#010 Design Economics and Cost Planning (PART 1) 🏠🤑
Updated: Oct 17, 2021
Hello friends 👋
This week I’m going to briefly go through the Design Economics and Cost Planning competency. It’s probably the competency that I am most comfortable with at present because I have logged a lot of experience against this topic over the last three or so years. I will be only covering Level 1 in this post!
To become a chartered quantity surveyor, you have to be certified to a Level 3 status for the following 6 competencies:
Commercial management (of construction works) or Design economics and cost planning.
Construction technology and environmental services.
Procurement and tendering.
Project finance (control and reporting).
Quantification and costing (of construction works).
You must also achieve Level 2 in two of the following:
Commercial management (of construction works) or Design economics and cost planning (whichever is not selected as core competency)
Conflict avoidance, management and dispute resolution procedures or Sustainability
Corporate recovery and insolvency
Programming and planning
Project feasibility analysis
I’ve chosen Risk and Contract Administration as my optional level 2 competencies!
So what is Design Economics all about?
I think the best way to deal with the APC is to pay very close attention to what the RICS say:
This competency covers the impact of design and other factors on cost throughout the life of the building and the control of cost during the pre-contract stage, including how design decisions and construction processes impact on construction and operational costs. They must have a thorough understanding of techniques used to manage and control costs pre-contract. RICS – QS Pathway Guide
As mentioned above, there are 3 levels to this core competency and level 1 is all about the following:
Demonstrate knowledge and understanding of the main factors that affect design economics over the whole life of a building. Demonstrate knowledge and understanding of how cost planning assists in the financial control of projects during the design development stage. RICS – QS Pathway Guide
When I was first starting the APC I struggled to find a lot of information about how to attack each of the competencies. If you are not from the construction industry, unfortunately, it can become a case of “you don’t know what you don’t know”. I'm going to try and go through the examples of knowledge comprised in this level to hopefully give you an idea of what you may need to cover.
DISCLAIMER: The following is not an exhaustive set of notes, but it’s an attempt to help those who, like me at the beginning, did not know where to start! Please feel free to let me know if I have said anything incorrect or out of date!
The rules under which Order of Cost Estimates and Elemental Cost Plans are produced:
Order of cost estimate – means the determination of possible cost of a building(s) early design stage in relation to the employer’s fundamental requirements. This takes place prior to the preparation of a full set of working drawings or bills of quantities and forms the initial build-up to the cost planning process (NRM1).
Essential OCE’s are really rough documents that intend to give a client an idea of how much a project will cost.
OCE’s can vary quite significantly depending on the stage of the project e.g. you have functional, floor area and elemental estimates and formal cost plans – each variant increasing with detail.
The question you might is who decides the format of OCE’s? if everyone did it differently there would be havoc. Thankfully rules for estimating and cost planning exist and the RICS have written and recommended the New Rules of Measurement (NRM).
The NRM has 3 versions for various things but let's focus on NRM 1 for now.
This essentially brokes down the various types of OCE and how you need to measure and lay them out.
As mentioned above, the NRM has a few types of OCE:
Floor Area Estimate
Formal Cost Plan (1,2 and 3)
The NRM isn’t the only set of rules. The railway industry has its own – the Railway Method of Measurement which is controlled by Network Rail.
Main factors that affect design economics:
You can categorise the main factors that affect ‘design economics’ into the following:
Geography – the geographical location will definitely impact the cost of a project. For example, if the work is in a relatively uninhabited area with a lack of labour or material supply, this may drive up the cost as the items may have to be imported in.
Site restrictions – the physical location of the site may also have an impact. For example, if the site is in a greenfield site with no access restrictions it will be cheaper than building something in a heavily congested city centre.
The shape of a building can have a dramatic impact on the cost of a project. A square building will be cheaper than a building that is L shaped – not only because of potential additional material but because of the additional labour time, it will take to build the shape.
Part of this is also about height – taller buildings are inherently more expensive because after you get past a certain height you need to start thinking about adding lifts and installing ventilation, heating, chilling services.
This one is pretty straightforward, the more expensive materials you choose, the more expensive your project will be.
This one is not really obvious to those who are not construction minded. The longer the project duration the longer and more costly the preliminaries will be.
Preliminaries refer to the cost of getting the site ready for the project to be operational i.e. site huts, cranes etc.
Prelims aren’t the only thing to consider, for large schemes e.g large railway schemes, you will also have to consider the potential cost of design fees and any separate project management fees (as is required by the RMM). In such instances, you will tend to find that the latter often cost more than the physical works themselves.
