction teams
b) gives accurate description of his/her requirements (design brief)
c) makes sure he obtains quality of work from competent players
d) makes sure project is kept within budget.
e) responsible for the settlement of all claims submitted by Contractors and
Consultants (finance)

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Building Professions
The main building professionals are:
The Project Manager
Civil Engineers/Structural Engineers
Architects
Quantity Surveyors
Building Services Engineers
Clerk of Works

Project Manager
The Project Manager, who may be considered as the clients representative, is likely to be
appointed at the outset by the client.
Role:
The Project Manager will be directly responsible for the successful outcome of the
project in its broadest sense, from inception to completion.
This involves the programming, monitoring and management of the over all project, and
advice to the client on all matters relating to the project including the appointment of the
Architect, Quantity Surveyor and the other professionals/Consultants. This is a relatively
new concept in Ghana.

Civil/Structural Engineer
The Structural Engineers main objective is to ensure that the project is physically (structurally)
stable.
Role:
He advises and liaises with the design team or Architect during the design process and
provides the detailed structural information for the production of the project/building.

Architect
The main objective of the Architect is to ensure that the clients requirements/needs are realized
and that these needs are kept within the framework of his own concept of what should be the

20
clients request, in the clients brief to enable the client obtain a reasonable return on his
investment.
Roles:
Formulates the functional requirements of the clients brief to ensure that the projects
functional and aesthetic demands are met within the clients budget.
May recommend the appointment of a team of advisors including structural, engineers,
services engineers, quantity surveyors etc.
May recommend the appointment of the main contractor, sub-contractor and suppliers.
May play the coordinating role of uniting the respective interest of the other parties to the
contract.

Services Engineer
The main objective is to ensure the project meets energy, health and safety, transportation and
other support systems for the proper functioning of the structure.
Roles:
Advises and liaises with Client/Architect or building team to ensure that the building
performs satisfactorily in terms of the need for mechanical and Electrical including
water, electrical, fire, telephones, sewage and refuse disposal systems.

Quantity Surveyor
The Quantity Surveyor is the financial advisor to the Client/Architect/building team.
Roles:
Advises the Client/Architect/Building Team on the cost implications of the project.
Provide the legal working document between the client and the contractor.

For example,

21
Clerk of Works (C.O.W)
The Clerk of Works is normally appointed by the Client to act, under the direction of the
Architect, solely as an inspector of the works.
Role:
Acts as an intermediary between the Architect and the Contractor on site.
Ensures that the work done on site is of the quality and quantity specified in the contract
document.

Contractors and Sub-Contractors

The Contractor is a person or organization/firm whose main interest is to erect and / or repair and
complete a project within the confines of the Conditions of Contract and to ensure that he obtains
a return on his resources invested.
Roles:
Ensures that the project progresses in accordance with the contract conditions.
Coordinates the tasks and responsibilities of other sub contractors.
Liaises with the clients consultants to achieve the physical erection of the building.
Provide general and special attendance to nominated and/or approved sub -contractors
and suppliers.

Sub-Contractors
They are Contractors who execute aspects of the project which they are deemed to possess
specialist knowledge of.
Role:
Liaises with the design team by offering specialist knowledge of the work
Work under authority of the main contractor and conforms to the program of the main
contractor
To achieve a reasonable return on his capital employed

22
Operatives
These can also be classified as shown below:
Carpenters and joiners
Painters
Masons, block layers / brick layers
Mechanical plan operators
Electricians
Plumbers
Heating and ventilating technicians
Tilers
Steel benders
Other building and Civil Engineering Crafts
General labourers (these have no skill and are easy to obtain and dismiss)

These operatives are generally organized by the Contractors and employed in their firms as
skilled and unskilled labour. The level of employment, skill acquisition and mobility of
operatives affect the economy.

Handling Materials
Materials account for about 40% of the value of work carried out (NEDO 1978), ranging from
15% in repair and maintenance work to 60% in services installation intensive work. The
availability of Construction materials are therefore critical in the flexibility of the industry to
economic pressures and may present a major difficulty in adapting to changes within and outside
the industry. Any change in demand for products of the industry must result in change in
supply.

Construction firms in the industry in Ghana are classified into two main groups:
Civil Engineering and Road Contractors
Building and Civil Engineering Contractors(ABCECG)
Others (General Builders) freelance.

23
1-1.5 The Building Team
The two major parties are the client and the contractor. Those appointed by these two will
complete the Building Team which includes:
The Design Team
Client - Owner

Project Manager
Architect
Quantity Surveyor
Structural Engineer - Consultants
Services Engineer
(Nominated Sub-Contractor) Building Team

The Construction Team

Contractor (or Main Contractor)

Site Agent/Foreman - Contactor
Nominated Sub-Contractors
Clerk of Works

Roles:
May be combined and may be fulfilled by individuals or firms from varying technical
backgrounds.

