Civ4104 Quantity Surveying II (2021) Ok

 

NDEJJE

UNIVERSITY

 

FACULTY OF ENGINEERING & SURVEY DEPARTMENT OF CIVIL ENGINEERING

CIV4104  –  QUANTITY  QUANTITY SURVEYING II (ESTIMATI0N/PROC (ESTIMATI0N/PROCUREMENT) UREMENT)

Bachelor of Engineering (Civil)  –  BCE  BCE IV  Semester I –  I –  2021/2022   2021/2022

LECTURE NOTES

By:   By:

 

Patrick Sekigongo Mob.: +256 752 647330/776 647330 Email: [email protected]

 

QUANTITY SURVEYING II –  CIV  CIV 4104 (2021/2022)

CHAPTER 1: INTRODUCTION 1.1   INTRODUCTION 1.1 The cost (both the; initial capital   cost   and the subsequent operation and maintenance costs) of constructing a facility to a client/owner/promoter is usually very high and this makes it a matter of great concern. The owner is interested in achieving the lowest possible overall project cost that is consistent with investment objectives.

1.2   CAPITAL COSTS VERSUS OPERATION AND MAINTENANCE COSTS 1.2 1.2.1   Capital costs  1.2.1 For a construction project, these are the expenses related to the initial establishment of a facility. They include;  

Land acquisition,   Planning and feasibility studies,   Architectural and engineering design,   Cost of construction (materials, equipment, labour, overheads),            

Supervision of construction works (by Consultant), Construction financing cost (when borrowed from Bank), Insurance and taxes during construction, The owners general office overheads, Inspection and testing fee, Equipment and furnishings not included in construction.

The magnitude of each of these cost components depends on the nature, size and location of the project as well as the management organisation. Whereas the construction costs may be the single largest component of the capital cost, other cost components must not be ignored e.g., land acquisition costs are the major component when it comes to urban areas.

1.2.2   Operation and Maintenance costs  1.2.2 These are expenses in subsequent years over the project life cycle. They include;  

Land rent (if (if applicable), applicable),   Operating staff,   Labour and materials for maintenance and repairs,   Periodic renovations,

 

Insurance and taxes,   Financial costs,   Utilities,   Owner’s other expenses. 

Every stage of construction involves costs right from perception to commissioning and including disposal. The success of a project lies on number of factors including; © 2 21: Quantity Surveying II Notes. Notes. Ndejje Univ. By By:: Patrick Sekigongo. Email Email:: [email protected]. Mob Mob.. +256 776 647330  

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a)  Accurate estimation of the project costs, b)  Proper project planning, and c)  Good management. The process of obtaining competitive offer for work involves calculating approximate quantities and inviting willing Contractors to give in their prices of work. This process is called Estimating and Tendering. Clients or Promoters of the construction industry in the public sector (e.g., The Central Government Departments, Local Authorities and Public Co-operatives/Organisations) rely almost exclusively on competitive tendering to justify the award of tenders. On the other hand, clients from the private sector try to follow the practice of the public sector by advertising in the media.

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CHAPTER 2: ESTIMATING AND TENDERING 2.1   INTRODUCTION 2.1 Contractors base tenders on estimates of the cost of the contract for executing the work described in the contract document. Hence the commercial success of the contract is dependent on the estimator. Estimating therefore is the process of producing an approximate calculation or judgement of the  size  size,, value value,, cost cost,, duration duration,, etc. of a project. It is also the prediction of what the key cost of materials  and labour   for for constructing a facility will be. The person who materials,, land land,, plant plant and carries out estimation is called an an  Estimator/Building Economist/Quantity Surveyor . Tendering on the other hand is simply the submission of a quotation. A quotation is a price price   that a firm charges to offer a good  or service good or  service..

2.2   TERMS USED IN ESTIMATING AND TENDERING 2.2 2.2.1   Accurate Bills of Quantities Quantities (B.o.Qs) (B.o.Qs) 

Much of the Quantity Surveyor’s work is the preparation of B.o.Qs and their accuracy depends on the availability of full particulars of the works. The fuller and more detailed the Architect’s drawing are, the higher the chances of generating an accurate bill.  2.2.2   Approxima  Approximate te B.o.Qs 

These are used at times when sufficient full information cannot be given to enable an accurate B.o.Q to be prepared. E.g., a foundation contract in which the depth of excavation and thickness cannot be ascertained. 2.2.3  Preliminaries 

When preparing a tender for a contract based upon B.o.Qs, there are certain items of expenses usually termed  project overheads overheads that  cannot be satisfactorily distributed among  that cannot the unit the practicebill. is to calculate someGeneral of theseforeman, items as Insurances, place lump sums  sums  and them in rates; the preliminaries The list includes; temporary roads, removal of rubbish, plant, tools, vehicles, temporary services (water, electricity, telephone, etc.), etc. 2.2.4  Establishment charges or Overheads 

These include; payment of salaries to the head office staff, head office operating costs and similar items which are necessary for the administration of the contract and which are not normally charged direct to the actual cost of the work. 2.2.5  Profit  

This is the amount of money added to the net estimated cost as a return on invested capital.

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2.2.6  Contractor Contractor’s ’s Estimates 

These are based on facts calculated from the t he proposed work. 2.2.7  Consultant’ s  s Estimate 

This is an average price from past record or the design estimate. 2.2.8  Estimate Adjudication Adjudication 

After an estimator has done his/her calculations of the approximate cost of the project including profits and overheads, the work is presented to Management for adjustment to convert the estimate into a tender. The adjustment may involve lowering, raising or maintaining the same figure to prepare the tender document. This process is termed estimate adjudication. adjudication. 2.2.9   Schedule of Prices 

Information may be so scanty or at times so short that not even an approximate quantity can be given. In such a case, a schedule of probable/possible items can be prepared giving descriptions similar to those in a B.o.Q but without quantities. There is difficulty in making comparisons of tenders with such schedules as there are no quantities. However, comparison can be made between the major items. 2.2.10  Prime cost Contracts 

Information may be so lacking that an adhoc (unplanned/emergency) schedule of prices may not be prepared and no standardised schedule may be considered suitable. In such a case, a form of prime cost contract is used; i.e., one where a contractor is reimbursed his proven cost and paid an additional sum to cover profits and overheads either as a percentage on that cost or a fixed fee. 2.2.11  All-in Contract Contract (Turnkey/Package (Turnkey/Package deal) 

With this form of contract, the Contractor undertakes the whole of the services required from design; so, dispensing with the independent Architect, Consultant and Quantity Surveyor. Barter trade is usually the payment pa yment mode. 2.2.12  Cost engineering engineering 

This is an area of engineering practice where engineering judgement and experience are utilised in the application of scientific principles and techniques to the problem of cost estimation, cost control and profitability. 2.2.13  Own builder’s work  

This is work which is carried out by the builder’s own operatives. 

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2.2.14  Own sub-contractor’ sub-contractor’ss work  

This is work which is carried out by a sub-contracto contractorr of the builder’s own choice.  2.2.15  Nominated sub-contractor’s sub-contractor’s work  

This is work which is carried out by a sub-contractor chosen by the Architect. They are for specialised works e.g., installation of a lift. 2.2.16  Nominated supplier  

Supplier chosen by Architect/Client to supply particular materials (special materials usually).

2.3   PARTIES INVOLVED IN ESTIMATING AND TENDERING 2.3 1.  2.  3.  4. 

Client’s/Promoter’s staff or their professional Client’s/Promoter’s professional representatives. representatives.  Consultant. Contractor; Planners, Plant managers, Site management staff. Sub-contractors and Nominated suppliers.

2.4   ESTIMATING 2.4 2.4.1  Importance of Estimating One of the keys to co mmercial success is the estimator’s ability to estimate the cost of construction work and to construct that work to the estimated cost. In competitive tendering, the tender is based on the estimated costs which represent as much as 90% of the tender. The other allowances added to it are overheads & profits which are smaller to make a contractor win a tender. Work connected with the construction of a new building, or with alterations and additions to an existing building, is invariably the subject of a contract agreement. The essence of such contract is that a builder promises to erect the building as shown on the drawing and in accordance with the detailed specification in return for a certain sum of money known as the contract sum. A prospective building owner cannot give the builder instructions to erect the proposed building and hand him an open cheque to be filled on completion of the building. If this practice was to be adopted, the result would be a cost plus account with greater advantage to the Contractor and a great loss to the Client. Virtually all building contracts are obtained by competition between builders, and the subject of builders’ estimating consists of the process involved in arriving at the contract sum. In recent years negotiated contracts have become more fashionable but the ability of both parties to t o be able to understand and appreciate the estimating process is the basis of such successful negotiation.

