Category: Cost Information
Importance of Cost Planning Your Building Project.
Construction projects are dynamic and continually changing. You need to be able to anticipate challenges, identify potential risks, and manage costs so you don’t get caught off guard when the unexpected happens. If you’re in the planning stage of a construction project, cost planning will help you set a budget for all the expenses that come with it. This includes material costs, labor, subcontractor costs, and other related expenses so that you have an accurate estimation of how much money is needed before breaking ground.
Cost planning also helps you identify areas where your project has high risk — like a slim budget or tight timeline — which is useful information if you plan on getting financing to pay for it. Knowing these things up front will save you from potential pitfalls and unpleasant surprises later on down the road.
What’s Included in a Building Cost Plan?
To bookend the cost management process, you’ll want to create a procurement plan and a cost summary. The procurement plan will help you outline the process of securing contracts with suppliers and vendors, which will include details like the type of material needed, the schedule for delivery, and any certifications needed. The cost summary will include all the numbers that went into calculating your budget, including the total cost of materials, labour, and any additional expenses like permits and inspection fees. A Quantity Surveyor can help you have this information in form of a Bills of Quantity, Program of Works and Material Schedules.
Identify the Scope of Your Project
The best place to start when cost planning is to determine the scope of your project. This will help you identify the necessary labour and materials you’ll need, which will in turn help you calculate the cost. The scope includes details like the overall building size and construction type, the number of floors, and any unique or special features like rooftop gardens or green roofs. A project scope might also include other factors, like whether you’re planning to include mechanical systems like plumbing and electrical work or add any special features like a conference room or rooftop patio.
Estimate Material Costs
When estimating material costs, you’ll want to account for any unique factors that may increase your building costs. This can include things like the type of material you choose or the labour costs associated with a certain construction method. For example, if you’re planning to use timber framing instead of concrete columns, you’ll want to account for increased labour costs associated with putting in posts instead of setting a sill plate. If you’re unsure of the costs associated with certain materials, you can visit a building supply store like Builders in Karen or Central Auto Hardware in Industrial Area (Nairobi) to research local pricing.
Estimate Labour Costs
Labour costs can vary widely, depending on the region where you’re building, the type of work you need done, and the skills of the people doing it. You may also want to account for overtime hours or any additional expenses that come up during the course of your project. To estimate labour costs, you can use the services of a quantity surveyor or reach out to your local construction company to get a quote from a project manager.
Identify Subcontractor Costs
Subcontractor costs are the expenses associated with hiring outside construction companies to handle tasks like excavation, site grading, concrete work, or electrical work. To estimate subcontractor costs, you can request a bid from a contractor to get an accurate estimate. You’ll also want to account for any change orders, fee changes, or potential miscommunications that could lead to added expenses. Therefore allow a Contingency Sum of between 5 to 7% of the Overall Cost.
Summing up
As you can see, cost planning is an important part of project management. It will help you estimate the total amount of money needed to complete a project, as well as identify potential risks that can affect the project. If you’re planning a building project, it’s important to understand the factors that will affect the price of your project. This will allow you to set an accurate budget and make informed decisions.
How To Think And Build like a Real Estate Investor (With a Simplified Worked Example)
Introduction
Money is made or lost in real estate before a house is built. The decisions that determine the outcome are made at the beginning. These include the Vision to Build(Why?), the Design (What?), the Costs summarized in a Bills of Quantity(How?), the Location (Where?) and the target Market (Who?). Here is how to build while thinking as an investor:
Build to Rent
By Self: Rent to Own
If your annual rent is higher than the cost of owning land plus building a small office, then build and use the savings to offset the cost of development. It is possible to find good land in Peri-Urban Areas near main Cities.
This will allow you to start your journey of owning a small office and eventually a bigger office complex as you complete your Rent-to-Own Milestones. In this scenario, you build a house and move in so that you can stop paying rent but pay down the loan used to build the house or office. Caution: Do not be too quick to move out of major Cities since some Opportunities are more concentrated in Cities than Rural Areas.
By Others: Rent for Profit
Becoming a landlord is a worthy goal when thinking about building. There is always pressure created by increasing household sizes and there will always be persons willing to rent if the location and price is right.
The main factor to consider while thinking about rental properties is affordability, Location, Services and The Payback Period. In Other Words, will your tenants be happy? and will you be able to recoup your initial investment by collecting rental income? One should also consider the prevailing rental income of the location and whether there are Opportunities for growth. For example, Universities and Hospitals can be great source of constant clientele.
Build to Sale
When Building to Sell, the most important factors are Location, Affordability and Profitability. One needs to consider all the costs of the project including Value of land, Financing Costs, Consultancy Fees, Cost of Statutory Services (Electricity, Water and Sewerage) and then determine the Selling Price. The metric to study will be the return on Investment (ROI)
Worked Example with a Financial Template
Financial Template:
In the above example, we are looking at a Potential Development of an Apartment Block Comprising of 8 Residential Units with shared services (Parking, Play Area, Common Staircase et Cetera).
As the numbers show, we have only two factors to consider, the input costs and the revenues. A difference of which will either generate a Profit, Loss or Rental Income with the indicated Payback Period.
All the Variables in the template are adjustable such that one can do further analysis on different neighborhood, House Types, Project Type e.g. An Industrial building or Park et cetera.
The most important thing to remember is that money is made or lost before a house is built.
NOTES ON FINANCIAL TEMPLATE:
- The proposal is to build 2 Blocks in two phases or at a go if funds are available and allow some green area, parking, landscaping and a running track all-round the land.
