A PROJECT REPORT

ON

“LOCATIONAL STRATEGIES OF BIG BAZAAR”

MASTER OF BUSINESS ADMINISTRATION

Introduction to the Topic:

Being in the right location is a key ingredient in a business's success. Locational

Strategies is a results-oriented retail real estate consulting firm providing retailers,
investors, shopping center managers and institutions with fact-based, decision-
making research. If a company selects the right location, it may have adequate
access to customers, workers, transportation, materials, and so on. Consequently,
location often plays a significant role in a company's profit and overall success. A
location strategy is a plan for obtaining the optimal location for a company by
identifying company needs and objectives, and searching for locations with
offerings that are compatible with these needs and objectives. Generally, this
means the firm will attempt to maximize opportunity while minimizing costs and
risks.

A company's location strategy should confirm with, and be part of, its overall
corporate strategy. Hence, if a company strives to become a global leader in retail
chain, for example, it must consider establishing warehouses in regions that are
consistent with its strategy and that are optimally located to serve its global
customers. A company's executives and managers often develop location
strategies, but they may select consultants (or economic development groups) to
undertake the task of developing a location strategy, or at least to assist in the
process, especially if they have little experience in selecting locations.

While research is often associated with identifying new opportunities, it is also a

powerful and effective tool in the area of asset preservation. Shopping center
managers benefit from proactively using research to solicit and maintain tenants,
support valuation and set capital priorities. Retailers make better staffing and
consolidation decisions with research. Investors and institutions make better
decisions with research’s strategic perspective by minimizing the risk of their
investment.

Location Strategies was established in 2005 by Greg Kerfoot and Barbara Bruce
who have over 60 years of combined experience in development location research.
The firm has extensive experience in a broad spectrum of services including
feasibility studies, strategic assessments for underperforming properties,
acquisition analysis, risk / opportunity assessment, portfolio review and tenant
solicitation.

The importance of the location decision is due to the following factors.

Location is a major cost factor because it

•Involves large capital investment

•Affects transportation costs

•Affects human resources cost, e.g., salaries, wages etc.

Location is a major revenue factor because it

•Affects the amount of customer traffic

•Affects the volume of business

The choice of a store location has a profound effect on the entire business life of a
retail operation. A bad choice may all but guarantee failure, a good choice success.
This aid takes up site selection criteria, such as retail compatibility and zoning,
which the small store owner manager must consider after making basic economic,
demographic, and traffic analyses. In picking a store site, many storeowners
believe that it's enough to learn about the demographics ("people information" like
age, income, family size, etc.) of the population, about the kind of competition
they'll be facing, and about traffic patterns in the area they're considering.
Introduction to the Company
Pantaloon Retail (India) Limited, is India’s leading retailer that operates multiple
retail formats in both the value and lifestyle segment of the Indian consumer
market. Headquartered in Mumbai (Bombay), the company operates over 10
million square feet of retail space, has over 1000 stores across 61 cities in India
and employs over 30,000 people.

The company’s leading formats include Pantaloons, a chain of fashion outlets,

Big Bazaar, a uniquely Indian hypermarket chain, Food Bazaar, a supermarket
chain, blends the look, touch and feel of Indian bazaars with aspects of modern
retail like choice, convenience and quality and Central, a chain of seamless
destination malls. Some of its other formats include, Depot, Shoe Factory, Brand
Factory, Blue Sky, Fashion Station,Star and Sitara. The company also operates an
online portal, futurebazaar.com. A subsidiary company, Home Solutions Retail
(India) Limited, operates Home Town, a large-format home solutions store,
Collection , selling home furniture products and E-Zone focused on catering to the
consumer electronics segment.

Pantaloon Retail was recently awarded the International Retailer of the Year 2007
by the US-based National Retail Federation (NRF) and the Emerging Market
Retailer of the Year 2007 at the World Retail Congress held in Barcelona.

Pantaloon Retail is the flagship company of Future Group, a business group

catering to the entire Indian consumption space. Pantaloon is not just an
organization - it is an institution, a centre of learning & development. We believe
that knowledge is the only weapon at our disposal and our quest for it is focused,
systematic and unwavering.
Over the years, the company has accelerated growth through its ability to lead
change. A number of its pioneering concepts have now emerged as industry
standards. For instance, the company integrated backwards into garment
manufacturing even as it expanded its retail presence at the front end, well before
any other Indian retail company attempted this. It was the first to introduce the
concept of the retail departmental store for the entire family through Pantaloons in
1997. The company was the first to launch a hypermarket in India with Big
Bazaar, a large discount store that it commissioned in Kolkata in October 2001.
And the company introduced the country to the Food Bazaar, a unique 'bazaar'
within a hypermarket, which was launched in July 2002 in Mumbai. Embracing
our leadership value, the company launched all in July 2005 in Mumbai, making
us the first retailer in India to open a fashion store for plus size men and women.

Today Pantaloon is the fastest growing retail company in India. The number of
stores is going to increase many folds year on year along with the new formats
coming up. Their courage is to dream and to turn their dreams into reality – that
change people’s lives, is their biggest advantage.

Future Group

Future Group is one of the country’s leading business groups present in retail,
asset management, consumer finance, insurance, retail media, retail spaces and
logistics. The group’s flagship company, Pantaloon Retail (India) Limited
operates over 10 million square feet of retail space, has over 1,000 stores and
employs over 30,000 people. Future Group is present in 61 cities and 65 rural
locations in India. Some of its leading retail formats include, Pantaloons, Big
Bazaar, Central, Food Bazaar, Home Town, eZone, Depot, Future Money and
online retail format, futurebazaar.com.

Future Group companies includes, Future Capital Holdings, Future Generali India
Indus League Clothing and Galaxy Entertainment that manages Sports Bar, Brew
Bar and Bowling Co. Future Capital Holdings, the group’s financial arm, focuses
on asset management and consumer credit. It manages assets worth over $1 billion
that are being invested in developing retail real estate and consumer-related brands
and hotels.
The group’s joint venture partners include Italian insurance major, Generali,
French retailer ETAM group, US-based stationary products retailer, Staples Inc
and UK-based Lee Cooper and India-based Talwalkar’s, Blue Foods and Liberty
Shoes.Future Group’s vision is to, “deliver Everything, Everywhere, Every time to
Every Indian Consumer in the most profitable manner.” The group considers
‘Indian-ness’ as a core value and its corporate credo is- Rewrite rules, Retain
values.
Mr. Kishore Biyani

Managing Director (FUTURE GROUP)

Major Milestones
1987 Company incorporated as Manz Wear Private Limited. Launch of
Pantaloons trouser, India’s first formal trouser brand.
1991 Launch of BARE, the Indian jeans brand.
1992 Initial public offer (IPO) was made in the month of May.
1994 The Pantaloon Shoppe – exclusive menswear store in franchisee
format launched across the nation. The company starts the distribution
of branded garments through multi-brand retail outlets across the
nation.
1995 John Miller – Formal shirt brand launched.
1997 Pantaloons – India’s family store launched in Kolkata.
2001 Big Bazaar, ‘Is se sasta aur accha kahi nahin’ - India’s first
hypermarket chain launched.
2002 Food Bazaar, the supermarket chain is launched.
2004 Central – ‘Shop, Eat, Celebrate In The Heart Of Our City’ - India’s
first seamless mall is launched in Bangalore.
2005 Fashion Station - the popular fashion chain is launched

aLL – ‘a little larger’ - exclusive stores for plus-size individuals is

launched
2006 Future Capital Holdings, the company’s financial arm launches real
estate funds Kshitij and Horizon and private equity fund Indivision.
Plans forays into insurance and consumer credit.
Multiple retail formats including Collection i, Furniture Bazaar, Shoe
Factory, EZone, Depot and futurebazaar.com are launched across the
nation.
Group enters into joint venture agreements with ETAM Group and
Generali.

Big Bazaar
Big Bazaar is a chain of department stores in India currently with 100 outlets. It is
owned by Pantaloon Retail India Ltd., Future Group. It works on the same
economy model as Wal-Mart and has been successful in many Indian cities and
small towns. The idea was pioneered by entrepreneur Mr. Kishore Biyani, the CEO
of Future Group. Currently Big Bazaar stores are located only in India. It is the
fastest growing chain of department stores and aims at having 350 stores by 2010.

GROUP VISION:

Future Group shall deliver Everything, Everywhere, Every time for Every Indian
Consumer in the most profitable manner.

GROUP MISSION:

We share the vision and belief that our customers and stakeholders shall be served
only by creating and executing future scenarios in the consumption space leading
to economic development.

We will be the trendsetters in evolving delivery formats, creating retail realty,

making consumption affordable for all customer segments – for classes and for
masses.
We shall infuse Indian brands with confidence and renewed ambition.
We shall be efficient, cost- conscious and committed to quality in whatever we do.

We shall ensure that our positive attitude, sincerity, humility and united
determination shall be the driving force to make us successful.

CORE VALUES:

Indianness: confidence in ourselves.

Leadership: to be a leader, both in thought and business. Respect & Humility: to

respect every individual and be humble in our conduct.

Introspection: leading to purposeful thinking.

Openness: to be open and receptive to new ideas, knowledge and information.

Valuing and Nurturing Relationships: to build long term relationships.

Simplicity & Positivity: Simplicity and positivity in our thought, business and
action.

Adaptability: to be flexible and adaptable, to meet challenges.

Flow: to respect and understand the universal laws of nature.

Introduction to the Industry

Retail is India’s largest industry, accounting for over 10% of the country’s GDP
and around 8% of the employment. Retail industry in India is at the cross road. It
has emerged as one of the most dynamic in fast paced industry with several players
entering the market. But because of the heavy initial investments required break
even is difficult to achieve and many of this players have not tested success so far.
However the future is promising the market is growing; the governments policies
are becoming more favorable and emerging technology are facilitating operations.
Retailing in India is gradually inching its way towards becoming the next boom
industry. The whole concept of shopping has altered in terms of format and
consumer buying behavior, ushering revolution in India. Modern retail has entered
India as seem in sprawling shopping centers and multistory malls and huge
complexes offer shopping, entertainment and food all under one roof. The Indian
retailing sector is at an inflexion point where the growth of organized retailing and
growth in the consumption by the Indian population is going to take a higher
growth trajectory. The Indian population is witnessing a significant change in
demographics. A large young working population with average age of 24 years,
nuclear families in urban areas, along with increasing working women population
and emerging opportunities in the service sector are growing to be the key growth
drivers of the organized retail sector in India.
Retailing involves all activities incidental to selling to ultimate consumer for their
personnel family and household use. It does this by organizing their availability on
a relatively large scale and supplying them to customers on a relatively small scale.
Retailer is any person/organization instrumental in reaching the goods or
merchandise or services to the end users. Retailer is a must and cannot be
eliminated.
The Indian retailing industry is becoming intensely competitive, as more and more
players are targeting for the same set of customers. The major retail players are
Pantaloon Retail, Shoppers Stop, Reliance, etc..,
Retailing is one of the biggest sectors and it is witnessing revolution in India. The
new entrant in retailing in India signifies the beginning of retail revolution. India's
retail market is expected to grow tremendously in next few years. According to AT
Kearney, The Windows of Opportunity shows that Retailing in India was at
opening stage in 1995 and now it is in growth stage in 2008. India's retail market is
expected to grow tremendously in next few years. Retail market is expected to
grow 10% a year, with modern retailing just beginning.

Growth drivers in India for retail sector:

•Rising incomes and improvements in infrastructure are enlarging consumer

markets and accelerating the convergence of consumer tastes.
•Liberalization of the Indian economy
•Increase in spending per capita Income.
•Advent of dual income families also helps in the growth of retail sector.
•Shift in consumer demand to foreign brands.
•Consumer preference for shopping in new environs.
•The Internet revolution is making the Indian consumer more accessible to the
growing influences of domestic and foreign retail chains. Reach of satellite T.V.
channels is helping in creating awareness about global products for local markets.
•The increasing share of young population in total population of India.
•Availability of quality real estate and mall management practices
•Foreign companies' attraction to India is the billion-plus population.
Challenges of Retailing in India :

In India the Retailing industry has a long way to go, and to become a truly
flourishing industry, retailing needs to cross the following hurdles:

•The first challenge facing the organized retail sector is the competition from
unorganized sector.
•In retail sector, Automatic approval is not allowed for foreign investment.
•Taxation, which favors small retail businesses.
•Lack of trained work force.
•Low skill level for retailing management.
•Intrinsic complexity of retailing- rapid price changes, threat of product
obsolescence and low margins.
•Organized retail sector has to pay huge taxes, which is negligible for small retail
business.
•Cost of business operations is very high in India.
Recent Trends of Retail Marketing In India:
•Retailing in India is witnessing a huge revamping exercise as can be seen in below
graph.
•India is rated the fifth most attractive emerging retail market: a potential
goldmine.
•Estimated to be US$ 200 billion, of which organized retailing (i.e. modern trade)
makes up 3 percent or US$ 6.4 billion.
•As per a report by KPMG the annual growth of department stores is estimated at
24
Strategic Decision Support Systems :

• Store Site Location : Demographics and buying patterns of residents of an area

can be used to compare various possible sites for opening new stores. Today,
software packages are helping retailers not only in their locational decisions but in
decisions regarding store sizing and floor-spaces as well.

• Visual Merchandising: The decision on how to place & stack items in a store is
no more taken on the gut feel of the store manager. A larger number of visual
merchandising tools are available to him to evaluate the impact of his stacking
options. The SPACEMAN Store Suit from AC Neilsen and ModaCAD are
example of products helping in modeling a retail store design.
Major Formats of In-Store Retailing :

Format Description The Value Proposition

Complete range
Branded Exclusive showrooms either owned or available for a given
Stores franchised out by a manufacturer. brand, certified product
quality
Greater choice to the
Specialty Focus on a specific consumer need, carry consumer, comparison
Stores most of the brands available between brands is
possible
Large stores having a wide variety of
One stop shop catering
Department products, organized into different
to varied/ consumer
Stores departments such as clothing, house wares,
needs.
furniture, appliances, toys, etc.
One stop shop catering
Supermarkets Extremely large self-service retail outlets to varied consumer
needs
Stores offering discounts on the retail
Discount
price through selling high volumes and Low Prices
Stores
reaping economies of scale
Low prices, vast choice
Larger than a supermarket, sometimes
available including
Hyper- mart with a warehouse appearance, generally
services such as
located in quieter parts of the city
cafeterias.
Convenient location and
Convenience Small self-service formats located in
extended operating
stores crowded urban areas.
hours.
Shopping An enclosure having different formats of Variety of shops
Malls in-store retailers, all under one roof. available to each other.

Indian Retail- expanding the number of formats :

In modern retailing, a key strategic choice is the format. Innovation in formats can
provide an edge to retailers. Organized retailers inIndia are trying a variety of
formats, ranging from discount stores to supermarkets to hypermarkets to specialty
chains.
Formats Adopted by Key Players in India:

Retailer Original formats Later Formats

Hypermarket (Spencer's)Specialty Store
RPG Retail Supermarket (Foodworld)
(Health and Glow)
Department Store
Piramal's Discount Store (TruMart)
(Piramyd Megastore)
Small format outlets
Pantaloon (Shoppe) Supermarket (Food Bazaar)
Retail Department Store Hypermarket (Big Bazaar) Mall (Central)
(Pantaloon)
Department Store
K Raheja (shopper's stop) Supermarket (TBA)
Group Specialty Store Hypermarket (TBA)
(Crossword)
Department Store
Tata/ Trent Hypermarket (Star India Bazaar)
(Westside)
Landmark Department Store
Hypermarket (TBA)
Group (Lifestyle)
Discount Store (Subhiksha, Margin Free, Apna Bazaar),
Others
Supermarket (Nilgiri's), Specialty Electronics

Recent changes:

• Experimentation with formats: Retailing in India is still evolving and the sector
is witnessing a series of experiments across the country with new formats being
tested out. Ex. Quasi-mall, sub-urban discount stores, Cash and carry etc.

• Store design: Biggest challenge for organised retailing to create a “customer-

pull” environment that increases the amount of impulse shopping. Research shows
that the chances of senses dictating sales are upto 10-15%. Retail chains like
MusicWorld, Baristas, Piramyd and Globus are laying major emphasis & investing
heavily in store design.
• Emergence of discount stores: They are expected to spearhead the organised
retailing revolution. Stores trying to emulate the model of Wal-Mart. Ex. Big
Bazaar, Bombay Bazaar, RPGs.
• Unorganized retailing is getting organized: To meet the challenges of
organized retailing such as large cineplexes, and malls, which are backed by the
corporate house such as 'Ansals' and 'PVR‘ the unorganized sector is getting
organized. 25 stores in Delhi under the banner of Provision mart are joining hands
to combine monthly buying. Bombay Bazaar and Efoodmart formed which are
aggregations of Kiranas.

• Raising aspirations: Value added goods sales, Food and apparel retailing key
drivers of growth.

Organized retailing in India has been largely an urban phenomenon with affluent
classes and growing number of double-income households. More successful in
cities in the south and west of India. Reasons range from differences in consumer
buying behaviour to cost of real estate and taxation laws.
Rural markets emerging as a huge opportunity for retailers reflected in the share of
the rural market across most categories of consumption
ITC is experimenting with retailing through its e-Choupal and Choupal Sagar –
rural hypermarkets.
HLL is using its Project Shakti initiative – leveraging women self-help groups – to
explore the rural market.
Mahamaza is leveraging technology and network marketing concepts to act as an
aggregator and serve the rural markets.
IT is a tool that has been used by retailers ranging from Amazon.com to eBay to
radically change buying behaviour across the globe.
‘e-tailing’ slowly making its presence felt.
Companies using their own web portal or tie-sups with horizontal players like
Rediff.com and Indiatimes.com to offer products on the web.

Opportunities in Retail Sector:

• Investment Opportunities

Potential For Investment: The total estimated Investment Opportunity in the

retail sector is around US$ 5-6 Billion in the Next five years.

• Location: with modern retail formats having made their foray into the top cities
namely Hyderabad, Coimbatore, Ahmedabad, Mumbai, Pune, Chennai, Bangalore,
Delhi, Nagpur there exists tremendous potential in two tier towns over the next 5
years.

Sectors with High Growth Potential:

Certain segments that promise a high growth are

· Food and Grocery

· Clothing
· Furniture and Fixtures
· Pharmacy
· Durables, Footwear & Leather, Watch & Jewellery

Fastest Growing Formats:

Some of the formats that offer good growth potential are:

· Speciality and Super Market
· Hyper Market

THE PRODUCT – BIG BAZAAR

INTRODUCTION:

Big Bazaar is a chain of shopping malls in India currently with 29 outlets, owned
by the Pantaloon Group. The idea was pioneered by entrepreneur Kishore Biyani,
the head of Pantaloon Retail India Ltd. Big Bazaar stores in Metros have a gaming
area and kids play area for entertainment.

