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Tuesday, September 20, 2011

Composition of total price of a construction project

The total cost of a construction project comprise of direct cost, contingency costs and margin.

Direct cost includes labor, material and equipment costs related with a construction project.

As for example direct cost for building foundation may contain the following :- 
  • Cost of formwork, reinforcing steel and concrete
  • Cost of labor to create and later strip the formwork, and position and complete the concrete
  • Cost of equipment cost related with foundation activities like concrete mixer.

Contingency costs affect overall project cost which happens during the course of the project. While estimating the project cost there is always some When estimating the cost for a project, product or other item or investment, there is always ambiguity regarding specific content of all items in the estimate, how work will be performed, what work conditions will be like when the project is executed and so on. These uncertainties may create risks to the project. These risk are sometime referred as "known-unknowns" as the estimator is conscious about them and based on past experience, can even estimate their probable costs.

Margin alias markup includes three component indirect or distributable costs, company-wide or general and administrative costs; and Profit.

Indirect costs relate to project-specific cost not related with a specific physical item. These costs may range from project management cost, payroll preparation, receiving, accounts payable, waste disposal and building permits.

Company Wide Cost comprises of costs not associated with project but occurred throughout the course of a project. These types of costs belong to the costs of some parts of company salaries and rentals. Company wide costs may also include the costs occur prior to or after a project. These types of costs relate to proposal preparation cost and the cost of outside auditing.

Profit for construction may come in two ways – Gross Profit and Net Profit. Gross profit is calculated by deducting the real cost of the job from the total price decided. The range of gross profit may range from 25 percent to 40 percent.

But the average net profit creates the bottom line of a construction firm. The average net profit is calculated by deducting overhead expenses from Gross Profit. Net profit is what is left after all expenses are deducted.

Posted by Rajib Dey
Business Development
Global Associates
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construction estimating
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