Introduction to

Construction Economics
The nature of construction economics
Purposes of cost control
Importance of cost control
Cost advice
The principles of cost control
Construction Economics
Construction economics is a branch of general
economics.
In general, economics is a scientific study of
people’s behaviour in relationship to scarce
resources that have various uses.
Construction economics is to guarantee the
effective use of resources in the industry in
addition to increasing construction work. It
stresses on the optimum allocation of resources
to the building owner and the developer.
Construction Economics
Consists the application of the techniques and expertise
of economics to construction projects

Includes a study of the following:

A client’s requirements – design is kept within the
available funds
The possible effects on the surrounding areas if the
development is carried out
The relationship of space and shape
The assessment of the initial cost
The reasons for and method of controlling costs
The estimation of the life of buildings and materials
 Clients want…
Certainty of price
Projects constructed within budget
Completion on time
The best quality possible for the price
Value for money
No surprises
Contractors and consultants want…

A reasonable return for the risks they take

Payment on time
Clients who do not keep changing their minds
Satisfied clients
Repeat business
The pressure to change
Society is having to cope with rapid
technological and sociological change at a
pace never seen before
Construction projects are more complex
The increased number of groups who have
interest in a project
Modern practice in design, where new ideas,
techniques, materials and components are
used
 Cost Control
Terminology:
Estimate – The estimated cost based upon
information that is available ranging from
brief to detailed design information. A
contractor estimates the cost of a project and
submits a tender, which is a contractual offer.
Forecast price prediction – Term sometimes
used in practice to represent an estimate.
 Cost Control
Terminology:
Budget – The amount established for the
project which should not exceeded
First estimate – Term we have used already
which is the client’s first estimate and is often
used to establish the budget.
Final account – The cost of project upon
completion.
 Purpose of Cost Control
To keep expenditure within the amount allowed by the
client

Client stipulates the desired cost limit and the design team
examines the feasibility of keeping the first estimate within
this amount
 Purpose of Cost Control
To achieve a balanced design expenditure between the
various elements of the buildings

Balance of expenditure – ensuring the cost is distributed

across the elements to meet the clients’ and designers’
requirements.
Purpose of Cost Control
To provide the client with a value-for-money project

Fitness for Quality

purpose

Balance
Life cycle
Initial
cost
capital cost
Importance of Cost Control
Clients less likely to tolerate delays caused by redesigning
due to tenders are too high
There is greater urgency for the completion of
projects, to reduce the amount of unproductive capital
or borrowed money, and few building clients have
sufficient time for the redesign of schemes consequent
upon the receipt of excessively high tenders.

Client’s requirements are more complex

Building clients’ needs are becoming more
complicated, more consultants are being engaged and
the estimation of probable costs becomes more
difficult.
Importance of Cost Control
Employing organsations, both public and private, are
themselves adopting more sophisticated techniques for
the forecasting and control of expenditure, and they in
their turn expect a high level of efficiency and expertise
from their professional advisers for building projects
and require a broad and comprehensive range of
services.

Wider and new techniques, material and methods of

construction can be chosen during designing has
produced variety and traditional method of estimating
are unable to cope in these circumstances
 Importance of Cost
Control
Contractors’ profit margins is reduced
resulted their greater cost-consciousness to
redress possible losses
Elimination of waste and emphasis on the use
of the world’s scarce resources
Greater cost-effectiveness and a need to
examine construction costs including initial
cost, whole-life costs and total-cost appraisal
Shortage of funds for capital purposes due to
world recession, high inflation
 Cost Advice
QS are widely recognized within the industry as
the most appropriate cost advisers with their
measurement and valuation skills
Cost advice is crucial at the project inception due to
decisions that affecting the size and quality of the
works are determined
The type of cost advice will vary depending on the
individual circumstances and the nature of the
design and specification information available.
Realistic cost advice contribute to the success of
the project
 Cost Advice
Advice may be given on the strategic planning of a
project which will affect the decision whether or not
to build, where to build, how quickly to build and the
effect of time and costs or prices and on profitability.
During the design stage, advice is needed on the
relationship of capital costs, maintenance costs and on
the cost implications of design variables and differing
constructional techniques.
The cost control process should be continued through
the construction period to ensure that the cost of
building is kept within the agreed cost limits.
 Cost Advice
Different stages of the development cycle required different types of
cost advice:
Budget estimating based on a clients’ brief
Cost advice on different tendering and contractual arrangement
Pre-tender estimating
Comparative costs of alternative design solutions
Elemental target costs for cost planning
Whole life cost planning
Tender analysis, reconciliation and recommendation
Interim payments and financial statements
Final account
Cost analysis of accepted tenders
Cost-in-use
Taxation and insurance considerations
The Principles of Cost
Control
Principle 1 - There must be a frame of
reference or set of conditions which must
adhered to.

Establishing a realistic first estimate.

Planning how this estimate should be

spent among the parts of the building.
 Principle One
Establishing a realistic first estimate
The first estimate
Figure that clients remember most
It sets the budget
Accepted realistic first estimate is considered
as the cost limit for the project
Cost limit defined as the cost agreed between
the client and design team as the amount
beyond which the project may not be
pursued.
 Principle One
Planning how this estimate should be spent
among the parts of the building
Splitting the cost limit into a number of
smaller cost limits (cost targets), one for
each part of the building.
The sum of the cost targets must equal to the
cost limit.
 Principle One
Planning how this estimate should be spent
among the parts of the building
Element:
 An elements is often defined as a major
component common to most buildings
which usually fulfills the same function, or
functions, irrespective of its construction
or specification.
 Principle One
Standard Elements in
BCIS
In the case of BCIS list of
elements, there are 7 group 1. Substructure
elements and 30 detailed 2. Superstructure
elements. 3. Internal Finishes
Most tender documents will A. Wall finishes
often include a sum for B. Floor Finishes
contingencies (for unforeseen C. Ceiling
work encountered during site Finishes
operations). 4. Fittings
 Principle One
Standard Elements in BCIS
5. Services
A. Sanitary appliances I. Gas Installations
B. Services equipment J. Lift and conveyor
C. Disposal installations installations
D. Water installations K. Protective installations
E. Heat Source L. Communications
F. Space heating and air installations
treatment M. Special installations
G. Ventilating systems N. Builder’s work in
H. Electrical installations connection
O. Builder’s profit and
attendance
 Principle One
Standard Elements in BCIS
6. External Works
A. Site works
B. Drainage
C. External services
D. Minor building works
 Principle Two
Principle 2 - There must be a method of
checking or a feed-back system.
To detect and measure departures from
targets and thereby check that the estimate is
being spent as originally established.
 Principle Three
Principle 3 - There must be a means of remedial action
Re-designing the element
Changing the specification
Seeking an alternative solution

Take immediately before the design process moves on

too far

Remedial action ensures that expenditure is contained

within the amount agreed between the client and design
team

When suitable remedial action is impossible, additional

finance must be supplied to the project
 Basic Approaches to Design Cost
Management
DESIGNING Client establishes cost limit/budget
TO A COST Revise
cost limit

Design team develops design within

budget

Revise
Design within budget? design

Proceed Yes No
 Basic Approaches to Design Cost
Management
COSTING A Client’s brief on the requirement
DESIGN Revise
requirements

Design to suit client’s requirements

Revise
Design form the cost limit design

Affordable Not
Proceed affordable