Cities where stores are located:

Agra
Ahmedabad
Allahabad
Ambala
Asansol
Bangalore
Bhubaneswar
Chennai
Coimbatore
Palakkad
Kolkata
Delhi
Durgapur
Ghaziabad
Gurgaon
Hyderabad
Indore
Lucknow
Kanpur
Mangalore
Mumbai
Nagpur
Nasik
Panipat
Pune
Rajkot
Surat
Thane
Thiruvananthapuram
Vishakhapatnam

Big Bazaar has democratized shopping in India and is so much more than a
hypermarket. Here you will find over 170,000 products under one roof that cater to
every need of the family, making Big Bazaar India’s favorite shopping destination.
At Big Bazaar, you will get best products at the best prices, this is their guarantee.
From apparel to general merchandise, like plastics, home furniture, utensils,
cookery, cutlery, sports goods, car accessories , books, music, computer
accessories and many more. Big Bazaar is the destination where you get products
available at prices lower than the MRP , setting a new level of standard in price,
convenience, and quality.

Big Bazaar is a great platform for fashion conscious buyers, who want great
clothes at great prices. Leveraging on the companies inherent strength of fashion,
Big Bazaar has created a strong value for money, proposition for its customer. This
highlights the uniqueness of Big Bazaar as compared top traditional supermarkets,
which principally revolves around food, groceries and general merchandise.
KEY FEATURES:

a. MANUFACTURER’S WARRANTIES ON ALL

PRODUCTS:
Big Bazaar promises to sell only the original products from the authorized dealers;
so that all applicable products carry the original manufacturer’s warranty. To
service any product purchased at Big Bazaar, customer can visit the authorized
service centre of the manufacturer. The invoice accompanying the product is the
warranty document.

b. GUARANTEED DELIVERY:
Big Bazaar guarantees to deliver the exact product that has selected, without
defects. In case of receiving a different product, or if the product is damaged in
transit, the customer should contact it within the stipulated time period and Big
Bazaar will ensure that it is replaced or refunded.

c. SECURE PAYMENT:
It commits to ensure that no payment misuse happens, so we work with banks and
payment gateways to ensure that your information is protected. Payments are
protected both by it and by the policies of customer’s bank, and the chances of
fraud in these channels are actually very low. Big Bazaar openly publishes its
office addresses and is part of India’s largest retail company with a presence all
over India – so you know how to contact us in person, if required.
d. OUR SIMPLE 15-DAY RETURN POLICY:
If customer has purchased something at Future Bazaar and the product did not
meet its expectations or does not fit to his needs, then it can return the product to
us; no questions asked, as long as it is in its original packaging and accompanied
by its invoice. We will even make the return process simple for you – just contact
our customer support and we’ll arrange to pick up the product from your home.
Alternately, you can drop it off at the nearest Big Bazaar.

e. PROMPT CUSTOMER SUPPORT:

Our customer support is manned by dedicated call centre personnel, who can take
decisions and resolve your problems. They are eager to solve your problems and
are aware of the processes and means to handle them. In case they cannot solve the
problem at their end, they will trigger the required action on your behalf or advise
you the best possible method to a successful fulfilment of all your queries/issues.
Be assured that when you call us, your call is being taken seriously.

GUARANTEED
DILIVERY

15 DAYS
PROMPT
RETURN
CUSTOMER
POLICY
SUPPORT
BIG
BAZAAR

MANUFACTUR
SECURE -ER’S
PAYMENT WARRANTY
PRODUCT LINE

Here, one finds over 170,000 products under one roof that cater to every need of a
family, making Big Bazaar India’s favourite shopping destination. Where Big
Bazaar scores over other stores is its value for money proposition for the Indian
customers. Big Bazaar, one finds a huge variety of products to select from with a
good price and quality. With the ever increasing array of private labels, it has
opened the doors into the world of fashion and general merchandise including
home furnishings, utensils, crockery, cutlery, sports goods and much more at
surprisingly low prices. In recent years, Big Bazaar has adopted value pricing in
which they win loyal customers by charging a fairly low price for a high – quality
offering. However, consistent low price for the products is not only the universally
desired characteristic.

MARKETING STRATEGY

PROCESS FOLLOWED (STP)

Segmentation, targeting, and positioning together comprise a three stage process.

a. Determine which kinds of customers exist,
b. Select which ones we are best off trying to serve,
c. Implement our segmentation by optimizing our products/services for that
segment and communicating that we have made the choice to distinguish ourselves
that way.

SEGMENTATION:

Segmentation involves finding out what kinds of consumers with different needs
exist. In the auto market, for example, some consumers demand speed and
performance, while others are much more concerned about roominess and safety.
In general, it holds true that “You can’t be all things to all people,” and experience
has demonstrated that firms that specialize in meeting the needs of one group of
consumers over another tend to be more profitable. Several different kinds of
variables can be used for segmentation:-

1. Demographic variables essentially refer to personal statistics such as income,

gender, education, location (rural vs. urban, East vs. West), ethnicity, and family
size.
2. Some consumers want to be seen as similar to others, while a different segment
wants to stand apart from the crowd.
3. Another basis for segmentation is behaviour. Some consumers are “brand
loyal”—i.e. they tend to stick with their preferred brands even when a competing
one is on sale. Some consumers are “heavy” users while others are “light” users.
For example, research conducted by the wine industry shows that some 80% of the
product is consumed by 20% of the consumers—presumably a rather intoxicated
group. It’s the well-known 20-80 rule.
4. One can also segment on benefits sought, essentially by passing demographic
explanatory variables. Some consumers, for example, like scented soap (a segment
likely to be attracted to brands such as Irish Spring), while others prefer the “clean”
feeling of unscented soap (the “Ivory” segment).
Some consumers use toothpaste primarily to promote oral health, while another
segment is more interested in breathe freshening.

TARGETING:

1. In the next step, we decide to target one or more segments.

Our choice should generally depend on several factors:-

First
How well are existing segments served by other manufacturers? It will be more
difficult to appeal to a segment that is already well served than to one whose needs
are not currently being served well.

Secondly
How large is the segment, and how can we expect it to grow?

Thirdly
Do we have strengths as a company that will help us appeal particularly to one
group of consumers?

2. Big Bazaar targets higher and upper middle class customers.

3. The large and growing young working population is a preferred customer
segment.
4. Big Bazaar specifically targets working women and home makers who are the
primary decision makers.
POSITIONING:

Positioning involves implementing our targeting. Big Bazaar has established itself
in the first quadrant of Organization Value and Customer Value Matrix
The SWOT analysis of current strategy of Big Bazaar elaborates the
core competencies and areas of improvement. The key features that have shaped in
establishing of Brand includes
Big Bazaar ensures that no other Kirana store/ departmental store are offering
considerable discount compared to its own price. This helped Big Bazaar in being
the “Value for money” store.
Big Bazaar scores high on product mix as compared to Kirana store.
Cheap and local products are heavily stocked in Big Bazaar which make it easier to
attract lower middle class category of customers.
Promotion of Kirana event is rare event but Big Bazaar used this channel
efficiently to establish itself as national brand.
Customer loyalty resulting in high up sell i.e. selling to existing customers.
Big Bazaar refrains from high-end locations for business which reduces its rental
budget and provides competitive advantage over competitors. Kishore Biyani has
taken “early movers advantage” in many retail spaces.
Organization Value and Customer Value Matrix

SWOT analysis of Big Bazaar

MARKETING MIX

The easiest way to understand the main aspects of marketing is through its more
famous synonym of "4Ps of Marketing". The classification of four Ps of marketing
includes marketing strategies of product, price, placement and promotion. The
following diagram is helpful in determining the main ingredients of the four Ps in a
marketing mix.

PRODUCT:

In simpler terms, product includes all features and combination of goods and
related services that a company offers to its customers. Product is the most
important aspect of marketing mix for two main reasons. First, for manufacturers,
products are the market expression of the company's productive capabilities and
determine its ability to link with consumers. So product policy and strategy are of
prime importance to an enterprise, and product decisions dictate the scope and
direction of company activity. Moreover, the market indicators such as profits,
sales, image, market share, reputation and stature are also dependent on them.
Secondly, it is imperative to realize that the product of any organization is both a
component and a determinant of the marketing mix as it has a great influence on
the other elements of the mix: advertising, personal selling, channels of
distribution, physical distribution and pricing. So without proper product policy, a
company can not pursue for further elements of marketing mix.

PRICING:

Pricing is basically setting a specific price for a product or service offered. In a

simplistic to the concept of price as the amount of money that customers have to
pay to obtain the product. Setting a price is not something simple.

Normally it has been taken as a general law that a low price will attract more
customers. It is not a valid argument as customers do not respond to price alone;
they respond to value so a lower price does not necessarily mean expanded sales if
the product is not fulfilling the expectation of the customers

Generally pricing strategy under marketing mix analysis is divided into two parts:
price determination and price administration (ibid).

Price determination is referred to as the processes and activities employed to arrive

at a price for a product including consideration of relative prices of products within
the same line, and differences in price for similar products of differing grades and
qualities.

Price administration is referred to as the activities involved in fitting basic prices to

particular sales situations such as geographic locale, functions performed by
customers, position of distribution channel members, or special sales situations.
PLACEMENT:

Placement under marketing mix involves all company activities that make the
product available to the targeted customer while planning placement strategy under
marketing mix analysis, companies consider six different channel decisions
including choosing between direct access to customers or involving middlemen,
choosing single or multiple channels of distributions, the length of the distribution
channel, the types of intermediaries, the numbers of distributors, and which
intermediary to use based on the quality and reputation .

PROMOTION:

Promotional strategies include all means through which a company communicates

the benefits and values of its products and persuades targeted customers to buy
them .The best way to understand promotion is through the concept of the
marketing communication process. Promotion is the company strategy to cater for
the marketing communication process that requires interaction between two or
more people or groups, encompassing senders, messages, media and receivers

Limitation of Marketing Mix Analysis (4Ps of Marketing)

Despite the fact that marketing mix analysis is used as a synonym for the 4Ps of
Marketing, it is criticised on the point that it caters seller's view of market analysis
not customers view. To tackle this criticism, attempted to match 4 Ps of marketing
with 4 Cs of marketing to address consumer views:

Product – Customer Solution

Price – Customer Cost
Placement – Convenience
Promotion – Communication

RETAIL MIX:

1. Merchandise assortment: “Main objective of the store layout is to maximize

the interface between customers and merchandise” It provides easy accessibility to
the customers to view the offerings of the store. Layout of the store has been
strategically designed in order to make effective use of merchandise and passage to
draw customers’ attention on store’s offerings.
Big Bazaar has a wide range of merchandise they have both branded and
unbranded products like:
Home line items: Like bed sheets, pillow covers, carpets to kitchen utility items
like steel utensils and crockery and other minor utility items required in a house
Electronic items: like refrigerator, T.V, vacuum cleaner, music system, vacuum
cleaner, washing machine. Etc
Mobile Zone: A wide range of mobile phones and accessories is available at lowest
possible price
Furniture: All kinds of furniture are available that one may require to decorate their
house.
Opticians: In this section all brands and types fashion glasses are available
Men Ladies and kids wear: This section includes fashion and casuals wear for men
ladies and kids both branded and unbranded.

Foot wear: In this section footwear for men women and kids is made available.
Music: A wide collection of CDs DVDs is made available
Toys: All kinds of toys for children is available
Stationary: all kind of office stationery and stationery for school going kids is
available

Location

Big bazaar is located has 31 outlets in India , big bazaar locates its outlet near the
commercial area and residential complexes so that they can cover all their target
customers E.g. : their outlet in Ameerpet , Hyderabad , is located near commercial
areas so that the working class people can drop in and shop house hold items after
office hrs.

The choice of location of Big Bazaar in many ways captures the essence of what
they were doing- they adapt themselves to the habits tastes and preferences
according to the location. One of the distinct feature of their location is that it is
easily accessible and they try to locate their outlet in such a location where they
can reach a large customer base.

Layout

People often complain that Big Bazaar outlets always look very crowded. But few
realize that it is concisely designed to look just like that. When the shop looks neat
and empty, the masses never walk into it. There has to be what is called the ‘button
brush effect’, and an ‘organized chaos’. As Indians, we like bumping into people,
chatting, gossiping and eating while we shop!
Big Bazaar layout consists of layout of long rows of parallel fixtures; with no
aisles because aisles can be boring they restrict space and can’t be dramatized. At
Big Bazaar, they create multiple cluster or mini-bazaars within every store. It was
designed as an agglomeration of bazaars with different sections selling different
categories’
“It uses space efficiently.
It provides easy sitting of merchandise and linking of the product throughout the
store.
It allows more customers in the store at any time.
Allows staff of the store to work easily alongside the customers without disturbing
them.
Provide self-service atmosphere

Visual merchandising

Visual merchandising supports:-

a. sales
b. retail strategies
c. communicates with customers
d. communicates image
e. supports retailing trends.
Visual merchandising at Big Bazaar uses “Store display for promotional purpose,
but as customers are becoming more sophisticated, Big Bazaar has found various
techniques for effective display for providing information and communicating
image of the store to the customers, helping them in taking purchase decision and
creating exciting shopping environment” Big Bazaar not only uses visual
merchandising for promoting their product, but they use it as a significant tool for
creating appropriate store environment and influencing purchase decision of
customers.

They use danglers and hoardings at the entrance of the store as this may be a
deciding element in a consumer’s decision to enter a store. It uses various visual
merchandising like it uses remarkable window display for creating a shopping
environment as it creates initiative impression in the mind of customers as window
display also sometimes become a deciding factor whether to enter the store or not .
Retailers develop visual merchandising in order to relate customer’s social life
with the product, arouse their personnel interest for the product. “Retailers can use
combination of elements of in store display; such as colour, texture, lighting,
fixtures, graphics, signage.”

RETAIL PROMOTION MIX

1. ADVERTISING:
Advertising is recognized as an indispensable tool of promotion. It has acquired a
lot of significance in the national and international markets. With the advent of
globalization and liberalization its imperativeness in the Indian retail sector has
increased as a result of competitions, latest technologies, and the rapidly changing
consumer lifestyles.

a. Objectives of Advertising:

The fundamental objective of advertising is to sell something –a product, service,

or an idea.

The Major Objectives of advertising are:

1. To promote a new product.

2. To warn the public against imitation of the retailer’s product.
3. To manage competition in the market.
b. Benefits of Advertisements:

1. Advertisement helps in creating awareness among the customer about the

existence, price, and availability of product.
2. Increases the utility of existing products.
3. It educates customer about new product and their diverse uses.

c. Types of advertising:

1. Informative Advertising:
Purchases of durable products are generally erratic and often too expensive to buy,
so the retailer spends a huge amount on informative advertising.

2. Corporate Advertising:
Its main motive is to build a corporate image. Corporate Advertising builds up
retailer image. It increases goodwill towards the retail organization.

3. Financial Advertising:
It refers to advertisements by various financial institutions. Big Bazaar has also
tied up with ICICI bank, which provide information about the investment
opportunities and the risks and benefits.

4. Classified Advertising:
It refers to messages, which are placed under specific headings and columns in
various magazines and newspapers.

2. PROMOTION:

Promotion can be loosely classified as "above the line" and "below the line"
promotion. The promotional activities carried out through mass media like
television, radio, newspaper etc. is above the line promotion. The terms
'below-the-line' promotion or communications refers to forms of non-media
communication, even non-media advertising. Below-the-line promotions are
becoming increasingly important within the communications mix of many
companies, not only those involved in fmcg products, but also for industrial goods.

1. BELOW THE LINE SALES PROMOTION

Some of the examples of BTL (below the line) promotions are by exhibitions,
sponsorship activities, public relations and sales promotions like giving freebies
with goods, trade discounts given to dealers and customers, reduced price offers on
products, giving coupons which can be redeemed later etc.
Below the line sales promotions are short-term incentives, largely aimed at
consumers. With the increasing pressure on the marketing team to achieve
communication objectives more efficiently in a limited budget, there has been a
need to find out more effective and cost efficient ways to communicate with the
target markets. This has led to a shift from the regular media based advertising.

Methods of below the line sales promotion:-

a. Price promotions
Price promotions are also commonly known as" price discounting". These can be
done in two ways:-
1. A discount to the normal selling price of a product, or more of the product at the
normal price.
2. Price promotions however can also have a negative effect by spoiling the brand
reputation or just a temporary salesboost (during the discounts).

b. Coupons
Coupons are very versatile, way of offering a discount.

Following are the examples of the use of coupons:-

-On a pack to encourage repeat purchase

-In coupon books sent out in newspapers allowing customers to redeem the coupon
at a retailer.
-A cut-out coupon as part of an advert.
-On the back of till receipts.

The key objective with a coupon promotion is to maximize the redemption rate –
this is the proportion of customers actually using the coupon. It must be ensured
when a company uses coupons that the retailers must hold sufficient stock to avoid
customer disappointment. Use of coupon promotions is often best for new products
or perhaps to encourage sales of existing products that are slowing down.

c. Gift with purchase

The "gift with purchase" is a very common promotional technique. In this the
customer gets something extra along with the normal good purchased.
d. Competitions and prizes

This is an important tool to increase brand awareness amongst the target consumer.
It can be used to boost up sales for temporary period and ensure usage amongst
first time users.

e. Money refunds

Here, a customer receives a money refund after submitting a proof of purchase to

the manufacturer.
Customers often view these schemes with some suspicion – particularly if the
method of obtaining a refund looks unusual or onerous.

f. Frequent user / loyalty incentives

Repeat purchases may be stimulated by frequent user incentives.

g. Point-of-sale displays

A data collection system that electronically receives and stores bar code
information derived from a sales transaction. This could the zip codes for library
users, facilitating the library in determining geographic market are that users reside
in. Most of the big brands are following the suit of BTL promotion because of
rising prices of media based promotion, advertising clutter and increased impulse
purchasing. BTL promotions are gaining popularity among all big companies
nowadays considering their effectiveness because of the "individual customer
promotion" at a price, which is much lesser than the normal media promotions.

• Low prices on Wednesday Low prices on Wednesday

• Concept of Big Day Concept of Big Day
• Promotional offers
1. School Jao Khushi Khushi
2. Khushi Ki Barsaat
3. Happy Father’s Day
E.g.
Big Bazaar's `junk' swap offer
Big Bazaar is launching a promotional offer from
Saturday, with the slogan, "Bring anything old and take something new".
The prices fixed by Big Bazaar are: clothes (Rs 200 per kg), newspaper (Rs 25 per
kg), plastics/utensils/leather goods (Rs. 75 per kg), footwear/luggage (Rs. 100 per
kg), Pet/beer bottles (Rs 15 per kg), tyres (Rs 50 per kg), furniture (Rs 75 per kg)
and others (Rs 20 per kg). "This offer will help the housewife clean out the junk
while getting a good value for it.

2. PERSONAL SELLING:

Persuasive communication between a representative of the company and one or

more prospective customers, designed to influence the person's or group's purchase
decision.

3. PUBLICITY OF PRODUCT:

Publicity non-personal communication in news story form about an organization,

its products or both, that is transmitted through a mass medium at no charge.