1-1.6 Contractors Plant and Equipment

These are the equipment and machinery needed for Construction activities. Their
acquisition/ownership (purchase, lease, hiring) and usage levels must give economic returns to
the plant holding units. Contractors plant has effects on the products of other industries and for
that matter the overall economy.
.
The Construction industry is an extremely important industry to entire economies as a major
employer, a major contributor to National Wealth and National output (GNP and GDP) and the
producer of infrastructure and buildings necessary for others to operate.

The following are some of the general characteristics of the Construction Industry compared
with general manufacturing industries:

24
1. Economic regulator
2. Large contributor to GDP and large employer
3. Capital goods industry, which sells means of production to other industries.
4. Stock of buildings very large in relation to production of new
5. Each project is large in relation to firm
6. Project custom built
7. Not one industry, but several
8. Product often sold before it is produced
9. Division between design and construction
10. Sells the process of construction and not the end-product
11. Weather
12. Mass of small firms, through ease of entry into exit from industry.
13. The Construction industry also has certain features, which differentiate it from other
industries
a. Physical nature of its products inputs are large expensive and bulky.
b. Structure of the industry itself.
c. Organization of the Construction process products are influenced by local
environmental conditions
d. Method of price determination.
e. others include:
Fast moving, intense level of resource demand and the frequent changing
nature of construction activities.
The products are constructed wherever they are required.
The unique design nature of the product.
GDP - Gross Domestic Product
- Total value of goods and services produced by a country
in a year.
GNP - G.D.P + including the total income from foreign
Countries = total wealth

25
 Self-test
A design team has been tasked to compare two alternative proposals to provide a
prescribed floor area of office space in a rectangular shaped 2-storey block or a
six-storey L-shaped block.

As a cost expert on the team compare the essential features of these two blocks
assuming they are of similar specifications.

SESSION 2-1: THE NATURE OF BUILDING ECONOMICS

2-1.1 Shelter A Need

Maslows needs hierarchy

5. self-
actualization
4. self-
esteem
3.
belongingness
2. safety needs
(include shelter)
1. physiological needs
(include shelter)
Figure 7: Maslows needs hierarchy

Physiological needs including shelter form the strongest of needs motivation. As one gets
satisfied safety, social belongingness, self-esteem respectively and self-actualization needs get
placed at the apex. Shelter becomes greatest concern to satisfy.

26
Building Economics is the branch of economics that involves human shelter.

Economics has to do with:

What to produce
How to produce
For whom to produce

Shelter is a place to live or stay. It is considered as basic human need for protection from rain,
danger and attack. This shelter will imply:
Structure built to give protection especially from the weather and attack.
Efficient use of resources
Growth of the Construction Industry

Building economics involves the study of mans need for shelter and for suitable and appropriate
conditions in which to live to ensure protection from weather and attack.

Major Objectives of the study of Building Economics:

1. To ensure efficient use of available resources (resources are limited or scarce)
2. To ensure the increase of the rate of growth of construction

The study includes the following:

1. Clients requirements
2. Effects of construction on the environment
3. Relationships between shapes and sizes
4. Assessment of the Initial Cost
5. Reasons for and methods of controlling cost (Cost Control)
6. Life cycle costing

27
2-1.2 Clients Requirement

QUALITY/PERFORMANCE
Aesthetics /Appearance TIME
Function (Quality) Design length
space, comfort Start Date
Performance, Durability, Hand Over Date
Maintenance Actual Completion

CLIENTS
REQUIREMENTS

COST
Estimate
Budget
Tender
Final Account
Cost-in-use

Figure 8: Value for Money

Possible effects on the environment

This takes into accounts the wider aspects of planning and the general amenities affected by the
proposed new construction project.

Relationship between shapes and sizes

This evaluates the cost implications of the design variables and looks at those aspects of a
particular design which affects the cost.

Assessment of initial cost

This is the establishment of an initial estimate that is reasonably accurate for advice purpose and
which can be used to compare different designs at the design stage of a building process.

28
Reasons for and methods of controlling cost
One of the clients main requirements for any construction project is the assessment of its
excepted cost. The method used for controlling cost will vary depending on the type of project
and the client.

Estimate the life of buildings and materials

The emphases on the initial construction cost have now been shifted to consider the total cost of
the building, which includes the initial cost, and the cost in use. Sometimes it may be better to
spend a little more money initially to secure a project so that some savings can be made over the
life span of the project.

There are other aspects involved in building economics they include:

(a) The roles of the Quantity Surveyor, Engineers, designers and builders employed
in the industry.
(b) The division of the industry between design and construction process.
(c) The size of the industry and its relationship to other industries and the national
economy.
(d) Types of development undertaken.
(e) Types and sizes of construction firms and the availability of specialist
contractors.

Individual buildings come about only as a result of complex external influences, which affect
aggregate of supply and demand.

