Construction Cost Accounting Essay

Chapter 2

Literature Review

2.1Construction Costss

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Within a building house the cost happenings during the life clip of the undertakings are highly complex and huge, due to this fact the clear dislocation of costs are indispensable building. For a successful and efficient building concern the project/company direction should hold a sound apprehension of the types of cost which will be happening during the undertaking life-time. Harmonizing to ( USSD, May 2012 ) the building cost is divided into three chief classs, chiefly “Direct Cost” , “Indirect Cost” , and “Corporate Over Head” . More amplification of these each class will be done in the latter portion of this subdivision. This cognition about the categorization of cost is of import to do determination in cut downing the costs occurred in the undertakings. Such as the cost of indirect cost for a undertaking can be reduced by utilizing the indirect goods/services in more undertakings.

2.1.1 Direct Costss

Direct costs are those costs, which can be attributed to a individual undertaking of building work. ( ENGINEERS ) . And the ( USSD, May 2012 ) states that to place and distinguish direct costs is trusting on the undertaking design stage and the magnitude or consequence of a peculiar point in the Work Breakdown Structure on the entire undertaking cost. Harmonizing to ( USSD, May 2012 ) direct cost are categorized in to four classs. They are:

  • Labor
  • Equipment
  • Materials
  • Subcontracts

Labor Costss

In the modern, fast-moving industrialized epoch, where most of the merchandises which are available is quickly lump produced in mills by machinery, the building industry still depends on the work force of the ordinary workers which creates the best construction the universe has seen with their accomplishment of experience. Due to this ground the building industry is a heavy labour demanding compared to other industries in the modern market, Harmonizing to ( XXX ) . The labour cost part of a building industry frequently ranges from 30 to 50 % , and can be every bit high as 60 % of the overall undertaking cost. Therefore, it is clear that building labour is a critical constituent of a building undertaking. Sing all the facts given above it is critical an approximated labour cost must be defined for each separate trade prior to ciphering direct costs for any work bundle in the WBS. This process might include skilled labourers, unskilled labourers, bar-benders, Crane operators, carpenters, etc. An experient labour will be having a higher rate of rewards due to the accomplishment value. The United States Department of Labor’s Prevailing Wage Rates provides the guideline for the appraisal of labour rewards and is found on the U.S. DOL web site, The information from this web site is merely accurate inside U.S. for an appraisal of the rates outside U.S the regional codifications should be followed ( USSD, May 2012 ) . Labor hiring can be done in two ways, direct labour, which is hired straight from the company and indirect labour, which are supplied by a labour provider group/company. Due to the complexness of the building industry the maps of the undertaking will be broken in to stand in map for the convenience of direction internal, this is defined as Work Packages in the building industry. For these work bundles different groups of workers are assigned. This assignment of workers can be separately or as a crew. And the crew can be incorporating the same skilled workers or a combination. Normally due to the complexness of work different skilled worker group are formed and used. Labor payment can be day-to-day rewards or contract footing. The day-to-day paid labour gets paid harmonizing to the working hours and the contract footing labourers gets paid harmonizing to the fulfilment of the contract.

Equipment Costss

The Modern building is symbolized by the spread outing application of equipment to carry through huge building activities. In a building field equipment costs are by and large categorized into subdivisions. The chief subdivision class covers the cost of equipment and is frequently cited as equipment cost. This exhibit the cost of accomplishing the equipment and the cost of operating that equipment during the building clip. The 2nd class covers the cost of manus tools. This class exhibit a smaller part of the overall undertaking cost and is often performed as a per centum of paysheet costs ( XXX ) .this part is added to the indirect cost under the jobsite operating expense. For the range of this paper the equipments cost will be interpreted as machinery operation as building machinery, tools, equipments which are necessary for the advancement of the building undertaking thou these equipments are non fixed constituent of the undertaking. It is noted that most contractors have their ain equipment fleet. Individual contractor commands will be based on use of such fleets, therefore internal costs for equipment can change widely between contractors. Harmonizing to ( USSD, May 2012 ) Factors impacting equipment choice and, finally, equipment costs include, but are non limited to:

  • Work agenda
  • Work bundle size
  • Undertaking specifications
  • Mobilization and demobilisation costs
  • Type of stuffs handled or installed
  • Availability of infinite ( entree, working, storage, standby/lay down )
  • Suitability of equipment for other utilizations
  • Equipment capablenesss
  • Distances stuff must be moved
  • Weather conditions
  • Hauling limitations
  • Standby clip
  • Contract demands
  • Potential salvage or resale value of workss
  • Contractor owned equipment versus lease or leased equipment


When using the equipments in the building field it is frequent for a alone work point or points on the occupation a peculiar equipment/s to be allocated, these units are assigned to merely to that peculiar occupation and are non shared by other parties. And therefore removed from the undertaking immediately after the occupation is completed. The use of such equipments are shorter term when compared to conventional usage equipment. For instant the tower Crane is merely used until the completion of the structural work of the top floor and is removed shortly as the work is completed.

Harmonizing to ( XXX ) building equipment may be purchased or rented from outside beginning and the factors regulating the pick normally depends on the sum of clip the equipment will be used in the contractor’s undertaking. If extended use of the equipment is expected, the purchase of the equipment could be financially executable. If the equipment is to be used a limited sum of clip, it is normally rented. A contractor needfully doesn’t have to have any building equipment in order to make building undertakings. There can be distinguishable advantages to leasing equipment, including:

– Large stock lists are non required of specialised equipment.

