Project Management for the Built Environment by Low Sui Pheng

Author:Low Sui Pheng
Language: eng
Format: epub
Publisher: Springer Singapore, Singapore

7.2 Cost Components

a. Four types of costs

Cost estimating takes into account the various types of costs incurred for an activity that is needed to complete the project. There are generally four different types of costs to be considered for cost estimating. The first type is direct costs which refer to costs that are directly attributed to the project and cannot be shared among other projects that are also progressing at the same time. Examples of direct costs include hotel charges, airfares, long distance telephone charges, drafting expenses to produce drawings, architectural modelling costs, etc. The second type is indirect costs which are also often referred to as overheads. Indirect costs are typically costs that can be shared among projects that are running at the same time. These include for example rentals and utilities bills for head office premises as well as software licensing fees for the entire organization. A company vehicle that is shared among different projects is another example of indirect costs to the organization. The third type is variable costs which as the name suggests, can vary depending on market conditions. For example, costs of materials can vary depending on the demand and supply situation in the marketplace. Such a situation can occur during an economic recession where supply may exceed demand, causing prices of materials to come down.

On the other hand, supplies from overseas may be severely curtailed because of trade restrictions which then cause prices to increase. The fourth type is fixed costs which as the name suggests, will remain the same throughout the project. For example, the professional lump sum fees paid to the design consultants are fixed even if there is a delay in project completion. Similarly, the annual retainer fees paid to a law firm are fixed for that period of time regardless of the number of consultations made by the project organization.

The cost estimates built up from the four types of costs can however be reduced by exploring and finding new and better ways of doing things. This is where value engineering is applied which is a systematic way in which less expensive ways are identified and used to complete the same work. For example, the project may have originally identified System A for constructing the structural frame of a building at a certain cost. The cost for using System A may be viewed by the client as being expensive and he makes a request to explore other comparable systems to achieve cost reduction. Through value engineering, the project team can study comparable System B and System C to determine if the same work can be completed within the same time period but at lower costs. Upon completion of the value engineering exercise, a more informed recommendation is then made to the client for approval.b. Historical cost information

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