29
These complex interactions are represented in the model below.

MARKET
Nature of construction industry
Price fixing by supply and demand
Land availability and quality

Ownership Design
Lease Cost
Value BUILDING Location
Income Site

INFRASTRUCTURE
Transport System
Planning
Legal Climate
Pollution & Contamination
(Environmental)

SOCIAL
Business Organizations
Consumer Habits
The Public V. Private
Debate

Figure 9: Showing complex interactions

Note
The Market is where interaction between supply and demand of prosperity which
will determine price in the short term. Design impacts on cost.

30
 Unit 2
CONSTRUCTION COSTS, PRICE AND VALUE COSTS

Learning Objectives
After reading this Unit, you should be able to:
1. Define and describe construction costs, price and value costs
2. Calculate construction costs and value costs

Introduction

Economic cost is the full cost of production, including a normal rate of return on investment and
the opportunity cost of each factor of production. That is, the result of labour, materials, plant
and entrepreneurship deployed for a specific activity.

SESSION 1-2: COST, PRICE AND VALUE

1-2.1 Economic Cost Has Three Major Facets

1. Fixed Cost: These are costs that a firm incurs in the short term that do not depend on its
level of output. The costs do not vary according to the amount of business. These costs
are incurred even if the firm is producing nothing. Typical short-term fixed costs relate to
the costs of maintaining assets (buildings) and labour costs. E.g., administrative
overheads and production overheads like rents, salaries, etc. (Also indirect costs).

31


(Value)
Costs T2

T1
F1 F2

0 Output Q

Figure 10: Fixed costs and Total costs

2. Variable Costs: These are costs which a firm incurs as a result of production and which
depend on the level of production chosen. There are no variable costs if there is no
production. These are costs that vary directly in relation to output. (See also Direct
Costs).

In construction, the contractors variable cost may include:

a) plant
b) materials
c) site wages and salaries
d) suppliers, sub contractor costs

The clients variable cost may also include:

a) building cost
b) consultancy fees
c) legal fees

32
 Costs
(Value)

Linear relationship with

output increases T2

T1
V2

V1
0 Output

Figure 11: Variable costs and Total costs

Opportunity Costs
The cost of the best alternative which has been given up or forgone; that is, when one item is
chosen over another. In a world of scarcity, the satisfaction of one want can be achieved only be
ignoring other wants. Opportunity cost is not necessarily money.

Cost Behaviour
Observe that the total cost line will reveal that all increases of total cost are increases of variable
cost.

33
 Total revenue >
The line starts at 0
Costs total cost where there are no
sales, no output and
(Value) therefore no revenue

R2
Total cost>total
revenue
Profit T2 Contribution
B
V2
T1
F1 Loss F2

R1 V1
0 Output

Figure 12: costs / output

Break even point B is the point where total cost and total revenue meet.
2. Maximum loss shown in graph is equal to fixed costs. At zero output, where there
would be no sales income (revenue), no variable cost, the fixed cost would comprise
the loss. Profit is contribution on all units of output above the break even point.

1-2.2 Price And Goods

Price is defined simply as the sum of cost and profit. It is the amount a consumer (or purchaser)
is willing to pay for an item or a product. It is the result of many individual decisions concerning
the ability and willingness to supply and to demand the good involved. Note that:
- Economic goods have price
- Free goods have no price

Price is the invisible hand that helps to allocate resources. It helps to know when, how, what and
for whom to produce.
- Every economic resource has got a price.
Land rent
Labour wages / salaries
Capital interest

34
 Entrepreneur profit
Entrepreneur takes the risk to combine the other three (3) resources to produce

Any good that has no price is a free good e.g., Air. For something to have a price:
(i) the thing must be useful and it must be scarce. if it is useful but not scarce it
has no price and it is contextual. In central New York, air will be useful and
scarce. However, in Ghana presently, air is useful but not scarce: air is a free
good.
Things that have price have an opportunity cost. Anything that has no opportunity cost is a free
good. It depends on where you are, that is, the location and interest of the individual.

Economic goods
Economists are interested in economic goods. Economic goods are made up of private goods and
public goods

Private goods
There is rivalry consumption and excludability. Private goods are also consumption goods.
People are prepared to pay for it. Private goods can be produced by individuals who want profit.
Public goods there is no rivalry in consumption. You cannot exclude people from using or
enjoying it. It will be difficult to exclude people from using or enjoying it. Note that, (1) people
are not prepared to pay when everybody will free ride a public good, and (2) these goods are
normally provided by the state.

1-2.3 Value
The basic economic concept of value requires that a commodity must be scarce to have a value.
Value measures the relationship between the supply and demand for goods and services. This
would give rise to the concept of Marginal Utility, which recognizes that a goods or a services
value reduces with each extra unit consumed. When you are very thirsty, the first glass of water
is most welcome, the second is worth less, and the third even less.