4. PUBLIC RELATION:

Public relations the planned and sustained effort to establish and maintain goodwill
and mutual understanding between an organization and its target publics.

5. INTERNAL ATTRIBUTES:

a. Envelope: Something that envelops; a wrapping. A products wrapping affects a

lot on its sale. More customers are attracted if envelope is very attractive.
b. Internal layout: Methods of display
•Visual merchandising

6. LOGISTICS:
Logistics is the art and science of managing and controlling the flow of goods ,
energy, information and other resources like products, services and people from the
source of production to the marketplace. It’s Important to have professional
logistical support logistical. The operating responsibility of logistics is the
geographical repositioning of raw materials, work in process and finished
inventories where required at the lowest cost possible.

7. SUPPLY CHAIN:
Supply chain, is a coordinated system of organizations, people, activities,
information and resources involved in moving a product or service in physical or
virtual manner from supplier to customer. Supply chain activities transform raw
materials and components into a finished product that is delivered to the end
customer.

DISTRIBUTION OF REVENUE EARNER

a. Big Bazaar is working to make fashion its largest revenue earner.

b. Big Bazaar, the value retailing chain of the Rs 4,500crore Pantaloon Retail, is
strategieng to focus specially on ‘fashion retailing’ or its apparel business to boost
overall revenues.

c. It has created ‘Fashion @ Big Bazaar’, a sub-brand, to position the format as

much more than food or general merchandise.

d. Big Bazaar is looking at making apparel business its largest revenue generator,
as much as 40 per cent in two years and 50 per cent of its overall business, in five
years.

e. Currently sales of apparel make up almost 30 per cent of Big Bazaar’s revenues,
which is next only to its food retailing business that makes up almost 40 per cent.

f. However, we will focus on apparel as the margin here is as high as 35 per cent
compared to food retailing business where margins are probably 12 per cent. So a
slight increase in apparel sales boosts the overall business. Going forward, Big
Bazaar plans to rearrange its apparel and fashion merchandise section in stores in
terms of design, layout and elbow space. This is expected to ensure better product
display in stores keeping with consumer buying habits and convenience.

g. Future Group recently clocked over Rs 350crore of sales in five ‘Mahabachat’

days, with sales exceeding Rs 105crore on the last day.

h. During this time, the largest selling category was apparel. As many as 1lakh
jeans were sold and onelakh sarees as well as some 2 lakh t-shirts.

