The Project
Construction industry
plays a vital role in the economy of any nation. It employs largest number of
labour, materials and financial resources. Hence the necessity for the optimum
use of these scarce resources. In addition, the construction activity precedes
any social, business recreational activities. These construction economics has
developed into a separate field distinct from design and construction.
This has led to the genesis of modern concept of quantity surveying functions.
The quantity surveyor is called upon to render advice to the employer on
various aspects of economy in construction from the stage of conception to
completion of the project and even during the life cycle period. The employer
will look for the value for the money spent by him. The Engineer/Quantity
surveyor therefore need to possess a thorough knowledge of the project,
market conditions, availability of vendors and contractors to render his timely
and independent advice to the employer.
What is construction
Economics?
Economics is
derived from the Greek word ‘Oikonomia’ (Oikos = house + Nomos = laws) meaning
managing the home. The definition of economics is the “Social science that
studies the production, distribution and consumption of goods and services”.
The modern definition according to Lionel Robbins in 1932 states economics as
a “science which studies human behavior as a relationship between ends
and scarce means which have alternate uses”.
Construction
economics is a branch of general economics. It consists of application of
techniques and expertise of economics to the particular area of construction
industry. Construction economics is concerned with man’s needs for shelter and
the suitable and appropriate conditions in which to work and live. It seeks to
ensure the efficient use of available resources and to increase the rate of
growth of construction in the most efficient manner.
Construction economics include study of the following:
Ø Client’s requirements :
a) Structure meets the client’s needs
b) Design is within the available
funds
c) Building is available on the
specified date
d) Final cost closely resembles the
estimate
e) Quality / safety ensured
Ø How the new construction
affects the surrounding areas. This will consider aspects of planning, general
amenities affected.
Ø The relationship of
space and shape. Influence of design on cost.
Ø Assessment of initial
cost estimate that is sufficiently accurate which will be useful for comparison
throughout the building process.
Ø The reasons and methods
of controlling costs. The methods adopted will vary according to the nature of
project. The methods adopted should be sufficiently accurate but flexible
enough to suit client’s requirements.
Ø Estimating the life of
buildings and materials. The emphasis on initial costs has moved to costs in
use.
Other
important aspects to be considered:
§ Role of surveyors,
engineers and builders employed in the industry.
§ Division of industry
between the design and construction process.
§ The size of construction
industry, its relation with other industries and national economy.
§ Types of developments
undertaken.
§ The types and sizes of
construction firms, and the availability of specialist contractors.
§ The variations in
building costs and factors that influence variations, such as market
conditions, regional locations.
§ Physical /unique nature
of the project.
§ Organization of
construction process.
§ Method of price
determination.
Cost Information:
a) Price books / Current
Market rate data – These data needs to be updated regularly to take price
escalations into account.
b) Monthly cost data – Cost
information on cost of materials, labour rates, indices, market indicators and
other information relevant to construction. Research has shown that in the
periods of high escalation, the prices can change even in a month, during Govt.
Budget proposals, policy changes of Govt.
c) Construction cost
indices – In Britain comprehensive construction cost information is supplied on
reciprocal basis based on analysis of completed projects. In addition it also
provides cost indices, cost studies, cost trends, monthly briefings. However in
India such information is maintained by concerned organizations. RBI/ Ministry
of finance, Govt. of India publishes price indices for building materials, fuel
monthly/ Quarterly.
d) Construction cost price indices –
Labour rates are fixed by labour commissioners of respective states. Many
companies are now a days maintaining cost data of completed projects in their
archives which will be useful for determining cost of future projects.
e) Priced bill of
quantities – They provide a wealth of information. However such data must be
carefully analyzed because
Cost planning and cost comparison:
Cost planning: The aim is to inform the client on the economic
consequences of various designs to enable him to select the most
appropriate solution. Following are some of the aspects of cost planning.
a) Planning Efficiency –
Although length of bridge is similar the depth of foundations, height of piers
and spans are different. The details of deck slab are different.
b) Constructional
details – In order to advise the client, the planner will have to undertake
cost studies of sensitive elements (Elements where alternatives make large
change), technology, methods of construction. This will involve time and money.
