Building Economics

Critical Design Time: ‖This is the time where the important design decisions are made that will determine the project’s ultimate success – architecturally, functionally, economically.

Increase in critical design time means additional fees of the architect and other consultants and delay in the projected start of the project. Also the loss of rental for the increased amount of time. However, the additional input in critical design can lead to reduction in   

Reduction in the initial cost of the project Savings on the operation, maintenance and energy costs of the project. This translates to a large amount when the entire life cycle of the project. Reduction in personnel costs ( By employing lesser people in operations)

------------------------------------------------------------------------------------------------------------------------------Q2. Initial Cost of the Project means the total cost spent on the planning and construction of the project till the time of occupancy. The components of Initial cost of the project include: 1. Site Cost: Cost incurred in acquiring land. 2. Development Cost: Cost of developing the site, that is clearing the site, providing temporary roads, site utilities like a site office for the project manager and other facilities to the office. 3. Building cost: This includes the total cost of the construction of the building. The areas other than building like roads, landscape are listed separately. 4. Site Work cost: The cost of developing the site, that is roads, surface parking, landscaped lawns etc 5. Fees: This includes architect’s and engineer’s fees, money spent on surveying, soil testing, environmental impact studies, feasibility analysis reports 6. Cost of permits: The costs incurred in obtaining permits for construction, approval of plans, 7. Carrying Charges: Cost of owning, maintaining the site in order before and during the construction like site security, property taxes, fencing, security personnel 8. Interim financing costs:Interest charges on construction loan till the completion of the project 9. Equipment costs: Cost of furniture and equipment( both movable and fixed) 10. Contingency Funds: Money kept aside for unforeseen and emergency circumstances. The sum of all the above costs is called the Initial Cost of the project. ------------------------------------------------------------------------------------------------------------------------Utility in economics: Total utility is the aggregate sum of satisfaction or benefit that an individual gains from consuming a given amount of goods or services in an economy. The amount of a person's total utility corresponds to the person's level of consumption. Usually, the more the person consumes, the larger his or her total utility will be. Marginal utility is the additional satisfaction, or amount of utility, gained from each extra unit of consumption. Utility is usefulness, the ability of

something to satisfy needs or wants. In economics, utility is a representation of preferences over some set of goods and services. ---------------------------------------------------------------------------------------------------------------------Micro Economics and Macro Economics Microeconomics may be defined as that branch of economic analysis, which studies the economic behaviour of the individual unit, maybe a person, a particular household, or a particular firm. It is a study of one particular unit rather than all the units combined together. Microeconomics is the study of decisions that people and businesses make regarding the allocation of resources and prices of goods and services. This means also taking into account taxes and regulations created by governments. Microeconomics focuses on supply and demand and other forces that determine the price levels seen in the economy. For example, microeconomics would look at how a specific company could maximize it's production and capacity so it could lower prices and better compete in its industry. Macroeconomics, on the other hand, is the field of economics that studies the behavior of the economy as a whole and not just on specific companies, but entire industries and economies. This looks at economy-wide phenomena, such as Gross National Product (GDP) and how it is affected by changes in unemployment, national income, rate of growth, and price levels. For example, macroeconomics would look at how an increase/decrease in net exports would affect a nation's capital account or how GDP would be affected by unemployment rate. Macro Economics may be defined as that branch of economic analysis which studies the behaviour of not one particular unit, but of all the units combined together. Macroeconomics is a study of aggregates. It is the study of the economic system as a whole total production, total consumption, total savings and total investment. The following are the fields covered by macroeconomics: 

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Theory of Income, Output and Employment with its two constituents, namely, the theory of consumption function, the theory of investment function and the theory of business cycles or economic fluctuations. Theory of Prices with its constituents of the theories of inflation, deflation and reflation. Theory of Economic Growth dealing with the long-run growth of income, output and employment. Macro Theory of Distribution dealing with the relative shares of wages and profits in the total national income.

-------------------------------------------------------------------------------------------------------------Hard Costs 

Hard costs are direct costs incurred in relation to a specific construction project. Hard costs may be directly related to construction, including labor, materials, equipment, basic building services, shell features, interior enclosures, fit-out costs, mechanical services and electrical services. Hard costs are construction costs that are directly affected by decisions made by the architect working on the project. Other hard costs that are generally not included under the construction contract may include equipment, furniture and fixtures, and specialized mechanical or electrical services. These costs are often borne directly by the project owner. Itemized Hard Costs

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Unlike soft costs that occur prior to project start, hard costs occur once project construction begins. Hard costs are mostly tangible assets acquired for the completion of the project and cover costs directly associated with the project. Hard cost items include physical items such as site preparation, grading, building structure, sewage tank, walls and landscape. Hard costs cover all types of visible improvements such as excavating, foundation, concrete work and framing; electrical work; mechanical costs for HVAC and plumbing; carpentry and roofing; contingency costs and over-budget costs due to changes in construction plans. All labor, tools and materials directly used in construction are also part of the hard costs. Soft Costs Soft costs refer to costs incurred in addition to the direct construction cost. These costs cannot be charged to the specific project directly. They are generally incurred by the project owner, consultant and contractor. Soft costs are also called indirect costs; these costs, in contrast to hard costs, are not directly related to the physical construction of the project. The common perception of soft costs is they include non-construction costs such as marketing, taxes, finance charges, insurance, interest payments and general administration costs. Itemized Soft Costs