i.Some of Big Bazaar’s private labels, like DJ&C and Knighthood, are already big
revenue generators, with DJ&C projecting Rs 1,000crore in the next three years,
from 600crore right now.
LOCATIONAL STRATIGIES FOR LAST 5 YEARS
INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE
CONTEXT From “Building Economics for Architects” by Thorbjoern Mann ―… The attitude of architects toward
issues related to the economics of building at times seems somewhat ambivalent*. Most professionals agree that
economic factors are quite important; in fact that they often influence design decisions more than any other single
factor and should be well understood by the designer. On the other hand, in the prestigious journals where the
profession represents its work to itself and the world, in discussions of architectural theory, and in the curricula of
Schools of Architecture, one finds little concern for the issue. It seems tainted or even ―dirty‖. Architects who
manage to design building that work out well economically for their clients run the risk of being considered
―hacks‖ by their colleagues… Are the economic issues of building unworthy of the architect’s creative effort?‖
ambivalent: Simultaneously experiencing or expressing opposing or contradictory feelings, beliefs, or motivations.
WHAT IS YOUR OPINION ON THIS REMARK*? remark: The expression, in speech or writing, of something
remarked or noticed; the mention of that which is worthy of attention or notice; hence, also, a casual observation,
comment, or statement; as, a pertinent remark. INAR 413 BUILDING ECONOMICS LECTURE 01
INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT  Buildings are expensive. Decisions about
investments in buildings usually involve the largest single-item expenditures most people have to deal with during
their life time, even if they are merely renting an apartment.  Expressed in terms of income, an average suburban
house costs up to several times an individual wage earner’s annual salary. Spread out over time as monthly mortgage
payments, it can require anywhere from a quarter to one-half of the monthly family income. WHAT IS THE
SITUATION IN TURKEY? DO YOU HAVE FRIENDS WHO PAY MORTGAGE FOR THEIR HOME? WHAT
IS THE AVERAGE COST OF AN OVERALL INTERIOR DESIGN PROJECT FOR A RESIDENTIAL UNIT
(APARTMENT FLAT, SUBURBAN HOUSE, LUXURY VILLA) IN ANKARA? INAR 413 BUILDING
ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT  The initial
costs of a building, however, appears quite insignificant when compared with the costs incurred to operate and
maintain a building over its lifetime. For a 20 year period, these costs can amount to three or four times the initial
cost of construction.  Even more impressive is the difference between initial cost and long-term salary
expenditures needed for carrying out the work in a building, for example of a manufacturing firm. The amount spent
on slaries of people working in a building over twenty years can be up to fifty times, or more, of the initial
construction cost. Reichstag 1894 Reichstag 1945 Reichstag 1999 Reichstag: The seat of the German Parliament in
Berlin Renovation by Norman Foster INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO
BUILDING ECONOMICS – THE CONTEXT The Challenge to the Interior Architect  One might argue: ―Why
even look at these issues? The interior architect cannot do anything about them anyway.‖ Most of the significant
factors do seem to be under someone else’s control.  For example, the interior architect often is under pressure to
speed up the delivery of the project, and thus cut the time spent on designing and other tasks to the minimum.  The
client’s argument is that ―time is money‖, every day that the building cannot be occupied is costing money in
interest for loans and lost rental income. INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION
TO BUILDING ECONOMICS – THE CONTEXT  Imagine the following situation: It is the crucial meeting
between the client and the interior architect to negotiate the contract for a large building project. The negotiation is
almost complete. The client gets ready to sign the contract and as one of the last points, attempts to get an agreement
on the delivery date for the preliminary design: Client: I expect the preliminary drawings Monday after next – is that
OK with you? Interior Architect: Sure. We can get you the schematics ready by that date, and you know you will get
a professional solution that meets the state of the art expectations. But let me make you a calculation: In the typical
project of this kind, about a quarter of our time and fee is spent on what we call ―critical design time.‖ That is
where the important design decisions are made that will determine the project’s ultimate success – architecturally,
functionally, economically. That is where our firm has earned its reputation for bringing projects that compare
favorably with other projects. But every solution, no matter how good can still be improved; for example with
respect to economic performance. So let us assume that we could further reduce the initial cost of your project by
only 1% without reduction in the quality. INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION
TO BUILDING ECONOMICS – THE CONTEXT I.A.: That would be 10.000 TL off your 1 million TL project.
But we would have to spend a little more time on it – especially in the important schematic design phase. Interested?
Client: Mm. I.A.: Would you be willing to let us spend, say, 5.000 TL more on critical design time to achieve this?
Over the delivery time of the building say a year, that would be a 2:1 ratio of savings in initial cost to the investment
of the added design fee. Client: Not bad, but... I.A.: At a total interior architect’s fee of say, 8% for the building,
which is now going to cost 990.000 TL, that would be roughly 79.000 TL plus 5.000 TL = 84.000 TL, which would
be about an 8,5% fee. In terms of time, the added effort and cost would be equivalent to about one month in critical
design time; two weeks if we put two people on it. Client: Well, I don’t Know... I.A.: There is more. If your building
requires a roughly 4 million TL in operating, maintenance, energy and other running costs, over 20 years, one more
month of critical design time couls result in a 1% reduction of those costs, this would represent a savings-
toinvestment ratio of 8:1 (40.000:5.000). At the same terms as above (aiming at a savingsinvestment ratio of 2:1),
you should be willing to let us spend 20.000 TL more on design time, for a total fee of around 10%. But what if we
could actually do it for about the same 5.000 TL as above, or one more designer month. That would give you a
return of 40.000 TL on an investment of 5.000 TL, which represents an annual return in savings of 2.000 TL – that
is 40% annually. Which of your stocks gives you that kind of return? Client: Now you are talking. How... INAR 413
BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT
I.A.: Wait; it could get even better. What if we looked at your actual operation and managed to develop a layout that
would save you 1% on personnel cost over 20 years? How much do you spend per year on salaries? 50 people in
that size building, at an average annual salary of, say, 20 million TL over 20 years. One percent of that is a savings
of 200.000 TL, or 10.000 TL a year. So, still on the same deal as for the initial cost (2:1 savings ratio), you should
be willing to let us spend up to 100.000 TL more on design costs and still make 100.000 TL in savings. Client: Wait
a minute... I.A.: Ok, so what if we could do that for the same 5.000 TL? You would be looking at a return of
200.000 TL on 5.000 TL investment over 20 years, or 10.000 TL each year. That is an annual return rate of 200%.
Client: That all sound too good to be true. Can you show me what kind of things you would do, or where have you
done that in a past project? Can you guarantee the result? Why can’t you come up with a better solution right away?
Didn’t you just argue that ―good design is just as cheap as bad design‖ when you tried to snatch the commision
away from your competitors? Besides, you forgot to consider that each month of delay is going to cost me some
7.000 TL in interest alone... I.A.: Well, uh, ah... Client: Have the schematics ready Monday after next. OK? INAR
413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE
CONTEXT  Do we as interior architects have good, convincing answers to these questions?  Clients, especially
corporate and government clients, increasingly expect architects to be able to answer them. As they, and their
advisors, become more sophisticated in analyzing their financial situation, they expect the interior architects to
follow suit.  They know that information as well as analytical methods and tools – computers, programmable
calculators, spreadsheet programs, data services – are increasingly available even to the smallest firms: they expext
interior architects to use them. We are running out of excuses for not doing so... Inside Interior Architect’s Head
INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE
CONTEXT  The trouble is that we have rarely looked at our tasks that way, and that is why we would have trouble
answering the client's next-to-last question. Backed into the comer, a common reaction on the part of some interior
architects is to let the client negotiate their commission down even further. (they do not like to talk about this)  A
number of years ago I (Thorbjoern Mann) was teaching a design class in a Far Eastern city. The project was a large
downtown office building, using the site and program of an actual project of this kind. The architect came in to talk
to the students, who had spent the first weeks studying efficient access and service core configurations, massing, and
similar issues.  It was amazing to watch the students' astonishment when the architect casually mentioned that the
client had had a team of five financial feasibility advisors work on the project for many months before the architect
was involved. None of the advisors was an architect. They gave him a program with the complete service core,
number of floors, and outside dimensions worked out in considerable detail, leaving the architect essentially to
design a skin around the building. INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO
BUILDING ECONOMICS – THE CONTEXT  The message was clear: The client, a major international
corporation, did not seem to have sufficient confidence in architects' ability to advise on these crucial feasibility
considerations even to make an architect part of this team.  Was this just an isolated incident? The result of some
disappointing cost overruns in previous projects? An indication of a general attitude toward architects? A realistic
assessment of the (lack of) competence of architects? Many architects would disagree especially with the last
judgment— some no doubt quite vehemently, and some even with good justification. But even if the client's attitude
were different, how many architects live up to the expectation of reliably carrying out such feasibility analyses, or
are competent members of teams such as the one above? INAR 413 BUILDING ECONOMICS LECTURE 01
INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT  My (Thorbjoern Mann) own architectural
education hardly mentioned these issues. As a graduate entering the profession after my first degree, I would have
been quite lost had anyone asked me to estimate the cost, let alone the feasibility or financial performance, of a
building. I suspect that many graduates of schools of architecture today, even practicing architects, are in a similar
situation. It does not have to be this way. In spite of sometimes confusing jargon, and some fierce-looking
mathematical equations, it is quite possible to grasp the basics and to make building economics just one more of the
many balls the architect has to keep juggling, and even to turn it into an advantage.  Architects like to see
themselves as problem-solvers. The economic questions of buildings always are a major part of the client's problem.
We cannot afford to ignore a part of the problem the client often considers is the most critical one—even if we
ourselves are more concerned with other facets such as aesthetics, user needs, environmental response, or image.
Including economic factors in our range of design concerns will not compromise our designs; it will make us better
designers. What it takes is, first, a change of attitude. WHAT DO YOU THINK? INAR 413 BUILDING
ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT What is
Building Economics?  Once we have accepted the challenge of finding out more about building economics, a
reasonable first step is to ask what it is?  Can we define the field?  How does it relate to other fields that also
carry the label of ―economics‖? Engineering economics Urban economics Energy economics Environmental
economics INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS
– THE CONTEXT What is Building Economics?  Most of these are concerned with what, in general economic
theory, would be called microeconomic analysis (The study of how individual actors in the economic realm make
economic plans and decisions) as opposed to macroeconomics (the study of laws governing the economy as a
whole) WHERE DO YOU THINK BUILDING ECONOMICS STAND IN ECONOMIC SCALE?
MICROECONOMICS OR MACROECONOMICS? INAR 413 BUILDING ECONOMICS LECTURE 01
INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT  Several important directions can be
established in building economics. For one, given the importance of building industry in any national economy,
there are important macroeconomic issues that must be studied and would properly fall under the label of building
economics:  What are the relationships between the construction-related segments of the economy and other fields,
and general economic conditions such as those that are influenced by the decisions made by the government or the
central bank?  How can and should areas of vital national importance such as housing be influenced and kept
healthy? INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS –
THE CONTEXT  At the other end of the spectrum are the concerns of the practitioners involved with actual and
specific building projects, studying construction estimating, construction management, project management,
construction financing, and real estate financing. The economics of the various production processes, including
transportation processes, would constitute another complex area in building economics. All these fields are further
divided into areas of concern by building type; the economics of housing, for example, are quite different from the
economics of commercial projects such as office buildings, shopping centers, or industrial buildings.  Building
economics issues, even for specific projects, look quite different to the various actors involved. The economic
decisions for the owner of a building project are embedded in a range of economic choices going far beyond the
building itself, in a way that is of little or no concern to either interior architect or contractor once the decision has
been made to go ahead with a building. INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO
BUILDING ECONOMICS – THE CONTEXT  Finally, the economics of the process of planning and designing
buildings could be seen as a legitimate subfield of building economics that still is waiting for a systematic treatment,
even though many people have been concerned with this issue in practice.  This survey shows that building
economics is far from a well-defined area of study, and that it would probably be counterproductive to insist on a
concise definition, which would either exclude some of the concerns mentioned or else turn out so broad and general
as to be of little practical value. It should be understood that this course is limited to a particular perspective — that
of the interior architect who tries to get a better grasp of the economic implications of his or her architectural design
decisions, and tries to understand how these implications affect others involved in building projects. INAR 413
BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT
The Main Aspects of Recurring Building Economics Problems  There are many different decision and design
problems in the realm of building economics, depending on what is known, assumed, or given in a specific situation,
and what answers must be found in that situation.  First is the level at which the decisions are made. The situation
that comes to mind most often is that of the individual decision-makers for a specific project trying to arrive at the
best decisions for that project—such as the interior architect trying to design a specific building to best serve the
interests of the project client.  Building economics issues also include the concerns of specific groups involved in
the building process within society or the overall economy, with the aim of safeguarding the interests of those
groups and maintaining or improving their economic position relative to other parties. This can take two main
directions: seeking to maintain or improve the context conditions within which the group operates; or trying to help
members of the group become more competitive and effective by developing better methods and techniques for
doing its work, providing better information and the analysis tools needed to turn that information into better
decisions.  Finally, there is the level of governmental or societal policymaking, which is concerned with the
overall effectiveness of the entire system of building planning, design, production, operation, and maintenance, and
the proper balance among all its parties and components. INAR 413 BUILDING ECONOMICS LECTURE 01
INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT  The total number of possible combinations
and thus problem types arising from this brief survey is very large; and not all combinations are necessarily
meaningful. The following list includes some typical building economics problems that often are encountered: 1.
Given a solution proposal and established budget, is the proposal within the budget? 2. Given several solution
proposals, which will have the lowest initial cost? 3. Given several solution proposals, which will have the best
performance (measured in terms of both costs and benefits)? 4. Given the program, site, and context conditions, find
the best possible (optimal) solution. 5. Given the program and performance expectations (cost and other measures),
which of several proposed sites is most preferable? INAR 413 BUILDING ECONOMICS LECTURE 01
INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT INAR 413 BUILDING ECONOMICS
LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT Materials, Labour, Physical
Capital  Innovation  The driving force behind product innovation is the constant search by companies to retain or
increase their market share., enabling them to grow, survive and to enhance profitability.  To be successfull they
must produce something cheaper or better to offer an attractive combination of cost and quality with alternative
materials.  What interior architects have to attempt is to keep up with the innovations, constantly estimating their
relative cost and values in particaular uses. Intermittent Kiln Hoffman Kiln Tunnel Kiln INAR 413 BUILDING
ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT Materials,
Labour, Physical Capital  Economies of Scale  Why do economies of scale exist? The reason is sometimes
purely mathematical and physical.  Delivering more bricks to construction sites using larger vehicles will reduce
the cost of delivery per brick, simply because the cost of the driver’s time and the cost of fuel remain relatively
constant while the number of the bricks delivered increases.  The most significant driving force behind economies
of scale is innovation. New methods are often introduced precisely because they allow more output to be produced
at a lower average cost. Complex and sophisticated machinery will cost more than the simpler early versions they
replace but their output capacity will be so much higher that the capital costs per unit will fall. ? INAR 413
BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT
Materials, Labour, Physical Capital  Competition  The most important effect of the combination of technical
innovation and scale is on the structure of the industry itself and through that on the nature of competition.  The
need for expensive capital equipment to exploit the innovation and the existence of scale economies will tend to lead
to production becoming increasingly dominated by large firms.  Small producers may be neither afford the new
equipment or compete on price using traditional techniques. They may well be driven out of business or taken over
by large companies. INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING
ECONOMICS – THE CONTEXT Materials, Labour, Physical Capital  Modes of Employement INAR 413
BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT
Materials, Labour, Physical Capital  Using Avaliable Technology Nevada, USA Residential Development
Namibia, Africa House Construction Saudi Arabia Water Pipeline Construction Kenya, Africa Clean Water Well
Construction INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING
ECONOMICS – THE CONTEXT Materials, Labour, Physical Capital  The Future: A Robot Takeover? GOOD
OR BAD? INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS
– THE CONTEXT Materials, Labour, Physical Capital  The Future: A Robot Takeover? INTERIOR
ARCHITECT OF YEAR 2050? WHAT IS YOUR OPINION? INAR 413 BUILDING ECONOMICS LECTURE 01
INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT From “Building Economics for Architects”
by Thorbjoern Mann ―… The attitude of architects toward issues related to the economics of building at times
seems somewhat ambivalent*. Most professionals agree that economic factors are quite important; in fact that they
often influence design decisions more than any other single factor and should be well understood by the designer.
On the other hand, in the prestigious journals where the profession represents its work to itself and the world, in
discussions of architectural theory, and in the curricula of Schools of Architecture, one finds little concern for the
issue. It seems tainted or even ―dirty‖. Architects who manage to design building that work out well economically
for their clients run the risk of being considered ―hacks‖ by their colleagues… Are the economic issues of building
unworthy of the architect’s creative effort?‖ ambivalent: Simultaneously experiencing or expressing opposing or
contradictory feelings, beliefs, or motivations. WHAT IS YOUR OPINION ON THIS REMARK*? remark: The
expression, in speech or writing, of something remarked or noticed; the mention of that which is worthy of attention
or notice; hence, also, a casual observation, comment, or statement; as, a pertinent remark. INAR 413 BUILDING
ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT  Buildings
are expensive. Decisions about investments in buildings usually involve the largest single-item expenditures most
people have to deal with during their life time, even if they are merely renting an apartment.  Expressed in terms of
income, an average suburban house costs up to several times an individual wage earner’s annual salary. Spread out
over time as monthly mortgage payments, it can require anywhere from a quarter to one-half of the monthly family
income. WHAT IS THE SITUATION IN TURKEY? DO YOU HAVE FRIENDS WHO PAY MORTGAGE FOR
THEIR HOME? WHAT IS THE AVERAGE COST OF AN OVERALL INTERIOR DESIGN PROJECT FOR A
RESIDENTIAL UNIT (APARTMENT FLAT, SUBURBAN HOUSE, LUXURY VILLA) IN ANKARA? INAR
413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE
CONTEXT  The initial costs of a building, however, appears quite insignificant when compared with the costs
incurred to operate and maintain a building over its lifetime. For a 20 year period, these costs can amount to three or
four times the initial cost of construction.  Even more impressive is the difference between initial cost and long-
term salary expenditures needed for carrying out the work in a building, for example of a manufacturing firm. The
amount spent on slaries of people working in a building over twenty years can be up to fifty times, or more, of the
initial construction cost. Reichstag 1894 Reichstag 1945 Reichstag 1999 Reichstag: The seat of the German
Parliament in Berlin Renovation by Norman Foster INAR 413 BUILDING ECONOMICS LECTURE 01
INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT The Challenge to the Interior Architect 
One might argue: ―Why even look at these issues? The interior architect cannot do anything about them anyway.‖
Most of the significant factors do seem to be under someone else’s control.  For example, the interior architect
often is under pressure to speed up the delivery of the project, and thus cut the time spent on designing and other
tasks to the minimum.  The client’s argument is that ―time is money‖, every day that the building cannot be
occupied is costing money in interest for loans and lost rental income. INAR 413 BUILDING ECONOMICS
LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT  Imagine the following
situation: It is the crucial meeting between the client and the interior architect to negotiate the contract for a large
building project. The negotiation is almost complete. The client gets ready to sign the contract and as one of the last
points, attempts to get an agreement on the delivery date for the preliminary design: Client: I expect the preliminary
drawings Monday after next – is that OK with you? Interior Architect: Sure. We can get you the schematics ready by
that date, and you know you will get a professional solution that meets the state of the art expectations. But let me
make you a calculation: In the typical project of this kind, about a quarter of our time and fee is spent on what we
call ―critical design time.‖ That is where the important design decisions are made that will determine the project’s
ultimate success – architecturally, functionally, economically. That is where our firm has earned its reputation for
bringing projects that compare favorably with other projects. But every solution, no matter how good can still be
improved; for example with respect to economic performance. So let us assume that we could further reduce the
initial cost of your project by only 1% without reduction in the quality. INAR 413 BUILDING ECONOMICS
LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT I.A.: That would be 10.000
TL off your 1 million TL project. But we would have to spend a little more time on it – especially in the important
schematic design phase. Interested? Client: Mm. I.A.: Would you be willing to let us spend, say, 5.000 TL more on
critical design time to achieve this? Over the delivery time of the building say a year, that would be a 2:1 ratio of
savings in initial cost to the investment of the added design fee. Client: Not bad, but... I.A.: At a total interior
architect’s fee of say, 8% for the building, which is now going to cost 990.000 TL, that would be roughly 79.000 TL
plus 5.000 TL = 84.000 TL, which would be about an 8,5% fee. In terms of time, the added effort and cost would be
equivalent to about one month in critical design time; two weeks if we put two people on it. Client: Well, I don’t
Know... I.A.: There is more. If your building requires a roughly 4 million TL in operating, maintenance, energy and
other running costs, over 20 years, one more month of critical design time couls result in a 1% reduction of those
costs, this would represent a savings-toinvestment ratio of 8:1 (40.000:5.000). At the same terms as above (aiming at
a savingsinvestment ratio of 2:1), you should be willing to let us spend 20.000 TL more on design time, for a total
fee of around 10%. But what if we could actually do it for about the same 5.000 TL as above, or one more designer
month. That would give you a return of 40.000 TL on an investment of 5.000 TL, which represents an annual return
in savings of 2.000 TL – that is 40% annually. Which of your stocks gives you that kind of return? Client: Now you
are talking. How... INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING
ECONOMICS – THE CONTEXT I.A.: Wait; it could get even better. What if we looked at your actual operation
and managed to develop a layout that would save you 1% on personnel cost over 20 years? How much do you spend
per year on salaries? 50 people in that size building, at an average annual salary of, say, 20 million TL over 20 years.
One percent of that is a savings of 200.000 TL, or 10.000 TL a year. So, still on the same deal as for the initial cost
(2:1 savings ratio), you should be willing to let us spend up to 100.000 TL more on design costs and still make
100.000 TL in savings. Client: Wait a minute... I.A.: Ok, so what if we could do that for the same 5.000 TL? You
would be looking at a return of 200.000 TL on 5.000 TL investment over 20 years, or 10.000 TL each year. That is
an annual return rate of 200%. Client: That all sound too good to be true. Can you show me what kind of things you
would do, or where have you done that in a past project? Can you guarantee the result? Why can’t you come up with
a better solution right away? Didn’t you just argue that ―good design is just as cheap as bad design‖ when you tried
to snatch the commision away from your competitors? Besides, you forgot to consider that each month of delay is
going to cost me some 7.000 TL in interest alone... I.A.: Well, uh, ah... Client: Have the schematics ready Monday
after next. OK? INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING
ECONOMICS – THE CONTEXT  Do we as interior architects have good, convincing answers to these questions?
 Clients, especially corporate and government clients, increasingly expect architects to be able to answer them. As
they, and their advisors, become more sophisticated in analyzing their financial situation, they expect the interior