Economics of Quality:
‘M’ factors affecting Quality
Market: Comparability between standards provided by different firms.
Men:
Single most important factor in achieving quality, i.e. having right men
Money:
Quality costs money
Management:
It is the function of management to set company’s quality policy.
Materials:
Specified correctly, properly delivered and checked at site, stored and used.
Methods:
The method specified must be capable of being executed in practice to the
tolerance and finish required.Machines:
Selection of correct machine for the work being carried out to work efficiently
Construction economics is concerned with making efficient use
of limited resources to maximize output and satisfy greatest possible number of
wants.
Productivity of Economy:
Ø Quantity & Quality of natural and manmade resources
Ø Quality and extent of education and training of labour
force
Ø Levels of expectation, motivation and well being
Ø Commitment to research and development
Causes of Inefficiency in Construction Industry:
Ø Industry demonstrates poor safety record
Ø No real culture from learning from previous projects
Ø Poor level of investment into R&D
Ø Technology not used widely enough.
Construction Industry has four distinct Qualities:
Ø Physical nature of the product is large, heavy and
expensive and often one off
Ø Dominated by large number of relatively small firms
spread over vast area
Ø Demand for activity directly determined by general state
of economy
Ø Method of price determination is usually complex due to
tendering process used in various stages. As a result of poor management,
construction firms may have cost over runs (20-30%). Clients fell short of
revenues by 30-40%.
Sustainable Construction:
Ø Efficient use of resources
Ø Effective protection of environment
Ø Economic growth
Ø Social progress that meets needs of every one
Construction process is a world of as if:
Ø As if client knew what he wanted when he commissions the
structure from a designer
Ø As if the designer was in a position to advise the client
on the best value for money he could obtain from the market
Ø As if the contractual procedures were devised to ensure
that the client could get the best possible deal from the profession from the
market place
Ø As if the manufacturer of construction materials and
components know in advance what is expected of him and geared his production to
such expectation
Ø As if the contractor knows how his resources were used,
was in a position to control them and was able to use this experience on his
next project (Complex, Fragmented and Conservative nature). Construction
economics should therefore favour models that prioritize strategies and improve
sustainability, competitiveness, productivity and value to clients.
Ø Investment criteria: (Discounting Methods)
Ø Net present value (NPV): It is the sum of the present
values of all cash flows-positive as well as negative-that are expected to
occur over the life cycle period of the project.
Investment
criteria: (Discounting Methods):
Benefit
cost ratio:
Present value of benefits (PVB)
Benefit
cost ration (BCR)= -----------------------------------
Initial Investment (I)
Net benefit
cost ratio (NCBR)= BCR – 1
Criteria:
When
BCR
Or NBCR Rule
is
>
1
> 0
Accept
=
1
= 0
Indifferent
< 1
<
0
Reject
Internal
rate of return (IRR): It is the discount rate which makes its NPV
equal to zero. Put differently it is the discount rate which
equates the present value of future cash flows with the
initial investment.
Urgency: Projects that are
deemed to be more urgent get priority over projects that are regarded as less
urgent.
E.g. Replacement of a
machine that has failed and the major work is stalled.
Payback period: It is the length of
time required to recover the initial investment on the project
Accounting rate of
return: The accounting rate of return, also referred to as average rate of return
on investment, is a measure of profitability which relates to investment, both
measured in accounting terms.
Value Engineering and Value management:
Ø Value management is a strategy for identifying the
project that provides the best value for money through the best use of limited
resources that are available
Ø As per Lawrence De Miles, GEC USA, the originator
of value engineering, ‘It is an organized approach to providing the necessary
functions at the lowest cost’.