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2.4.2   Process of producing an estimate 2.4.2 1.  The estimating process

Estimating is the process by which the cost of carrying out a quantified work activity can be established using historical data, synthesis of the activity and computer generated software information. The contract estimates produced by the Estimator in conjunction with the pre-contract tendering team is their assessment of the cost of a contract; which has been derived from the information provided by the Client to the Architect and Quantity Surveyor; and also from research, investigations and planning carried out by the team. This will include processes and document production which will assist the Estimator to establish a cost to complete the project. They include among others; Risk assessments assessments Site investigation Resources availability Contract program Sub-contract availability

Drawings and specifications Preliminaries & individual site conditions and location Form of contract and requirements Prime costs (PC) & Provisional sums (PS)

When the Designer/Architect has produced the drawings for a building, these are passed to the Quantity Surveyor who prepares the B.o.Qs. The B.o.Q is a document which lists the items and describes the work that is to be done in order to construct the building. It specifies the details of each operation and itemises the materials, plant and labour for each operation. It will also include preliminaries, material specifications, details about the form of contract, PC and PS inclusion, other factors which will affect how the work will be carried out and the quality and allowances to be incorporated. Once the document has been prepared, it is sent to the companies who are invited to tender for the contract. Each company that wishes to tender will then cost each of the items in order to obtain an overall estimate. Before a company decides to submit a tender for a contract, they need to decide if they wish to price the contract, taking into account all relevant factors and finally determine what profit they expect before turning the estimates into a tender. Estimators need to keep up to date with the factors which will influence costs such as plant, materials and labour availability. The estimating process incorporates decisions about;  

Equipment needs,   Sequence of operation,   Number of workers required,

 

Physical constraints at the site, and   Conditions of contract.

Allowances must be made for wastage wastage   of materials, inclement weather , or any other factors that may increase costs. These must be incorporated into the estimates. Once these factors have been considered, the estimator will produce a cost summary for the © 2 21: Quantity Surveying II Notes. Notes. Ndejje Univ. By By:: Patrick Sekigongo. Email Email:: [email protected]. Mob Mob.. +256 776 647330  

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contract and include profit profit   and overheads overheads;; and move the process on to the tender production stage. Take off The initial “take off ” content within any contract is vital and whilst various systems of approximate estimating exist, none can be as accurate as using the Standard Method of Measurement (SMM) approved and accepted by professional Quantity Surveyors and the Royal Institute of Chartered Surveyors (RICS).

Being realistic in the form and amount of work output whether referring to machine or person is vital if the contract is to be won and return to a profit. 2.  Cost calculations calculations

The Estimator should possess the knowledge and understanding of the work items (as detailed within SMM) in order to be able to place accurate figures against each of the Bills of Quantity measured work items and/or to be able to complete the costing of the preliminaries and other such items. The Estimator will also carefully consider the information provided by the Tendering team and incorporate this in the unit rates. a)  Unit rates Unit rates are rates per unit of measured work within the B.o.Q. They are described in terms of lm, Tonnes,, Item Item,, etc. all complying with the rules of SMM. For each unit of lm, m 2, m3, Tonnes measured work, the Estimator includes a price at which he/she considers that the work can be completed. The basic inclusions in the “unit rate” will be;   

Cost of materials,   Waste on materials,   Labour in the form of an output constant multiplied by the craft person ’s “all-in” hourly rate,   Plant (Specialist plant identified for a specific work item may be included within the unit rate but may be itemised at the end of the B.o.Q section in which the description of the work was present). Generally, plant may be described within the Preliminaries,   Overheads, and   Profit. Price books and computer software used for estimating purposes provide an excellent source of information, particularly to confirm or query the Estimator’s labour constants but all such information should be taken as a guide only and not used without interpretation of the constraints and opportunities identified by the Tender team as applicable to the individual tender and contract under consideration. c onsideration.

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b)  Labour constants The establishment of accurate “labour constants” is vital to the accuracy of the   calculation of the unit rate. Indeed the accuracy of the Estimator’s calculation of labour output could be considered to be central to the accuracy of the estimates and tender figure itself. In addition to determining the cost of the contract to the Contractor, the labour constant will determine amongst other factors the program durations for the contract and hence cash flow.

c)  Cost Estimate not Tender figure After all the work which has gone into the production of the estimate for a contract, it should be remembered that the Estimator’s price to complete the contract is not the tender figure/price which will be submitted to the client, it is purely the cost of carrying out the work in view of the Estimator and the Tendering team. The actual Tender figure/price (the amount to be quoted to the Client which will secure the contract for the company) will be subject to a process usually referred to as; completing the Estimate and final tender review ( Adjudication or settlement); a process by which the company takes into account factors which will enhance their chances of success or diminish them. It will also consider the amount of work they currently have and the importance of gaining the contract. Only then will a Tender figure/price be established. 3.  Production of the Estimates

The first thing that needs to be done in the production of the estimates is to estimate the costs involved with the project. Although this section deals specifically with the development of a project, the principles will apply to all construction works. i)  Estimating construction costs The construction costs for a project will depend on the; size, type of building, standard of finish required, location (cost will vary according to the region in which the development occurs), the economic climate of the construction industry, i.e., if there is a shortage of construction work available, firms will reduce the amount of their tender in order to try and attract work. If the opposite is the case and there is a lot of work available, firms will increase their tenders, as they will not be too keen to obtain the contract which would stretch their resources (unless it is worth their investment). Building costs can vary between builders/developers. This can be due to the size or purchasing abilities of a company or the discount that it receives from suppliers. Professional fees must be added to the cost of construction and these will vary according to the project.

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ii)  The use of Price books Estimators may use “ Price books” as a means of determining unit rates ; particularly where the Estimator does not have a full f ull understanding of the work to be executed.

The skill of the Estimator rests with his/her ability to amend the published unit rates to reflect the true cost of resources as obtained from quotations received for; plant plant,, labour   and materials materials;; and combining these with his/her calculations and requirements for  and profit overheads and overheads profit.. iii)  Bills of Quantities The B.o.Q description and format may be considered as a form of shorthand standardization of work to be completed during the contract which is understood by other members of the construction industry. iv)  Producing the Estimates The estimate is a net estimated cost of carrying out the work. It considers all items of expenditure which are likely to be required in order for the work to be completed. On completion, the estimate is submitted to Management to enable them to determine if a tender is to be submitted and the price of the tender. 4.  Turning the Cost Estimates into a Tender

The Estimator in co-ordination with the Tender team will at this stage have completed the task of investigating the true nature and extent of the contract under consideration and produced documents and reference materials to aid their final pricing of the contract. They will have produced a pre-tender program early in the tendering cycle to ensure that the tender is completed and received by the Client by the date noted on the tender document documentation. They will be working as a team to produce that which they consider will be the right price for the contract and the strategy by which this price will be competitive enough to secure the contract.  Settlement/Adjudication  Settlement/Ad judication Meeting

The process of settlement or adjudication involves considering among other factors:              

Estimator’s report Contract conditions and form of contract Site factors Past experience of the Client Analysing own work content Sub-contract allocation Prime cost and Provisional sum content

Discounts available   Non Standard Insurance requirements

 

               

Liquidated damages applicable Complexity of the contract Programme constraints Likely variations Valuation dates Labour availability Profit margins required Preliminaries

Effects on Overheads   Dayworks

 

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Contingency sums included Preliminaries including Contractual requirements Competitors Existing company workload Need for new contract Financial implications and Cash flow analysis

         

Risk analysis Health and safety plan Cash flow with the new contract Cash flow without the new contract Company retention on selective tendering lists

The list is in reality extensive and many of these factors will already have been considered by the Tendering team and related to the Estimator. However, the final “Settlement” is in many respects left to the Senior Management of the Tendering Company because on their shoulders rests the continuance of the company and responsibility for its profitability. This process of estimation can be further summarized as below: a)  Acquisition of Documents (Plans, Specifications, B.o.Qs, Form of Agreement, Condition of Contract) upon acquiring information from Client through Newspapers, Internet, Friends, etc. b)  Decision to tender considering resources, manpower, profitability, location, etc. c)  Programming the estimates. d)  i) Collection and calculation of cost information through site visits (labour, water, raw materials, power), ii) Decision to tender after visit. e)  Project study. f)  Preparing the estimates; having details of work and contract sum. g)  Calculation of project overheads and establishment of overheads plus contractor’s profits. h)  Production of estimator’s report.