architects to follow suit.  They know that information as well as analytical methods and tools – computers,
programmable calculators, spreadsheet programs, data services – are increasingly available even to the smallest
firms: they expext interior architects to use them. We are running out of excuses for not doing so... Inside Interior
Architect’s Head INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING
ECONOMICS – THE CONTEXT  The trouble is that we have rarely looked at our tasks that way, and that is why
we would have trouble answering the client's next-to-last question. Backed into the comer, a common reaction on
the part of some interior architects is to let the client negotiate their commission down even further. (they do not like
to talk about this)  A number of years ago I (Thorbjoern Mann) was teaching a design class in a Far Eastern city.
The project was a large downtown office building, using the site and program of an actual project of this kind. The
architect came in to talk to the students, who had spent the first weeks studying efficient access and service core
configurations, massing, and similar issues.  It was amazing to watch the students' astonishment when the architect
casually mentioned that the client had had a team of five financial feasibility advisors work on the project for many
months before the architect was involved. None of the advisors was an architect. They gave him a program with the
complete service core, number of floors, and outside dimensions worked out in considerable detail, leaving the
architect essentially to design a skin around the building. INAR 413 BUILDING ECONOMICS LECTURE 01
INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT  The message was clear: The client, a major
international corporation, did not seem to have sufficient confidence in architects' ability to advise on these crucial
feasibility considerations even to make an architect part of this team.  Was this just an isolated incident? The result
of some disappointing cost overruns in previous projects? An indication of a general attitude toward architects? A
realistic assessment of the (lack of) competence of architects? Many architects would disagree especially with the
last judgment— some no doubt quite vehemently, and some even with good justification. But even if the client's
attitude were different, how many architects live up to the expectation of reliably carrying out such feasibility
analyses, or are competent members of teams such as the one above? INAR 413 BUILDING ECONOMICS
LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT  My (Thorbjoern Mann)
own architectural education hardly mentioned these issues. As a graduate entering the profession after my first
degree, I would have been quite lost had anyone asked me to estimate the cost, let alone the feasibility or financial
performance, of a building. I suspect that many graduates of schools of architecture today, even practicing
architects, are in a similar situation. It does not have to be this way. In spite of sometimes confusing jargon, and
some fierce-looking mathematical equations, it is quite possible to grasp the basics and to make building economics
just one more of the many balls the architect has to keep juggling, and even to turn it into an advantage.  Architects
like to see themselves as problem-solvers. The economic questions of buildings always are a major part of the
client's problem. We cannot afford to ignore a part of the problem the client often considers is the most critical
one—even if we ourselves are more concerned with other facets such as aesthetics, user needs, environmental
response, or image. Including economic factors in our range of design concerns will not compromise our designs; it
will make us better designers. What it takes is, first, a change of attitude. WHAT DO YOU THINK? INAR 413
BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT
What is Building Economics?  Once we have accepted the challenge of finding out more about building
economics, a reasonable first step is to ask what it is?  Can we define the field?  How does it relate to other fields
that also carry the label of ―economics‖? Engineering economics Urban economics Energy economics
Environmental economics INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING
ECONOMICS – THE CONTEXT What is Building Economics?  Most of these are concerned with what, in
general economic theory, would be called microeconomic analysis (The study of how individual actors in the
economic realm make economic plans and decisions) as opposed to macroeconomics (the study of laws governing
the economy as a whole) WHERE DO YOU THINK BUILDING ECONOMICS STAND IN ECONOMIC SCALE?
MICROECONOMICS OR MACROECONOMICS? INAR 413 BUILDING ECONOMICS LECTURE 01
INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT  Several important directions can be
established in building economics. For one, given the importance of building industry in any national economy,
there are important macroeconomic issues that must be studied and would properly fall under the label of building
economics:  What are the relationships between the construction-related segments of the economy and other fields,
and general economic conditions such as those that are influenced by the decisions made by the government or the
central bank?  How can and should areas of vital national importance such as housing be influenced and kept
healthy? INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS –
THE CONTEXT  At the other end of the spectrum are the concerns of the practitioners involved with actual and
specific building projects, studying construction estimating, construction management, project management,
construction financing, and real estate financing. The economics of the various production processes, including
transportation processes, would constitute another complex area in building economics. All these fields are further
divided into areas of concern by building type; the economics of housing, for example, are quite different from the
economics of commercial projects such as office buildings, shopping centers, or industrial buildings.  Building
economics issues, even for specific projects, look quite different to the various actors involved. The economic
decisions for the owner of a building project are embedded in a range of economic choices going far beyond the
building itself, in a way that is of little or no concern to either interior architect or contractor once the decision has
been made to go ahead with a building. INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO
BUILDING ECONOMICS – THE CONTEXT  Finally, the economics of the process of planning and designing
buildings could be seen as a legitimate subfield of building economics that still is waiting for a systematic treatment,
even though many people have been concerned with this issue in practice.  This survey shows that building
economics is far from a well-defined area of study, and that it would probably be counterproductive to insist on a
concise definition, which would either exclude some of the concerns mentioned or else turn out so broad and general
as to be of little practical value. It should be understood that this course is limited to a particular perspective — that
of the interior architect who tries to get a better grasp of the economic implications of his or her architectural design
decisions, and tries to understand how these implications affect others involved in building projects. INAR 413
BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT
The Main Aspects of Recurring Building Economics Problems  There are many different decision and design
problems in the realm of building economics, depending on what is known, assumed, or given in a specific situation,
and what answers must be found in that situation.  First is the level at which the decisions are made. The situation
that comes to mind most often is that of the individual decision-makers for a specific project trying to arrive at the
best decisions for that project—such as the interior architect trying to design a specific building to best serve the
interests of the project client.  Building economics issues also include the concerns of specific groups involved in
the building process within society or the overall economy, with the aim of safeguarding the interests of those
groups and maintaining or improving their economic position relative to other parties. This can take two main
directions: seeking to maintain or improve the context conditions within which the group operates; or trying to help
members of the group become more competitive and effective by developing better methods and techniques for
doing its work, providing better information and the analysis tools needed to turn that information into better
decisions.  Finally, there is the level of governmental or societal policymaking, which is concerned with the
overall effectiveness of the entire system of building planning, design, production, operation, and maintenance, and
the proper balance among all its parties and components. INAR 413 BUILDING ECONOMICS LECTURE 01
INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT  The total number of possible combinations
and thus problem types arising from this brief survey is very large; and not all combinations are necessarily
meaningful. The following list includes some typical building economics problems that often are encountered: 1.
Given a solution proposal and established budget, is the proposal within the budget? 2. Given several solution
proposals, which will have the lowest initial cost? 3. Given several solution proposals, which will have the best
performance (measured in terms of both costs and benefits)? 4. Given the program, site, and context conditions, find
the best possible (optimal) solution. 5. Given the program and performance expectations (cost and other measures),
which of several proposed sites is most preferable? INAR 413 BUILDING ECONOMICS LECTURE 01
INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT INAR 413 BUILDING ECONOMICS
LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT Materials, Labour, Physical
Capital  Innovation  The driving force behind product innovation is the constant search by companies to retain or
increase their market share., enabling them to grow, survive and to enhance profitability.  To be successfull they
must produce something cheaper or better to offer an attractive combination of cost and quality with alternative
materials.  What interior architects have to attempt is to keep up with the innovations, constantly estimating their
relative cost and values in particaular uses. Intermittent Kiln Hoffman Kiln Tunnel Kiln INAR 413 BUILDING
ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT Materials,
Labour, Physical Capital  Economies of Scale  Why do economies of scale exist? The reason is sometimes
purely mathematical and physical.  Delivering more bricks to construction sites using larger vehicles will reduce
the cost of delivery per brick, simply because the cost of the driver’s time and the cost of fuel remain relatively
constant while the number of the bricks delivered increases.  The most significant driving force behind economies
of scale is innovation. New methods are often introduced precisely because they allow more output to be produced
at a lower average cost. Complex and sophisticated machinery will cost more than the simpler early versions they
replace but their output capacity will be so much higher that the capital costs per unit will fall. ? INAR 413
BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT
Materials, Labour, Physical Capital  Competition  The most important effect of the combination of technical
innovation and scale is on the structure of the industry itself and through that on the nature of competition.  The
need for expensive capital equipment to exploit the innovation and the existence of scale economies will tend to lead
to production becoming increasingly dominated by large firms.  Small producers may be neither afford the new
equipment or compete on price using traditional techniques. They may well be driven out of business or taken over
by large companies. INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING
ECONOMICS – THE CONTEXT Materials, Labour, Physical Capital  Modes of Employement INAR 413
BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT
Materials, Labour, Physical Capital  Using Avaliable Technology Nevada, USA Residential Development
Namibia, Africa House Construction Saudi Arabia Water Pipeline Construction Kenya, Africa Clean Water Well
Construction INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING
ECONOMICS – THE CONTEXT Materials, Labour, Physical Capital  The Future: A Robot Takeover? GOOD
OR BAD? INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS
– THE CONTEXT Materials, Labour, Physical Capital  The Future: A Robot Takeover? INTERIOR
ARCHITECT OF YEAR 2050? WHAT IS YOUR OPINION? INAR 413 BUILDING ECONOMICS LECTURE 01
INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT From “Building Economics for Architects”
by Thorbjoern Mann ―… The attitude of architects toward issues related to the economics of building at times
seems somewhat ambivalent*. Most professionals agree that economic factors are quite important; in fact that they
often influence design decisions more than any other single factor and should be well understood by the designer.
On the other hand, in the prestigious journals where the profession represents its work to itself and the world, in
discussions of architectural theory, and in the curricula of Schools of Architecture, one finds little concern for the
issue. It seems tainted or even ―dirty‖. Architects who manage to design building that work out well economically
for their clients run the risk of being considered ―hacks‖ by their colleagues… Are the economic issues of building
unworthy of the architect’s creative effort?‖ ambivalent: Simultaneously experiencing or expressing opposing or
contradictory feelings, beliefs, or motivations. WHAT IS YOUR OPINION ON THIS REMARK*? remark: The
expression, in speech or writing, of something remarked or noticed; the mention of that which is worthy of attention
or notice; hence, also, a casual observation, comment, or statement; as, a pertinent remark. INAR 413 BUILDING
ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT  Buildings
are expensive. Decisions about investments in buildings usually involve the largest single-item expenditures most
people have to deal with during their life time, even if they are merely renting an apartment.  Expressed in terms of
income, an average suburban house costs up to several times an individual wage earner’s annual salary. Spread out
over time as monthly mortgage payments, it can require anywhere from a quarter to one-half of the monthly family
income. WHAT IS THE SITUATION IN TURKEY? DO YOU HAVE FRIENDS WHO PAY MORTGAGE FOR
THEIR HOME? WHAT IS THE AVERAGE COST OF AN OVERALL INTERIOR DESIGN PROJECT FOR A
RESIDENTIAL UNIT (APARTMENT FLAT, SUBURBAN HOUSE, LUXURY VILLA) IN ANKARA? INAR
413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE
CONTEXT  The initial costs of a building, however, appears quite insignificant when compared with the costs
incurred to operate and maintain a building over its lifetime. For a 20 year period, these costs can amount to three or
four times the initial cost of construction.  Even more impressive is the difference between initial cost and long-
term salary expenditures needed for carrying out the work in a building, for example of a manufacturing firm. The
amount spent on slaries of people working in a building over twenty years can be up to fifty times, or more, of the
initial construction cost. Reichstag 1894 Reichstag 1945 Reichstag 1999 Reichstag: The seat of the German
Parliament in Berlin Renovation by Norman Foster INAR 413 BUILDING ECONOMICS LECTURE 01
INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT The Challenge to the Interior Architect 
One might argue: ―Why even look at these issues? The interior architect cannot do anything about them anyway.‖
Most of the significant factors do seem to be under someone else’s control.  For example, the interior architect
often is under pressure to speed up the delivery of the project, and thus cut the time spent on designing and other
tasks to the minimum.  The client’s argument is that ―time is money‖, every day that the building cannot be
occupied is costing money in interest for loans and lost rental income. INAR 413 BUILDING ECONOMICS
LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT  Imagine the following
situation: It is the crucial meeting between the client and the interior architect to negotiate the contract for a large
building project. The negotiation is almost complete. The client gets ready to sign the contract and as one of the last
points, attempts to get an agreement on the delivery date for the preliminary design: Client: I expect the preliminary
drawings Monday after next – is that OK with you? Interior Architect: Sure. We can get you the schematics ready by
that date, and you know you will get a professional solution that meets the state of the art expectations. But let me
make you a calculation: In the typical project of this kind, about a quarter of our time and fee is spent on what we
call ―critical design time.‖ That is where the important design decisions are made that will determine the project’s
ultimate success – architecturally, functionally, economically. That is where our firm has earned its reputation for
bringing projects that compare favorably with other projects. But every solution, no matter how good can still be
improved; for example with respect to economic performance. So let us assume that we could further reduce the
initial cost of your project by only 1% without reduction in the quality. INAR 413 BUILDING ECONOMICS
LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT I.A.: That would be 10.000
TL off your 1 million TL project. But we would have to spend a little more time on it – especially in the important
schematic design phase. Interested? Client: Mm. I.A.: Would you be willing to let us spend, say, 5.000 TL more on
critical design time to achieve this? Over the delivery time of the building say a year, that would be a 2:1 ratio of
savings in initial cost to the investment of the added design fee. Client: Not bad, but... I.A.: At a total interior
architect’s fee of say, 8% for the building, which is now going to cost 990.000 TL, that would be roughly 79.000 TL
plus 5.000 TL = 84.000 TL, which would be about an 8,5% fee. In terms of time, the added effort and cost would be
equivalent to about one month in critical design time; two weeks if we put two people on it. Client: Well, I don’t
Know... I.A.: There is more. If your building requires a roughly 4 million TL in operating, maintenance, energy and
other running costs, over 20 years, one more month of critical design time couls result in a 1% reduction of those
costs, this would represent a savings-toinvestment ratio of 8:1 (40.000:5.000). At the same terms as above (aiming at
a savingsinvestment ratio of 2:1), you should be willing to let us spend 20.000 TL more on design time, for a total
fee of around 10%. But what if we could actually do it for about the same 5.000 TL as above, or one more designer
month. That would give you a return of 40.000 TL on an investment of 5.000 TL, which represents an annual return
in savings of 2.000 TL – that is 40% annually. Which of your stocks gives you that kind of return? Client: Now you
are talking. How... INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING
ECONOMICS – THE CONTEXT I.A.: Wait; it could get even better. What if we looked at your actual operation
and managed to develop a layout that would save you 1% on personnel cost over 20 years? How much do you spend
per year on salaries? 50 people in that size building, at an average annual salary of, say, 20 million TL over 20 years.
One percent of that is a savings of 200.000 TL, or 10.000 TL a year. So, still on the same deal as for the initial cost
(2:1 savings ratio), you should be willing to let us spend up to 100.000 TL more on design costs and still make
100.000 TL in savings. Client: Wait a minute... I.A.: Ok, so what if we could do that for the same 5.000 TL? You
would be looking at a return of 200.000 TL on 5.000 TL investment over 20 years, or 10.000 TL each year. That is
an annual return rate of 200%. Client: That all sound too good to be true. Can you show me what kind of things you
would do, or where have you done that in a past project? Can you guarantee the result? Why can’t you come up with
a better solution right away? Didn’t you just argue that ―good design is just as cheap as bad design‖ when you tried
to snatch the commision away from your competitors? Besides, you forgot to consider that each month of delay is
going to cost me some 7.000 TL in interest alone... I.A.: Well, uh, ah... Client: Have the schematics ready Monday
after next. OK? INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING
ECONOMICS – THE CONTEXT  Do we as interior architects have good, convincing answers to these questions?
 Clients, especially corporate and government clients, increasingly expect architects to be able to answer them. As
they, and their advisors, become more sophisticated in analyzing their financial situation, they expect the interior
architects to follow suit.  They know that information as well as analytical methods and tools – computers,
programmable calculators, spreadsheet programs, data services – are increasingly available even to the smallest
firms: they expext interior architects to use them. We are running out of excuses for not doing so... Inside Interior
Architect’s Head INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING
ECONOMICS – THE CONTEXT  The trouble is that we have rarely looked at our tasks that way, and that is why
we would have trouble answering the client's next-to-last question. Backed into the comer, a common reaction on
the part of some interior architects is to let the client negotiate their commission down even further. (they do not like
to talk about this)  A number of years ago I (Thorbjoern Mann) was teaching a design class in a Far Eastern city.
The project was a large downtown office building, using the site and program of an actual project of this kind. The
architect came in to talk to the students, who had spent the first weeks studying efficient access and service core
configurations, massing, and similar issues.  It was amazing to watch the students' astonishment when the architect
casually mentioned that the client had had a team of five financial feasibility advisors work on the project for many
months before the architect was involved. None of the advisors was an architect. They gave him a program with the
complete service core, number of floors, and outside dimensions worked out in considerable detail, leaving the
architect essentially to design a skin around the building. INAR 413 BUILDING ECONOMICS LECTURE 01
INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT  The message was clear: The client, a major
international corporation, did not seem to have sufficient confidence in architects' ability to advise on these crucial
feasibility considerations even to make an architect part of this team.  Was this just an isolated incident? The result
of some disappointing cost overruns in previous projects? An indication of a general attitude toward architects? A
realistic assessment of the (lack of) competence of architects? Many architects would disagree especially with the
last judgment— some no doubt quite vehemently, and some even with good justification. But even if the client's
attitude were different, how many architects live up to the expectation of reliably carrying out such feasibility
analyses, or are competent members of teams such as the one above? INAR 413 BUILDING ECONOMICS
LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT  My (Thorbjoern Mann)
own architectural education hardly mentioned these issues. As a graduate entering the profession after my first
degree, I would have been quite lost had anyone asked me to estimate the cost, let alone the feasibility or financial
performance, of a building. I suspect that many graduates of schools of architecture today, even practicing
architects, are in a similar situation. It does not have to be this way. In spite of sometimes confusing jargon, and
some fierce-looking mathematical equations, it is quite possible to grasp the basics and to make building economics
just one more of the many balls the architect has to keep juggling, and even to turn it into an advantage.  Architects
like to see themselves as problem-solvers. The economic questions of buildings always are a major part of the
client's problem. We cannot afford to ignore a part of the problem the client often considers is the most critical
one—even if we ourselves are more concerned with other facets such as aesthetics, user needs, environmental
response, or image. Including economic factors in our range of design concerns will not compromise our designs; it
will make us better designers. What it takes is, first, a change of attitude. WHAT DO YOU THINK? INAR 413
BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT
What is Building Economics?  Once we have accepted the challenge of finding out more about building
economics, a reasonable first step is to ask what it is?  Can we define the field?  How does it relate to other fields
that also carry the label of ―economics‖? Engineering economics Urban economics Energy economics
Environmental economics INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING
ECONOMICS – THE CONTEXT What is Building Economics?  Most of these are concerned with what, in
general economic theory, would be called microeconomic analysis (The study of how individual actors in the
economic realm make economic plans and decisions) as opposed to macroeconomics (the study of laws governing
the economy as a whole) WHERE DO YOU THINK BUILDING ECONOMICS STAND IN ECONOMIC SCALE?
MICROECONOMICS OR MACROECONOMICS? INAR 413 BUILDING ECONOMICS LECTURE 01
INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT  Several important directions can be
established in building economics. For one, given the importance of building industry in any national economy,
there are important macroeconomic issues that must be studied and would properly fall under the label of building
economics:  What are the relationships between the construction-related segments of the economy and other fields,
and general economic conditions such as those that are influenced by the decisions made by the government or the
central bank?  How can and should areas of vital national importance such as housing be influenced and kept
healthy? INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS –
THE CONTEXT  At the other end of the spectrum are the concerns of the practitioners involved with actual and
specific building projects, studying construction estimating, construction management, project management,
construction financing, and real estate financing. The economics of the various production processes, including
transportation processes, would constitute another complex area in building economics. All these fields are further
divided into areas of concern by building type; the economics of housing, for example, are quite different from the
economics of commercial projects such as office buildings, shopping centers, or industrial buildings.  Building
economics issues, even for specific projects, look quite different to the various actors involved. The economic
decisions for the owner of a building project are embedded in a range of economic choices going far beyond the
building itself, in a way that is of little or no concern to either interior architect or contractor once the decision has
been made to go ahead with a building. INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO
BUILDING ECONOMICS – THE CONTEXT  Finally, the economics of the process of planning and designing
buildings could be seen as a legitimate subfield of building economics that still is waiting for a systematic treatment,
even though many people have been concerned with this issue in practice.  This survey shows that building
economics is far from a well-defined area of study, and that it would probably be counterproductive to insist on a
concise definition, which would either exclude some of the concerns mentioned or else turn out so broad and general
as to be of little practical value. It should be understood that this course is limited to a particular perspective — that
of the interior architect who tries to get a better grasp of the economic implications of his or her architectural design
decisions, and tries to understand how these implications affect others involved in building projects. INAR 413
BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT
The Main Aspects of Recurring Building Economics Problems  There are many different decision and design
problems in the realm of building economics, depending on what is known, assumed, or given in a specific situation,
and what answers must be found in that situation.  First is the level at which the decisions are made. The situation
that comes to mind most often is that of the individual decision-makers for a specific project trying to arrive at the
best decisions for that project—such as the interior architect trying to design a specific building to best serve the
interests of the project client.  Building economics issues also include the concerns of specific groups involved in
the building process within society or the overall economy, with the aim of safeguarding the interests of those
groups and maintaining or improving their economic position relative to other parties. This can take two main
directions: seeking to maintain or improve the context conditions within which the group operates; or trying to help
