How much will a project cost? Construction projects are capital-intensive. Exactly how capital-intensive a project is will depend on the size, complexity and quality of the project. It also depends on the choice of which line items to include in the project cost. The design and construction industry recognizes two major cost definitions: construction cost and project cost. Both are useful to know, and can vary significantly from each other. In general, construction cost is the cost to hire a contractor. Project cost is the construction cost and all other costs, both internal and external. Construction cost is also known as hard cost. Project cost is hard cost plus soft cost, or costs other than general contractor costs.
It may seem construction cost is the cost of materials and labor. One might imagine construction cost is the sum of each trade’s material and labor costs. These costs make up the majority, but not all, of construction cost. Most of the difference comes from general conditions costs, contractor overhead, and profit.
General contractors provide a needed service on projects. They make sure the foundation contractor does his work before the framing contractor, and the electrical contractor shows up before the drywall contractor. They are also responsible for jobsite safety and cleanliness. They collate and submit the various pieces of information that must flow from the construction crew to the architect and owner. All these tasks are required on complex projects. The requirement to perform them is known as the project general conditions. They obviously cost money.
Overhead and Profit
Contractors must maintain an office. The money to pay for the office comes from construction projects. In general, contractors charge a percent of construction cost to pay for this overhead. An efficient contractor will have lower overhead than an inefficient contractor. Profit is the return a contractor makes for taking on project risk. Contractor profit is similar to the profit in other industries. General conditions, overhead and profit are all costs associated with the work necessary to run a smooth project. Together, they may account for 25 percent of a project’s construction cost.
Required Scope Costs
An organization may contemplate a renovation and addition to its current facility. This work includes building an addition, and general renovations to existing space. The contemplated renovations will bring added utility: better circulation, better offices, a better reception area. With each project, building and land use codes may require improvements not directly related to the goal of immediate, functional goals. Parking, accessibility and life safety improvements are three areas of code-driven capital cost. Energy efficiency improvements may also be required. These are costs that ensure regulatory requirements are met. No matter how much an organization may want to build cheap, usable space, the law will require that space to be safe and energy efficient.
Required scope costs affect both the construction cost and the project cost, since they affect soft costs and hard costs.
In addition to costs associated with the general contract for construction, projects encumber other costs. Many of these are grouped as soft costs.
Design fees are the costs to have a project designed. They include the cost of an architect and engineers, which are generally lumped together. Design fees may run 10 percent of construction costs. Additionally, design fees may include the cost of code-required special inspections, and commissioning costs. Special inspections are the review of particular elements of construction that ensure critical systems are installed correctly. These include concrete strength and steel welds. Commissioning services can run the gamut, but encompass areas of the project that deserve a second set of eyes. Mechanical systems are an example of a part of the project where a second set of eyes on the design and construction can be valuable.
Permit fees and other regulatory costs are often lumped into soft costs. Building permits are not expensive, but permits that involve community approval can be expensive to secure. Think about neighbors who are against development, and the effort it takes to win them over.
In addition to the typical design fees, there are certain survey-type services that have costs, and that are usually borne directly by the owner. These include boundary and topographic surveys, soils surveys for wastewater system design, and geotechnical surveys for foundation design.
It is not uncommon for these soft costs to equal 20 percent of the construction cost.
After paying out all this money, is there anything else to spend on? The answer is yes.
Furniture, fixtures and equipment (FF&E) can be a significant portion of the project cost. For an office building, this might mean buying desks and chairs, but it might also mean buying printers, computers, and artwork. What about toilet paper? For a manufacturer, the FF&E budget may exceed the construction cost. Think about a microchip manufacturer.
Tenants may find they thought certain items were included with their new space. Window blinds, floor mats, whiteboards and a front desk: these are not always, or even usually, supplied with the building.
The new facility might be less expensive to run and maintain than the old facility, but it might not. Owners should be aware that new digs means new things to spend money on. Hopefully, the new facility is energy efficient, and made with durable, easy to clean materials. This will contribute to lower recurring costs.
What else? What are you and your staff doing to make this project happen? How much time have you sunk into the project? Some organizations choose to hire an owner’s representative to be their front person. Whether you hire out or handle interfacing with the architect and contractor directly, there is time (and therefore money) involved. This could be a significant investment.
Bottom line? When getting a handle on project costs, the total cost may be 50 percent more than the value of the goods and services put in place. A project never costs the same as the value of the walls, windows, and roof that make up the pieces. The coordination of trades, design, management, and internal effort are necessary, and significant. As I said at the beginning, an official project cost will depend on what line items get assigned to the project. That new printer might be included in the project cost, or it might not be. Either way, knowing how the full cost of projects is important, as well as knowing which cost centers belong in which revenue streams.