2.4.3   Techniques/Methods of Estimating 2.4.3 1.  Unit rate estimating technique

This is based on the traditional B.o.Qs approach where the quantities of works are defined and measured in accordance with the Standard Methods of Measurement. Example 2.1 Compute the cost per tonne for the provision and fixing a 16 mm diameter ribbed bar  steel reinforcement in isolated beams; given the following data: Data  Material purchase cost Wastage Tie wires and spacers Cutting and bending Fixing rate Bar bending machinery Site transportation

Ugx. 3,164,557/= per Ton 5% 2% 25 hrs per Ton 45 hrs per Ton within on-site cost within on-site cost

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Labour for steel fixer

Ugx. 3,500/= per hour

 Solution Purchasing …………………………………………………………………   3,164,557/= per ton  Add: Wastage of 5% of purchase …………………………………   158,228/=  Add: 2% of purchase for spacers and binding wires …………….  63,291/= Total 1 = 3,386,076/= per ton  Add: Labour ……………………  (25 + 45) x 3,500/= ……  245,000/=  Add: 25% for Profit and Overheads

Total 2 = ……………………………..   Grand Total =

3,631,076/= per ton 907,769/= 4,538,845/= per Ton

Example 2.2 Compute the cost of dredging per m 3 if a total of 300,000 m 3 of material is to be dredged from a harbour basin and deposited off on land. From the work programme, dredging,  reclamation and slope protection extend over a duration of 6 months. Data Hire rate of dredger $100,000 per month Hire rate of bulldozer $75,000 per month Fuel cost estimated at 5% of the equipment cost  Machine operator is paid $6.5 per hour for an average of 48 hours per week Banks-man is paid $5.5 per hour for an average of 48 hrs. per week  Solution Dredging Cost of dredger hiring for 6 months ……………………….. $100,000 x 6 …….  600,000 Fuel cost …………………………………………………………..  5% x $600,000…….  30,000 Cost of labour …………………………………  $(6.5 +5.5) x 48 x 24 weeks 13,824 Total cost of dredging $643,824 Cost of disposal Cost of bulldozer hiring for 6 months ………………………..  $75,000 x 6 …….  450,000 Fuel cost …………………………………………………………..  5% x $450,000…….  22,500

Cost of labour

………………………………… 

$(6.5 +5.5) x 48 x 24 weeks 13,824 Total cost of disposal $486,324 Total cost of dredging and material deposit off land, $(643,824 + 486,324) = $1,130,148  Cost per m3  …………………………………………   $(1,130,148/300,000) ……… $3.78 per m3  Assuming a 25% for Profit and Overheads, $0.94 per m3  …………………………………  $0.94 0.94) …….= $4.72  ………………  $(3.78 + 0.94) The total cost per m 3  2.  Operational estimating technique

This is a complex procedure based on calculating the total quantity of work involved in an operation (e.g., excavation and concreting); estimating the total elapse time of the operation in weeks; and combining this with the selected resources (materials, labour and plant). © 2 21: Quantity Surveying II Notes. Notes. Ndejje Univ. By By:: Patrick Sekigongo. Email Email:: [email protected]. Mob Mob.. +256 776 647330  

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This method is favoured by estimators involved in plant dominated activities e.g. excavation and concrete works. 3.  Other estimating technique

a)  Global method: - this is a crude estimating method which relies on the existing data for similar projects assessed purely on a single characteristic such as the size, capacity or output. b)  Factorial technique: - this is a widely used estimating method on process plants e.g. water works where the key components can easily be identified and priced; and all other works are calculated as factors of this component c)   Spot (Gash) technique technique: - this is a direct cost estimate which is not based on calculations but is based on experience. d)  Man-hour technique: - this is a labour based method. Work is broken down into unskilled, semi-skilled semi-skilled and skilled according to t o the required standards. e)  Empirical cost interference and Production function Approach.

2.4.4   Types of Cost Estimates for Tendering 2.4.4 These include the following:  

Pre-tender cost estimates (design estimates)  –   Screening, Preliminary, Detailed and Engineer’s estimates.   Tender/bid estimates   Control estimates. 1)  Pre-tender cost estimates (Design estimates) In planning and design stages of a project, various design estimates reflect the progress of the design. A  Screening  or Order of magnitude  estimate  is one which is usually made before the facility is designed and must therefore rely on the cost data of similar facility built in the past. A Preliminary  or Conceptual  estimate is one which is based on the conceptual design of the facility at the t he state when the basic technologies for the design are known. A Detailed  or Definitive estimate is one made when the scope of work is clearly defined and the detailed design is on progress so that the essential features of the facility are identifiable. The Engineer’s estimate  is one based on the completed plans and specifications when they are ready for the owner to solicit bids from construction Contractors.

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In preparing the estimates, the design professional will include expected amounts for the Contractor’s overheads and profits.  2)  Bid/Tende Bid/Tenderr estimates A Bid estimate is one submitted to the owner either for competitive bidding or negotiation consisting of direct construction cost including field supervision, plus a mark-up to cover general overheads and profits. The direct cost of construction for bid estimates is usually derived from a combination of the following approaches; Sub-contractor’s quotation, Quantity take-off and Construction procedures. Contractor’s bid estimates often reflect the Contractor’s desire to secure a job as well as the estimating tool at its disposal. d isposal.

If a Contractor believes that the chances of success are not high, he/she puts in the least amount of possible efforts in making a cost estimate since always the lowest bidder will be the winner of the contract in most bidding contests. 3)  Control estimates For monitoring the project during construction, a control estimate is derived from available information to establish;  

Budget estimate for financing,   Budgeting cost after contracting but prior to construction,   Estimated cost of completion during the progress of construction. Both the owner and the Contractor must adopt some baseline for cost control during the construction. For the Owner , the budget estimate must be adopted early enough for planning along with financing the facility. The detailed estimate is often used as a budget estimate as it reflects the project scope. The budget cost must always be revised periodically as is necessary either because of change orders initiated by owner or unexpected cost overrun. For the Contractor , the bid estimate is used as a budget estimate which will be used for control purposes as well as for planning construction financing. Revise the budgeted costs periodically to reflect the estimated costs to completion as well as to ensure adequate cash flow.

Importance of the above estimates to different parties in any construction project a)  To the Owner Pre-tender/Design Cost Estimate  

Assessing best alternative

Tender/Bid Estimates  

Choosing the best Bidder

Control Estimates  

Come up with a control budget

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b)  To the Contractor Pre-tender/Design Cost Estimate    

Understand scope of work Determine resource demand

Tender/Bid Estimates    

Estimating tool Come up with the best bid

Control Estimates      

Come up with a control budget Carryout cost analysis Execute work as per schedule

c)  To the Consultant Pre-tender/Design Cost Estimate      

Choosing appropriate technology Design different facility components Allocating prices as drawn

Tender/Bid Estimates  

Selecting the best bidder according to quotations and requirements of facility

Control Estimates  

Valuing work done according to specifications

Contracts normally handled during the estimation process include (but not restricted): A.  Contracts with Quantities These contracts are normally prepared for major works and they are based on B.o.Qs. The B.o.Qs are prepared by the Quantity Surveyor on behalf of the Client. Several copies of the B.o.Qs are prepared and sent out to the Contractors who are interest in rendering of the works to enter-in their rates for the execution of the works. When the contract is signed, the B.o.Qs and prices become part of the contract agreement and will be used in preparation of the final account and in the settlement of any variations. The division of the B.o.Qs leads to accurate tendering, as all the tenderers have identical documents from which to work and considerably reduces the cost of estimating for building works. Any errors that may occur in the preparation of the B.o.Qs will be rectified in the final account. B.  Contracts without Quantities These contracts are usually restricted to minor works, and the contract documents comprise of the; drawings, specification and form of agreement. i)  The Drawings  are the plans, elevations, sections, and large-scale details of the proposed building. ii)  The  Specificati  Specification on  is a document prepared by the Architect to supplement the drawings. In the specification, the mixes of concrete, type of bricks and quality of timber are described in detail, as well as the methods of work. All the essential information that will affect the price but cannot be written on the drawings will be mentioned in the specification. © 2 21: Quantity Surveying II Notes. Notes. Ndejje Univ. By By:: Patrick Sekigongo. Email Email:: [email protected]. Mob Mob.. +256 776 647330  