members of the group become more competitive and effective by developing better methods and techniques for
doing its work, providing better information and the analysis tools needed to turn that information into better
decisions.  Finally, there is the level of governmental or societal policymaking, which is concerned with the
overall effectiveness of the entire system of building planning, design, production, operation, and maintenance, and
the proper balance among all its parties and components. INAR 413 BUILDING ECONOMICS LECTURE 01
INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT  The total number of possible combinations
and thus problem types arising from this brief survey is very large; and not all combinations are necessarily
meaningful. The following list includes some typical building economics problems that often are encountered: 1.
Given a solution proposal and established budget, is the proposal within the budget? 2. Given several solution
proposals, which will have the lowest initial cost? 3. Given several solution proposals, which will have the best
performance (measured in terms of both costs and benefits)? 4. Given the program, site, and context conditions, find
the best possible (optimal) solution. 5. Given the program and performance expectations (cost and other measures),
which of several proposed sites is most preferable? INAR 413 BUILDING ECONOMICS LECTURE 01
INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT INAR 413 BUILDING ECONOMICS
LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT Materials, Labour, Physical
Capital  Innovation  The driving force behind product innovation is the constant search by companies to retain or
increase their market share., enabling them to grow, survive and to enhance profitability.  To be successfull they
must produce something cheaper or better to offer an attractive combination of cost and quality with alternative
materials.  What interior architects have to attempt is to keep up with the innovations, constantly estimating their
relative cost and values in particaular uses. Intermittent Kiln Hoffman Kiln Tunnel Kiln INAR 413 BUILDING
ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT Materials,
Labour, Physical Capital  Economies of Scale  Why do economies of scale exist? The reason is sometimes
purely mathematical and physical.  Delivering more bricks to construction sites using larger vehicles will reduce
the cost of delivery per brick, simply because the cost of the driver’s time and the cost of fuel remain relatively
constant while the number of the bricks delivered increases.  The most significant driving force behind economies
of scale is innovation. New methods are often introduced precisely because they allow more output to be produced
at a lower average cost. Complex and sophisticated machinery will cost more than the simpler early versions they
replace but their output capacity will be so much higher that the capital costs per unit will fall. ? INAR 413
BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT
Materials, Labour, Physical Capital  Competition  The most important effect of the combination of technical
innovation and scale is on the structure of the industry itself and through that on the nature of competition.  The
need for expensive capital equipment to exploit the innovation and the existence of scale economies will tend to lead
to production becoming increasingly dominated by large firms.  Small producers may be neither afford the new
equipment or compete on price using traditional techniques. They may well be driven out of business or taken over
by large companies. INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING
ECONOMICS – THE CONTEXT Materials, Labour, Physical Capital  Modes of Employement INAR 413
BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT
Materials, Labour, Physical Capital  Using Avaliable Technology Nevada, USA Residential Development
Namibia, Africa House Construction Saudi Arabia Water Pipeline Construction Kenya, Africa Clean Water Well
Construction INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING
ECONOMICS – THE CONTEXT Materials, Labour, Physical Capital  The Future: A Robot Takeover? GOOD
OR BAD? INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS
– THE CONTEXT Materials, Labour, Physical Capital  The Future: A Robot Takeover? INTERIOR
ARCHITECT OF YEAR 2050? WHAT IS YOUR OPINION? INAR 413 BUILDING ECONOMICS LECTURE 01
INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT From “Building Economics for Architects”
by Thorbjoern Mann ―… The attitude of architects toward issues related to the economics of building at times
seems somewhat ambivalent*. Most professionals agree that economic factors are quite important; in fact that they
often influence design decisions more than any other single factor and should be well understood by the designer.
On the other hand, in the prestigious journals where the profession represents its work to itself and the world, in
discussions of architectural theory, and in the curricula of Schools of Architecture, one finds little concern for the
issue. It seems tainted or even ―dirty‖. Architects who manage to design building that work out well economically
for their clients run the risk of being considered ―hacks‖ by their colleagues… Are the economic issues of building
unworthy of the architect’s creative effort?‖ ambivalent: Simultaneously experiencing or expressing opposing or
contradictory feelings, beliefs, or motivations. WHAT IS YOUR OPINION ON THIS REMARK*? remark: The
expression, in speech or writing, of something remarked or noticed; the mention of that which is worthy of attention
or notice; hence, also, a casual observation, comment, or statement; as, a pertinent remark. INAR 413 BUILDING
ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT  Buildings
are expensive. Decisions about investments in buildings usually involve the largest single-item expenditures most
people have to deal with during their life time, even if they are merely renting an apartment.  Expressed in terms of
income, an average suburban house costs up to several times an individual wage earner’s annual salary. Spread out
over time as monthly mortgage payments, it can require anywhere from a quarter to one-half of the monthly family
income. WHAT IS THE SITUATION IN TURKEY? DO YOU HAVE FRIENDS WHO PAY MORTGAGE FOR
THEIR HOME? WHAT IS THE AVERAGE COST OF AN OVERALL INTERIOR DESIGN PROJECT FOR A
RESIDENTIAL UNIT (APARTMENT FLAT, SUBURBAN HOUSE, LUXURY VILLA) IN ANKARA? INAR
413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE
CONTEXT  The initial costs of a building, however, appears quite insignificant when compared with the costs
incurred to operate and maintain a building over its lifetime. For a 20 year period, these costs can amount to three or
four times the initial cost of construction.  Even more impressive is the difference between initial cost and long-
term salary expenditures needed for carrying out the work in a building, for example of a manufacturing firm. The
amount spent on slaries of people working in a building over twenty years can be up to fifty times, or more, of the
initial construction cost. Reichstag 1894 Reichstag 1945 Reichstag 1999 Reichstag: The seat of the German
Parliament in Berlin Renovation by Norman Foster INAR 413 BUILDING ECONOMICS LECTURE 01
INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT The Challenge to the Interior Architect 
One might argue: ―Why even look at these issues? The interior architect cannot do anything about them anyway.‖
Most of the significant factors do seem to be under someone else’s control.  For example, the interior architect
often is under pressure to speed up the delivery of the project, and thus cut the time spent on designing and other
tasks to the minimum.  The client’s argument is that ―time is money‖, every day that the building cannot be
occupied is costing money in interest for loans and lost rental income. INAR 413 BUILDING ECONOMICS
LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT  Imagine the following
situation: It is the crucial meeting between the client and the interior architect to negotiate the contract for a large
building project. The negotiation is almost complete. The client gets ready to sign the contract and as one of the last
points, attempts to get an agreement on the delivery date for the preliminary design: Client: I expect the preliminary
drawings Monday after next – is that OK with you? Interior Architect: Sure. We can get you the schematics ready by
that date, and you know you will get a professional solution that meets the state of the art expectations. But let me
make you a calculation: In the typical project of this kind, about a quarter of our time and fee is spent on what we
call ―critical design time.‖ That is where the important design decisions are made that will determine the project’s
ultimate success – architecturally, functionally, economically. That is where our firm has earned its reputation for
bringing projects that compare favorably with other projects. But every solution, no matter how good can still be
improved; for example with respect to economic performance. So let us assume that we could further reduce the
initial cost of your project by only 1% without reduction in the quality. INAR 413 BUILDING ECONOMICS
LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT I.A.: That would be 10.000
TL off your 1 million TL project. But we would have to spend a little more time on it – especially in the important
schematic design phase. Interested? Client: Mm. I.A.: Would you be willing to let us spend, say, 5.000 TL more on
critical design time to achieve this? Over the delivery time of the building say a year, that would be a 2:1 ratio of
savings in initial cost to the investment of the added design fee. Client: Not bad, but... I.A.: At a total interior
architect’s fee of say, 8% for the building, which is now going to cost 990.000 TL, that would be roughly 79.000 TL
plus 5.000 TL = 84.000 TL, which would be about an 8,5% fee. In terms of time, the added effort and cost would be
equivalent to about one month in critical design time; two weeks if we put two people on it. Client: Well, I don’t
Know... I.A.: There is more. If your building requires a roughly 4 million TL in operating, maintenance, energy and
other running costs, over 20 years, one more month of critical design time couls result in a 1% reduction of those
costs, this would represent a savings-toinvestment ratio of 8:1 (40.000:5.000). At the same terms as above (aiming at
a savingsinvestment ratio of 2:1), you should be willing to let us spend 20.000 TL more on design time, for a total
fee of around 10%. But what if we could actually do it for about the same 5.000 TL as above, or one more designer
month. That would give you a return of 40.000 TL on an investment of 5.000 TL, which represents an annual return
in savings of 2.000 TL – that is 40% annually. Which of your stocks gives you that kind of return? Client: Now you
are talking. How... INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING
ECONOMICS – THE CONTEXT I.A.: Wait; it could get even better. What if we looked at your actual operation
and managed to develop a layout that would save you 1% on personnel cost over 20 years? How much do you spend
per year on salaries? 50 people in that size building, at an average annual salary of, say, 20 million TL over 20 years.
One percent of that is a savings of 200.000 TL, or 10.000 TL a year. So, still on the same deal as for the initial cost
(2:1 savings ratio), you should be willing to let us spend up to 100.000 TL more on design costs and still make
100.000 TL in savings. Client: Wait a minute... I.A.: Ok, so what if we could do that for the same 5.000 TL? You
would be looking at a return of 200.000 TL on 5.000 TL investment over 20 years, or 10.000 TL each year. That is
an annual return rate of 200%. Client: That all sound too good to be true. Can you show me what kind of things you
would do, or where have you done that in a past project? Can you guarantee the result? Why can’t you come up with
a better solution right away? Didn’t you just argue that ―good design is just as cheap as bad design‖ when you tried
to snatch the commision away from your competitors? Besides, you forgot to consider that each month of delay is
going to cost me some 7.000 TL in interest alone... I.A.: Well, uh, ah... Client: Have the schematics ready Monday
after next. OK? INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING
ECONOMICS – THE CONTEXT  Do we as interior architects have good, convincing answers to these questions?
 Clients, especially corporate and government clients, increasingly expect architects to be able to answer them. As
they, and their advisors, become more sophisticated in analyzing their financial situation, they expect the interior
architects to follow suit.  They know that information as well as analytical methods and tools – computers,
programmable calculators, spreadsheet programs, data services – are increasingly available even to the smallest
firms: they expext interior architects to use them. We are running out of excuses for not doing so... Inside Interior
Architect’s Head INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING
ECONOMICS – THE CONTEXT  The trouble is that we have rarely looked at our tasks that way, and that is why
we would have trouble answering the client's next-to-last question. Backed into the comer, a common reaction on
the part of some interior architects is to let the client negotiate their commission down even further. (they do not like
to talk about this)  A number of years ago I (Thorbjoern Mann) was teaching a design class in a Far Eastern city.
The project was a large downtown office building, using the site and program of an actual project of this kind. The
architect came in to talk to the students, who had spent the first weeks studying efficient access and service core
configurations, massing, and similar issues.  It was amazing to watch the students' astonishment when the architect
casually mentioned that the client had had a team of five financial feasibility advisors work on the project for many
months before the architect was involved. None of the advisors was an architect. They gave him a program with the
complete service core, number of floors, and outside dimensions worked out in considerable detail, leaving the
architect essentially to design a skin around the building. INAR 413 BUILDING ECONOMICS LECTURE 01
INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT  The message was clear: The client, a major
international corporation, did not seem to have sufficient confidence in architects' ability to advise on these crucial
feasibility considerations even to make an architect part of this team.  Was this just an isolated incident? The result
of some disappointing cost overruns in previous projects? An indication of a general attitude toward architects? A
realistic assessment of the (lack of) competence of architects? Many architects would disagree especially with the
last judgment— some no doubt quite vehemently, and some even with good justification. But even if the client's
attitude were different, how many architects live up to the expectation of reliably carrying out such feasibility
analyses, or are competent members of teams such as the one above? INAR 413 BUILDING ECONOMICS
LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT  My (Thorbjoern Mann)
own architectural education hardly mentioned these issues. As a graduate entering the profession after my first
degree, I would have been quite lost had anyone asked me to estimate the cost, let alone the feasibility or financial
performance, of a building. I suspect that many graduates of schools of architecture today, even practicing
architects, are in a similar situation. It does not have to be this way. In spite of sometimes confusing jargon, and
some fierce-looking mathematical equations, it is quite possible to grasp the basics and to make building economics
just one more of the many balls the architect has to keep juggling, and even to turn it into an advantage.  Architects
like to see themselves as problem-solvers. The economic questions of buildings always are a major part of the
client's problem. We cannot afford to ignore a part of the problem the client often considers is the most critical
one—even if we ourselves are more concerned with other facets such as aesthetics, user needs, environmental
response, or image. Including economic factors in our range of design concerns will not compromise our designs; it
will make us better designers. What it takes is, first, a change of attitude. WHAT DO YOU THINK? INAR 413
BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT
What is Building Economics?  Once we have accepted the challenge of finding out more about building
economics, a reasonable first step is to ask what it is?  Can we define the field?  How does it relate to other fields
that also carry the label of ―economics‖? Engineering economics Urban economics Energy economics
Environmental economics INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING
ECONOMICS – THE CONTEXT What is Building Economics?  Most of these are concerned with what, in
general economic theory, would be called microeconomic analysis (The study of how individual actors in the
economic realm make economic plans and decisions) as opposed to macroeconomics (the study of laws governing
the economy as a whole) WHERE DO YOU THINK BUILDING ECONOMICS STAND IN ECONOMIC SCALE?
MICROECONOMICS OR MACROECONOMICS? INAR 413 BUILDING ECONOMICS LECTURE 01
INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT  Several important directions can be
established in building economics. For one, given the importance of building industry in any national economy,
there are important macroeconomic issues that must be studied and would properly fall under the label of building
economics:  What are the relationships between the construction-related segments of the economy and other fields,
and general economic conditions such as those that are influenced by the decisions made by the government or the
central bank?  How can and should areas of vital national importance such as housing be influenced and kept
healthy? INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS –
THE CONTEXT  At the other end of the spectrum are the concerns of the practitioners involved with actual and
specific building projects, studying construction estimating, construction management, project management,
construction financing, and real estate financing. The economics of the various production processes, including
transportation processes, would constitute another complex area in building economics. All these fields are further
divided into areas of concern by building type; the economics of housing, for example, are quite different from the
economics of commercial projects such as office buildings, shopping centers, or industrial buildings.  Building
economics issues, even for specific projects, look quite different to the various actors involved. The economic
decisions for the owner of a building project are embedded in a range of economic choices going far beyond the
building itself, in a way that is of little or no concern to either interior architect or contractor once the decision has
been made to go ahead with a building. INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO
BUILDING ECONOMICS – THE CONTEXT  Finally, the economics of the process of planning and designing
buildings could be seen as a legitimate subfield of building economics that still is waiting for a systematic treatment,
even though many people have been concerned with this issue in practice.  This survey shows that building
economics is far from a well-defined area of study, and that it would probably be counterproductive to insist on a
concise definition, which would either exclude some of the concerns mentioned or else turn out so broad and general
as to be of little practical value. It should be understood that this course is limited to a particular perspective — that
of the interior architect who tries to get a better grasp of the economic implications of his or her architectural design
decisions, and tries to understand how these implications affect others involved in building projects. INAR 413
BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT
The Main Aspects of Recurring Building Economics Problems  There are many different decision and design
problems in the realm of building economics, depending on what is known, assumed, or given in a specific situation,
and what answers must be found in that situation.  First is the level at which the decisions are made. The situation
that comes to mind most often is that of the individual decision-makers for a specific project trying to arrive at the
best decisions for that project—such as the interior architect trying to design a specific building to best serve the
interests of the project client.  Building economics issues also include the concerns of specific groups involved in
the building process within society or the overall economy, with the aim of safeguarding the interests of those
groups and maintaining or improving their economic position relative to other parties. This can take two main
directions: seeking to maintain or improve the context conditions within which the group operates; or trying to help
members of the group become more competitive and effective by developing better methods and techniques for
doing its work, providing better information and the analysis tools needed to turn that information into better
decisions.  Finally, there is the level of governmental or societal policymaking, which is concerned with the
overall effectiveness of the entire system of building planning, design, production, operation, and maintenance, and
the proper balance among all its parties and components. INAR 413 BUILDING ECONOMICS LECTURE 01
INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT  The total number of possible combinations
and thus problem types arising from this brief survey is very large; and not all combinations are necessarily
meaningful. The following list includes some typical building economics problems that often are encountered: 1.
Given a solution proposal and established budget, is the proposal within the budget? 2. Given several solution
proposals, which will have the lowest initial cost? 3. Given several solution proposals, which will have the best
performance (measured in terms of both costs and benefits)? 4. Given the program, site, and context conditions, find
the best possible (optimal) solution. 5. Given the program and performance expectations (cost and other measures),
which of several proposed sites is most preferable? INAR 413 BUILDING ECONOMICS LECTURE 01
INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT INAR 413 BUILDING ECONOMICS
LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT Materials, Labour, Physical
Capital  Innovation  The driving force behind product innovation is the constant search by companies to retain or
increase their market share., enabling them to grow, survive and to enhance profitability.  To be successfull they
must produce something cheaper or better to offer an attractive combination of cost and quality with alternative
materials.  What interior architects have to attempt is to keep up with the innovations, constantly estimating their
relative cost and values in particaular uses. Intermittent Kiln Hoffman Kiln Tunnel Kiln INAR 413 BUILDING
ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT Materials,
Labour, Physical Capital  Economies of Scale  Why do economies of scale exist? The reason is sometimes
purely mathematical and physical.  Delivering more bricks to construction sites using larger vehicles will reduce
the cost of delivery per brick, simply because the cost of the driver’s time and the cost of fuel remain relatively
constant while the number of the bricks delivered increases.  The most significant driving force behind economies
of scale is innovation. New methods are often introduced precisely because they allow more output to be produced
at a lower average cost. Complex and sophisticated machinery will cost more than the simpler early versions they
replace but their output capacity will be so much higher that the capital costs per unit will fall. ? INAR 413
BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT
Materials, Labour, Physical Capital  Competition  The most important effect of the combination of technical
innovation and scale is on the structure of the industry itself and through that on the nature of competition.  The
need for expensive capital equipment to exploit the innovation and the existence of scale economies will tend to lead
to production becoming increasingly dominated by large firms.  Small producers may be neither afford the new
equipment or compete on price using traditional techniques. They may well be driven out of business or taken over
by large companies. INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING
ECONOMICS – THE CONTEXT Materials, Labour, Physical Capital  Modes of Employement INAR 413
BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT
Materials, Labour, Physical Capital  Using Avaliable Technology Nevada, USA Residential Development
Namibia, Africa House Construction Saudi Arabia Water Pipeline Construction Kenya, Africa Clean Water Well
Construction INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING
ECONOMICS – THE CONTEXT Materials, Labour, Physical Capital  The Future: A Robot Takeover? GOOD
OR BAD? INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS
– THE CONTEXT Materials, Labour, Physical Capital  The Future: A Robot Takeover? INTERIOR
ARCHITECT OF YEAR 2050? WHAT IS YOUR OPINION? INAR 413 BUILDING ECONOMICS LECTURE 01
INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT From “Building Economics for Architects”
by Thorbjoern Mann ―… The attitude of architects toward issues related to the economics of building at times
seems somewhat ambivalent*. Most professionals agree that economic factors are quite important; in fact that they
often influence design decisions more than any other single factor and should be well understood by the designer.
On the other hand, in the prestigious journals where the profession represents its work to itself and the world, in
discussions of architectural theory, and in the curricula of Schools of Architecture, one finds little concern for the
issue. It seems tainted or even ―dirty‖. Architects who manage to design building that work out well economically
for their clients run the risk of being considered ―hacks‖ by their colleagues… Are the economic issues of building
unworthy of the architect’s creative effort?‖ ambivalent: Simultaneously experiencing or expressing opposing or
contradictory feelings, beliefs, or motivations. WHAT IS YOUR OPINION ON THIS REMARK*? remark: The
expression, in speech or writing, of something remarked or noticed; the mention of that which is worthy of attention
or notice; hence, also, a casual observation, comment, or statement; as, a pertinent remark. INAR 413 BUILDING
ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT  Buildings
are expensive. Decisions about investments in buildings usually involve the largest single-item expenditures most
people have to deal with during their life time, even if they are merely renting an apartment.  Expressed in terms of
income, an average suburban house costs up to several times an individual wage earner’s annual salary. Spread out
over time as monthly mortgage payments, it can require anywhere from a quarter to one-half of the monthly family
income. WHAT IS THE SITUATION IN TURKEY? DO YOU HAVE FRIENDS WHO PAY MORTGAGE FOR
THEIR HOME? WHAT IS THE AVERAGE COST OF AN OVERALL INTERIOR DESIGN PROJECT FOR A
RESIDENTIAL UNIT (APARTMENT FLAT, SUBURBAN HOUSE, LUXURY VILLA) IN ANKARA? INAR
413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE
CONTEXT  The initial costs of a building, however, appears quite insignificant when compared with the costs
incurred to operate and maintain a building over its lifetime. For a 20 year period, these costs can amount to three or
four times the initial cost of construction.  Even more impressive is the difference between initial cost and long-
term salary expenditures needed for carrying out the work in a building, for example of a manufacturing firm. The
amount spent on slaries of people working in a building over twenty years can be up to fifty times, or more, of the
initial construction cost. Reichstag 1894 Reichstag 1945 Reichstag 1999 Reichstag: The seat of the German
Parliament in Berlin Renovation by Norman Foster INAR 413 BUILDING ECONOMICS LECTURE 01
INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT The Challenge to the Interior Architect 
One might argue: ―Why even look at these issues? The interior architect cannot do anything about them anyway.‖
Most of the significant factors do seem to be under someone else’s control.  For example, the interior architect
often is under pressure to speed up the delivery of the project, and thus cut the time spent on designing and other
tasks to the minimum.  The client’s argument is that ―time is money‖, every day that the building cannot be
occupied is costing money in interest for loans and lost rental income. INAR 413 BUILDING ECONOMICS
LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT  Imagine the following
situation: It is the crucial meeting between the client and the interior architect to negotiate the contract for a large
building project. The negotiation is almost complete. The client gets ready to sign the contract and as one of the last
points, attempts to get an agreement on the delivery date for the preliminary design: Client: I expect the preliminary
drawings Monday after next – is that OK with you? Interior Architect: Sure. We can get you the schematics ready by
that date, and you know you will get a professional solution that meets the state of the art expectations. But let me