35
Water and diamonds paradox: Adam Smith stated that while water was of infinite value, because
life could not exist without it, it was of little market value, because at the time Adam Smith was
writing water, was not a scarce commodity. The reverse was true for useless, yet expensive
diamonds. The abundance of water and the scarcity of diamonds were deemed to be the cause of
this.

Customer Value:
(i) Price
(ii) Quantity
(iii) Delivery (Time)
Value - use value individual usefulness to be gained by customers
- exchange value barter value (market value)

SUMMARY
Cost = materials + labour + plant + overheads
general overheads Head office/main office e.g.,
Accountant, Administration,
Site overheads work supervision
Price = Cost + Profit (mark-up)

Value = Price + satisfaction (time + quality)

SESSION 2-2: CALCULATING COSTS

2-2.1 The Use Of Calculus

Simple linear functions represent relationships.
e.g., y = a + b x or f(x) = a + bx
Where y =Total Cost, the dependable variable of function.

36
 x = output, the independent variable
a, b = constants representing fixed cost and variable cost respectively.

Costs
b = the slope of the line which
represents the marginal cost

a= fixed cost

x
Output

Figure 13: Marginal Cost curve

There are many occasions when a linear function is not an accurate representation of reality and
quadratic equations (polynomials) are required.

Cost
or
Revenue

Output x
Figure 14: Types of polynomials required for accurate representation

37
 dy
It is important to know the rate of change of a function representing Marginal Cost Marginal
dx
Revenue and also the point of zero gradient, or the turning point implies maximum revenue or
minimum cost. Process of differentiation is very important.

2-2.2 Mathematics Of Total Cost

Total Cost (TC) = variable cost (VC) + Fixed Cost (FC)
Y = Qx + C
TC = VC + FC
x = Variation Cost
Q = Level of Output
C = Fixed Cost
Profit () = Total Revenue (TR) Total Cost (TC)
= TR TC
but TC = Qx + C
= TR (Qx + C)
TR = Price per Unit (P) x No. of Units produced (Q)
TR = PQ
= PQ - (Qx + C)
= (P - x) Q C

(i) A firm, BT II Ltd., produces pavement blocks for sale. The blocks have a selling price
of 3,000,000.00 each. The firm has a fixed operational/ownership cost of 500,
000,000.00 but expends 2,500 on each block produced as variable cost.
(i) what should be the level of output if the firm expects a profit of 80,000,00.
(ii) what will be the effect on profit if variable costs increases by five percent?
Solution:
(i) = (P x) Q C
= 80,000,000
P = 3,000
x = 2,500
Q = ?
C = 500,000,000
+ C 80,000,000 + 500,000,000
Q = =
P-x 3,000 - 2,500
= 1,160,000 blocks

(ii) = (P x) Q C

38
 = ?
P = 3,000
X = 2,500 + 5% of 2,500 = 2,500 + 125 = 2,625
Q = 1,160,000
C = 500,000,000

= (3,000 2,625) 1,160,000 500,000,000

= (375) 1,160,000- 500,000,000
= 435,000,000 500,000,000
= - 65,000,000 (i.e., a loss of 65million)

(iii)What should be the new selling price of the blocks to enable the firm break even at the
same output level?

At the break even point:

Total Revenue = Total Cost

TR = TC
PQ = Qx + C
Qx C
P = +
Q Q
C
P = + x
Q
500,000,000
P = + 2625
1,160,000
P = 431.04 + 2625
P = 3056.04
56.04 100
P% = x = 1.87% increase in price/block.
3,000 100

Note
5% increase in variable cost implies 1.87% increase in selling price, all things
being equal

(iv) An excavator can dig out a trench on the Ayeduase-Kotei road at 8,000.00 per m3. The
Contractor could also employ labour intensive methods and use one (1) man to carry out
the digging at a daily wage of 40,000.00 per m3 of excavation, whereas in a day, it costs
16,000,000.00 to bring an excavator to the site.
a) what output of excavation would justify the use of the excavator ?

39
 b) if the mans daily output is increased by 25% at no additional cost, how
would the figure in (a) be affected.
solution
Y = QX + C
for labour intensive
YL = QXL + O
YL = Qx40,000.00 + 0 ---------------(1)
for Machine (Excavator)
Ym = QX m + C
Ym = Qx8000 + 16,000,000 ------(2)

when YL = Ym
equation (1) = equation (2)
40,000 Q = 8000 Q + 16,000,000
Q = 500 m3

labour
Costs intensive

plant

fixed
cost

0 Output, m3
500

Figure 15: Showing labour intensive curve with respect to Cost / Output

This shows that when the job is > 500m3 then it is best to use the plant.

c) If the mans daily out put is increased by 20%

new output = Qn = 1.25 Q, where the new Q is denoted by Qn

40
 YL = {1.25 Q} {40,000) + O
Ym = {Q} {8,000) + 16,000,000
YL = Ym
(1.25 Q) (40,000) = (Q) (8,000) + 16,000,000
50,000 Q 8,000 Q = 16,000,000
42,000 Q = 16,000,000
16,000,000
Q =
42,000
Q = 380.92
The use of excavator will be justified at the output level of 380.92 m3. Note that the figure in (a)
of 500 m3 output has reduced by 23.81% to 380.92 m3.