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iii)  The Form of Agreement  is  is the legal document signed by both parties, which states that the Contractor contracts to erect the building in accordance with the drawings and specification and the Client agrees for his/her part to t o pay the contract sum. In the event of a dispute, the arbitrator must study the original d drawings, rawings, specification and form of agreement, before he/she can arrive at any settlement. Formerly, Contractors quoting for such contracts would carefully study the specification and the drawings r elyingwith relying on past quote a lump-sum figure and be prepared to sign and contract this experience, figure as thewould contract sum. As competition grew keener, Contractors could no longer rely on such a crude method. It became necessary to take-off measurements and prepare quantities of work involved. Applying prices to these quantities, one would come up with the total estimates of the work. The quantities prepared were not only for materials, but specific elements of the building such as foundations, walls, roofs, etc. Any errors that occurred were the Contractor’s responsibility, since the detailed calculations did not form part of the contract.

2.5   TENDERING 2.5 As earlier defined, tendering is the submission of a quotation. Against corporate plan, Senior Managers will take the decision to bid for a specific contract. Decisions are taken; during the pre-selection stage, after careful examination of the contract documents, and after the estimate has been prepared and tender t ender is ready for submission.

2.5.1   Factors considered while taking the decision to tender 2.5.1  

Potential contribution of the contract to the company’s turnover in a particular sector i.e., the overhead recovered and the anticipated profits,   The likely demand of the contract on the company’s financial resources, 

 

       

The company’s resources available e.g., the working capital and human resources, Type of work Location of the project Type of client Contract deal

2.5.2   Tendering Procedures/Methods 2.5.2 1.  Open tendering

The procedure is to advertise in the press inviting any firm that wishes to do so to submit a tender/bid/offer. The advertisement will give an outline detail of the type of work, the scale, program and any other key features. Any interested firm applies for the tender documents and there are usually no formalities other than a little fee for the tender documents and discourage those who are not interested in the job or idle curiosity. This system is commonly used by public bodies, e.g. Local Governments, Public Service, etc. It is also used by Private Institutions. © 2 21: Quantity Surveying II Notes. Notes. Ndejje Univ. By By:: Patrick Sekigongo. Email Email:: [email protected]. Mob Mob.. +256 776 647330  

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It is usually stated in the advertisement and in the tender documents that the employer does not bind himself to the lowest offer and the advertisement does not bind the employer in any way but it is merely an invitation to a person or firms to make an offer and any offer made should be unconditionally accepted. Merits It gives chance of tendering to any firm which wishes to do so. Since there is no restriction, there can be no chance of favouritism. Demerits   There are a large number of tenders to evaluate; hence much time and money wasted.   There is normally pressure to accept low tenders.   There is a high cost on the Contractor’s side as he tenders for  very  very many jobs and wins nothing or only one.   There is difficulty in selecting the right firm. 2.   Selective tendering tendering

Here, the procedure is to select a limited number of firms known to the Architect/Client and invite them to tender. This procedure is mainly used by Private firms or Institutions. Selection should be made sufficiently early for firms to be asked whether they will be willing to tender at the required time. The criteria to be employed in drawing up the list of the selected firms will depend to some extent on the nature of the project as well as its size and location. Also, consider equipment available, standard of workmanship by the firm, size of payroll, business record and number of strikes within the company, financial stability and real willingness to tender. Merits It is possible to select the most competent firm. Since tenders are few, there is time and cost c ost saving. Demerits   Firms are sometimes overloaded as they may be reluctant to decline some tenders at the time they have a lot of jobs.   It breeds/brings favouritism and corruption.   There is always reluctance to strike off incompetent firms from the list.   Newly formed firms that are competent cannot tender for the job.   There is always higher quotation than obtainable by open tendering as there is less competition. 3.   Single tendering tendering

There may be circumstances in which only one firm will be able to satisfy the criteria for selection. This happens in cases when seeking a specialist or nominated contractors e.g., for installation of lifts, gas pipes work, supply of some selected materials, etc. © 2 21: Quantity Surveying II Notes. Notes. Ndejje Univ. By By:: Patrick Sekigongo. Email Email:: [email protected]. Mob Mob.. +256 776 647330  

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Merits It is cheap to evaluate the tender.

Firms with tested results are employed.

Demerits   It’s usually expensive as a single contractor tender.    It’s somewhat undesirable and perhaps and it can be embarra ssing if unsatisfactory tender is received. 4.   Serial tendering tendering

This is a premeditated (deliberate) form of extension and comes essentially into the category of tendering rather than negotiation. It applies where there are a series of similar schemes which are to be carried out over a period of time within the same area and permitting the phased utilization of the site organization and plant e.g., construction of schools. It is useful for main contracts and can also secure the benefits of the increased size or order; and production run for component contracts and specialist site installation works which become sub-contracts to the series of main contracts. An example is where a contractor is invited to tender for one building e.g., a school on the understanding that the successful firm will build several schools at the agreed rate. Merits It encourages keener prices than would be for a single project. Experience gained on the earlier project will be useful later on. Demerit   Rapid inflation tends to curtail this type of contract. 5.  Negotiated tendering

This is usually used for construction of very difficult nature of works where the magnitude of the contract may be unknown at first or where early completion is most important, or where continuation or repetition an existing contract is considered desirable.One For firm this contract, there is usually no time toofwait for drawings and B.o.Qs to be prepared. is selected and negotiated with. Merits It’s time saving s no documents/drawings are prepared.  It offers a more rational price basis for the contract’s perhaps stimulate design improvement. Demerits   It is hard to satisfy the test of the public accountability.   Suffers from higher cost due to lack of competition.

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6.  Prequalification tendering

This is where a selection of capable firms takes place before submission of the tenders or quotations. Merits Same as for Selective tendering. tendering . Demerits   Same as for Selective tendering except leaving out of new firms .

2.5.3   Pricing of Tenders 2.5.3 Tenders are prepared on the basis of net or gross pricing. a)  Net pricing

Here, only the net site cost is included when building up a basic unit rate for an item; the quantities are then extended at these rates and totalled, and a final net site cost is obtained for the complete building. Profits and Overheads are calculated as lump sum based on total net site costs and added to net site cost to give a tender figure. Merit   Calculation of profits and Overheads can be reduced to one or two operations thus giving a more accurate tender. Demerit Automatic increase in the amount included for general profits and overheads do not take effect if variations for addition are made. b)  Gross pricing

Net site cost unit rates are calculated and a percentage is added to each unit rate to cover the general profits and overheads. Merit   If variations occur on the contract, they are priced at the rates inserted in the B.o.Q which subsequently increases the amount with variations for addition work. This is advantageous to the contractor. Demerit There is a greater margin of error when the percentage is added to each unit rate to cover profits and overheads.

2.5.4   Tender Documents 2.5.4 The Institution of Civil Engineers  Engineers   (ICE ICE)) Chapter 6, Clause 5 states that; “the several documents forming a contract are to be taken as mutually explanatory (serving to explain)”. There is no order of preference, the Engineer will have to resolve any © 2 21: Quantity Surveying II Notes. Notes. Ndejje Univ. By By:: Patrick Sekigongo. Email Email:: [email protected]. Mob Mob.. +256 776 647330  

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contradictions and under the “contra “contra proferentem” proferentem” rule, contradictions will be construed against the employer (who drew up the contract).

The tender documents will comprise of;  

Instructions to bidders   Form of tender   Conditions of contract   Form of Agreement   Drawings

 

Specifications   Bill of Quantities   Other documents e.g., Soil data, Specific conditions.

