Republic of the Philippines

PARTIDO STATE UNIVERSITY

Camarines Sur
COLLEGE OF ENGINEERING AND TECHNOLOGY

MODULE 9-FINANCIAL CONSIDERATIONS

Name of Student:_______________________ Week No. 14-15

Course Code: PCC-1 Name of Faculty: MARIJOY C. ATOLE
Course Title: Building Systems Design

I. Introduction:
Building a new house or any structure is certainly a very big financial commitment. One
primary consideration in building design and construction is the budget. The budget is the
statement of the amount of money that will be spent for the materials, labor, and equipment
and other miscellaneous or contingency items in the building design and construction. To
determine the budget for a certain construction project, a cost estimate for the predicted
expenditure is being prepared before the project is taken up.

II. Learning Objectives:

At the end of the lesson the students must be able to:

1. Learn the fundamentals of building cost
2. Differentiate Cost estimate and cost planning
3. Identify different types of building cost
4. Understand the life cycle cost

III. Lesson:

Cost Estimates VS Cost Planning

A cost estimate in construction is the prediction of the cost of a proposed building or

structure for construction. The purpose of cost estimate is to assess the quantity, cost, and
price of the required resources to complete a construction job within the project scope. Cost
estimation is done by identifying the scope of the project down into its details and using all
information available (existing structure, location, type of design, design requirements,
materials, methods of construction and others) to arrive at a total expected cost.

A cost planning is one way of controlling the estimated costs during the design and
construction phase of the project. The objective of the cost planning is to determine the

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 Republic of the Philippines
PARTIDO STATE UNIVERSITY
Camarines Sur
COLLEGE OF ENGINEERING AND TECHNOLOGY
estimated cost of the project by setting the lifecycle budget and cost controls to manage the
delivery and quality of the project over a set time frame.

Guiding principles to cost estimating and cost planning are:

1. Time is money.
2. Risk and reward are opposites. The higher the risk, the greater potential for reward.
If the risk is unsustainable, there’ll be no reward.
3. Appropriate controls to develop, implement and manage cost estimates and cost
plans are the key to repeatable quality outcomes and commercial success.
4. Cost estimating and cost planning outcomes provide the framework for cost control
through the lifecycle of any initiative. Cost control is making sure you stay within the
budget set during the cost estimating and cost planning processes.

Types of costs for buildings

1. Capital costs are those costs associated with one-off expenditure on the acquisition,
construction or enhancement of significant fixed assets including land, buildings and
equipment that will be of use or benefit for more than one financial year.
2. Construction costs are those costs incurred by the actual construction works
themselves, and on some projects may be determined by the value of the contract
with the main contractor.
3. Building operating costs are the costs incurred by the day-to-day operation of the
building, which might include; utilities costs, maintenance and repairs, general and
administrative expenses and so on.
4. Business operating costs may include building operating costs and also other
operating costs such as; rent, wages and so on
5. Life cycle costing is an economic assessment of the discounted net present value of
life cycle costs, carried out using profiles of current and future costs and benefits.
There is increasing emphasis on life cycle costing to ensure all costs are taken into
account during the decision-making process, not just those for capital investment.
6. Whole life cost. Whole-life costs consider all costs associated with the life of a
building, from inception to construction, occupation and operation and disposal.
Generally this refers to the actual, total construction cost calculated at the end of the
project, but it may also refer to the cost of a specific contract, or to costs incurred

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 Republic of the Philippines
PARTIDO STATE UNIVERSITY
Camarines Sur
COLLEGE OF ENGINEERING AND TECHNOLOGY
over a defined period. This contrasts with cost estimates, or target costs, which are
calculations of the cost that is expected, or the cost that should be achieved.

Two key types of costs addressed by the cost estimation process:

1. Direct costs: Costs associated with a single area, such as a department or the project
itself. Examples of direct costs include fixed labor, materials, and equipment.

2. Indirect costs: Costs incurred by the organization at large, such as utilities and quality
control.

Typical elements that a cost estimation will take into account:

1. Labor: The cost of team members working on the project, both in terms of wages and
time
2. Materials and equipment: The cost of resources required for the project, from physical
tools to software to legal permits
3. Facilities: The cost of using any working spaces not owned by the organization.
4. Vendors: The cost of hiring third-party vendors or contractors.
5. Risk: The cost of any contingency plans implemented to reduce risk.

A Construction Cost Estimates Perspective on Building Systems

Creating a cost estimate for a project as complicated as a building calls for a systematic way
of enumerating costs.

Seven functional divisions

1. Substructure
2. Shell
3. Interiors
4. Services
5. Equipment and furnishings
6. Special construction
7. Building site work

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 Republic of the Philippines
PARTIDO STATE UNIVERSITY
Camarines Sur
COLLEGE OF ENGINEERING AND TECHNOLOGY
The Elements of a Construction Cost Estimate

Estimators collects information to create an estimates. The following are the key terms and
concepts of the construction cost estimates.