41
 Unit 3
LEGISLATION AND CENTRAL SOURCES OF FINANCE

Learning Objectives
After reading this Unit, you should be able to:

1. State and explain central sources of finance for construction

2. Describe legislation concerning the central sources of finance
and how they can be utilized

Introduction
Financing a building project could be a challenge, and may be beyond the resources of a single
client to invest. Therefore it is crucial to know where, when and how to source for these funds.
This unit concerns itself with major sources of finance for building construct. Two forms of
finance are required for construction and property development: (1) Short-term finance to pay for
the costs of production (i.e., the purchase of land, building costs, professional fees and promotion
costs), and (2) Long-term finance to enable developers to repay their short-term borrowing and
either retain the property as an investment or realize their profit. Their sources are discussed in
this unit.

SESSION 1-3: FINANCIAL INSTITUTIONS

1-3.1 Sources
Traditionally, clearing banks and Merchant Banks provide short-term development finance with
the long-term investment finance being provided by the Financial Institutions (Insurance

42
Companies and companies). Bank is an institution which takes deposits from individuals,
organizations, etc.; and provides financial services, pays interest on deposits (interest varies with
the amount of money and time the money stays in account. It gives loans and charge on loans.

Sometimes there is a combination or mix. The financial institutions also take on the role of
short-term financiers by providing the necessary interim development finance to a developer and
agree to purchase the property on completion of the scheme.

1-3.2 Financial Institutions/Financial Intermediaries/Non-Bank

This is the general term used in the construction and property industry to describe pension funds,
insurance companies, investment trusts and unit trust. They invest in property directly and
indirectly through the ownership of shares in property investment companies and development
companies (e.g., SSNIT)

Direct property investment includes the owning of completed and let developments, the forward-
funding of development schemes and the direct development of sites and existing properties.
Pension funds vary considerably in size and include the individual occupational funds managed
exclusively for the employees of former/present industries and large public companies, together
with company and personal pension schemes managed by insurance companies. (E.g., Ghana
Universities Superannuating Scheme, GUSS)

They invest the premiums paid by the clients to achieve income and capital growth in real terms
in order to meet future payment obligations of pensioners on retirement. Life assurance and
insurance companies also invest the premiums they receive on life and general insurance
policies, respectively. To ensure long term income growth to meet payment obligation when they
occur and charities, securities, fractions of values of investment in various different, businesses
unit trusts are managed by financial institutions who offer investment management services, e.g.,
Merchant Banks, Home Finance Company (HFC), National Trust Holding Company (NTHC),
etc.

43
The unit trust will comprise unit holders such as small investors and institutions who are able to
take on the risk of direct investment. The trust will manage a portfolio of shares on behalf of the
unit holders to obtain a spread of risk. Unit trusts normally for small investors but have high
management costs. All the financial institutions mentioned above and to minimize risk and
adopt a conservative approach to any investment as they are trustees of other peoples money
and are therefore under constant pressure to perform.

1-3.3 Banks And Building Societies Deposit Taking Institutions

(Commercial Banks, Merchant Bank, Building societies, discount houses, etc.). The clearing and
Merchant Bank provide short-term development finance, (either on a rolling or project-by-
project basis) by means of overdraft facilities or short-term corporate loans secured against assets
of the development company or project loans secured against a particular development. They
had to specialize in debt investments with short-term horizons. The clearing banks due to heir
large deposit base are the major providers of corporate finance loans to development companies.

The Merchant Banks (some are subsidiaries of clearing banks) and specialist property lenders
have smaller funds but have more property expertise. Therefore, they are more inclined to
provide project loans and because of their expertise will take on more risky loans in return for an
equity stake in a project.

Building Societies, e.g., First Building Society, may provide corporate loans and loans secured
on commercial rented properties. Typically, they restrict themselves of small loans and tend to
be less competitive than banks in relation to the interest rates they charge.

SESSION 2-3: Investors

2-3.1 Property Companies And The Stock Market

The investor type of Company, usually referred to as a property company, is a source of long-
term finance as some purchase property investments for their portfolio as well as retaining their
own developments. Property Companies and development companies are partly financed by their

44
own capital and that of their shareholders, and partly financed by borrowing money either short-
term or long term.

Equity (share in ownership) voting rights, share in risks and rewards, finance can be raised by
issuing the various forms of shares in a company, with investors directly participating in the
profits and risks of the company. New property companies may float on the stock market and
raise money by selling shares. Quoted companies can issue new shares to raise equity finance for
their development activities.

2-3.2 Foreign Oversees Investors

These are investors who came from outside the country. The performance of an economy and its
relative stability attract significant participants in the construction and property investment
market. The overseas companies or individuals become involved in direct development either in
partnership or on their own account.

