The Estimation of bid price or tender cost of a construction project is calculated as the sum of the total cost of construction and mark-up price. Total cost of construction project consists of direct cost and indirect costs for the construction works.
Direct cost of construction project includes the cost of materials, labors, plants and equipment while the indirect costs are associated with expenses on personnel recruitment and their training, research and development required for the construction works.
Thus a direct cost is associated with the activities performed at construction site, i.e. if the activities are not carried out, direct costs are not incurred. In case of indirect costs, they are non-traceable based on activity. Indirect costs may have incurred even if the construction works / activities have not been performed.
Thus, following formulas can be used to calculate the cost of construction projects:
Direct Cost = Labor Cost + Plants & Equipment Cost + Crew Cost + Materials Cost + Subcontractor Cost
Indirect Cost = Project Overheads + Common Plants & Equipment Cost + Common Workmen Cost
Mark-up Cost = Profit + Contingency + General Overheads + Allowance for Risks
Construction Project Cost = Direct Cost + Indirect Cost + Mark-up Cost
Estimation of Direct Cost of Construction Project:
Direct cost of construction project consists of cost of materials, labors, plants and equipment, subcontractors and crew costs. Following are the guidelines for estimating components of direct cost:
Cost of Material:
Cost of materials includes cost of all construction materials which will go into the building or the construction work. These materials include cement, aggregates, reinforcement steel etc. The cost of material consists of actual cost of the material at the source, their packing and handling charges, transportation, excise duty, sales tax, entry tax etc. on the actual rate of material.
Therefore, the cost of material = Actual cost of material at the source + packing and handling charges + transportation cost + taxes
Cost of Labor:
The cost of labor is the payment made to labor for works done at construction site on daily or weekly or monthly basis. The cost of labor includes the basic wage paid, bonus payments, cost for labor welfare schemes such as pension, insurance, health benefits, notice pay, housing, food, retrenchment, mobilization and demobilization costs.
The cost of labor are influenced by local laws. Thus they vary from place to place and also depend on skill levels of the labors.
Cost of Plants & Equipment:
Cost of plants & equipment covers the cost incurred towards owning and operating the equipment for various construction activities.
The cost of plants and equipment includes cost of owning and operating, mobilization cost, cost of fuel, oil and lubricants, cost of repair and maintenance of equipment, cost of spare parts, cost of operators, drivers, statutory expenses, personnel, carrier expenses and demobilization costs.
In a large construction project, the main contractor has one or many sub-contractors under them for various construction works or activities or specialized works such as waterproofing, wood works, aluminium works, anti-termite treatments etc.
The cost associated with specialized construction work or any work done by a subcontractor is called as subcontractor costs.
The main contractor gets the quotation from subcontractors for the proposed construction work to be done by them. Then the cost of works to be completed by subcontractor is considered as subcontractor costs.
A crew is a group of men (workers, supervisors etc.) and machineries which are assigned a particular type of construction activity such as excavation, piping, welding, woodwork etc.
The cost associated with these crew to complete the given work is taken as the crew cost. This cost can also be taken directly instead of calculating cost of labor, equipment for such works.
For example, excavation crew consists of 2-3 workers, excavator machine, dumpers etc. By knowing the capacity of this crew to complete the work in a time frame and cost of the crew per unit time, we can compute the cost of excavation directly without calculating the cost of labor, equipments separately.
Estimate Indirect Cost of Construction Project:
The indirect costs are also called as overheads. A construction project has many activities to be complete. Some costs are incurred in a construction project which are not associated with only one activity and they can be distributed to many activities. Thus these costs are not considered as direct costs and considered separately as indirect costs.
For example, for a material cost, the indirect cost can be purchase cost, inventory carrying cost etc.
The indirect cost includes project overheads, common workmen, common plants and equipment costs.
Project Overheads Cost:
Project overhead cost consists of following in a construction project:
i) Salaries and benefits – This includes the salaries and benefits to staffs including engineers, supervisors and other administrative posted at construction site. The gross salaries of these are considered for this cost. Thus, salaries and benefits to staffs shall be considered in bid price estimation calculation.
ii) Insurance cost – A construction project possesses many types of safety and health hazards. Thus insurance for life and health and provided to all staff and workmen involved in the construction project.
iii) Financing cost – A large construction project required a large amount of money to mobilize and carryout the construction activities. For this, the loans are arranged from various banks which attracts interest. Also costs are incurred during bidding process such as bid bond, performance bond, advance bond and payment guaranty, retention guaranty, letter of credit, establishment charges, work insurance, fines and penalties etc. So, these costs are appropriately considered while estimating bid price or tender cost of a construction project.
iv) Conveyance cost, Travel and transfer Cost – Many times equipments, staffs and workmen need to move from one place to another for various purposes which incurs a cost known as conveyance cost. This is also considered while estimation of bid price of a construction project.
v) Temporary Site Installation Cost – Temporary site installation such as site office, workshops, stores, fencing, warehouses and storage areas, sanitary, first aid, furniture and fittings, computers and other electronics, temporary roads, car parking and even residential units and messing facilities are provided at construction site. The cost associated with these temporary site installations are also considered in bidding price calculation of construction project.
vi) Clients and Consultants Requirements – Many times a contractor has to provide facilities to client and consultants such as office staffs, office space, furniture, telephone etc. The cost associated with these facilities also have to be taken into tender cost calculation of construction project.
vii) Utilities Cost – The cost associated with utilities such as water, power etc. for office and residential areas are to be borne by the contractor and shall be considered for bidding price estimation calculation.
viii) Taxes and Duties – Taxes such as contract tax, excise duties, custom duties, income tax, sales tax, service tax, value added tax etc. are different type of taxes which may be application for a construction project. Thus cost of these taxes are considered appropriately for bidding price calculation wherever applicable.
ix) Miscellaneous Expenses – There can be other expense other than mentioned above such as administrative expenses, field expenses, stationary, documentation, communication, tools and consumables, safety and protective equipments etc. The cost associated with these miscellaneous expenses are considered for tender price estimation calculation.
Common Plant & Equipment and Common Workmen Cost:
Some plants and equipments and construction workers are associated with many construction activities. They are grouped and their cost is calculated separately and included in the tender cost – bid price estimation calculation of a construction project.