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Soft costs are generally incurred for the most part before construction of the project actually begins. The items that are categorized as soft costs include legal fees, permits, real estate commissions and fees, advertising, promotions, financing fees, insurance, leasing, mortgages, loans, construction interest, design fees, taxes, management fees, owner's administration, supervision, engineering, licensing fees, toxic report fees, plan check fees, property assessment fees, sewage and water connection fees, and equipment rental fees.

-------------------------------------------------------------------------------------------------------------------------------------Whole Unit Method: This is strictly speaking not an estination method as there is only one unit. The unit referred to is the whole building- For example a house or a school assuming some standard type and size.The cost quoted in the data sources are initial project cost and not the building construction cost. Unit of Use Method Estimating-Many buildings are characterized by repitiion of units of use or user stations. This method is used in early stages of the project and a basis of comparison with other project of similar type and scope. The unit method estimating consists of choosing a standard unit of accomodation and multiplying an approximate cost per unit Estimate = Standard units of accommodation X Cost/Unit for example: Schools – costs per pupil place Hospitals - costs per bed place Roads – per Kilometers Car parks – costs per car space The technique is based on the fact that there is usually some close relationship between the cost of a construction project and the number of functional units it accomodates. Functional units are those factors which express the intended use of the building better than any other. This method is

extremely useful on occasions where the building’s client requires a preliminary estimate based on little more information than the basic units of accommodation. Using this estimating method can generate a rough estimate quickly, but the lack of accuracy will render it of little use in the costplanning procedure outlined earlier. However, this method is often used to determine the very first notion of a price in early discussions of a project and as a crude means of comparing the known costs of different buildings.

Area Method: This is one of the most common methods of calculation cost and is based on the total floor area or gross floor area Volume Method: The size of the project is not measured in area but in units of space volume (cubic feet or cubic metres)

-------------------------------------------------------------------------------------------------------------------------------------NET BENEFIT IN CONTEXT OF ECONOMIC PERFORMANCE OF A BUILDING The NB method provides a measure of the economic performance of an investment, taking into account all relevant monetary values associated with that investment over the investor's study period. The NB measure can be expressed in either present value or equivalent annual value terms, taking into account the time value of money. The NB method is used to decide if a given project is cost effective and which size or design for a given purpose is most cost effective when no budget constraint exists. The NB method can also be used to determine the most cost effective combination of projects for a limited budget; that is, the combination of projects having the greatest aggregate NB and fitting within the budget constraint. Use the NB method when the focus is on the benefits rather than project costs. Use the NS method when the focus in on project savings (that is, reductions in project costs).

Cost-Benefit Analysis A process by which business decisions are analyzed. The benefits of a given situation or businessrelated action are summed and then the costs associated with taking that action are subtracted. Most analysts will also factor opportunity cost into such equations. Prior to erecting a new plant or taking on a new project, prudent managers will conduct a costbenefit analysis as a means of evaluating all of the potential costs and revenues that may be generated if the project is completed. The outcome of the analysis will determine whether the project is financially feasible, or if another project should be pursued. Incremental Analysis A decision-making technique used in business to determine the true cost difference between alternatives. Incremental analysis ignores sunk costs and costs that are the same between the two alternatives to look only at the remaining costs. For this reason, it is also called the "relevant cost approach," "marginal analysis" or "differential analysis." If a company is considering replacing its old copy machine, using incremental analysis, the company would not look at the cost of the existing copy machine because it is a sunk cost (the cost of buying it cannot be reversed). They would look at things like the cost of toner cartridges for each machine, the cost of the electricity run each machine, and most importantly, the time saved by having employees use a more efficient model and perhaps the cost savings of being able to prepare documents in-house instead of outsourcing them. 'Break-Even Analysis' An analysis to determine the point at which revenue received equals the costs associated with receiving the revenue. Break-even analysis calculates what is known as a margin of safety, the amount that revenues exceed the break-even point. This is the amount that revenues can fall while still staying above the break-even point. Break-even analysis is a supply-side analysis; that is, it only analyzes the costs of the sales. It does not analyze how demand may be affected at different price levels.

For example, if it costs $50 to produce a widget, and there are fixed costs of $1,000, the break-even point for selling the widgets would be:If selling for $100: 20 Widgets (Calculated as 1000/(10050)=20)If selling for $200: 7 Widgets (Calculated as 1000/(200-50)=6.7) In this example, if someone sells the product for a higher price, the break-even point will come faster. What the analysis does not show is that it may be easier to sell 20 widgets at $100 each than 7 widgets at $200 each. A demand-side analysis would give the seller that information.