2-3.3 Private Individuals/Owner-Occupiers

Private individuals do purchase property investments at the lower end of the market. They
should be precluded from the prime market due to the significant sums of money involved

2-3.4 Joint Venture Partners (Sharing Of Risks And Rewards)

A development company may raise finance or secure the acquisition of land by forming a
partnership or a Joint Venture Company with a third party to carry out a specific development or
a whole series of development projects. The basic principle behind forming a partnership to
secure either finance or land in return for a share in the profits of the development or the joint
venture company, from the developers point of view. The joint share given to the third party
will depend largely on the value of their contribution combined with the extend they wish to
participate in the risk of the scheme.

45
2-3.5 Government Assistance
There are finances available from the central government for development through various
Ministries, Departments and Agencies or through the local Authorities, i.e., Metropolitan
Municipal and District Assemblies. Charities, Churches and Educational Bodies may also
provide some non-governmental (NGO) assistance.

2-3.6 Developers
Private sector developers come in a variety of forms and sizes from one-man-bands to
multinationals. Their purpose is usually to make a direct financial profit from the process of
development in the same way any other private sector company operates, whatever their product.

Developers operate as traders or investors must small companies trade, i.e., to sell the
properties they develop, as they do not have the capital resources to be able to retain their
completed schemes.

Building Contractors - are employed by developers to construct the development scheme and
their prime objective is direct financial gain from the construction activities. Unless a
development is being financed entirely with a developers own capital or that of a partner, then
financial institutions, as providers of finance, have a very important role in the development
process.

The main types of money are needed for development: short-term money or development
finance to cover the costs during the development process, and the long-term money to cover
the cost of holding the completed development as an investment.

Alternatively, the developer will in the long-term seek a buyer for the completed scheme to repay
the short-term loan and realize any profit. Financial institutions are motivated by direct financial
gain.

46
2-3.7 Mortgage
It is a loan secured on a property whereby the borrower has to repay the capital loan plus interest
by a certain date.

Financial Institutions play a very important in the investment of individuals funds. They act as
intermediaries, channeling the savings of investors into the hands of borrowers who need the
capital to keep industry and commerce efficient and competitive in national and international
markets. E.g., an investor may invest cash in a bank deposit account in return for interest and the
ability to withdraw cash easily and quickly. The bank will then land these savings at a higher rate
of interest to a borrower, such as a company which needs a mortgage or term loan to purchase
premises of machinery and plant to expand business.

47
 Unit 4
PERIMETER /FLOOR AREA RATIOS

Learning Objectives
After reading this Unit, you should be able to:

1. Calculate the perimeter/floor area ratio

2. Sketch and explain draws relating to the perimeter/floor area
ratio
3. Identify the major constituents of enclosing walls
4. Calculate cost efficiency of a building

Introduction
In this unit we consider the elements involved in the perimeter/floor area ratio.

SESSION 1-4: SHAPE AND SIZE OF BUILDING

Enclosing walls have major constituents as:
The external walls, windows and external doors.
There are directly affected by plan shapes.
The ratio of the enclosing walls to floor area in square metres that is known as the
perimeter wall/floor area ratio or the wall/floor ratio.
The lower the wall/floor ratio, the more economical will be the proposal.
The best wall/floor ratio is produced by a circular building but the saving in quantity of
wall is normally off set by the much higher cost of circular work over straight work.

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 5m 5m 10m

8m

16m

A 8m

4m

20m
Figure 16: L-shaped floor plan
Assume
2-Storey Building
Total walling height = 6m

Building A: L-shaped

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Floor Area: 10m x 8m = 80 m 2 --- (a)
20m x 8m = 160m 2 --- (b)
= (a) + (b) = 240m 2
Total Floor Area = 240m 2 x 2 = 480m 2
Perimeter = 72m
Total Enclosing Wall = 72m x 6m = 432m 2
432
Wall/floor ratio = = 0.09
480

4m

4m

4m

B 4m

4m

5m 5m 5m 5m 5m

Figure 17: Irregular shaped floor plan

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Assume
2-Storey building
total walling height = 6m

Building B: Irregular shaped.

Floor Area = 240m 2
Total Floor Area = 240 x 2 = 480m 2
Perimeter = 109m
Total Enclosing = 108 x 6 = 648m 2
648
Wall to floor ratio = = 1.35
480

Note
Both buildings have an identical floor 240m2 on each floor but Building B is very
uneconomical with a much greater area of enclosing walls than A.

1-4.1 Plan Shape

The shape of a building has an important effect on the overall cost. As a general rule the simpler
the shape of the building the lower the cost (more economical the building). A square plan-
shaped structure will in the majority of cases provide the most economic solution.

A square shape provides the lowest wall-to-floor ratio.

