Estimating construction rate per unit of work

Competitive tendered price is one of the greatest factor to win a construction project. However in any business, one of the main factor is to make money. This is true and also applied to construction industry. Therefore winning a project is just a small portion of construction business but be able to secure and deliver projects within the budget is the main agenda of construction business.


HOW TO ACCOMPLISHED THAT TARGET???????


The answer is knowing how to estimate and doing the breakdown of the BUILT-UP RATE PER UNIT OF WORK.


Building the rate is in theoretically knowing the cost of every single item or component that involved in order to deliver the end product. In general these are some of the item that need to be include while estimating rate per unit work or product.


(1). Cost of the construction material
(2). Cost of the Logistic or transportation
(3). Labor cost
(4). Machinery cost
(5). Allow cost for wastage of material
(6). PROFIT MARGIN


Each of the item, from item no. (1) to item no. (5) need some simple calculation and have to be present into "per unit rate". It is then sum-up to create the cost of construction of a unit product.The next procedure is to apply item no.(6) into the sum-up cost.


For example if the cost of construction of a unit product is "W" and targeted profit margin is "Y%", the profit will be "W" X "Y%". let say that the outcome of this calculation is "Z". Hence the built-Up rate is the sum of "W" + "Z"


Calculation:
Item (1) + (2) + (3) + (4) + (5) = W
Profit Margin = Y %
Profit = W x Y% =  Z
Built-Up rate per unit product = W + Z


Built-up rate offered MUST inclusive of PROFIT and Construction Cost.

7 important factor affecting Roadworks cost estimation

7 important item that must be consider while doing cost estimation for road construction.

1. Cost of the construction material needed to construct a road.
2. Delivery cost for the construction material.
3. Machinery and labour cost involve during construction period.
4. material wastage, labour and machine inefficiency during construction. 
5. Increase of the price of construction material, Labour and machine in the near future.
6. indirect cost such as Insurance premium, material handling cost, safety and others.
7. profit margin.

Making money or Losing money in Construction.

Why contractor loosing money when doing construction? There is few reason why contractor always mentioning that they are loosing money a particular project. If we wanted to list down all of the reason, it will be quite a number of it. However let we know some of the reason.

1. Poor Project Planning by contractor.

2. Lack of understanding or knowledge on the current market trend for resources.

3. Ignorant on the principal, "make thing right at the first attempt".

4. Fail to ascertained all necessary cost that is not reflected in the contract Bill of quantity or drawing.

5.Bidding a project for the sake of winning it without thinking and analysed the pricing that been inserted during bidding process.

6. Fail to examine each of single page of the tender document  when doing the estimation.

7. Fail to notice what is the term and condition stated in the tender document during tendering process.

First of all let we jump to the item no.6 and no.7. Item no.6 is related to item no.7. Why is this so? The reason is if the bidder do not read carefully the tender document, he will tend to lose the important information which is not clearly stated in the bill of quantity. This scenario  always happened in a Lump Sum Contract. For instant, Inside the contract there might be special condition of contract which form part of the contract. What written inside the special condition of contract is Contractor need to abide to local authority, authority body or government agency rules and regulation. Then we derive from this clause, Who are these local Authority? 

Now we go deeper. Local authority,  can be any authority that have direct involvement in your project. For example Department of Occupation Safety and Health(DOSH), Local Council, Construction Industry Board, Board of engineers, Labour Department, Board of contractor under government and National board of Environment. Each of this department or authority body have their own rules and regulation which contractor need to comply with. For instant DOSH. When you do a construction project, You must first registered your project with them. registration might be no cost implication but the set of rules that you need to follow will required you to provide enough safety equipment and precaution. As and example, You are required to hire a full time safety office. how much is the cost that you need to pay for the Safety Officer for the whole duration of the project? second, You must provide all necessary safety gear for all of your workers at site. How much will it cost? This two item will easily cost you thousands dollar per month and just if imagine if your project duration is one year. How much do you think the cost will be? I have seen lot contractor underestimate this item or ignorant to this rules. When the project awarded to them then only they start grumble that they did not priced for it. Who's mistake is this? Sometime inside the Bill of quantity it only mention as "Contractor to provide all necessary safety and heath personal,equipment and ect for the whole duration of project" or even it being lump into an item as preliminaries and General. Then when this happened in the Bill of Quantity contractor will just insert some Amount which is most of the time under estimated. At the end of the day this item alone had cost a huge some to contractor.

