Elements of builder's costsRate quoted by a builder have to cater for the following :

Basic costs
Indirect costs
Materials,
Overheads,
Labours,
Establishment charges,
Tools and plant.
Profit.








Materials

Cost of materials will include the price charged by suppliers, transportation/haulage to site of work, unloading mandand storing. Allowance has also to be made for waste, pilferage, breakages, offcuts due to nonstandard  sizes specified, depreciation due to bad storage, returning empty cases, compaction/loss in bulk, and for cash/trade discounts available. Another important consideration will be payments on account of state / interstate sales tax, octroi, custom duty, royalty and the like.

Labour

Requirement of labour can be met with by the builder either by entering into agreements with labour sub-contractors by negotiating net rates payable per unit of each different item of work or getting work executed by directly employed labour, or by a judicious mixture of the two methods.

The system of labour subcontractors is usually found to be cost-time effective, but may tend to compromise on the aspect of quality. Reputed builders usually opt to execute important activities like curing of concrete etc. and 'finishing items' of work through directly employed labourers and the remaining bulk of work through labour subcontractors.

Due allowance as applicable has to be made for idle/travelling time, overtime, holidays with pay, attendance on Regional Labour Commissioner, compliance with provisions of labour compensation act and other labour regulations, minimum fair wages, irrecoverable advance payments to labourers, and the like.

In situations where labour has to be imported, aspects like fares, paid leave, increments in scales, medical attention, free messing/living accomodation, visa, passport, airport fees etc. may also come into play.

The element of labour in the basic rate therefore, is not calculated on the actual wages paid but on a previoulsy worked out 'all-in' rate for each category of labourer/artisan or item of work giving judicious weightage to all the factors mentioned above.

Tool plant and machinery

Plant used on site is subdevided into :

1.     Plant used for specific items of work which enables charging cost of its use to the basic rates of particular item of work like brickwork, concrete etc.

2.     Plant like cranes, hoists, scaffolding etc. the cost of which cannot be broken down and allocated to individual items of work and therefore has to be accounted for in the overheads.

Cost of plant has to include for 'standing charges' consisting of interest on capital outlay and depreciation to cater for replacement cost, maintenance and repairs, 'running costs' consisting of fuel, oil, lubricants and the operator's pay and 'variable costs' consisting of setting up the plant, temporary site work required in connection with use of the plant, shifting location etc.

Overheads

Overhead charges denote expenses incurred for a particular job/site by the builder but which cannot be conveniently included in the basic cost of specific items of work such as brickwork etc.

Overhead charges are subdivided into 'fixed' or 'one-time' overheads and 'variable' or 'time-related' overheads.

Fixed or one-time overhead charges should include for all costs incurred in the initial setting up of an efficiently operating work site, such as providing temporary site-offices, storage sheds, labour camp, canteen, ablution places, fencing, approach roads, mixing/casting platforms, water tanks, curing tanks; obtaining telephone/electrical/water connections and for demolishing and clearing all these temporary site works on completion. All expenses in connection with shifting tools, plant, machinery, and fares paid to employees for shifting to the new site are also treated as fixed one-time overhead charges.

Variable or time related overhead charges should include for finance charges on the rolling capital employed (or loans/overdrafts from Banks) which will remain locked up during the period of construction and the amount of security deposit until the end of defects liability period, site office expenses like salaries of engineers, supervisors, time keepers, clerk, cashier, watchmen, storekeepers, drivers of jeeps/staff bus, stationery, postage, telephone/electricity/water bills, tea and refreshments served at site, maintenance of site offices including furniture/equipment put up for builder's employees as well as supervising agencies working in behalf of the employer, repair and unkeep of all temporary works like mixing/casting platforms, storage sheds, water/curing tanks. approach roads, fencing, labour camp, canteen, ablution places, petrol/disel lubricants for jeeps, staff-bus and pumps for pumping construction water, rents for hired accomodation if any and similar other expenses.

Owning and using costs or lure charges on general plant like cranes/hoists/scaffolding, pump for pumping constructing water and the like will also figure in the variable or time related overheads.

Maintaining a skeleton team of workers and supervisor for attending to defects cropping up during the defects habits period, may depending on preference of the builder, be included either as a time related overhead or assessed on lump sum basis as included in the fixed or one-time overhead charges.

The following items should not be lost sight of when toting up the overhead expenses :

1.     Turnover tax, Income tax, and Sales tax (if the law requires the work to be treated as a finished article solve by builder to the employer) as applicable.

2.     In tendering for works for which an impossibly short period of completion coupled with penalty or preasses liquidated damages are stipulated, the builder may have to reluctantly work out the likely penalty/damages in advance an include them in the overheads.

3.     Builders being a pragmatic community may also have to accept facts of life and allow for the likely expenses on entertaining and any inevitable extent of 'greasing' of officials in the employer's organisation.

Establishment Charges

Expenses incurred on running the permanent head office of the builder's firm (as distinct from the site office meant for a particular job) are termed as establishment charges.

Establishment charges include salaries of head office clerical staff like clerks, secretary and cashier, low grad employees like peons, messengers, drivers of office cars, attendants, cleaners etc., specialist staff like accountant, estimate quantity surveyor for working out tenders, and administrative staff like Directors (fee/salary as applicable) or working partners (their salary being distinct from share in net profit). Other incidental expenses incurred by the head office establishment a telex/telephone/electricity/water bills/stationery, postage, depreciation of office furniture and equipment like computers/tele machines/typewriters etc., rent/repairs of office premises, theft/fire insurance, legal fees to lawyers and professional fees pay to chartered accountants and consultants.

The percentage addition for establishment charges to be made in each tender submitted by the firm is decided by comparing the annual turnover of the firm during the previous year with the total expenses of the head office during previous year.

Profit

Simply stated, profit to a builder, similar to any other commercial transaction, is the difference between all-inclusive construction cost and the contract amount paid by the employer.

Building contracts provide for interim or on-account payments at fixed intervals of a month (or less). The rolling capital required by the builder on a particular job therefore is only a fraction of the total contract amount. The net profit in a building contract may be (say) only 10 % but the return on the rolling capital employed can turn out to be as large 120 % per annum, or even more. (As an example consider a contract for Rs. 60 Lacs to be completed in 12 months with stipulation for monthly on-account payments. If the tender allows for 10 % profit, the yield on the initial rolling capital about 5 Lacs inclusive of the cost of site mobilisation will be Rs.6 Lacs or 120 % per annum.)

Any extent of care exercised in working out the legitimate costs involved in a work cannot neutralize risk element like meeting unfavourable strata in foundations, inclement weather, strikes, labour and political unrest, or for that matter gravest risk of the owner (employer) going bankrupt half way through. The percentage mark-up for profit by the builder therefore considered as inclusive of the risk elements.