1)  Instructions to bidders This will include;  

Place, date and time by which tenders must be returned,   Methods of dealing with queries,   How qualified tenders will be dealt with,

 

Provision for site visits,   Documents to be submitted with the tender,   Methods of dealing with errors.

 2)  Form of Tender This satisfies that there is an offer by the Contractor and acceptance by the Employer. This has no prices. This means, a variation order is not required for changes in quantities. Its appendix gives defects correction period, whether there is need for performance bond, minimum amount of third party insurance, start date and completion date, liquidated damages and retentions. 3)  Conditions of Contract These do two things;  

Set out the contractual responsibilities and liabilities, and   Establish the administrative arrangement.  4)  Form of Agreement This needs only to be signed if the employer wants to enter into a sealed contract otherwise, a letter of acceptance is all that t hat is needed.  5)  Drawings The tender documents will not usually be all that is needed to complete the works but they should be as comprehensive as possible to ensure that the contractor’s rate truly reflect the nature and extent of the work. These include among others; plans, sections and elevations.

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 Specificationss 6)   Specification

In the ICE 6 Contracts, the Specifications is an independent contract document provided to supplement the drawings by giving missing information like quality of materials and it also states general characteristics common to all works in the B.o.Q. 7)  Bills of Quantities These should be drawn up in accordance with the Civil Engineering Standard Method of  Measurement, 3 rd Edition (CESMM3) or any agreed standard method of measurement in the country. a)  Purpose of B.o.Q A B.o.Q consists of a schedule of the items of work to be carried out under the contract with quantities entered against each item. The quantities inserted in a bill are normally approximate to; i)  Enable the contractor tendering for a job to price on exactly the same information with a minimum of effort. ii)  Give itemised lists of the elements of the building, with a full description and the quantity of each item; this may assist the building owner and the successful contractor in ordering materials and assessing their labour requirements for the contract. iii)  Be used in the valuation of works done at any time during construction of these works and their completion. iv)  Provide a basis for the valuation of variations which often occur during the progress of the works. v)  Provide a good basis for cost planning and cost analysis after they have been priced. vi)  Enable contractors to check on their accuracy and order for materials for different works. b)  Process of preparing a B.o.Q i)  Taking off This is where dimensions are scaled or read from drawings and entered in a recognised form on a specially ruled paper called a “Dimensions “ Dimensions paper ”. ii)  Working up This comprises of;  

Squaring the dimensions, transferring the resultant lengths, areas and volumes to the abstract where they are arranged in a convenient order for billing and reduced to the recognized units of measurement.

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The billing operation, where the various items of work making up the complete project are listed in full, with the quantities involved in a suitable order under work section or elemental headings.

The term “quantities” is the estimated amount of labour and materials required  in the execution of various items of work, and together these items give the total requirements of the building contract. Functions of the Building Economists or Quantity Surveyor

Besides preparing a B.o.Q, they also perform the following; f ollowing;  

Advice on what a project would cost, c ost,

 

Advise on what size and standard of structure that can be erected for any given expenditure,

 

Co-operate with designers to ensure that a building is erected within an approved expenditure,

 

Advise on the tendering procedure and contractual arrangements,

 

Exercise control during the construction so that the cost is not exceeded without authority,

 

Determine compensations compensations of those affected by the project,

 

Working with the Architect or Engineer, to ensure that the final provisions of the contract are properly interpreted and applied; so that the client’s financial interest is safely guarded and the contractor is paid a proper price for the work.

2.5.5   Tender period 2.5.5 6 weeks is common. The range is from 4 weeks to 12 weeks. Queries and replies are dealt with in this time formally.

2.5.6   Analysis of Tender 2.5.6 No tender should be opened before the submission closing time and date; and they should all be opened at the same time. All tenders’ names and bill totals should be written down and witnessed by the parties present. First check is for arithmetic errors and Contractor’ss rendering rates.  Contractor’

2.5.7   Acceptance 2.5.7 Prior to acceptance, it is not uncommon to meet the contractor to clarify points on the tender. A letter to the contractor accepting the tender will form a binding contract.

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2.5.8   Bid bond/Bid security 2.5.8 This is the money paid by the bidder on submission of the tender documents. It shows the seriousness of the contractor to do the job. j ob.

2.5.9   Bid withdraw 2.5.9 This can happen after the contractor has obtained information about the job and realized that he/she cannot afford to carry out the work. Before opening of the bids, the bid b id security will be returned to the Bidder. After bid opening, a successful bidder may not withdraw his/her bid unless the Bidder can prove by clear and convincing evidence that a non-judgemental mistake was made in the original bid.

2.5.10   Performance bond 2.5.10 This is the security paid by the contractor to show that he will execute the work appropriately according to the contract details. This money is refunded to the contractor on completion of the contract.

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CHAPTER 3: ALL-IN RATES FOR RESOURCES 3.1   INTRODUCTION 3.1 An All-in rate refers to the total cost/price of executing a unit piece of work. It includes the costs of labour, plant, materials, profits and overheads. Resources   refer to the valuable elements required for the accomplishment of a given

piece of work activities. or task. .In economics resources are usually land, labour, capital and entrepreneurial activities

3.2   ANALYSIS OF RATES 3.2  Analysis of rates rates refers to the process of determining the rate per unit of an item or work or supply of materials. A reasonable profit, usually 10% to 25% for the contractor should be included in the analysis of rates.

3.2.1   Factors that affect the analysis of unit rates 3.2.1 These are sometimes called components/constraints. 1.  Materials. The quantities of various materials required for the completion of an item are known from the B.o.Qs B.o.Qs,, Drawings Drawings   and Specification Specification   from the tender documents. The prices of the materials are dependent on the market conditions and vary from place to place. 2.  Labour . The amount of labour force required depends on the average of past works. Since capacity to do work and the wages of labour vary from place to place, the cost of labour is a variable factor; hence the efficiency of the labourer and the wages of the labourers should be properly studied before starting the rate analysis for a particular item. 3.   Site condition condition. Difficult site conditions will usually invite slightly higher rates. 4.   Specification  Specificationss. The rate will be on a higher side if specifications of the work are very rigid without any tolerance. 5.  Conditions of contract . The contract imposing very strict conditions will invite higher rates and vice-versa. vice -versa. 6.  Quantum of work . If the contract is big, the rates of items are likely to be lower. © 2 21: Quantity Surveying II Notes. Notes. Ndejje Univ. By By:: Patrick Sekigongo. Email Email:: [email protected]. Mob Mob.. +256 776 647330  

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7.   Special equipment  equipment . If certain items require use of some special equipment, the rate of item of work is bound to be higher as cost of equipment or its rented cost has to be added in the rate analysis of that item. 8.  Place of work . If the site is situated in a highly congested area, it will not be possible to take the materials directly on site; hence, higher rates. 9.  Profits to the Contractor . This is a variable depending on a number of factors; terms of payment, nature of work, size of job, source of working capital etc. 10. Miscellaneous . Factors like; time of project completion, climatic conditions and reputation of the contracting agency etc. also affect the rate of items.

3.2.2   Purpose of carrying out rate analysis: 3.2.2       

   



To compute the current actual cost per unit of work at the locality, To examine the viability of rates offered by contractors, contract ors, To calculate the quantity of materials and labour strength required for project planning, To fix up labour contract rates. To fix profits and overheads.

3.2.3   How to fix up rates per unit of item 3.2.3 The following 5 sub-heads are to be examined and a summation of these is the rate per unit of an item:

  Quantity of materials and their cost   Labour costs   Cost of equipment and tools



  Overheads or establishment charges   Contractor’s profits 



3.3   LABOUR 3.3 Labour refers to the people or workers who provide physical effort for the execution of practical works. Labour output is the most uncertain part of a unit rate. It can vary considerably depending upon the skill and out put of the operatives, the site organisation, weather conditions and many other factors outside the control of the contractor.

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The estimator should calculate the hourly cost to the builder of the skilled and unskilled labour which will be employed on the contract if the tender is successful, and this is classified as the build-up of labour rate.