As for item 7. worse case scenario, the special condition of contract does not allow for any claim on lost and expense due to whatever reason and also it does not allow for any price fluctuation claim for construction material as per current market rate for the month particular month when the purchase are make. If the increase of material price is very marginal, most probably contractor still can absorb the the cost. But if it happened as the scenario during the year 2004 until 2007 where the price of steel and other construction material gone up substantially,  What will be the cost that contractor need to pay? most probably it will contribute to a huge losses to contractor. Hence it is very important that during tendering stage contractor need to know what is the basis and the content of the tender document.

For all contractor, be cautious with the term and condition in the tender document when you do your estimation. If you already gone through these scenario don't let it happened again and for those who have not come across this type of rule and regulation, let this article become and important information for you to minimised your will be loses.

MAKING MONEY OR LOOSING IT

Hai All. This week I am making internal audit for a firm under provision of "Construction Management Services in civil, Building & Infrastructure works". Great..The Quality Management System (QMS) Manual was nicely in place and fullfill all the ISO 9001:2008 requirements. Procedure and processes to achieve their goal all had been properly documented and followed. The question here is how do they can loose so much in a project !!!!!!. It cause millions.

It is no body fault. That is construction. After a light conversation with the owner, I realise Who is the culprit behind all the event that make them lost so much. Here is it.

CLICK PICTURE TO PURCHASE 

Project planning( Click this to purchase at Amazon) had failed.
The project had been awarded, However they could not start the construction due to le land accusation problem.

Time.
The above issue was only resolve almost a year after the contract awarded. Cost increase.

Project Pricing.
Pricing was done and accepted however there is no clause allow for price fluctuation variation order. From tendering until start work, it take almost two years!!! market price for almost all construction material had increase and the worst part is it goes up above their pricing. It is not contractor fault. They had include such situation in their budget but they still get beaten.

Service provider.
Their main service provider had pull out from that project to avoid the losses. They pull out without making any profit. They make such a loss in form of had not been able to captured other opportunity to make money  from other project. They don't dare to take the opportunity due to the reason that the project they had committed to is a mega project to them. Hence they can't wait any longer and decide to give up the project.

The firm decision.
To continue with the project no matter what it takes. They cannot pull out because of legal implication on them. They will be blacklisted!!!!!....They had to proceed with a lost.

Minimising the Lost.(Click this link to purchase)
Actively look for ways to minimise losses. Negotiating Skills required...!!!!!


Moral of the story.
1. Step back If you are not prepared to continue.
2. planning is a way to maximize your profit and ability.( Click here to buy).

CLICK AND BUY HERE

Related Article in this blog :
Top Secret of successful construction project.
Project planning guide
Tendering Guide
Quality Documentation filing
Tendering : Evaluate your financial capacity
Construction tender bidding procedure and processes
Big money in Construction Industry
Making Money in Construction
How to reduce the construction cost
Winning a tender
Important of project Planning
How to bid and win any tender
Construction Management

Construction tender bidding procedure and process

In construction industry, the prominent words is "PROJECT" and "TENDER". There are few ways in securing  projects on construction. Among them are "direct Negotiation project", "Direct award project" and the most popular is "Tender Bidding".

Here the discussion will only focus on the construction project that need to be secure through the "TENDER BIDDING". In this procedure or process, client usually will applied few steps of filtering in order to select the best contractor  to do their construction work.

The first step will be the process of "call for tender". In this steps they will specifies what is their requirement, where is the exact location for the construction site, who can or allow to participate in this tender and etc.

