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(PRE AND POST CONTRACT)

COST LIMIT1

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INTRODUCTION

‘Maximum expenditure’.

Is a statement of the limit of cost for clearly defined client requirement beyond which a client is not prepared to enter into a building contract.

It is that part of the client’s brief which having specified the quantity of the requirement, direct the architect to obtain an acceptable tender within the limit of certain sum money.

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INTRIDUCTION (CONT’D)

The cost limit will be very much influenced by:-

i) The floor space required

ii) The standard of accommodation

iii) The function of the building / use

iv) Either client type:-

a) Client – prescribed accommodation requirement but unaware of cost implication

b) Client determines both the accommodation requirement and cost limit through past experience

c) Client prescribed a cost limit, design team to produced standard accommodation that can be provided for this sum

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METHODS OF COST LIMIT

1. Financial method

‘Developer equation’.

Established by means of the developer budget.

Is depends on the finance available for the project.

This method is used only in the private sector where profit making is the sole motive of any development and this consideration determines the permissible cost of a building

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METHODS OF COST LIMIT

2. Interpolation method

Comparison with cost of similar buildings by cost/m2 GFA adjusted for space, standard and use.

Assessed from a comparative study of known costs of similar building.

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No.

of

Bui

ldin

gs

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Cost/m2 GFA200

300

400

500

600

700

800

Common range

Result: Most buildings – the range is between RM 400 – 600/m2 GFA

PROCEDURE OF INTERPOLATION METHOD

Collect all available cost analysis for buildings of similar use, update and compile histogram. Example:

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• Select/choose ONE cost analysis closest to proposed building in QUALITY.

• Isolate major difference between proposed building and cost analysis chosen.

Difference:

1. GFA

2. Tender date

3. Items shown in analysis but NOT REQUIRED in proposed building

4. Item REQUIRED in proposed building but not provided in cost analysis

5. Significant differences in preliminaries and contingencies.

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PROCEDURE OF INTERPOLATION METHOD (CONT’D)

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PREPARATION OF ‘FIRST ESTIMATE’ BY ‘INTERPOLATION METHPD’

1. A range of ‘Cost analysis’ of the same ‘type’ of building as the proposed building is assembled.

2. This range is examined to find the ‘cost analysis’ of the building whose ‘quality’ approximates most closely to that desired by the client.

3. The initial brief of the proposed building and ‘all’ of the information given in the cost analysis are studied in order to ‘isolate’ the ‘major differences’ between the two building.

4. ‘Allowances’ are made for each of these ‘major differences’ (including, of course, differences in floor area and general market level).

5. Finally, an allowance is made as a reserve against price rises between the general market price level at the date of ‘preparation’ of the ‘first estimate’ and the ‘contractor’s’ price level of the tender.

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PRICE AND DESIGN RISK

In preparing cost limit and/or outline cost plan, an allowance should be made for unforeseen difficulties, which may come to light later in the design process, and price rises between the preparation of the cost limit and the receipt of tender and between receipt of tender to the completion of project.

1. Design contingencies

A percentage allowance should be allowed for changes that can occur for unforeseen problems during the design period and the construction period. Normally a well thought design scheme would carry a small percentage than one where many problems have to be solved by the design team. As the scheme progresses through the various stages of design development, it can be expected that the percentage will fall to reflect the greater certainty of the design decisions.

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2. Contract contingencies (differences in contract particulars)

The magnitude of contract contingencies generally reduces as the design progresses. In normal circumstances, the percentage may range from around 5% in the early stages to fall to possibly as low as 1% in the tender document stages, subject to assessments of the possibility of unforeseen problems. A repetitive design on a normal site, the percentage may be lower.

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PRICE AND DESIGN RISK (CONT’D)

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3. Price risks – escalation to tender date, contract cost adjustment

Prices are expected to move between the preparation of outline cost plan and the receipt of tender and between the date of tender and the completion of the project.

If the contract includes price fluctuation, then this amount will be paid during the progress of the works in progress payment. If the contract does not allow for price fluctuation, a percentage allowance should be given by predicting the construction market from tender to completion of project.

The allowance made will be related to the length of construction time for the project and the risk involved. It will increase the longer the time needed to complete the works.

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PRICE AND DESIGN RISK (CONT’D)

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PRICE AND DESIGN RISK (SUMMARY)1. Price Risk

• Adjustments of the cost analysis figure by multiplying the appropriate figure by an index.

• Related to market condition

Example:

High inflation of 24% per annum

Costs are rising at 2% per annum• An estimate prepared in January for tender in May will need

to add 10% just to cover for inflation.

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PRICE AND DESIGN RISK (SUMMARY) (CONT’D)2. Design Risk

• An allowance must be made for uncertainties in the proposed design from finished design.

• Larger % of design needs to be added to cover design risk at inception than at much later stages during design process.

• % depends on:

i) Client

ii) Type of project

iii) General familiarity of each consultant• Almost negligible to some project but at certain

circumstances may represent 30 – 40% of estimates cost.

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‘Price and design risk’ is allowed to take account:

• Type and complexity of design

• Nature of client

• Price trends

• Delay prior to receipt of tenders

Percentage adjustments on price and design risk depend on the experience of the designer and the QS familiarity with the cost planning procedure.

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PRICE AND DESIGN RISK (SUMMARY) (CONT’D)

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