3.3.1   Factors considered in coming up with labour rates 3.3.1                           

 



Basic rate of pay in accordance with the working rule agreement, Third party insurance and federation payments –  autonomous  autonomous (self-governance), Guaranteed time for inclement weather, Training levy, Graduated pension contribution, Sickness benefit, Holiday with pay contribution at current rate, National insurance and redundancy (standby) contribution at current c urrent rate, Tool allowance, Travelling expenses, Extra payments of discomfort, extra skill, intermittent (specialist) responsibility etc., Trade supervision, Percentage addition to cover the extra cost brought about by operatives working fewer hours than expected, Overtime.

Example 3.1 Computations are made basing on a week of 5 days, 8 hours a day giving 40 hours a week. Consider a year of 50 weeks and the table below. Unskilled Skilled

Basic pay per day Third party as a %age of basic Guaranteed time as a %age of basic Graduated pension as a %age of basic Sickness benefit as a %age of basic Holiday with pay contribution (Annually)

10,000/= 2.5% 2.0% 2.0% 0.5% 200,000/=

20,000/= 2.5% 2.0% 2.0% 0.5% 350,000/=

National Insurance & Redundancy (Annually) Public holiday (Annually) Training levy per week

128,000/= 120,000/= 5,000/=

128,000/= 120,000/= 10,000/=

Calculations Unskilled rate Basic pay …………………………………...... …………………………………................ 10,000/8 = 1,250 x 40 ……… = 50,000/=  Add 3rd party insurance, etc……………......... 2.5 % Guaranteed time……………………….... 2.0 % Graduated pension……………………..... 2.0 % Sickness benefit………………………......... 0.5 %

7.0 % of 50,000/= ………….............. = © 2 21: Quantity Surveying II Notes. Notes. Ndejje Univ. By By:: Patrick Sekigongo. Email Email:: [email protected]. Mob Mob.. +256 776 647330  

3,500/= 53,500/=

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Holidays-with-pay contribution Annual ........................................... 200,000/= Public ............................................ 120,000/=

(320,000/=)/50 (320,000/=)/50 ……  =

6,400/= 59,900/= National insurance and Redundancy contribution ….. = 128,000/=/50 …....  = 2,560/= Training levy ……………………………………………………………………………   = 5,000/= Total per week   = 67,460/= 

Unskilled rate per hour therefore = (67,460/=)/40 (67,460/=)/40 hours = 1,687/=   Skilled rate Basic pay …………………………………...... …………………………………................ 20,000/8 = 2,500 x 40 ……… = 100,000/=  Add 3rd party insurance, etc……………..... etc……………......... 2.5 % Guaranteed time……………………….... 2.0 % Graduated pension……………………..... 2.0 % Sickness benefit………………………......... 0.5 % 7.0 % of 100,000/= …………........... = 7,000/= 107,000/= Holidays-with-pay contribution

Annual Public

........................................... 350,000/= ............................................ 120,000/=

9,400/= 116,400/= National insurance and Redundancy contribution ….. = 128,000/=/50 ….... = 2,560/= Training levy …………………………………………………………………………….   = 10,000/= Total per week   = 128,960/=  Skilled rate per hour therefore

(470,000/=)/50 (470,000/=)/50 ……  =

= (128,960/=)/40 hours = 3,224/= 

3.3.2   Labour constants 3.3.2 Labour output is the most uncertain part of a unit cost. It varies considerably depending on the operatives, site organisation, weather conditions and other factors outside the control of the contractor. Records of labour outputs of each operative involved in construction have been kept for many years, taking into account varying conditions and a comprehensive list of skilled, semi-skilled and unskilled times has been prepared. p repared. These records which give the average unit times for each operative is what is called labour constants. E.g., if an average joiner can fix a 75 mm mortice lock in ¾ hour working at a normal speed, the labour constant for the operation would be ¾ hour each.

3.3.3   Factors that lead to variation in labour rates 3.3.3   Variation in attitudes, culture etc. of individuals    Location of work, e.g. height; underground works, ground level or



up above the level where one can work when standing on the ground.    Weather condition   Workmanship expected.

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  Level of supervision   Site organisation

  Skills of workers





3.3.4   Factors that affect labour rates 3.3.4   Supervision   Overtime



  Holidays   Training levy



  Locality



Note: Where labour rates cannot be built up due to inadequate time, labour rates can be got from; i)  Past records of work, ii)  Current rates from sister companies considering inflation.

Multiply past rates by a factor (1+f)n  where n  is the number of years that have elapsed from the time of tendering and f is the average inflation rate.

3.3.5   Trade Supervision 3.3.5 On large projects it is usual to employ a Trades foreman who will be largely unproductive as far as actual output is concerned. The estimator must include the cost of this supervision. Example 3.2 Consider 8 brick layers building say 2 m 2 of a wall in an hour each at Ugx. 1,687/= with 1  supervisor for the one hour at Ugx. 3,224/=

If all 9 were to lay 9  2 m2 = 18 m2 at 1,687/= ……………………………...……................................ 15,183/= If the supervisor is to lay for half the time, and supervise half the time, the time spent on the work = 8.5 instead of 8 hrs. In terms of costs Ordinary craftsman @ Ugx 1,687/= per hour Craft supervisor @ Ugx 3,224/= per hour Therefore, 8 craftsmen……………………………………...……………………..…... 13,496/= One hour supervision………………………………………………………………......  3,224/= 16,720/= Effective hours = 8.5 hrs.  Therefore labour rate = 16,720/8.5 ………………………… ……………………………...…………………….. …...…………………….. 1,967/=  Instead of 1,687/=, giving additional cost of 280/= per hour Cost per unit ……………………………………………................ ……………………………………………....................16,720/18 = 929/= per m2  If only the 8 masons were laying, cost per m2 ………………….16,720/16 = 1,045/= per m2 

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3.3.6   Extra Payments 3.3.6 Extra payments for discomfort or risk, continuous extra skill or responsibility, intermittent responsibility and similar items should be added to the built-up hourly rate, in accordance with the working rule agreement.

3.3.7   Overtime 3.3.7 The estimator must decide the amount of overtime which is to be included in the labour rate for the contract being tendered for. Example 3.3 Consider a basic 40-hour week of 5 days. Assume a 1 hour overtime from Monday to Friday, and that Saturday working will be included from 8:00 am to 1:00 pm with 30 minutes for lunch. Calculation Hours paid  Monday to Friday: Ordinary time: Overtime:

Saturday: Saturday: Overtime:

8 hours x 5 days ………………………  = 40 hours 1 hour at time and a quarter x 5 days = 6.25 hours = 46.25 hours

4.5 hours at time and a half

Hours worked  Monday to Friday: 9 hours x 5 days Saturday:: Saturday 4.5 hours x 1 day

.............................................. = 6.75 hours 53.00 hours

……………………………………………………………………  = 45 hours

............................................................................................. ........................................................................................... .. = 4.5 hours 49.5 hours Actual hours of work in a week ……………….................................................... 49.5 hours Labour per week will be:

Cost of productive hour:

Unskilled: Unskilled:

53 x 1,687/= …………...................

89,411/=

Skilled: Skilled:

53 x 3,224/= …………................... 170,872/=

Unskilled: Unskilled: Skilled:: Skilled

89,411/49.5 …………………........ 1,806/= 170,872/49.5 …………………........ 3,452/=

This is an additional cost of 119/= and 228/= per hour on unskilled & skilled labours respectively.

3.3.8   Holidays 3.3.8 On public holidays workers are paid even when they have not reported at the work place.

  3.3.9 Training Levy Workers are paid as skilled labourers yet their outputs are low. © 2 21: Quantity Surveying II Notes. Notes. Ndejje Univ. By By:: Patrick Sekigongo. Email Email:: [email protected]. Mob Mob.. +256 776 647330  

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3.3.10   Fluctuation Clause 3.3.10 When a fluctuation clause is included in the conditions of contract, it is necessary for the estimator to ascertain whether his built-up rates are to be on current rates of wages or if known increases are to be included. If known increases have to be included they are dealt with in a similar manner to the section “Firm “Firm price Tender ”.

3.3.11   Firm Price Tender 3.3.11 When the project tendered for has had the fluctuation clause deleted from the t he conditions of contract it is necessary for the estimator to add or omit all known increases or decreases in labour after the date of tender and during the estimated contract period, and also to make allowance for further anticipated variations in labour cost over the period.