The second steps will be the tender submission by tenderer. For all contractor that involve in construction industry, this is crucial steps to ensure their advancement to the next steps of this tendering process. In this process, client will review the tender document submitted. They will check for the "completeness of the tender document". At this stage client will ensure that all information required had been submitted by contractor together in their tender document. usually the required documents are financial background, resources capability, contractor background, current work load and also comments from third party with regards to the contractor performance in their past or present construction work that they undertake. All of these requirement actually spell-out under the section namely " instruction to tenderer". This is to be fair to contractor to eneable them prepare their tender document accordingly.

The third steps will be "reviewing the submitted information". During this procedure, client will read and examine whether the contractor is capable to carried the construction works. Client will rate all the information starting from contractor financial capability, Availabilities of their technical and supporting staff , machineries, plant and equipment that they have for the construction works, contractor past experience and also their current experience. This process will help client to estimate if the contractor will be able to carried out the construction work successfully. Let say  even-though Contractor A having vast experience in the similar project and having good performance and tract record in the past, however after weighing the financial capacity against their current work load, client found out that Contractor A is now overloaded, the construction work will not be awarded to Contractor A. This is mainly due to higher chances that Contractor A will not be able to deliver the project within the time frame required.

The final stage of this tender evaluation process is " tender offered price". In actual fact, before call for a tender, client already complete their own estimation cost. Hence in this process it is about choosing the most close offered price with their own estimate.This stage will determine which contractor will be offered the construction work.

To wrap up this discussion and if you are contractor that always fail in your tender bidding, than these are few key factor that you need to review.
1. Completeness of the tender document,
2. Financial against current work load.
3. Similar past experience.
4. comments from third party on your past and current performance.
5. Current resources that you have ( Technical staff, machine, Plant, Equipment and supporting staff.)
6. Financial against your offered price.
7. stay competitive in your offer by knowing the market rate in construction industry.

Happy tendering.

Big Money in construction Industry

Now a days, Construction Industry still maintaining it relevancy in improving any country economy. This is because in construction there is lots of other industry will involve. It covered vast range of industry. Some of the major field that directly involve in the construction industry are Manufacturing Industries, Financial,Timber industries, Transportation industries, traders for the construction material and also Labour.

By taking a glance on the few listed industries that having direct impact due to this construction activities, it only mean one thing, That is, there is lots of money to be grab in this industries. Take for instance. A 10 million worth in value of a project is awarded to a contractor. The ratio of the construction material to construction work is ranging from 6:4 to 7:3. with this ratio, it is about 6 Million to 7 million is for the manufacturer, supplier, and transportation. the remaining is for the labour cost. For contractor usually the profit margin will be ranging around 3% to 6% of the contract sum. with some simple calculation contractor will make 400K to 600K for a 10 million project. How about the the other industry that involve? This huge sum of money is vital to ensure that the economy keep on moving.

Without construction industry there will be no Houses, No road, No utilities and may other things.

However Construction industry is not for those who only think that they will make money with money. Person who involve in this industry must have knowledge, skill and commitment to ensure their success. It is very important that they know what is the risk in this industry.

Some of the major risk is Labour factor, follow by weather, the construction life cycle, Material and financial  and many more. Thus if you are thinking to involve in construction business because you have strong financial background, re-think about it.

Making Money in Construction.

How to make money in construction industry as a contractor is always tricky. This is simply because the profit margin are affected by few factor. The Five TOP FACTOR are as following.
1. Labour Cost.
2. Plant, Equipment and Machinery Cost.
3. Time ( how long will you be able to complete the works)
4. Construction Material.
5. Negotiation skills to secure a contract.

There is almost no contractor that can do all the construction work on their own. Most of them will categorized the works according to the scope of work and sub-let it to smaller contractor. By doing this the Main Contractor will have a better control over their own profit margin.

