A Guide to Cost Sources - O'Grady

1 A Guide to ConstructionCost SourcesCommissioned by:Ontario Construction SecretariatAuthored by:Prism Economics and Analysisand the Department of Civil Engineering,University of TorontoMarch 2001A Guide to cost SourcesA Guide to cost SourcesAs the industrial, commercial and institutional (ICI)marketplace becomes increasingly global, the competition tohost new facilities also becomes more intense. Decisions byowners on where to build are often based upon a conceptualestimate, with construction costs being part of that factors include (but are not limited to) projected returnson investment, location-specific tax relief, energy availability,and operating is important to put construction costs in context. For a newindustrial facility, construction cost comprises both the cost ofconstructing a building and the cost of equipping the following chart from Richardson Engineering Services,Inc.

2 Illustrates the cost breakdown for a Toronto area Canadian locations would have a similar cost from Richardson Engineering ServicesAs can be seen, for a typical processing plant, building andsite work accounts for only 20% of the total costs includinginstallation of processing equipment. Labour costs account for21% of the total construction cost (9% in building and siteconstruction, and 12% in processing determining the cost of construction in the preliminarystages of project development, several cost indexes arecommercially available. These differ in their intended use andtheir reliability. One index may depict the cost of constructionin a certain city or area as very competitive globally, whileanother may indicate that the same location is report discusses the assumptions behind constructioncost indexes available in the ICI industry and compares theresulting indication of cost competitiveness using Toronto asthe answers the question: what is the base ( ) for an index.)

3 cost indexes can be normalized on time orlocation. Often, indexes are normalized to a baseline value of100 assigned to a specific year and location. For example, anindex might take as its baseline 100 as the cost of building a20 storey office building in Toronto in 1992. Locations may bedefined as cities, telephone area codes, provinces/states, orcountries, depending on the level of detail and the intendeduse of the index. The assumptions and methodology behindeach index is unique, therefore the values are not , Output, and Hybrid IndexesThere are several facets of cost indexes that may affect theirapplicability. First, it is important to know the philosophy100% ConstructionCost20% Buildings& Site80% ProcessSystem55% FieldMaterial45%Labour75%EngineeringEqui pment10% FieldMaterial15%LabourA Guide to cost Sourcesbehind the index.

4 Generally, they are characterized as input,output, or hybrid indexes are compiled from a shopping cart of commonmaterials, equipment, and trade labour hours. They representthe inputs to the construction process and reflect the marketprices for these items. For example, an input index may bebased upon the cost of 100 m3 of concrete, 50 hours each fora carpenter, mason, plumber, electrician, and an ironworker,and 200 hours each for a backhoe and a mobile crane. Localcosts for the items in the shopping cart are determined forevery location covered by the index, and summed. They arethen normalized to the baseline to produce the indexes do not contain any assumptions or adjustmentsrelated the local labour productivity although some effort mayhave been expended to generally proportion the quantities oflabour and materials.

5 It is important to note that the quantitiesare constant in every location. This means that some aspectsof the construction process are not captured, such as labourskill levels or practices and local building code the use of input indexes is limited, they are the simplestto produce and contain the least error. Local hard costs arecollected from collective agreements and materialdistributors/retailers. Importantly, these indexes are not biasedby assumptions or estimates of local conditions. This indexmay be useful for construction companies that move their owncrews between projects and only need to know the differencesin the cost of indexes attempt to measure the total cost ofconstruction of a completed structure in each location. This is 1 Mohammadian, R.

6 , and Seymour, S., 1994, Construction PriceIndex Methodology, 1994 CSCE Annual Conference, Winnipeg, MB,Canadaachieved in one of two ways. First, actual tender prices forprojects are collected. Because every project will havedifferent parameters, the costs must be adjusted to account forthe different project characteristics. Although these indexesmore closely represent real costs, it is extremely difficult tocollect this information and to adjustment the costs in areasonable way to reflect the effects of the different projectparameters. For example, the cost of constructing a high risebuilding will be affected by the footprint size and shape, thebuilding height, the interior finishes, the presence ofunderground parking, and ground second procedure is to estimate the cost of constructing aspecific building.

7 The various characteristics of the building areoutlined and estimates are solicited from practitioners in eachlocation. While this method produces indexes that reflectlocation conditions including labour skill, availability, andproductivity, it requires significant cost estimating care must be taken to ensure that the assumptionsmade in the specifications are acceptable across all method introduces uncertainty and possibly biasesbecause the estimated costs are dependent upon thepractitioners. When tenders are submitted for a project, everybid that is submitted has a different price. The index costdeveloped by the estimator may affect the perceivedcompetitiveness of that location by the users of that indexes exploit the ease of input index developmentand the reliability of output indexes .

8 Instead of providingindexes based on the total cost of a project, hybrid indexesfocus on the installed costs of smaller building elements, suchas foundation walls, insulation or roof membranes. Buildingelements are usually organized using MasterFormat. Often,labour cost , material cost , and total cost including overheadsare Guide to cost SourcesIt is important to understand the basis of these indexes . Ifcosts are provided for each location, then they may containproductivity differences. If the cost is ascertained for a singlelocation and then applied across locations using a locationindex, the assumptions behind the location index must also beconsidered. Often assumptions are based on labour hourlycosts and material costs, with a standard productivity rate andoverhead rate applied, making them more similar to an inputindex than an output MethodA second facet of the cost index relates to how the costinformation collected over several projects or locations iscompiled into a single index.

9 Several schemes have beendeveloped including using simple averages, medians, modes,inverse averages, and product roots. Each method results in adifferent index value even if the same data are used. In mostcases, the mean (the mathematical average) or the mode (themost likely value) is used based on a sample of 3 costestimates. For example, consider three costs collected as$ , $ , and $ The mean would result in a cost of$ whereas the mode may be interpreted as $ small sample sizes are usually used, somesubjective judgement must be used to ensure the results arereasonable. Occasionally, a confidence level is used as thevalue. Assuming a normal distribution was fit to these data andan 85% confidence value was desired, this would result in acost of $ It is obvious that the method significantly affectsthe resulting reported cost , and they are all correct based ontheir $ Likely$ Confidence$ , the reliability of the data is always in question.

10 Themethod used to collect the cost data is very important toensure the data are representative of the political andeconomic conditions. Data collection may be done by phonewith associated firms (engineers, quantity surveyors, and/orcontractors) providing information, by survey of publishedlabour, material, and equipment costs, or by review ofcompleted project files. Where associated firms are providingthe information, it is important that they all understand theassumptions that must remain constant for all locations, and tonot allow personal or local biases affect the reliability of Guide to cost SourcesResearch ObjectiveThe primary objective of this research was to: Develop a reference Guide that presents the keycharacteristics of each construction cost source separatelyand allows convenient comparisons of was achieved by collecting the cost Sources , interviewinganalysis and publishers, documenting results and preparingthe Guide .