Life Cycle Cost
This refers to the operational and maintenance of running the built asset after it's been built. People don’t necessarily always think about this, but if a building is going to last 100 years and your organisation is going to own that building for that period, it might be worth considering how much you are going to spend running that building.
Design decisions can be made which in some instances (not always) mean the construction cost is higher but the overall lifecycle cost is lower …
You can go into a lot more detail on the above but those are some of the key points to consider. How does cost planning assist in the financial control of projects during the design development stage?
OCE’s and cost planning is vital for clients to understand what they are going to spend their money on. When a large project starts it usually follows some sort of stage-gate process, for example, the RIBA Plan of Work, or the Guidance for Railway Investment Projects (GRIP).
The early stages of each of these stage-gate processes involve refining the design from concept to detail to single option etc – in order to get the client to truly understand what their built asset is.
During that design refinement process, QS’s can assist the client by running cash flow projects and embarking on value engineering exercises to achieve the client's requirements at the least cost.
The various stages of cost planning
As discussed above, under the NRM the are various levels of OCE:
Functional Estimate – This is a rudimentary early stage estimate where a rough cost for a project is ascertained based on a functional unit i.e. cost per hotel bed, per flat (apartments), per child (schools), per prayer space (church/mosque). Check the NRM for a full list of functional units.
Floor Area Estimate – This is a more detailed version of the functional estimate, the preliminary design has been created by the client design team, and we now have a rough understanding of the size of the built asset. By understanding the floor area, we can apply rough metrics based on how similar projects cost on an m2 basis.
Elemental Estimate – Again this is more detailed than the previous. The idea is that we can start to break down the asset into the constituent building parts:
Stairs and ramps
Windows and external doors
Internal walls and partitions
Fittings Furniture & Equipment
Fittings Furniture & Equipment
Space heating and air conditioning
Lifts and conveyors
Fire and lightning protection
Builder’s work in connection with services
Prefabrication buildings and building units
Works to Existing Buildings
The benefit of this is that the client can start to see which group element is costing the most. For example, if he can see that his internal finishes are disproportionately high, he can take actions to mitigate – i.e. de-spec/alter the design.
Formal Cost Plan (1,2 and 3): Formal cost plans are the most detailed variant of the OCE’s. Ideally, there will be three iterations of the cost plans, each one increasing in detail as the design develops.
As noted above during the Elemental estimate stage you will be reporting costs for the element on an m2 basis. For example, the substructure for building x will be £800/m2.
Once you get to the cost plan stage you can start breaking this out into whether it's strip foundations, piles, a raft etc.
The point of all of this is to give the client as much transparency as possible as to the possible cost of their built asset. As the design and estimate develop, more and more information will be available to the client to make some key decisions. Sources of Cost data
Clients pay quantity surveyors to provide robust pricing information for potential pricing information. So where do QS’s get their cost information from? Cost information can be categorised into four main areas:
Past project data – This is the most reliable source of data because it is data that the QS knows and understands from previous projects – either project they handled themselves or from their colleagues, therefore they understand its provenance.
BCIS – Building Cost Information Service – This is an industry service whereby firms submit cost analyses of projects. These can then be accessed by everyone who has a BCIS subscription. This can be useful when trying to validate costs from a benchmarking perspective, but I always take BCIS information with a pinch of salt.
Pricing books – These are books like SPONS which have a library of cost information for various things. These books also contain constants that help you identify how long it will take for a gang or individual to do various tasks. Again these can be useful as reference material but you need to take these with a pinch of salt also. The information printed in these books are collected at a point in time over a long duration, therefore they may not take into account changes in legislation that increase or decrease costs, changes in construction technology or market forces.
Supplier quotations – These are pretty self-explanatory, generally, suppliers will provide quotes for isolated pieces of work, but again these should be treated with caution. When The overall scheme is procured, that isolated piece of work may be different in cost as suppliers will take into account overall profitability etc. Adjustments that may be required for factions including location, specification, time and market forces
A QS is not just interested in the bricks and sticks element of construction, they have to be cognizant of the social, economic and political environment too! For example, over the last few years Brexit has been on the brain and the impact the new immigration system will have on labour supply and in turn the cost of construction.
In terms of time and location, we can use BCIS indices in order to update pricing information to the current pricing base date and locational area.
Okay so the above was a quick run-through for the level 1 element of the design economics competency —> if you have any questions or queries please give me a shout!
Have a great week!