– Can acquire the newest and most efficient points of available equipment.

– No demand for equipment warehouse and storage installations.

– Reduced need to use care staff.

– Equipment cost accounting is simpler when equipment is rented.

Contractors may buy equipment when factors refering to ownership and economic sciences make this option more favourable than leasing. When the building operations of a contractor need the steady usage for certain equipment, owing such equipment may be financially better.

Material Costss

Material cost have the most important impact to the overall cost in any building undertaking and should be managed decently in order to do net incomes from building concern. ( XXX ) Defines stuffs as those points ( stuffs and installed equipment ) that are incorporated into and stay portion of the characteristic or construction and whereas supplies are defined as those points that are used during building but do non stay a lasting portion of the characteristic or construction ( e.g. Form-work ) . Due to the tremendous part to the overall cost of undertaking the material pricing should be smart, the pricing for stuffs should be considered from a figure of sellers and the most executable command should be used. It is adopted to achieve quotation marks for peculiar undertaking to safeguard that the cost is current and the merchandise meets specifications. It is important to verify the vendor’s capacity so that pricing is complete ( XXX ) .when managing stuff cost the followers should be considered:

  • The footing for the monetary value quotation marks ( include bringing to the occupation site, bringing method, conditions for defects )
  • Material Handling and Storage
  • Allowance for Waste and Loss Factor
  • Inflation of monetary values

2.1.2 Indirect Costss

The AACE definition for indirect costs is “ … all costs which do non develop into a concluding portion of the merchandise, but which are necessary for its orderly completion. It includes ( but is non limited to ) : field disposal, direct supervising, capital tools, some start-up costs, contractor ‘s fees, insurance, revenue enhancements, etc. “And the ( U.S DOE ) Order 4700.1 defines as indirect costs are “ … costs provoke by an company for common or joint aims, and which can non be classified specifically with a individual activity or project.” Indirect costs can by and large sum up to the scope of 8 to 20 per centum of entire undertaking costs ( be estimating ) . It is of import to understand the awaited building contract footings and conditions.

Indirect costs can by and large be separated into two distinguishable classs ;

  • Time-sensitive
  • Cost-sensitive.

Time-sensitive indirect costs are induced by the undertaking agenda. As an illustration the occupation staff can be taken. The cost of busying the undertaking direction staff is straight correlated to the undertaking agenda. The cost-sensitive indirect costs are induced chiefly by the overall cost of the undertaking. For an illustration bond cost. The cost of public presentation and payment bonds are straight correlated to the overall undertaking cost. It is important for the accounting section of the company to do this disagreement and study for time-sensitive costs accurately. Most of the clip the even the calculators ignore the undertaking agenda when gauging indirect costs. ( YYY )

Couple of indirect cost mentioned in the ( Thirty ) are shown below

  • Site security
  • Telephones – land lines and Mobile
  • Impermanent fence
  • Yard installations and betterments
  • Office supplies
  • Postage and FedEx/UPS charges
  • Signs • Photographs
  • Fire suppression
  • Drinking H2O
  • Dust control
  • Noise control

There besides can be indirect equipments cost including in the undertaking, these equipments are used merely for a peculiar group of work point and removed when the work is completed. Examples of indirect equipment costs might include:

  • Trucks and cars
  • Forklifts
  • Generators
  • Compressors
  • Pumps
  • Hoists and scaffolding
  • Crane

The points considered a direct cost vary with the type of contract as follows:

Appendix 1 shows the recommended classification of direct and indirect cost harmonizing to the ( DOE )

  1. Corporate Operating expense Costss

Construction companies are often overcome with the quandary of holding to pull off the proportions of their operating expenses. Harmonizing to ( Cost Estimate ) Corporate operating expense costs as a per centum of direct building costs including eventuality but excepting indirect and other costs range from 5 % to 15 % and norm approximately 10 % . In periods when prearranged marks of completions are non attained, may be due to low rate of work flow in the buildings or due of deficiency of truth of the command, companies may confront critical fiscal trouble, even bankruptcy, doing them force to cut down operating expenses. This is often conquered by agencies of retrenchments, redundancies, disposal of installations or assets, ( Cost Overhead ) cutting off of services and care of records and informations bases. Such actions may impact the company’s capableness to vie when the market recovery occurs. Companies obtaining reduced operating expense may happen themselves at a disadvantage from both capacity and fight. Harmonizing to ( Cost Overhead ) in the building companies a important job is that the “overheads go excessively high ; as the concern grows, operating expenses grow disproportionately high – many little concerns have big operating expenses – so pull offing overheads becomes an issue” so the importance of pull offing the corporate operating expense cost is really important for the profitableness of the building house. Some illustration of corporate operating expense costs are given in ( cost Extimate )

  • Head office rent or mortgage
  • Head office wages and benefits
  • Head office public-service corporations
  • Non-job-specific concern revenue enhancements, insurance, and licences
  • Head office trappingss, fixtures, and office equipment
  • Selling disbursals
  • Legal disbursals
  • Proposal/bid preparation/cost estimating
  • Subcontractor direction
  • Federal government/state authorities fees

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