4m 4m
B
A 10m
C
25m
4m

10m 5m 10m

Figure 18: Square-shaped floor illustrating lowest wall-to-floor ratio

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 A B C
Floor Area 100 m2 100 m2 100 m2
Perimeter Length 40 m 58 m 46 m
2 2
Wall Area 40 x 3 = 120 m 174 m 138 m2
Wall to Floor Ratio 120 174 138
= 1.20 = 1.74 = 1.38
100 100 100

The lower the wall-to-floor ratio, the more economic will be the design. An irregular outline will
also result in increased costs for other reasons: setting out, site works, and drawings works are
all likely to be complicated and expensive.

Although the square building will be the most economical to construct, it would not always be
the most practicable proposition because of the following reasons:
a. The purpose of the building may make a square shape undesirable. For example, in
smaller offices, schools and hospitals considerable desirability of securing natural
daylight to most parts of the buildings. Some industrial buildings require narrow
buildings because of machinery and finished
b. The site boundaries may be such as to restrict design to fit within the shape of the plot
of land.
c. Topography of the land may not allow the choice of a square building. On sloping
sites, rectangular buildings, following the lines of contours will form an economic
solution.
d. The balance of cost of a simple plan shape with the aesthetic appearance of the
building.
e. Environmental factors, provision of natural lighting, reduction of noise transfer and
adequate circulation space and internal division do not always favour the square
shape.

1-4.2 Size Of Building

Larger buildings have lower unit costs than smaller-size projects with an equivalent quality of
specification. Increases in the size of buildings usually produce reductions in unit cost.

52
Certain fixed costs such as the transportation erection and dismantling of site buildings, storage
facilities, temporary water supply arrangement, provision of temporary roads - may not vary
appreciably with and increase in the size of the project and will not reflect in a reduced
proportion of total costs on a larger project.
40m
20m

20m
A B 40m

Figure 19: Showing comparative floor areas A and B

Over all heights = 3m

A B
Floor Area 400m2 1600m2 [4 times]
Perimeter Length 80m 160m
Wall Area 240m2 480m2
Wall to Floor Ratio 240 480 [2 x ]
= 0.60 = 0.30
400 1600

Smaller factories cost more per unit area than their larger counterparts. This may be due to
economic theory of economies of scale. Improved discounts on materials are also factors that
favour the larger-sized projects. Compare unit costs of 1 bedroom, 2 bedroom 3 bedroom and 4
bedroom houses.

The designer may have little influence over the size of the project as this is generally determined
by clients needs. It is interesting to note the size is an important factor in terms of cost efficient
because costs are not in proportion to changes in size.

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SESSION 2-4: HEIGHT OF BUILD

2-4.1 Storey Heights

Variations in storey heights cause changes in the cost of a building for a given floor area. The
main constructional items which would be affected by a change in storey height are walls and
partitions with their associated finishings; longer service and waste pipes to increased cost of
constructing staircases, and lifts it provides.
e.g., Estimated cost of building - 100,000,000.00
Estimated Cost of Vertical Components
(Assure 30% of overall cost) = 0.30 x 100,000,000
= 30,000,000
Proposed increase in height
0.2
From 2.8m to 3.00 = x 30,000,000 (7.1% increase)
2.8
Increased Cost: = 2,142,857 (2.1% increase) in cost.
The Storey of height of buildings are largely determined by the needs of the user of the building.
b. A greater than normal height may be necessary to accommodate plant and machinery.
c. It may be necessary to provide space within false ceilings for service ducts for cables, pipes
or air conditioning ducts.
- for prestige reasons such as hotel foyers.
- Churches, sports halls, and theatres require high storey heights because of tradition
or design necessity.
- Excessive storey heights increase costs of vertical circulation elements and future
maintenance costs.
- Such buildings have high wall / floor ratio.

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 20m 20m

20m 20m
A B

Figure 20: Showing floor areas A and B with different wall height

3m high 4m high

A B
Floor Area 400 m2 400 m2
Perimeter length 80m 80m
Wall Area 240 m2 320 m2
Wall-to-Floor Ratio 240 320
= 0.6 = 0.8
400 400

2-4.2 Total Height Of Buildings

The Construction Costs of tall buildings are greater than those of low-rise buildings offering a
similar amount of accommodation. The additional costs can sometimes be offset, where the land
is expensive or in scarce supply, by the better utilization of the land and reduced cost of external
works when we go high rise.