Some of the questions asked in value management are:
Some of the questions asked in value management are:
1. What is it?
2. What does it do?
3. What is it worth?
4. What does it cost?
5. What else will do?
6. What does that cost?
In the development of value management following are encouraged:
In the development of value management following are encouraged:
§ Protect those in the group who are vulnerable
§ Listen to other’s point of view
§ Eliminate status or rank
§ Value the learning in mistakes
§ Set up win-wins
§ Share the risk
§ Assume it can be done
§ Take on faith
Cost Studies:
Cost sensitivity - The cost sensitivity of an element is dependent on the cost of the element to the total cost of the building. For any element to be cost sensitive, any change in its cost must significantly affect the initial building cost. The element is cost sensitive as regards quality and performance only where the quantity factor is high and how sensitive depends on combined costs of other elements.
Cost Studies:
Cost sensitivity - The cost sensitivity of an element is dependent on the cost of the element to the total cost of the building. For any element to be cost sensitive, any change in its cost must significantly affect the initial building cost. The element is cost sensitive as regards quality and performance only where the quantity factor is high and how sensitive depends on combined costs of other elements.
Development
Economics: Various sources of funds:
a) Owner’s capital – This
includes retained earnings in the form of profits, and is the most economical
source, should it be available. The use of trading funds, deferred expenses for
goods and materials or money set aside for taxation purposes may also be
available in the short term.
b) Bank overdraft – This is
unlikely to be available as a source of finance for building development. This
may be available for bridging purposes. High rates of interest are generally
charged by banks.
c) Loans – This is a long
term loan at a lower rate of interest. It is common for small firms to obtain
this form of loan from banks. However a large organization may choose an
insurance company, or a financial corporation.
d) Shares – Property companies are able to raise
capital by selling shares to purchasers who then receive a share of the profits
when distributed. There are two types of shares.
e) Hire purchase and
leasing – If a firm has insufficient capital for both equipment and
development, it can obtain the capital by hire purchase, which is in effect a
loan, and so as to release its capital for development. The firm may choose to
lease the equipment for a minimum period, with an option to purchase at the end
of the time period.
f) Installment finance –
Major building works are paid for on the basis of interim payments. The price
of the project is paid for on an installment basis, usually representing 90% of
the value of work complete. Payment by this way helps to reduce the borrowing
requirements. The developer, where he is not the contractor, may be able to offset
these sums by either forward selling or pre-selling methods, where monies are
received in advance of completion.
Note:
Preferential shares: These carry a fixed rate of interest which shall be paid
irrespective of whether the company makes profit or not.
Equity shares – The profits/ dividend are paid to
the purchasers equally only after the dues to preferential
shares/ debentures are paid in full. Even if the company goes into liquidation,
all the dues of debenture/ preferential holders are paid in the first instance.
Debentures – These are essentially loans to
the company at a fixed rate of interest and do not allow their holders to vote.
They must be paid first irrespective of whether the company makes profit or
loss.
Life Cycle Costing
1.Understand the
principles that affect the buildings life.
2.Identify the factors
that affect the physical deterioration of buildings.
3.Consider the different
forms of obsolescence that affect property.
4.Recognize the
variability in the lives of building components.
5.Identify the problems
that are inherent with component life data.
6.Understand the
relationship between inflation, interest rates and discount rates.
7.Recognize the
significance of taxation on the whole life costing calculations.
Lean Construction:
Eliminate waste: It can include mistakes, working out sequence, redundant
activities and movement, delayed or premature inputs and products &
services that don’t meet customer needs.
Primary focus is on moving closer to providing
product that customer really wants by understanding the process including
identifying waste within it and eliminating step by step.
Designing is identifying the right product in terms of customer needs and
then designing it correctly as coherent buildable products and not just styling
the exteriors. Design development target shall include reducing design changes
and process iterations.
Precisely specify value from the perspective of ultimate customer. Clearly
identify the process that delivers what the customer values and eliminate all
non value adding steps.
Pursue perfection by continuous improvement.