For example. Contractor A had secure a road project. throughout the whole contract the expected profit margin during the tendering or negotiation process was 12%. He then Split the works in to various category or trade with his profit margin of Maximum 7% to 10%. The balance, 2% is set apart for his subcontractor. With that scenario he already secure at least 7% to 10% of the project profit. His only problem is to make sure his Subcontractor can complete their works with-in the agreed contract period. If the Sub contractor failed to delivered the works, it is the Subcontractor duty to to ensure that what ever scope of work he undertake he need to complete it even with the extra cost incurred. Due to this possible extra cost had been taken over by subcontractor, it can be seen that the main contractor profit is almost undisturbed. At the end of the process Main Contractor can easily secure at least 5% profit from the project.

This strategy normally being applied by almost all contractor after considering the TOP 5 factor that will directly affect their profit margin.

BROKE DOWN CONTRACTOR

Have you ever been a broke down contractor?...

What does it mean with broke down contractor? it is very common that we here that contractor complaining that they cant bring some more construction material. this is not because that they do not have even a single sen but it merely because what they have is just enough to run the company. Most of the time construction payment is base on monthly or progressive payment certified by the client or their representative. However there is cases that after the evaluation and verification process after contractor submit their claim, contractor had being paid very late. some time they only received their payment after 3 months or even more. with this view, lets we make some calculation;

lets say, contract sum = $50M

construction period = 12months

Average (prorated) spending /months = $50M/12 = $4.167M

Hence total spending for 3 months = 3 X $4.167M =$12.5M

let say, Evaluation on work done take 2 weeks after progress claim submission.

therefore spending for 2 weeks =( $4.167/4weeks) X 2 weeks = $2.08M

The total spending from the date contractor submit their claim until they received their payment

will be;

=3 months spending + 2weeks spending = $12.5M + $2.08M = $ 14.58M

With that you have to fork out $14.58M!!!!!!!! its is a big sum of money.

Looking at this scenario, It is very important that a proper financial planning being carried out for every construction project.

This scenario is only for one project. what if you have 2 or even more project in hand !! It can be a deadly disaster...

Looking into this situation, if contractor is now well prepared with the financial planning when they are participating in a quotation or tender it will be a trap for your self...you will be one of the broke down contractor or even a bankruptcy!!!!!!!!!!!!

Construction is not for those that are not prepared to be a broke down person.

How to reduce the construction cost

How to reduce the construction cost.
Construction Industry is an industry like the other field of business. It is all about trading for what each and every one wanted for. The client will want to have a product that is value for money and the consultant always wanted to be part of the business with a reasonable price for their render service. The builder which known as contractor which will offer how much they need to be pay for realising the quality product.
The first stage that the contractor needs to do is win this competition. Next is start building the product with the agree contract sum between the client and them. When start building the product the contractor will have to find a way on how they can maximize their profit. The term is to do some cost saving in their activity in order to increase their profit margin from what have been included in their original contract sum.
There is a numbers of process or technique that contractor need to applied if they wanted to increase their profit margin. The answer is cost reduction for the construction. How can this being done. Here are some techniques that can be use.

1. Shopping for the cheapest and quality material available in the market.
2. Mitigate the risk of increase in construction work by sublet certain portion of work especially labour. ( Lump sum cost for certain work which the increase of labour cost will be absorb by the subcontractor)
3. Method of construction ( eg. By machine or man power)
4. Building component (temporary or permanent work). Eg. Recyclable falsework & formwork, Factory fabricated building component such as floor slab.
5. Plan for the project and adhere strictly to the programme.
6. Complete the project at the shortest time frame which will save more in the plant, equipment & manpower cost.

Acquire own machinery, plant & equipment instead of renting. For the long run this strategy will significantly reduce the contractor construction cost. However beware of the maintenance cost.

How to Win Tenders: Win More Tenders by Qualifying (Part 2)

How to Win Tenders: Win More Tenders by Qualifying (Part 2)

How to Win Tenders: Win More Tenders by Qualifying (Part 1)

How to Win Tenders: Win More Tenders by Qualifying (Part 1)

WINNING A TENDER

HOW TO WIN A TENDER

Construction industry is always about winning a tender. There will be no business for contractor if they do not participate in any tender or quotation. However tender or quotation is only the first step for contractor to get their business running. The important point here is winning a quotation or tender.
How to win in a tender or quotation competition? Here we will discuss some of the most important point on how it shall be. Bellow are what really important for contractor to know and do.