 Quantity Take-Off: Developed during the pre-construction phase, a quantity take-off

measures the materials and labor needed to complete a project.
 Labor Hour: The labor hour, or man hour, is a unit of work that measures the output
of one person working for one hour.
 Labor Rate: The labor rate is the amount per hour one pays to skilled craftsmen.
This includes not just the basic hourly rate and benefits, but the added costs of
overtime and payroll burdens, such as worker compensation and unemployment
insurance. This template will help you keep track of wages and labor hours.
 Material Prices: Since the cost of materials is prone to fluctuation based on market
conditions and such factors as seasonal variations, cost estimators may look at
historical cost data and the various phases of the buying cycle when calculating
expected material prices.
 Equipment Costs: Equipment costs refer primarily to the cost of running, and
possibly renting, heavy machinery, such as cement mixers and cranes. It’s important
to note that the equipment in use influences how quickly you can complete the
project, so the use of equipment actually impacts many costs outside of those directly
associated with running the equipment.
 Subcontractor Quotes: Most contractors will hire multiple specialist subcontractors
to complete parts of the construction. You add these subcontractors’ quotes to the
contractor’s total estimate. (It can be helpful to use a tracker to collect all the
subcontractor documentation in one place.

 Indirect Costs: Indirect costs are expenses not directly associated with construction
work, like administrative costs, transport costs, smaller types of equipment,
temporary structures, design fees, legal fees, permits, and any number of other costs,
depending on the particular project.
 Profits: Of course, in order to make a profit, the contractor adds a margin on to the
cost of completing the work. Subcontractors do the same when preparing their own
quotes.
 Contingencies: Since even the most accurate estimate is likely to be affected by
unforeseeable factors, such as materials wastage, an estimate will usually have a
predetermined sum of money built in to account for such added costs.

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 Republic of the Philippines
PARTIDO STATE UNIVERSITY
Camarines Sur
COLLEGE OF ENGINEERING AND TECHNOLOGY
 Escalation: Escalation refers to the natural inflation of costs over time, and it’s
especially vital to take into account for long-running projects. Some projects have
escalation clauses that address how to handle this inflation.
 Bonds: An owner will usually require a contractor to arrange for the issuance of a
performance bond in favor of the project owner. The bond functions as a kind of
guarantee of delivery. Should the contractor fail to complete the project according to
the terms of the contract, the owner is entitled to compensation for monetary losses
up to the amount covered by the performance bond.
 Capital Costs: Capital costs are simply the costs associated with establishing a
facility. These include the following: the cost of acquiring land; the cost of conducting
feasibility studies and the pre-design phase; paying the architect, engineer, and
specialist members of the design team; the total cost of construction, which covers
not just materials, equipment, and labor, but also administrative, permitting, and
supervision costs, as well as any insurance fees or taxes; the cost of any temporary
equipment or structures that are not part of the final construction; the cost of hiring a
commissioner; and the cost of inspecting the structure when it’s near completion.
 Operations and Maintenance Costs: More a concern for the owner than the
contractor, one accounts for operations and maintenance costs during the design
phase. Making choices that lower the total lifetime cost of a building may result in
higher construction costs. Operating costs include land rent, the salaries of
permanent operations staff, maintenance costs, renovation expenses (as needed),
utilities, and insurance.
 Variances: Owners will often allocate construction budgets that are larger than cost
estimates because even good, thorough cost estimates have a tendency to
underestimate actual construction costs. This can happen for a number of reasons.
For example, wage increases, which can be difficult to forecast, will make
construction costs rise. Seasonal or natural events, such as heavy rainfall, may call
for action to protect construction or restore the construction site. Large projects in
urban areas may face regulatory or legal issues, such as a demand for additional
permitting. And lastly, owners who begin construction without finalizing the project’s
design will over-budget to account for design changes and the inevitable cost
increases that result from throwing a project off schedule.

Influences on Construction Costs

1. Building site
2. location of the construction site relative to economic centers

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 Republic of the Philippines
PARTIDO STATE UNIVERSITY
Camarines Sur
COLLEGE OF ENGINEERING AND TECHNOLOGY
3. regulatory requirements
4. time related aspects- project schedules,
5. size and complexity of the project
6. quality of plans and specifications
7. value engineering
8. contingencies

Life Cycle Cost

Life cycle cost is the cost that is associated with the project from the beginning of the project
to the end of its useful life and beyond. It includes acquisition cost, operation cost and
disposal of the building until it reaches its useful life. Life cycle cost may include also the
money spent after the project’s useful life that is a result of the project's existence and
effects.

Normally the cost of a project is considered only from the beginning of the project to its end.
This is reasonable because the project team is formed to carry out the work of creating the
project, deliver the deliverables, and do it within the schedule and cost goals of the project.
This is really a narrow view because there are many costs that may occur for the
stakeholders as the result of decisions made within the project but occurring after the project
has been completed. Life cycle cost considers all these costs.

Life cycle cost is quite important in the justification of projects. The total cost of a project
should be considered over the entire life of the project and not just within a fixed period of
time.

The cost and benefits of the project must be considered over the life of the project. All of the
effects of the project from beginning to end must be considered.

IV. Learning Assessment:

Quiz
1. How does the following affects the building cost:
a. Building site
b. location of the construction site relative to economic centers
c. regulatory requirements
d. time related aspects- project schedules,
e. size and complexity of the project
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 Republic of the Philippines
PARTIDO STATE UNIVERSITY
Camarines Sur
COLLEGE OF ENGINEERING AND TECHNOLOGY
b. quality of plans and specifications
c. value engineering
d. contingencies

V. Suggested References:

1. Fundamentals of Building Construction by Edward Allen 6th Edition

2. Building Construction Illustrated 4th Edition by DK.CHing
3. Building Design and Construction by Federick S. Merrit & Jonathan T. Ricketts

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