Construction projects – part 4 - Project requirements
Direct costs
If a contractor is inefficient his or her costs will be higher than they need be. This will lead to bidding at a higher cost with reduced profit margins.
Improving efficiency means getting the job done with less resources and not cutting corners. Any contractor must know their rates to develop their business. If you are not competitive and you cannot increase your rates you must reduce costs by improving efficiency or go out of business.
Bidding should be carried out in a methodical manner, using a check list and planning well for things like, cash flow and the timing of equipment and labour needs.
Direct costs are incurred as a direct consequence of running the project. If the project did not occur then neither would the costs.
You need to calculate for each item ‘quantity’ the amounts of material, labour, equipment and any transport costs.
Experience and reference to well maintained records will be of tremendous benefit here.
As for any project, estimating the length of time a particular task will take is very important.
For simple activities your own experiences will suffice, with others you may wish to follow a slightly more formal approach usingPERT techniques.
This information and simple spreadsheet example is contained in the Excel file ‘simple costing.xls’ in the product package 'The Complete Project Management package'.
Labour costs tend to make the assumption that it will always be available. This is not often the case and adjustments may need to be made at a later date prior to putting in your bid.
In simple terms the labour cost is based upon the duration of the task (T), the number of people required (N) and their cost per day (R).
For example:
T = 10 days
N = 4
R = 5
Cost = T x N x R = 200
Most equipment has associated costs attached to it. For example, fuel and maintenance costs.
Even if you maintain equipment well it will eventually wear out and need replacing. The future replacement cost of equipment is offset on an annual basis over each project using it as depreciation.
If you do not use equipment regularly then you may have to hire it. A good contractor will not wish to have equipment or materials around when not in use as it will cost extra money. Try planning so that equipment and materials are available only when you need them.
The cost should take into account all of the equipment used for this task.
Let us assume that we have three pieces of equipment, that is, 'a', 'b' and 'c'.
They are each required for 2 days, 4 days and 1 day.
And their hire costs are 100, 300 and 150 per day.
The costs will be:
'a' = 2 days x 100 = 200
'b' = 4 days x 300 = 1200
'c' = 1 day x 150 = 150
total = 200 + 1200 + 150 = 1550
MaterialsAny materials that you have in stock should be valued at the current replacement cost.
This is because once they are gone you will need to replace them at current costs.
For certain items, for example, concrete mixtures, you may need to give clearer consideration to particular ratios of components in the mixture.
Be wary that volumes of raw materials do not always relate to the volume in the finished article, for example, dry mixes in concrete take up more volume than when wet.
Volumes and weights are usually a lot different.
Allow a small percentage for wastage and losses during storage and transportation.
When negotiating any discounts focus on the more costly items.
TransportApart from the cost of transport of goods from a site you will need to consider the cost of unloading the goods, which may be included in the price.
Consider costs of transporting other materials as well, such as water.
Indirect costs
There are three main areas of indirect costs.
These are costs that, in the main, would be incurred whether you run a project or not. These are mainly the cost of running the business.
In addition, there are ‘preliminary’ costs, for example, insurance and general tools and equipment. Finally, there are costs associated with ‘risk’.
Some costs are not associated with specific projects but are required none the less, for example, scaffolding, office buildings etc.
It is unlikely that many, if any indirect costs, will exist in the ‘bill of quantities’, therefore it is the contractor’s responsibility to add these.
Preliminary costs- Supervision
Preliminary costs are related to the project but may include items such as supervision as well as insurance etc.
It is likely that this will be included in the ‘bill of quantities’ for a large contract but not for smaller projects. You will need to make sure that all aspects of supervision are included. For example, site manager, foremen, a site clerk, a surveyor and engineer as consultants and a person to manage the stores etc.
- Buildings related
These will cover items such as offices, storage and sheds as well as access to them.
You will need to assess the useful life of each item. This will depend on the use to which they are put and their maintenance.
Naturally, maintenance also becomes an indirect cost. If you decide that a building will have a useful life of 10 years then you must make sure you can replace it at that time. If the building is worth £10,000 you may use straight line depreciation over 10 years as a cost to retain money to pay for a new one at the end of year 10. So, you will charge £1000 each year for the building replacement.
This cost can be spread over as many projects as you think suitable for the use of the item.
There are other methods of depreciation, which take into account higher losses in the initial years and your accountant may advise on your particular situation.
In addition to making allowance for building replacement through depreciation you must consider the cost of transport, erection or siting, adding any amenities and dismantling and clearing.
In addition to regular buildings you must consider materials storage areas. There will be a need to maintain materials in good condition as well as providing a secure location against theft. Other aspects of site security should be put in place ranging from fencing, security lighting and guards etc.
Also, you may need hard areas free from damp and potential flooding to stand certain material.
This may be dependant on the nature of the existing surfaces.
Access roads may not be straight forward. There may be ‘rights of way’ to consider, you may need to prepare and improve surfaces and the need to put the access areas back to how they were prior to the project. Examine the logistics to the site and on it so that you minimise the handling of materials.
- Services
The main one is water supply. Clean water is essential for building activities as well as for drinking. You will also need to consider electricity for power and lighting. A generator may be required. You may need a degree of heating for offices. For large contracts a telephone system may prove useful.
- Equipment
This covers a wide range of items form bigger pieces diggers, concrete mixers, scaffolding and hoists to smaller items such as general tools.
A degree of good planning will be required so that you only have equipment on site when you need it. Some items may be used elsewhere when not working on a specific area, for example, a digger or a crane. Good planning will improve cash flow.
Some of these pieces of equipment will be hired, for example, a crane, whilst others will be purchased for permanent use, for example, the concrete mixer and small tools such as hammers, saws etc. You may need to asses the size of equipment needed and then increase your requirement on the basis that extra work will almost certainly materialise. The expense of particular pieces of equipment can usually be off set against the cost of doing it manually.
Many of these costs will be based upon experience.
- Transport
This will include personnel and materials. This could also be included under the materials section or as a fraction of the direct costs.
- Health and safety
There are many aspects to consider here. These will include obvious items such as toilets and washing facilities.
Others will be first aid facilities. There are legal considerations here which you must be aware of so it is always best to consult an expert in this field.
- Security
This was referred to earlier under ‘buildings’ above. This would include fencing, lighting, guards, dogs, alarms etc.
You will need to tailor this to the requirements of the project.
- Site clearance and handover
The site must be cleared and tidy before handover to the client.
- Insurance
What you insure and the level of cover may depend partly on the project and what risk you are willing to take.
The list could include vehicles, public liability, equipment, compensation requirements and possibly others.
Again, it is best to discuss your needs with an expert insurance broker.
The use of ‘bonds’ is a variation where the client is insured against underperformance of the contractor but the contractor actually pays for it. Problems could arise if the contractor becomes bankrupt, losses incurred by the client because the project does not finish on time and the need to appoint another contractor to complete outstanding work.
The insurance company in effect acts as a guarantor (surety) against this underperformance. The contractor pays for it but only the client can claim against it. It only comes into force if the contractor underperforms in an agreed fashion.
If a contract requires a ‘bond’ then this contract may only be open to the larger contractors. It is a reflection, from the insurer’s viewpoint, of their confidence in a company to complete the project.