3.3.12   Fixed-price Contracts 3.3.12 Fixed-price types of contracts provide for a firm price, or, in appropriate cases, an adjustable price. Fixed-price contracts providing providing for an adjustable price may include a ceiling price, a target price (including (including target cost), or both. Unless otherwise specified specified in the contract, the ceiling price or target price is subject to adjustment or the revision of the contract price under sstated tated circumstances. The contracting officer shall shall use firm-fixedfirm-fixedprice or fixed-price with economic price adjustment contracts when acquiring commercial items. A firm-fixed-price firm-fixed-priced d contract  provides   provides for a price that is not subject to any adjustment on the basis of the contractor's cost cost experience in performing the contract. This contract type places upon the contractor maximum risk and full responsibility for all costs and resulting profit or loss. It provides maximum incentive incentive for the contractor to control costs and perform effectively and imposes a minimum administrative burden upon contracting parties.

3.4   MECHANICAL PLANT 3.4 Before pricing any of the items involved, the estimator must decide the type or types of machines to be used and the respective size of each machine. The type of machine will depend largely on the amount of work involved and the nature of the work itself or the material to be excavated. Excavation plant is usually charged on the site at an hourly hire rate based on a normal working week and this is true for all other plants like; the concrete mixers, rollers or even transport vehicles. Anytime worked over the number of hours shown on the hire agreement is charged extra, as also travelling time and expenses to and from the site. It is important to choose the right plant for the right work to avoid over using or under using as the rates are normally in terms hours worked.

3.4.1  Methods of acquiring a plant  

By purchasing

 

By hiring

 

© 2 21: Quantity Surveying II Notes. Notes. Ndejje Univ. By By:: Patrick Sekigongo. Email Email:: [email protected]. Mob Mob.. +256 776 647330  

By leasing

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3.4.2   Factors that affect the costs of a plant 3.4.2   Inclement weather   Lack of supervision   Inexperienced operators



  Lack of maintenance   Use of inappropriate machine   Haulage distance



3.4.3   Depreciation of machines (plant) 3.4.3 Depreciation is a term used in accounting, in accounting, economics  economics and finance and finance to spread the cost of an asset over the span of several years. Mechanical plant suffers wear, tear and physical an asset deterioration in constant use. It is important to ensure the capital invested is recovered for one to be in business. In simple words we can say that depreciation is the reduction in the value of an asset due to usage passage of time, wear and tear, technological outdating or obsolescence, depletion, inadequacy, rot, rust, decay or other such factors. factors .  Salvage value value

This is the estimated value of an asset at the end of its useful life . In accounting, the salvage value of an asset is its remaining value after depreciation. This is also known as  residual  value  or  scrap value. It is the net cash inflow that occurs when the asset is liquefied at the end of its life. Salvage value can be negative if the residual asset requires special treatment to terminate — for for example, used nuclear materials or disposal of objects containing lead. Causes of depreciation

Age Introduction of newer most efficient plant

Lack of maintenance Nature of work Wear and tear

Methods of calculating depreciation costs 

Depreciation can be calculated in several different ways, but the four most common methods used will be considered. line Method  a)   Straight line

This is the most commonly used method of depreciation and is relatively straightforward. The theory behind it assumes that an asset should be depreciated in equal amounts each year until it reaches its residual value (or scrap value). The  residual value is value  is the value that the business expects it to be worth when the asset has no use anymore. This value can often be nil but realistically, r ealistically, it usually has some value. Further, you must predict the expected life of the asset, i.e. the number of years that you believe the asset will be of use to the business.

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The total depreciation sum (total capital spent on acquiring it minus its estimated  salvage/scrap value at the end of its useful life) is divided by the estimated useful life of the asset. Depreciation = (Original Value - Residual Value)/Expected Life

Interest rate is not taken into consideration by convention and for the sake of simplicity. Example 3.4

Consider purchase of a tipper lorry at £16,915. The lorry has a life of 5 years and salvage value of £4,000.  Solution Depreciation = £(16,915 –  4,000)/5  4,000)/5 years = £2,583 per year

This figure will then be deducted from the previous year ’s asset value giving the new Net Book Value. In addition, this figure will be added to the total expenses each year on the profit and loss account. Straight line method of depreciation  Year   0 1 2 3 4 5

Depreciation (£)  0 2,583 2,583 2,583 2,583 2,583

Net Book Value (£)  16,915 14,332 11,749 9,166 6,583 4,000

b)  Declining balance method This method is also known as “diminishing balance method” method”  or “constant percentage book value method” method”. In this method, a fixed percentage of the book value of an asset is written off as depreciation charge annually. The reducing balance assumes that an asset loses more value during the earlier years of its life. Consequently, a depreciation rate (%) for reducing value is used, resulting in less value being lost each year. The percentage depends on;  

Cost of capital,   Life of the equipment,

 

Inflation,   Competition and

 

Profit.

Example 3.5  Consider a purchase of a dumper track at £16,000, with a residual value of £4,000 and is to be used for 4 years. Compute the annual depreciations for the four years.

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 Solution Now, there are two formulas that need to be considered here (nothing too extreme). Firstly, you need to work out the depreciation rate using the formula below.

Mathematically , if we are to depreciate an asset with an initial cost of P  and salvage value of S, over a period n, years and with a fixed % depreciation r  in  in fraction of unity, Then,   S = P (1-r)n 

and  r = 1 –  (S/P)  (S/P)1/n 

Therefore: The depreciation can now be worked out as follows: Table 4.1: Declining balance method of depreciation 

Year

Book value at the beginning of year, P (£)

Book value at the end of year (£)

Depreciation per Year, r (£)

Depreciation Cost/hr(£)

1 2 3 4

16,000 11,314 8,000 5,657

11,314 8,000 5,657 4,000

4,686 3,314 2,343 1,657

2.343 1.657 1.172 0.829

The residual value is exactly the £4,000 that was suggested and it is the book value at the th

end of the 4  year. Remember cost per hour does not include the cost of capital, running costs and profits. It is important these factors are included to make an economic sense. Example 3.6   A dumper track was purchased at £16,000 with a useful life of 4 years. Use the method of declining balance method to compute the yearly amounts to recover if the fixed percentage to recover is 30 and the salvage value is £3,842.  Solution Year

Beginning of year, P(£)

End of year, 0.7P(£)

Yearly amount to be recovered, 0.3P(£)

1

16,000

11,200

4,800

2 3 4

11,200 7,840 5,488

7,840 5,488 3,842

3,360 2,352 1,646

c)  The Sinking-fund method The straight line method has equal annual depreciation for every year. There are other methods which have more depreciation allocated to the earlier years like Constant  percentage  percentag e  Book value method  or Written-Down Value (WDV) method  in which depreciation is charged at fixed rate (%) on the reducing balance (i.e. cost less depreciation) every year. The sinking fund method allocates equal depreciation to the entire life of the plant which is not practical since the equipment may not be able produce much in the later years due to tear and wear. © 2 21: Quantity Surveying II Notes. Notes. Ndejje Univ. By By:: Patrick Sekigongo. Email Email:: [email protected]. Mob Mob.. +256 776 647330  

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The depreciation for the first year equals the annual deposit needed for a sinking fund to accumulate at the given rate to an amount that equals the depreciation base. For each consecutive year, the annual depreciation equals the annual sinking fund deposit plus the interest earned on the fund up to that year. Thus we may assume that regular end of year instalments , R, are paid into sinking fund up to the end of the asset’s useful life ( n = years), so that at an interest rate of i, it will amount to total future depreciable sum of P(1+i)n 

      1  i     1

Depreciation cost, R = Depreciable sum x (1+i) n  

R=

P (1  i )

(1  i ) n

i

 

n

n



1

i 

Where; i = Interest on capital, n = Number of years. Compute R using i as the interest on capital, add running cost as a percentage of R, then add profit profit and  and overhead overhead.. This series from geometric progression assumes that, where the purchaser is under obligation to deposit some regular sum, R  per given period of time, as the money accumulates for n-years, some interest accrues on it too. Thus,



   R1  i      R1  i 1   ....R ;