make you a calculation: In the typical project of this kind, about a quarter of our time and fee is spent on what we
call ―critical design time.‖ That is where the important design decisions are made that will determine the project’s
ultimate success – architecturally, functionally, economically. That is where our firm has earned its reputation for
bringing projects that compare favorably with other projects. But every solution, no matter how good can still be
improved; for example with respect to economic performance. So let us assume that we could further reduce the
initial cost of your project by only 1% without reduction in the quality. INAR 413 BUILDING ECONOMICS
LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT I.A.: That would be 10.000
TL off your 1 million TL project. But we would have to spend a little more time on it – especially in the important
schematic design phase. Interested? Client: Mm. I.A.: Would you be willing to let us spend, say, 5.000 TL more on
critical design time to achieve this? Over the delivery time of the building say a year, that would be a 2:1 ratio of
savings in initial cost to the investment of the added design fee. Client: Not bad, but... I.A.: At a total interior
architect’s fee of say, 8% for the building, which is now going to cost 990.000 TL, that would be roughly 79.000 TL
plus 5.000 TL = 84.000 TL, which would be about an 8,5% fee. In terms of time, the added effort and cost would be
equivalent to about one month in critical design time; two weeks if we put two people on it. Client: Well, I don’t
Know... I.A.: There is more. If your building requires a roughly 4 million TL in operating, maintenance, energy and
other running costs, over 20 years, one more month of critical design time couls result in a 1% reduction of those
costs, this would represent a savings-toinvestment ratio of 8:1 (40.000:5.000). At the same terms as above (aiming at
a savingsinvestment ratio of 2:1), you should be willing to let us spend 20.000 TL more on design time, for a total
fee of around 10%. But what if we could actually do it for about the same 5.000 TL as above, or one more designer
month. That would give you a return of 40.000 TL on an investment of 5.000 TL, which represents an annual return
in savings of 2.000 TL – that is 40% annually. Which of your stocks gives you that kind of return? Client: Now you
are talking. How... INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING
ECONOMICS – THE CONTEXT I.A.: Wait; it could get even better. What if we looked at your actual operation
and managed to develop a layout that would save you 1% on personnel cost over 20 years? How much do you spend
per year on salaries? 50 people in that size building, at an average annual salary of, say, 20 million TL over 20 years.
One percent of that is a savings of 200.000 TL, or 10.000 TL a year. So, still on the same deal as for the initial cost
(2:1 savings ratio), you should be willing to let us spend up to 100.000 TL more on design costs and still make
100.000 TL in savings. Client: Wait a minute... I.A.: Ok, so what if we could do that for the same 5.000 TL? You
would be looking at a return of 200.000 TL on 5.000 TL investment over 20 years, or 10.000 TL each year. That is
an annual return rate of 200%. Client: That all sound too good to be true. Can you show me what kind of things you
would do, or where have you done that in a past project? Can you guarantee the result? Why can’t you come up with
a better solution right away? Didn’t you just argue that ―good design is just as cheap as bad design‖ when you tried
to snatch the commision away from your competitors? Besides, you forgot to consider that each month of delay is
going to cost me some 7.000 TL in interest alone... I.A.: Well, uh, ah... Client: Have the schematics ready Monday
after next. OK? INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING
ECONOMICS – THE CONTEXT  Do we as interior architects have good, convincing answers to these questions?
 Clients, especially corporate and government clients, increasingly expect architects to be able to answer them. As
they, and their advisors, become more sophisticated in analyzing their financial situation, they expect the interior
architects to follow suit.  They know that information as well as analytical methods and tools – computers,
programmable calculators, spreadsheet programs, data services – are increasingly available even to the smallest
firms: they expext interior architects to use them. We are running out of excuses for not doing so... Inside Interior
Architect’s Head INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING
ECONOMICS – THE CONTEXT  The trouble is that we have rarely looked at our tasks that way, and that is why
we would have trouble answering the client's next-to-last question. Backed into the comer, a common reaction on
the part of some interior architects is to let the client negotiate their commission down even further. (they do not like
to talk about this)  A number of years ago I (Thorbjoern Mann) was teaching a design class in a Far Eastern city.
The project was a large downtown office building, using the site and program of an actual project of this kind. The
architect came in to talk to the students, who had spent the first weeks studying efficient access and service core
configurations, massing, and similar issues.  It was amazing to watch the students' astonishment when the architect
casually mentioned that the client had had a team of five financial feasibility advisors work on the project for many
months before the architect was involved. None of the advisors was an architect. They gave him a program with the
complete service core, number of floors, and outside dimensions worked out in considerable detail, leaving the
architect essentially to design a skin around the building. INAR 413 BUILDING ECONOMICS LECTURE 01
INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT  The message was clear: The client, a major
international corporation, did not seem to have sufficient confidence in architects' ability to advise on these crucial
feasibility considerations even to make an architect part of this team.  Was this just an isolated incident? The result
of some disappointing cost overruns in previous projects? An indication of a general attitude toward architects? A
realistic assessment of the (lack of) competence of architects? Many architects would disagree especially with the
last judgment— some no doubt quite vehemently, and some even with good justification. But even if the client's
attitude were different, how many architects live up to the expectation of reliably carrying out such feasibility
analyses, or are competent members of teams such as the one above? INAR 413 BUILDING ECONOMICS
LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT  My (Thorbjoern Mann)
own architectural education hardly mentioned these issues. As a graduate entering the profession after my first
degree, I would have been quite lost had anyone asked me to estimate the cost, let alone the feasibility or financial
performance, of a building. I suspect that many graduates of schools of architecture today, even practicing
architects, are in a similar situation. It does not have to be this way. In spite of sometimes confusing jargon, and
some fierce-looking mathematical equations, it is quite possible to grasp the basics and to make building economics
just one more of the many balls the architect has to keep juggling, and even to turn it into an advantage.  Architects
like to see themselves as problem-solvers. The economic questions of buildings always are a major part of the
client's problem. We cannot afford to ignore a part of the problem the client often considers is the most critical
one—even if we ourselves are more concerned with other facets such as aesthetics, user needs, environmental
response, or image. Including economic factors in our range of design concerns will not compromise our designs; it
will make us better designers. What it takes is, first, a change of attitude. WHAT DO YOU THINK? INAR 413
BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT
What is Building Economics?  Once we have accepted the challenge of finding out more about building
economics, a reasonable first step is to ask what it is?  Can we define the field?  How does it relate to other fields
that also carry the label of ―economics‖? Engineering economics Urban economics Energy economics
Environmental economics INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING
ECONOMICS – THE CONTEXT What is Building Economics?  Most of these are concerned with what, in
general economic theory, would be called microeconomic analysis (The study of how individual actors in the
economic realm make economic plans and decisions) as opposed to macroeconomics (the study of laws governing
the economy as a whole) WHERE DO YOU THINK BUILDING ECONOMICS STAND IN ECONOMIC SCALE?
MICROECONOMICS OR MACROECONOMICS? INAR 413 BUILDING ECONOMICS LECTURE 01
INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT  Several important directions can be
established in building economics. For one, given the importance of building industry in any national economy,
there are important macroeconomic issues that must be studied and would properly fall under the label of building
economics:  What are the relationships between the construction-related segments of the economy and other fields,
and general economic conditions such as those that are influenced by the decisions made by the government or the
central bank?  How can and should areas of vital national importance such as housing be influenced and kept
healthy? INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS –
THE CONTEXT  At the other end of the spectrum are the concerns of the practitioners involved with actual and
specific building projects, studying construction estimating, construction management, project management,
construction financing, and real estate financing. The economics of the various production processes, including
transportation processes, would constitute another complex area in building economics. All these fields are further
divided into areas of concern by building type; the economics of housing, for example, are quite different from the
economics of commercial projects such as office buildings, shopping centers, or industrial buildings.  Building
economics issues, even for specific projects, look quite different to the various actors involved. The economic
decisions for the owner of a building project are embedded in a range of economic choices going far beyond the
building itself, in a way that is of little or no concern to either interior architect or contractor once the decision has
been made to go ahead with a building. INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO
BUILDING ECONOMICS – THE CONTEXT  Finally, the economics of the process of planning and designing
buildings could be seen as a legitimate subfield of building economics that still is waiting for a systematic treatment,
even though many people have been concerned with this issue in practice.  This survey shows that building
economics is far from a well-defined area of study, and that it would probably be counterproductive to insist on a
concise definition, which would either exclude some of the concerns mentioned or else turn out so broad and general
as to be of little practical value. It should be understood that this course is limited to a particular perspective — that
of the interior architect who tries to get a better grasp of the economic implications of his or her architectural design
decisions, and tries to understand how these implications affect others involved in building projects. INAR 413
BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT
The Main Aspects of Recurring Building Economics Problems  There are many different decision and design
problems in the realm of building economics, depending on what is known, assumed, or given in a specific situation,
and what answers must be found in that situation.  First is the level at which the decisions are made. The situation
that comes to mind most often is that of the individual decision-makers for a specific project trying to arrive at the
best decisions for that project—such as the interior architect trying to design a specific building to best serve the
interests of the project client.  Building economics issues also include the concerns of specific groups involved in
the building process within society or the overall economy, with the aim of safeguarding the interests of those
groups and maintaining or improving their economic position relative to other parties. This can take two main
directions: seeking to maintain or improve the context conditions within which the group operates; or trying to help
members of the group become more competitive and effective by developing better methods and techniques for
doing its work, providing better information and the analysis tools needed to turn that information into better
decisions.  Finally, there is the level of governmental or societal policymaking, which is concerned with the
overall effectiveness of the entire system of building planning, design, production, operation, and maintenance, and
the proper balance among all its parties and components. INAR 413 BUILDING ECONOMICS LECTURE 01
INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT  The total number of possible combinations
and thus problem types arising from this brief survey is very large; and not all combinations are necessarily
meaningful. The following list includes some typical building economics problems that often are encountered: 1.
Given a solution proposal and established budget, is the proposal within the budget? 2. Given several solution
proposals, which will have the lowest initial cost? 3. Given several solution proposals, which will have the best
performance (measured in terms of both costs and benefits)? 4. Given the program, site, and context conditions, find
the best possible (optimal) solution. 5. Given the program and performance expectations (cost and other measures),
which of several proposed sites is most preferable? INAR 413 BUILDING ECONOMICS LECTURE 01
INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT INAR 413 BUILDING ECONOMICS
LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT Materials, Labour, Physical
Capital  Innovation  The driving force behind product innovation is the constant search by companies to retain or
increase their market share., enabling them to grow, survive and to enhance profitability.  To be successfull they
must produce something cheaper or better to offer an attractive combination of cost and quality with alternative
materials.  What interior architects have to attempt is to keep up with the innovations, constantly estimating their
relative cost and values in particaular uses. Intermittent Kiln Hoffman Kiln Tunnel Kiln INAR 413 BUILDING
ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT Materials,
Labour, Physical Capital  Economies of Scale  Why do economies of scale exist? The reason is sometimes
purely mathematical and physical.  Delivering more bricks to construction sites using larger vehicles will reduce
the cost of delivery per brick, simply because the cost of the driver’s time and the cost of fuel remain relatively
constant while the number of the bricks delivered increases.  The most significant driving force behind economies
of scale is innovation. New methods are often introduced precisely because they allow more output to be produced
at a lower average cost. Complex and sophisticated machinery will cost more than the simpler early versions they
replace but their output capacity will be so much higher that the capital costs per unit will fall. ? INAR 413
BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT
Materials, Labour, Physical Capital  Competition  The most important effect of the combination of technical
innovation and scale is on the structure of the industry itself and through that on the nature of competition.  The
need for expensive capital equipment to exploit the innovation and the existence of scale economies will tend to lead
to production becoming increasingly dominated by large firms.  Small producers may be neither afford the new
equipment or compete on price using traditional techniques. They may well be driven out of business or taken over
by large companies. INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING
ECONOMICS – THE CONTEXT Materials, Labour, Physical Capital  Modes of Employement INAR 413
BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT
Materials, Labour, Physical Capital  Using Avaliable Technology Nevada, USA Residential Development
Namibia, Africa House Construction Saudi Arabia Water Pipeline Construction Kenya, Africa Clean Water Well
Construction INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING
ECONOMICS – THE CONTEXT Materials, Labour, Physical Capital  The Future: A Robot Takeover? GOOD
OR BAD? INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS
– THE CONTEXT Materials, Labour, Physical Capital  The Future: A Robot Takeover? INTERIOR
ARCHITECT OF YEAR 2050? WHAT IS YOUR OPINION? INAR 413 BUILDING ECONOMICS LECTURE 01
INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT From “Building Economics for Architects”
by Thorbjoern Mann ―… The attitude of architects toward issues related to the economics of building at times
seems somewhat ambivalent*. Most professionals agree that economic factors are quite important; in fact that they
often influence design decisions more than any other single factor and should be well understood by the designer.
On the other hand, in the prestigious journals where the profession represents its work to itself and the world, in
discussions of architectural theory, and in the curricula of Schools of Architecture, one finds little concern for the
issue. It seems tainted or even ―dirty‖. Architects who manage to design building that work out well economically
for their clients run the risk of being considered ―hacks‖ by their colleagues… Are the economic issues of building
unworthy of the architect’s creative effort?‖ ambivalent: Simultaneously experiencing or expressing opposing or
contradictory feelings, beliefs, or motivations. WHAT IS YOUR OPINION ON THIS REMARK*? remark: The
expression, in speech or writing, of something remarked or noticed; the mention of that which is worthy of attention
or notice; hence, also, a casual observation, comment, or statement; as, a pertinent remark. INAR 413 BUILDING
ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT  Buildings
are expensive. Decisions about investments in buildings usually involve the largest single-item expenditures most
people have to deal with during their life time, even if they are merely renting an apartment.  Expressed in terms of
income, an average suburban house costs up to several times an individual wage earner’s annual salary. Spread out
over time as monthly mortgage payments, it can require anywhere from a quarter to one-half of the monthly family
income. WHAT IS THE SITUATION IN TURKEY? DO YOU HAVE FRIENDS WHO PAY MORTGAGE FOR
THEIR HOME? WHAT IS THE AVERAGE COST OF AN OVERALL INTERIOR DESIGN PROJECT FOR A
RESIDENTIAL UNIT (APARTMENT FLAT, SUBURBAN HOUSE, LUXURY VILLA) IN ANKARA? INAR
413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE
CONTEXT  The initial costs of a building, however, appears quite insignificant when compared with the costs
incurred to operate and maintain a building over its lifetime. For a 20 year period, these costs can amount to three or
four times the initial cost of construction.  Even more impressive is the difference between initial cost and long-
term salary expenditures needed for carrying out the work in a building, for example of a manufacturing firm. The
amount spent on slaries of people working in a building over twenty years can be up to fifty times, or more, of the
initial construction cost. Reichstag 1894 Reichstag 1945 Reichstag 1999 Reichstag: The seat of the German
Parliament in Berlin Renovation by Norman Foster INAR 413 BUILDING ECONOMICS LECTURE 01
INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT The Challenge to the Interior Architect 
One might argue: ―Why even look at these issues? The interior architect cannot do anything about them anyway.‖
Most of the significant factors do seem to be under someone else’s control.  For example, the interior architect
often is under pressure to speed up the delivery of the project, and thus cut the time spent on designing and other
tasks to the minimum.  The client’s argument is that ―time is money‖, every day that the building cannot be
occupied is costing money in interest for loans and lost rental income. INAR 413 BUILDING ECONOMICS
LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT  Imagine the following
situation: It is the crucial meeting between the client and the interior architect to negotiate the contract for a large
building project. The negotiation is almost complete. The client gets ready to sign the contract and as one of the last
points, attempts to get an agreement on the delivery date for the preliminary design: Client: I expect the preliminary
drawings Monday after next – is that OK with you? Interior Architect: Sure. We can get you the schematics ready by
that date, and you know you will get a professional solution that meets the state of the art expectations. But let me
make you a calculation: In the typical project of this kind, about a quarter of our time and fee is spent on what we
call ―critical design time.‖ That is where the important design decisions are made that will determine the project’s
ultimate success – architecturally, functionally, economically. That is where our firm has earned its reputation for
bringing projects that compare favorably with other projects. But every solution, no matter how good can still be
improved; for example with respect to economic performance. So let us assume that we could further reduce the
initial cost of your project by only 1% without reduction in the quality. INAR 413 BUILDING ECONOMICS
LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT I.A.: That would be 10.000
TL off your 1 million TL project. But we would have to spend a little more time on it – especially in the important
schematic design phase. Interested? Client: Mm. I.A.: Would you be willing to let us spend, say, 5.000 TL more on
critical design time to achieve this? Over the delivery time of the building say a year, that would be a 2:1 ratio of
savings in initial cost to the investment of the added design fee. Client: Not bad, but... I.A.: At a total interior
architect’s fee of say, 8% for the building, which is now going to cost 990.000 TL, that would be roughly 79.000 TL
plus 5.000 TL = 84.000 TL, which would be about an 8,5% fee. In terms of time, the added effort and cost would be
equivalent to about one month in critical design time; two weeks if we put two people on it. Client: Well, I don’t
Know... I.A.: There is more. If your building requires a roughly 4 million TL in operating, maintenance, energy and
other running costs, over 20 years, one more month of critical design time couls result in a 1% reduction of those
costs, this would represent a savings-toinvestment ratio of 8:1 (40.000:5.000). At the same terms as above (aiming at
a savingsinvestment ratio of 2:1), you should be willing to let us spend 20.000 TL more on design time, for a total
fee of around 10%. But what if we could actually do it for about the same 5.000 TL as above, or one more designer
month. That would give you a return of 40.000 TL on an investment of 5.000 TL, which represents an annual return
in savings of 2.000 TL – that is 40% annually. Which of your stocks gives you that kind of return? Client: Now you
are talking. How... INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING
ECONOMICS – THE CONTEXT I.A.: Wait; it could get even better. What if we looked at your actual operation
and managed to develop a layout that would save you 1% on personnel cost over 20 years? How much do you spend
per year on salaries? 50 people in that size building, at an average annual salary of, say, 20 million TL over 20 years.
One percent of that is a savings of 200.000 TL, or 10.000 TL a year. So, still on the same deal as for the initial cost
(2:1 savings ratio), you should be willing to let us spend up to 100.000 TL more on design costs and still make
100.000 TL in savings. Client: Wait a minute... I.A.: Ok, so what if we could do that for the same 5.000 TL? You
would be looking at a return of 200.000 TL on 5.000 TL investment over 20 years, or 10.000 TL each year. That is
an annual return rate of 200%. Client: That all sound too good to be true. Can you show me what kind of things you
would do, or where have you done that in a past project? Can you guarantee the result? Why can’t you come up with
a better solution right away? Didn’t you just argue that ―good design is just as cheap as bad design‖ when you tried
to snatch the commision away from your competitors? Besides, you forgot to consider that each month of delay is
going to cost me some 7.000 TL in interest alone... I.A.: Well, uh, ah... Client: Have the schematics ready Monday
after next. OK? INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING
ECONOMICS – THE CONTEXT  Do we as interior architects have good, convincing answers to these questions?
 Clients, especially corporate and government clients, increasingly expect architects to be able to answer them. As
they, and their advisors, become more sophisticated in analyzing their financial situation, they expect the interior
architects to follow suit.  They know that information as well as analytical methods and tools – computers,
programmable calculators, spreadsheet programs, data services – are increasingly available even to the smallest
firms: they expext interior architects to use them. We are running out of excuses for not doing so... Inside Interior
Architect’s Head INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING
ECONOMICS – THE CONTEXT  The trouble is that we have rarely looked at our tasks that way, and that is why
we would have trouble answering the client's next-to-last question. Backed into the comer, a common reaction on
the part of some interior architects is to let the client negotiate their commission down even further. (they do not like
to talk about this)  A number of years ago I (Thorbjoern Mann) was teaching a design class in a Far Eastern city.
The project was a large downtown office building, using the site and program of an actual project of this kind. The
architect came in to talk to the students, who had spent the first weeks studying efficient access and service core
configurations, massing, and similar issues.  It was amazing to watch the students' astonishment when the architect
casually mentioned that the client had had a team of five financial feasibility advisors work on the project for many
months before the architect was involved. None of the advisors was an architect. They gave him a program with the
complete service core, number of floors, and outside dimensions worked out in considerable detail, leaving the
architect essentially to design a skin around the building. INAR 413 BUILDING ECONOMICS LECTURE 01
INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT  The message was clear: The client, a major
international corporation, did not seem to have sufficient confidence in architects' ability to advise on these crucial
feasibility considerations even to make an architect part of this team.  Was this just an isolated incident? The result
of some disappointing cost overruns in previous projects? An indication of a general attitude toward architects? A
realistic assessment of the (lack of) competence of architects? Many architects would disagree especially with the
last judgment— some no doubt quite vehemently, and some even with good justification. But even if the client's
attitude were different, how many architects live up to the expectation of reliably carrying out such feasibility
analyses, or are competent members of teams such as the one above? INAR 413 BUILDING ECONOMICS
LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT  My (Thorbjoern Mann)
own architectural education hardly mentioned these issues. As a graduate entering the profession after my first
degree, I would have been quite lost had anyone asked me to estimate the cost, let alone the feasibility or financial
performance, of a building. I suspect that many graduates of schools of architecture today, even practicing
architects, are in a similar situation. It does not have to be this way. In spite of sometimes confusing jargon, and
some fierce-looking mathematical equations, it is quite possible to grasp the basics and to make building economics
just one more of the many balls the architect has to keep juggling, and even to turn it into an advantage.  Architects
like to see themselves as problem-solvers. The economic questions of buildings always are a major part of the
client's problem. We cannot afford to ignore a part of the problem the client often considers is the most critical
one—even if we ourselves are more concerned with other facets such as aesthetics, user needs, environmental
response, or image. Including economic factors in our range of design concerns will not compromise our designs; it
will make us better designers. What it takes is, first, a change of attitude. WHAT DO YOU THINK? INAR 413
BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT
What is Building Economics?  Once we have accepted the challenge of finding out more about building
economics, a reasonable first step is to ask what it is?  Can we define the field?  How does it relate to other fields
that also carry the label of ―economics‖? Engineering economics Urban economics Energy economics
Environmental economics INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING
ECONOMICS – THE CONTEXT What is Building Economics?  Most of these are concerned with what, in