Some reasons why multi-storey structures are expensive

1. The higher costs of the provision of foundations, structural frame, special requirements
for staircases and the engineering services
2. The increased costs of lifts/elevators, refuse disposal installations, fire fighting equipment
and lightening conductors
3. Wind loading factors increase constructional difficulties and associated costs
4. Higher construction costs will include rental of hoists and cranes, problem with storage of
materials, increased safety requirements, few contractors are interested in such a
construction hence high quotations

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General principles for multi storey buildings
a. The desire to let a tall building on a particular site, obtain large floor areas with
good day lighting and improved composition of buildings.
b. The effect of the number of storeys on cost varies with the type, form and
construction of the building.
c. Beyond a certain number of storeys, the form of construction changes and unit
costs usually vis-a-vis Foundation costs / m2 of floor area will fall initially and
increase again. Lifts become necessary.
d. Cost of e.g., Roof, foundations fall as the number of storeys increases.
1. Those which rise as the number of storeys increases (e.g., Lift
installations)
2. Those which are unaffected by height (e.g., Floor finishes, internal doors)

Construction can also be below ground level for:

1. security reason strong rooms of banks
2. freezer stores
3. car-parking to multi-storey off ice buildings

Often the shortage of land is one of the major reasons for constructing below ground level. (High
initial costs, savings in costs-in-use)

As high buildings are uneconomical so are single storey buildings. Consider:

Foundations
Frame
Staircases /lifts
Roof
External walls
Internal walls
Internal walls (partitions)
Services

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2-4.3 Circulation Space
The utilization of space has effect on costs of a project. Designers who aim at economic layout
always try to reduce the amount of circulation space to an acceptable minimum.

Circulation space includes Entrance Halls, passages, corridors, stairways and lift wells which
cannot be used for a profitable purpose and yet involves considerable cost in heating/cooling,
lighting, cleaning, decorating, etc.

Circulation space could also be referred to as dead space or non-usable space. Almost every
type of building requires some circulation space to provide for means of access between its
constituent parts. In prestige buildings, spacious entrance halls and corridors add to
impressiveness and dignity of the buildings. Circulation space requirements tend to rise with
increase in the height of buildings so care should be taken in considering circulation aspects of
high-rise buildings.

4m
2m

4m

50m
Figure 21: Showing circulation space Total area / Usable Area Ratio

Total Area = 500m2

Usable Area = 400m2
400
Efficiency = = 0.800
500

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 4m

2m

20m

2m

4m

2m 4m
25m

Figure 22: Showing circulation space Total area / Usable Area Ratio

Total Area = 500 m2

Usable Area = 384 m2
334
Efficiency = = 0.768
500

Note
a. The more irregular the plan shape, the lower the amount of usable space
that is likely to be available.
b. The building and planning regulations have influences on the overall
efficiency of the design layout. E.g., Provision of toilets in public
buildings, compliance with fire regulations and consideration for means of
escape.

Another aspect which has to be considered in perimeter / floor areas ratios is the adequacy of the
natural lighting to the interior of the building and the practicability of the internal layout.

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Elimination of lengths of corridor which result in communication through rooms or an entire
open plan may not prove to be the mot economical proposition of all costs and benefits of each
set of proposals are quantified and evaluated. Reducing the width of corridors to an extent that
persons using the building suffer actual inconvenience could not really be justified; corridors
may also have to serve as escape routes in case of fire.

Note
As with other parts of buildings, Cost is not the only criterion, which has to be
examined - aesthetic and functional qualities are also very important.

Cost of finishings as per specifications. See the following for relationships hospitals, hotels, air
ports.
Hospitals: - relationship of measurement (circulation spaces) for in-patients and out patients.
Hotels: - relationship of measurement between residents, guests and non-resident guests-
access to restaurants, halls, etc. And other service facilities for guests, staff or
personnel, information desk are provided.
Airports: - Departure, Arrivals, staff, etc.

One very clear danger of this area in building economic in that we can fall into a trap
programming our minds or our computers with very rigid rules or standard relationships which
that to relate conditions which may be described as average or normal. One has to always
therefore look as a matter of course for the possibility of exceptional circumstances to avoid
pitfalls of erecting an uneconomic building to the misapplication of principles.

A clear case of such misapplication could very well be the optimization of external walls areas in
very mild or warm climates with periods of very heavy rain. Here the performance of the wall
element for high rise building is far less critical and hence less expensive than the performance
of the roof. Soil conditions can cause much difference in foundation costs for similar
buildings.

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 Assignment
(1) The Department of Urban Roads (DUR) awards projects to
Construction firms to execute by Labour Intensive Methods. One
of such projects involved the excavation of trenches within the
Bomso surburb of Kumasi.

The use of the Labour Intensive Method to carry out the excavation
costs 50,000.00 per day for 1m3 of excavation.

The Contractor could also use an excavator, which costs 20,000,000

to bring to the site, to dig out the trench at 10,000.00 per m3.
(i) What level of output of excavation would justify the use of
the excavator?
(ii) If the daily output of the Labour Intensive Method is
increased by 25% at no additional cost, how would the figure
in (i) be affected?
The Construction Industry has many unique features compared to the
manufacturing Industry. Compare the construction and
manufacturing Industries.

Mid Semester Assignment

(1) A design team has been tasked to compare two alternative proposals to provide a
prescribed floor area of office space in a rectangular shaped 2-storey block or a
six-storey L-shaped block.
As a cost expert on the team, compare the essential features of these two blocks
assuming they are of similar specifications.

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