   R

P 1 i

n

 

n

n

    1  i   1



P 1 i

=>

n

P 1 i

n

i

,

therefore,

 R

 P1  i 

    R 1     i  1  i 1  ....1   n

i

n

1  i    1 n

n

n

 (  (Refer Refer to geometric series) series )

Where, P(1+i) n gives the future worth of the plant in n-years. Example 3.7 In the case of the truck with present worth =  £16,000, assumed interest of 14% and n = 4 years,

    = £5,491  4  1.14  1 

R = 16,000 x 1.144  

0.14

It can be seen that capital recovery is much higher than all the other methods stated so far. Example 3.8 Consider purchasing an excavator at Ugx. 300 m with a life of 3 years and resale value of Ugx. 100 m. Interest on capital is 20%, running cost is 10%. Profits and overheads are 20%. Calculate the cost per hour of the equipment assuming 8 hours a day, 5 days a week and  50 weeks a year.  Solution

Using R =

P (1  i )

(1  i )

n

n



i,

1

R=

300 30 0(1  0.2) 3

0.2  = 142.4 m

(1  0.2)  1 3

Adding running costs = 1.1*142.4 = 156.7 m © 2 21: Quantity Surveying II Notes. Notes. Ndejje Univ. By By:: Patrick Sekigongo. Email Email:: [email protected]. Mob Mob.. +256 776 647330  

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Adding profits and overheads = 1.2*156.7 = 188 m Therefore, cost per hour = 188,000,000/5*8*50 188,000,000/5*8*50 = Ugx. 94,000/=

Computation for an hourly rate of purchased plant Example 3.9 Cost of an excavator using straight line method. Initial cost ......................................................................................................................... ......................................................................................................... ................ 300 m Resale value after three years ………………………………………………………… ........ 100 m Cost of plant per year = (300 –  100)/3 = 200/3……………………………………………..  67 m Interest on capital is 20% in the first year = 300*20% ...................................................... 60 m Repairs and renewal (usually in %) per year and take say 5% of 300m …………….... 15 m Cost per year to recover… r ecover………………………… …………………………………………………… ………………………………............ ….................. 142 m Adding running costs = 1.1*142 ...................................................................................... 156.2 m Adding Profits and Overheads = 1.2*156.2 1.2*156.2 ................................................................... 187.4 m  Cost per hour of plant 187,440,000/(8*5*50) 187,440,000/(8*5*50) = 187,440,000/2000 187,440,000/2000 = Ugx. 93,720/= d)  The sum-of-digits method  In this method, the digit numbers representing each year of operation of the plant are added together. The depreciation charge for each year is taken as the depreciable sum multiplied by the ratio of the reverse year’s number to the total added digits. Example 3.10  A truck is purchased purchas ed at Ugx. 30 m and the resale value is Ugx. 10 m at the end of the fifth year. Determine the depreciation charge.  Solution The digits are 1,2,3,4 and 5 Total digits Depreciation sum

= 1 + 2 + 3 + 4 + 5 = 15 = 30 –  10  10 = 20 m/=

Depreciation in the 1st year Book value at the beginning of 2nd year Depreciation in the 2nd year Book value at the beginning of 3rd year Depreciation in the 3rd year Book value at the beginning of 4th year Depreciation in the 4th year

= 5/15*20 m = 6.67 m/= 30.00 –  6.67  6.67 = 23.33 m/= 4/15*20 m = 5.33 m/= 23.33 –  5.33  5.33 = 18.00 m/= 3/15*20 m = 4.00 m/= 18.00 –  4.00  4.00 = 14.00 m/= 2/15*20 m = 2.67 m/-

Book value at the beginning of 5th year = 14.00 –  2.67  2.67 = 11.33 m/th Depreciation in the 5  year = 1/15*20 m = 1.33 m/Book value at the beginning of 5th year = 11.33 –  1.33  1.33 = 10.00 m/-. © 2 21: Quantity Surveying II Notes. Notes. Ndejje Univ. By By:: Patrick Sekigongo. Email Email:: [email protected]. Mob Mob.. +256 776 647330  

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3.4.4   Hired plant 3.4.4 Where the plant is hired, the contractor negotiates with the client on the amount per day or per week or per month; say 800,000/= per day and this is reduced to the rate per hour of utilization and running cost, profits and overheads are added.

Summary  Having the fundamental knowledge of business accounting is almost a pre-requisite of running a successful business. Whether this is achieved through your bookkeeper or your accountant, the small business owner needs to understand the pros and cons of using different methods for, say, purchasing/tax-efficiency, and as a result, make best use of the cash flow generated by the business.  Assignment 1 GROUP A: Compute the cost per hour of a Sinotruk Howo 371 HP 6X4 Dump truck purchased at Ugx. 180 m. The truck was bought through a loan scheme with 27% interest and has 5 years useful life after which it can be sold for Ugx. 80 m. Assume the operating cost to be 10% and the owner’s profit 5%. Use the four methods and compare the results. GROUP B: a)   An estimator in pricing the concrete work in foundation has decided in conjunction with the planning department, that the concrete will be mixed on site and that a 14/10 concrete mixer with a loading skip and a power operated loading shovel will be used. The following has also been calculated:

i)  Hire cost of mixer including haulage to and from the site = Ugx. 600,000/= per week. ii)  Cost of erecting and dismounting mixer including aggregate bins = Ugx. 1,500,000/= iii)  Running cost per week = Ugx. 300,000/= iv)  Length of time required for operation, including erection and dismounting = 10 weeks v)  Quantity of concrete in foundation = 1200 m 3. Calculate the net cost of mixer to contract. b)  Clearly explain the differences in gross pricing from net pricing when estimating and  state any advantage of one over the other. c)  Differentiate project overheads from general overheads. GROUP C:

a)  Briefly explain the factors that determine the cost of a plant? b)  Briefly explain the major causes of depreciation associated with mechanical plants. c)   An excavator crawler mounted equipment with a single shovel costing Ugx.  435,000,000/- is assessed to have a life of 5 years after which it will be sold at Ugx.  20,000,000/-. What is the hourly rate of the plant if the working hours per annum is 1500 © 2 21: Quantity Surveying II Notes. Notes. Ndejje Univ. By By:: Patrick Sekigongo. Email Email:: [email protected]. Mob Mob.. +256 776 647330  

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hours? Given that: Taxes, interest and insurance = 10%; Repairs and maintenance = 12%; Fuel = 3 litres per hour; Oil and grease = 10% of fuel. Make realistic assumptions where necessary. GROUP D:

a)  What is estimating as applied in construction? State the parties involved in estimating with examples of where and when they use the estimates. b)  Explain what is meant by estimate adjudication. c)   A mechanical plant purchased at Ugx. 30 million will have Ugx. 5,042,100/5,042, 100/- as salvage or resale value and its depreciation is 30%. Use the declining balance method to calculate the payback period for the plant and the hourly rate for the truck. Adopt eight hours a day, five days a week and fifty week in a year. GROUP E:

a)  The Management of Ndejje Consulting Services Ltd, a consultancy firm has decided to use selective tendering method on one of their major projects. You have been asked by the directors to draft a pre-qualification notice to contractors. Making realistic assumptions, draft the notice. b)  What is profit? Explain any five factors considered in determining the profit margin. c)  Explain the six types of wastage of materials and explain how they are taken care of in estimating.

3.5   Material 3.5 In any construction work, the cost of materials constitute almost 60 -70% of the total cost. As a result, the total project cost is highly sensitive to the material costs likely to be incurred during the period of implementation of the project. The rate of return and profitability on capital investment in a construction project is seriously affected if materials are purchased at a higher rate or if money is mis-spent on materials that are sub-standard and not tallying with specifications. The costs of materials vary considerably depending upon the firm of suppliers and the purchaser .

3.5.1   Factors determining the cost of material (Unit rate of materials) 3.5.1        



Quantity to be purchased, Inflation, Annual turnover of the supplier, Law of demand and supply,

  Quality/specification,   Speed with which the purchaser settles his accounts,   Wastage to be encountered.



It follows that a builder who is a purchaser of large quantities of materials and a prompt payer of accounts will obtain advantageous quotations (discounts) than a builder of the opposite type. The other factors responsible for high costs of materials are: - inflation, distance of haulage, carriage costs and the size of the loads required. For example, ready

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