general economic theory, would be called microeconomic analysis (The study of how individual actors in the
economic realm make economic plans and decisions) as opposed to macroeconomics (the study of laws governing
the economy as a whole) WHERE DO YOU THINK BUILDING ECONOMICS STAND IN ECONOMIC SCALE?
MICROECONOMICS OR MACROECONOMICS? INAR 413 BUILDING ECONOMICS LECTURE 01
INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT  Several important directions can be
established in building economics. For one, given the importance of building industry in any national economy,
there are important macroeconomic issues that must be studied and would properly fall under the label of building
economics:  What are the relationships between the construction-related segments of the economy and other fields,
and general economic conditions such as those that are influenced by the decisions made by the government or the
central bank?  How can and should areas of vital national importance such as housing be influenced and kept
healthy? INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS –
THE CONTEXT  At the other end of the spectrum are the concerns of the practitioners involved with actual and
specific building projects, studying construction estimating, construction management, project management,
construction financing, and real estate financing. The economics of the various production processes, including
transportation processes, would constitute another complex area in building economics. All these fields are further
divided into areas of concern by building type; the economics of housing, for example, are quite different from the
economics of commercial projects such as office buildings, shopping centers, or industrial buildings.  Building
economics issues, even for specific projects, look quite different to the various actors involved. The economic
decisions for the owner of a building project are embedded in a range of economic choices going far beyond the
building itself, in a way that is of little or no concern to either interior architect or contractor once the decision has
been made to go ahead with a building. INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO
BUILDING ECONOMICS – THE CONTEXT  Finally, the economics of the process of planning and designing
buildings could be seen as a legitimate subfield of building economics that still is waiting for a systematic treatment,
even though many people have been concerned with this issue in practice.  This survey shows that building
economics is far from a well-defined area of study, and that it would probably be counterproductive to insist on a
concise definition, which would either exclude some of the concerns mentioned or else turn out so broad and general
as to be of little practical value. It should be understood that this course is limited to a particular perspective — that
of the interior architect who tries to get a better grasp of the economic implications of his or her architectural design
decisions, and tries to understand how these implications affect others involved in building projects. INAR 413
BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT
The Main Aspects of Recurring Building Economics Problems  There are many different decision and design
problems in the realm of building economics, depending on what is known, assumed, or given in a specific situation,
and what answers must be found in that situation.  First is the level at which the decisions are made. The situation
that comes to mind most often is that of the individual decision-makers for a specific project trying to arrive at the
best decisions for that project—such as the interior architect trying to design a specific building to best serve the
interests of the project client.  Building economics issues also include the concerns of specific groups involved in
the building process within society or the overall economy, with the aim of safeguarding the interests of those
groups and maintaining or improving their economic position relative to other parties. This can take two main
directions: seeking to maintain or improve the context conditions within which the group operates; or trying to help
members of the group become more competitive and effective by developing better methods and techniques for
doing its work, providing better information and the analysis tools needed to turn that information into better
decisions.  Finally, there is the level of governmental or societal policymaking, which is concerned with the
overall effectiveness of the entire system of building planning, design, production, operation, and maintenance, and
the proper balance among all its parties and components. INAR 413 BUILDING ECONOMICS LECTURE 01
INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT  The total number of possible combinations
and thus problem types arising from this brief survey is very large; and not all combinations are necessarily
meaningful. The following list includes some typical building economics problems that often are encountered: 1.
Given a solution proposal and established budget, is the proposal within the budget? 2. Given several solution
proposals, which will have the lowest initial cost? 3. Given several solution proposals, which will have the best
performance (measured in terms of both costs and benefits)? 4. Given the program, site, and context conditions, find
the best possible (optimal) solution. 5. Given the program and performance expectations (cost and other measures),
which of several proposed sites is most preferable? INAR 413 BUILDING ECONOMICS LECTURE 01
INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT INAR 413 BUILDING ECONOMICS
LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT Materials, Labour, Physical
Capital  Innovation  The driving force behind product innovation is the constant search by companies to retain or
increase their market share., enabling them to grow, survive and to enhance profitability.  To be successfull they
must produce something cheaper or better to offer an attractive combination of cost and quality with alternative
materials.  What interior architects have to attempt is to keep up with the innovations, constantly estimating their
relative cost and values in particaular uses. Intermittent Kiln Hoffman Kiln Tunnel Kiln INAR 413 BUILDING
ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT Materials,
Labour, Physical Capital  Economies of Scale  Why do economies of scale exist? The reason is sometimes
purely mathematical and physical.  Delivering more bricks to construction sites using larger vehicles will reduce
the cost of delivery per brick, simply because the cost of the driver’s time and the cost of fuel remain relatively
constant while the number of the bricks delivered increases.  The most significant driving force behind economies
of scale is innovation. New methods are often introduced precisely because they allow more output to be produced
at a lower average cost. Complex and sophisticated machinery will cost more than the simpler early versions they
replace but their output capacity will be so much higher that the capital costs per unit will fall. ? INAR 413
BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT
Materials, Labour, Physical Capital  Competition  The most important effect of the combination of technical
innovation and scale is on the structure of the industry itself and through that on the nature of competition.  The
need for expensive capital equipment to exploit the innovation and the existence of scale economies will tend to lead
to production becoming increasingly dominated by large firms.  Small producers may be neither afford the new
equipment or compete on price using traditional techniques. They may well be driven out of business or taken over
by large companies. INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING
ECONOMICS – THE CONTEXT Materials, Labour, Physical Capital  Modes of Employement INAR 413
BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT
Materials, Labour, Physical Capital  Using Avaliable Technology Nevada, USA Residential Development
Namibia, Africa House Construction Saudi Arabia Water Pipeline Construction Kenya, Africa Clean Water Well
Construction INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING
ECONOMICS – THE CONTEXT Materials, Labour, Physical Capital  The Future: A Robot Takeover? GOOD
OR BAD? INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS
– THE CONTEXT Materials, Labour, Physical Capital  The Future: A Robot Takeover? INTERIOR
ARCHITECT OF YEAR 2050? WHAT IS YOUR OPINION? INAR 413 BUILDING ECONOMICS LECTURE 01
INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT From “Building Economics for Architects”
by Thorbjoern Mann ―… The attitude of architects toward issues related to the economics of building at times
seems somewhat ambivalent*. Most professionals agree that economic factors are quite important; in fact that they
often influence design decisions more than any other single factor and should be well understood by the designer.
On the other hand, in the prestigious journals where the profession represents its work to itself and the world, in
discussions of architectural theory, and in the curricula of Schools of Architecture, one finds little concern for the
issue. It seems tainted or even ―dirty‖. Architects who manage to design building that work out well economically
for their clients run the risk of being considered ―hacks‖ by their colleagues… Are the economic issues of building
unworthy of the architect’s creative effort?‖ ambivalent: Simultaneously experiencing or expressing opposing or
contradictory feelings, beliefs, or motivations. WHAT IS YOUR OPINION ON THIS REMARK*? remark: The
expression, in speech or writing, of something remarked or noticed; the mention of that which is worthy of attention
or notice; hence, also, a casual observation, comment, or statement; as, a pertinent remark. INAR 413 BUILDING
ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT  Buildings
are expensive. Decisions about investments in buildings usually involve the largest single-item expenditures most
people have to deal with during their life time, even if they are merely renting an apartment.  Expressed in terms of
income, an average suburban house costs up to several times an individual wage earner’s annual salary. Spread out
over time as monthly mortgage payments, it can require anywhere from a quarter to one-half of the monthly family
income. WHAT IS THE SITUATION IN TURKEY? DO YOU HAVE FRIENDS WHO PAY MORTGAGE FOR
THEIR HOME? WHAT IS THE AVERAGE COST OF AN OVERALL INTERIOR DESIGN PROJECT FOR A
RESIDENTIAL UNIT (APARTMENT FLAT, SUBURBAN HOUSE, LUXURY VILLA) IN ANKARA? INAR
413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE
CONTEXT  The initial costs of a building, however, appears quite insignificant when compared with the costs
incurred to operate and maintain a building over its lifetime. For a 20 year period, these costs can amount to three or
four times the initial cost of construction.  Even more impressive is the difference between initial cost and long-
term salary expenditures needed for carrying out the work in a building, for example of a manufacturing firm. The
amount spent on slaries of people working in a building over twenty years can be up to fifty times, or more, of the
initial construction cost. Reichstag 1894 Reichstag 1945 Reichstag 1999 Reichstag: The seat of the German
Parliament in Berlin Renovation by Norman Foster INAR 413 BUILDING ECONOMICS LECTURE 01
INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT The Challenge to the Interior Architect 
One might argue: ―Why even look at these issues? The interior architect cannot do anything about them anyway.‖
Most of the significant factors do seem to be under someone else’s control.  For example, the interior architect
often is under pressure to speed up the delivery of the project, and thus cut the time spent on designing and other
tasks to the minimum.  The client’s argument is that ―time is money‖, every day that the building cannot be
occupied is costing money in interest for loans and lost rental income. INAR 413 BUILDING ECONOMICS
LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT  Imagine the following
situation: It is the crucial meeting between the client and the interior architect to negotiate the contract for a large
building project. The negotiation is almost complete. The client gets ready to sign the contract and as one of the last
points, attempts to get an agreement on the delivery date for the preliminary design: Client: I expect the preliminary
drawings Monday after next – is that OK with you? Interior Architect: Sure. We can get you the schematics ready by
that date, and you know you will get a professional solution that meets the state of the art expectations. But let me
make you a calculation: In the typical project of this kind, about a quarter of our time and fee is spent on what we
call ―critical design time.‖ That is where the important design decisions are made that will determine the project’s
ultimate success – architecturally, functionally, economically. That is where our firm has earned its reputation for
bringing projects that compare favorably with other projects. But every solution, no matter how good can still be
improved; for example with respect to economic performance. So let us assume that we could further reduce the
initial cost of your project by only 1% without reduction in the quality. INAR 413 BUILDING ECONOMICS
LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT I.A.: That would be 10.000
TL off your 1 million TL project. But we would have to spend a little more time on it – especially in the important
schematic design phase. Interested? Client: Mm. I.A.: Would you be willing to let us spend, say, 5.000 TL more on
critical design time to achieve this? Over the delivery time of the building say a year, that would be a 2:1 ratio of
savings in initial cost to the investment of the added design fee. Client: Not bad, but... I.A.: At a total interior
architect’s fee of say, 8% for the building, which is now going to cost 990.000 TL, that would be roughly 79.000 TL
plus 5.000 TL = 84.000 TL, which would be about an 8,5% fee. In terms of time, the added effort and cost would be
equivalent to about one month in critical design time; two weeks if we put two people on it. Client: Well, I don’t
Know... I.A.: There is more. If your building requires a roughly 4 million TL in operating, maintenance, energy and
other running costs, over 20 years, one more month of critical design time couls result in a 1% reduction of those
costs, this would represent a savings-toinvestment ratio of 8:1 (40.000:5.000). At the same terms as above (aiming at
a savingsinvestment ratio of 2:1), you should be willing to let us spend 20.000 TL more on design time, for a total
fee of around 10%. But what if we could actually do it for about the same 5.000 TL as above, or one more designer
month. That would give you a return of 40.000 TL on an investment of 5.000 TL, which represents an annual return
in savings of 2.000 TL – that is 40% annually. Which of your stocks gives you that kind of return? Client: Now you
are talking. How... INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING
ECONOMICS – THE CONTEXT I.A.: Wait; it could get even better. What if we looked at your actual operation
and managed to develop a layout that would save you 1% on personnel cost over 20 years? How much do you spend
per year on salaries? 50 people in that size building, at an average annual salary of, say, 20 million TL over 20 years.
One percent of that is a savings of 200.000 TL, or 10.000 TL a year. So, still on the same deal as for the initial cost
(2:1 savings ratio), you should be willing to let us spend up to 100.000 TL more on design costs and still make
100.000 TL in savings. Client: Wait a minute... I.A.: Ok, so what if we could do that for the same 5.000 TL? You
would be looking at a return of 200.000 TL on 5.000 TL investment over 20 years, or 10.000 TL each year. That is
an annual return rate of 200%. Client: That all sound too good to be true. Can you show me what kind of things you
would do, or where have you done that in a past project? Can you guarantee the result? Why can’t you come up with
a better solution right away? Didn’t you just argue that ―good design is just as cheap as bad design‖ when you tried
to snatch the commision away from your competitors? Besides, you forgot to consider that each month of delay is
going to cost me some 7.000 TL in interest alone... I.A.: Well, uh, ah... Client: Have the schematics ready Monday
after next. OK? INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING
ECONOMICS – THE CONTEXT  Do we as interior architects have good, convincing answers to these questions?
 Clients, especially corporate and government clients, increasingly expect architects to be able to answer them. As
they, and their advisors, become more sophisticated in analyzing their financial situation, they expect the interior
architects to follow suit.  They know that information as well as analytical methods and tools – computers,
programmable calculators, spreadsheet programs, data services – are increasingly available even to the smallest
firms: they expext interior architects to use them. We are running out of excuses for not doing so... Inside Interior
Architect’s Head INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING
ECONOMICS – THE CONTEXT  The trouble is that we have rarely looked at our tasks that way, and that is why
we would have trouble answering the client's next-to-last question. Backed into the comer, a common reaction on
the part of some interior architects is to let the client negotiate their commission down even further. (they do not like
to talk about this)  A number of years ago I (Thorbjoern Mann) was teaching a design class in a Far Eastern city.
The project was a large downtown office building, using the site and program of an actual project of this kind. The
architect came in to talk to the students, who had spent the first weeks studying efficient access and service core
configurations, massing, and similar issues.  It was amazing to watch the students' astonishment when the architect
casually mentioned that the client had had a team of five financial feasibility advisors work on the project for many
months before the architect was involved. None of the advisors was an architect. They gave him a program with the
complete service core, number of floors, and outside dimensions worked out in considerable detail, leaving the
architect essentially to design a skin around the building. INAR 413 BUILDING ECONOMICS LECTURE 01
INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT  The message was clear: The client, a major
international corporation, did not seem to have sufficient confidence in architects' ability to advise on these crucial
feasibility considerations even to make an architect part of this team.  Was this just an isolated incident? The result
of some disappointing cost overruns in previous projects? An indication of a general attitude toward architects? A
realistic assessment of the (lack of) competence of architects? Many architects would disagree especially with the
last judgment— some no doubt quite vehemently, and some even with good justification. But even if the client's
attitude were different, how many architects live up to the expectation of reliably carrying out such feasibility
analyses, or are competent members of teams such as the one above? INAR 413 BUILDING ECONOMICS
LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT  My (Thorbjoern Mann)
own architectural education hardly mentioned these issues. As a graduate entering the profession after my first
degree, I would have been quite lost had anyone asked me to estimate the cost, let alone the feasibility or financial
performance, of a building. I suspect that many graduates of schools of architecture today, even practicing
architects, are in a similar situation. It does not have to be this way. In spite of sometimes confusing jargon, and
some fierce-looking mathematical equations, it is quite possible to grasp the basics and to make building economics
just one more of the many balls the architect has to keep juggling, and even to turn it into an advantage.  Architects
like to see themselves as problem-solvers. The economic questions of buildings always are a major part of the
client's problem. We cannot afford to ignore a part of the problem the client often considers is the most critical
one—even if we ourselves are more concerned with other facets such as aesthetics, user needs, environmental
response, or image. Including economic factors in our range of design concerns will not compromise our designs; it
will make us better designers. What it takes is, first, a change of attitude. WHAT DO YOU THINK? INAR 413
BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT
What is Building Economics?  Once we have accepted the challenge of finding out more about building
economics, a reasonable first step is to ask what it is?  Can we define the field?  How does it relate to other fields
that also carry the label of ―economics‖? Engineering economics Urban economics Energy economics
Environmental economics INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING
ECONOMICS – THE CONTEXT What is Building Economics?  Most of these are concerned with what, in
general economic theory, would be called microeconomic analysis (The study of how individual actors in the
economic realm make economic plans and decisions) as opposed to macroeconomics (the study of laws governing
the economy as a whole) WHERE DO YOU THINK BUILDING ECONOMICS STAND IN ECONOMIC SCALE?
MICROECONOMICS OR MACROECONOMICS? INAR 413 BUILDING ECONOMICS LECTURE 01
INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT  Several important directions can be
established in building economics. For one, given the importance of building industry in any national economy,
there are important macroeconomic issues that must be studied and would properly fall under the label of building
economics:  What are the relationships between the construction-related segments of the economy and other fields,
and general economic conditions such as those that are influenced by the decisions made by the government or the
central bank?  How can and should areas of vital national importance such as housing be influenced and kept
healthy? INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS –
THE CONTEXT  At the other end of the spectrum are the concerns of the practitioners involved with actual and
specific building projects, studying construction estimating, construction management, project management,
construction financing, and real estate financing. The economics of the various production processes, including
transportation processes, would constitute another complex area in building economics. All these fields are further
divided into areas of concern by building type; the economics of housing, for example, are quite different from the
economics of commercial projects such as office buildings, shopping centers, or industrial buildings.  Building
economics issues, even for specific projects, look quite different to the various actors involved. The economic
decisions for the owner of a building project are embedded in a range of economic choices going far beyond the
building itself, in a way that is of little or no concern to either interior architect or contractor once the decision has
been made to go ahead with a building. INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO
BUILDING ECONOMICS – THE CONTEXT  Finally, the economics of the process of planning and designing
buildings could be seen as a legitimate subfield of building economics that still is waiting for a systematic treatment,
even though many people have been concerned with this issue in practice.  This survey shows that building
economics is far from a well-defined area of study, and that it would probably be counterproductive to insist on a
concise definition, which would either exclude some of the concerns mentioned or else turn out so broad and general
as to be of little practical value. It should be understood that this course is limited to a particular perspective — that
of the interior architect who tries to get a better grasp of the economic implications of his or her architectural design
decisions, and tries to understand how these implications affect others involved in building projects. INAR 413
BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT
The Main Aspects of Recurring Building Economics Problems  There are many different decision and design
problems in the realm of building economics, depending on what is known, assumed, or given in a specific situation,
and what answers must be found in that situation.  First is the level at which the decisions are made. The situation
that comes to mind most often is that of the individual decision-makers for a specific project trying to arrive at the
best decisions for that project—such as the interior architect trying to design a specific building to best serve the
interests of the project client.  Building economics issues also include the concerns of specific groups involved in
the building process within society or the overall economy, with the aim of safeguarding the interests of those
groups and maintaining or improving their economic position relative to other parties. This can take two main
directions: seeking to maintain or improve the context conditions within which the group operates; or trying to help
members of the group become more competitive and effective by developing better methods and techniques for
doing its work, providing better information and the analysis tools needed to turn that information into better
decisions.  Finally, there is the level of governmental or societal policymaking, which is concerned with the
overall effectiveness of the entire system of building planning, design, production, operation, and maintenance, and
the proper balance among all its parties and components. INAR 413 BUILDING ECONOMICS LECTURE 01
INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT  The total number of possible combinations
and thus problem types arising from this brief survey is very large; and not all combinations are necessarily
meaningful. The following list includes some typical building economics problems that often are encountered: 1.
Given a solution proposal and established budget, is the proposal within the budget? 2. Given several solution
proposals, which will have the lowest initial cost? 3. Given several solution proposals, which will have the best
performance (measured in terms of both costs and benefits)? 4. Given the program, site, and context conditions, find
the best possible (optimal) solution. 5. Given the program and performance expectations (cost and other measures),
which of several proposed sites is most preferable? INAR 413 BUILDING ECONOMICS LECTURE 01
INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT INAR 413 BUILDING ECONOMICS
LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT Materials, Labour, Physical
Capital  Innovation  The driving force behind product innovation is the constant search by companies to retain or
increase their market share., enabling them to grow, survive and to enhance profitability.  To be successfull they
must produce something cheaper or better to offer an attractive combination of cost and quality with alternative
materials.  What interior architects have to attempt is to keep up with the innovations, constantly estimating their
relative cost and values in particaular uses. Intermittent Kiln Hoffman Kiln Tunnel Kiln INAR 413 BUILDING
ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT Materials,
Labour, Physical Capital  Economies of Scale  Why do economies of scale exist? The reason is sometimes
purely mathematical and physical.  Delivering more bricks to construction sites using larger vehicles will reduce
the cost of delivery per brick, simply because the cost of the driver’s time and the cost of fuel remain relatively
constant while the number of the bricks delivered increases.  The most significant driving force behind economies
of scale is innovation. New methods are often introduced precisely because they allow more output to be produced
at a lower average cost. Complex and sophisticated machinery will cost more than the simpler early versions they
replace but their output capacity will be so much higher that the capital costs per unit will fall. ? INAR 413
BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT
Materials, Labour, Physical Capital  Competition  The most important effect of the combination of technical
innovation and scale is on the structure of the industry itself and through that on the nature of competition.  The
need for expensive capital equipment to exploit the innovation and the existence of scale economies will tend to lead
to production becoming increasingly dominated by large firms.  Small producers may be neither afford the new
equipment or compete on price using traditional techniques. They may well be driven out of business or taken over
by large companies. INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING
ECONOMICS – THE CONTEXT Materials, Labour, Physical Capital  Modes of Employement INAR 413
BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS – THE CONTEXT
Materials, Labour, Physical Capital  Using Avaliable Technology Nevada, USA Residential Development
Namibia, Africa House Construction Saudi Arabia Water Pipeline Construction Kenya, Africa Clean Water Well
Construction INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING
ECONOMICS – THE CONTEXT Materials, Labour, Physical Capital  The Future: A Robot Takeover? GOOD
OR BAD? INAR 413 BUILDING ECONOMICS LECTURE 01 INTRODUCTION TO BUILDING ECONOMICS
– THE CONTEXT Materials, Labour, Physical Capital  The Future: A Robot Takeover? INTERIOR
ARCHITECT OF YEAR 2050? WHAT IS YOUR OPINION?