1. Completeness of tender document.
   
   Make sure all instruction in the "INSTRUCTION TO TENDERER" being fulfilled such as all pages that need to be sign are already sign and all required supporting document being attached in. In other words completeness of the tender document.
   
    
2. Cash flow of the contractor.
   
   The cash flow normally being defines as how much the capital that a contractor have and ready to be utilised in the event that the contractor being award the project. Normally the available amount shall not less that by 5% of the tender sum. The capital can be combination of the cash in hand (Bank balance) and credit facilities (eg. Overdraft, project financing facilities from the bank, fixed deposit and ect.). How to know wether you have enough or not.
   
    
   Let say;
   Total tender sum = $ 100M.
   Construction period = 12 months
   Average prorated cash flow = $100/12mths = $8.34M
   
    
   Minimum Ready capital needed = $100M X 5% = $5.5M
   ( This minimum is because that in actual fact that normally in the first 3months the expenses for the project will be considerably low due to the reason that the first 3 months expenses could be only the preliminary expenses such as preparation for insurances, Bank guarantee, site office, and all office and accommodation required under the contract by client.)
   
    
   With reference to the above calculation contractor now can compare wether they have enough capital to win the project. For example:
   
    
   Available cash flow = bank balance + Fixed deposit + credit facilities.
   Say:            = $ 3M + $1M + $7M = $11M > $8.34M >$5.5M
   
    

• Contractor already passed the cash flow evaluation.

 

1. Construction period.
   In tendering contractor must never exceed the construction period required by client. One common mistake by contractor is never specified the duration they offered. This condition will cause them to be disqualified.

 

1. Contractor resources
   Resources can be categorised as follows:
   
   1. Plant and equipment.
   2. Machinery
   3. Man power
   All of the resources above must be as relevant as impossible to the nature of the project. For example in road construction, the plants that you will need are premix plant, soil test laboratory, Excavator, Dozer, Engineer, Site Supervisor, labour and ect.

 

1. Contractor current commitment.
   Contractor current commitment is define as current project that still progressing undertake by contractor. The more commitment the contractor have in hand the more slim chances that they have to win a tender. However, if the current commitments that they have are almost completed, there is a chance for them to win a tender. The only thing is that make sure that the current project report is ahead of schedule or on time. This is the factor that will contribute to the reputation of the contractor.

 

1. Previous Experience.
   Previous experience is defined as the project that had been completed by contractor. This Experience shall be as relevant as it be to the nature of tender that the contractor participating. The other factor to this is the size of the project. In this case the value of project is counted. Let say the tender price for this tender is $100M then the contractor experience must reach at least nearly $100M or more. With that, the client will be more comfortable to award the tender to the contractor who have completed the same nature of project and almost the same value or event more value from what he currently tendered for.

 

1. Tender Price.
   This tender price is the one that weighted most in the event that contractor already pas all the evaluation above. When it comes to this Factor there are a few item that will be considered. The Most important item is that the tender price shall not exceed the client budgeting price.
   The next issue is that it is in the range of what the market offer and the last but not least item is value of money.
   
    
   For instant if the client budget is $120M with the construction period of 12 months, the revenue collected when the project completed and in operation is $2M/mths.The recommended contractor have the following offer;
   
    

Tenderor no./Name	Offered tender price	Offered construction period	Ahead completion	Revenue
A	$100M	10 mths	2 Mths	$4M
B	$98M	12 mths	0mth	$0
C	110M	8 mths	4 Mths	$16M

 

Locking into the data above which one will be choose.

Lets do some analysis.

 

Take into account early completion :

Client will make extra 2M with contractor A after deduct $2M extra compare to contractor A and revenue of $4M in choosing Contractor C.

 

If I were the client, I will choose contractor C because after considering the expenses for this project do not exceed the project budget and in return, I will make extra $4M if I can operate this property earlier that planned.

 

This selection is what we called "Value for Money".

 
With the tips mentioned above contractor shall be able to secure another project under their cap.