- Item A: Cost of land is pegged at KES. 1 Million for each unit. A bloc will thus raise KES. 10,000,000 and Two Blocks of Apartments would raise KES. 20,000,000.00 towards the cost of land. The sum raised can be used to purchase subsequent land parcels for future developments. This figure can change depending with the final report from a Registered Land Valuer.
- Item B: Commitment Fees is sums paid for formal engagement of consultants and the Project Team. This is used towards making detailed feasibility studies of the proposed venture. This will also enable production of preliminary Concepts, Cost Estimates and a Master Plan. The Client can pay a minimum of KES. 200,000 and a maximum of KES. 500,000 to jumpstart this process.
- Item C: The Cost of Finance. Using the Concepts, Cost Estimates and Master Plan prepared under Item B, the Developer can secure a Loan Facility from lending institutions. The Cost of acquiring and processing such a facility is covered under Cost of Finance. This includes insurance for the facility, interest rates and processing fees. The lender will determine the Terms and Cost of Finance in negotiation with the Developer. Investors who put money into the project can also determine this as a return on their investment when the project is sold out.
- Item D: Professional Fees. This covers the fees for the Architect, Structural Engineer, Mechanical and Electrical Engineer, Quantity Surveyor, Landscaper and any other Specialist Consultants engaged by the Project Team to ensure the integrity and successful implementation of the project to completion. It is paid in pre-agreed stages until project completion and covers both Design, Inspections and Supervision.
- Item E: Preliminary Costs. These are costs which are incurred either as a statutory requirement or as a matter of necessity to make the e.g. Hoarding, Signboard, Project registration, Insurance for the Works, Sanitation for the Works, Water and Electricity for the Works, Security et Cetera. They may not form part of the final works but they are a necessity for the successful implementation if the project. They will be particularized and priced.
- Item F: Construction and Training Levy are mandatory sums payable to the Government on any ongoing or proposed project and may change from time to time depending on legislation.
- Item G: Renewable Energy Component. Studies indicate that Green Buildings and those which are designed and built with environmental consciousness attract more rental income and can be sold at a premium thereby increase their uptake in the market. This cost shall be covered by the Renewable Energy Component which includes Solar Water Heating and Lighting
- Item H: ICT Component is to make the building compatible with ICT Technology including charging ports, CCTV Surveillance, Security Installations, Conduiting and wiring for gadgetry.
- Item I: NEMA + Levies 1%. According to the Environmental Management and Coordination Act(1999), we will require to obtain a license from NEMA after an expert has undertaken an Environmental Impact Assessment of the Project.
- Item J: External Works Cost (Drainage+ Septic tank+ Water Storage). The Foul Drainage, Septic Tank and A Soak Pit will cost each dweller approximately KES. 300,000.00 as there is no Public Sewer near the project site. Each house will thus contribute this sum towards foul drainage and water storage tanks or Tower.
- Item K: Project Manager. There is need to coordinate the Project Components, Expectations and Delivery during the lifetime of the project from start to finish including period where the units will be under sale. This is usually done by the Construction Project Manager
- Item L: Marketing Cost. This cost is important to ensure there is speedy uptake of the housing units and to gauge the correct pricing point. It also includes cost of covering target market survey, advertising, billboards, social media campaigns, Print and Voice Advertising and any other Marketing Activities geared towards the success in the uptake of the project.
- Item M: Cost Per Unit: With Item A to K covered, the cost of building one residential unit will be 7,724,673.16 This cost is reasonable. More items can be introduced or removed depending on the overall target audience
- Item N: Projected Sale Price: The Developer is at liberty to sell the project at any cost. However, should the units be sold for KES. 15,000,000.00, it is projected that the Developer will realize a Net Revenue of KES. 150,000,000 for the 10 units. The Market Analysis generated from Market Research will provide the Best and Worst Case scenarios and the correct selling price.
- Item O: Cost Per Square Metre. This is the all-inclusive cost per square metre used to estimate the cost of building a similar unit in the neighborhood/ same land e.g. as Phase 2 or 3.
- Item P: Net Profit is what is realized after the Total Cost of the project as been subtracted from the Total Revenue.
- Item Q: Percentage Return on Investment (ROI) activities comparing what has been invested and what has been realized as profits. In this case, it is 94.18%. Selling the units at a higher price would raise the ROI and increasing the input costs would lower it subsequently.
- Item R: Rental Income. If the 10 Units as designed, are released to the market as rental properties, they will be able to fetch KES. 500,000 per month. This item will also vary depending on the Market Research and Feasibility Study.
- Item S: Total Annual Rental Income is the total sum realized from rent from the housing units built.
- Item T: Finally the Payback Period means the time it will take for the Developer to get back 100% of his initial investment if the Property is let out at the Proposed Rents. This is 10.73 Years using our analysis. The higher the rent, the shorter the payback period and vice versa
COST SAVINGS
- The floor area of the house is a major constraint in trying to lower the cost of the house. Our Key Assumption is that we shall design 3 Bedroom Houses in the range of 90 to 100 Square Metres
Maximizing Rental Income by Design
Example 1
Because the primary driver of an investment decision is to obtain a Return on Investment(ROI) or Make Profit at the shortest time possible, below is an example of a Proposed Residential Housing Unit that Maximizes Rental Income.
In the example, we are working with an 8No. Bedroom Maisonette where the following scenarios can play out to maximize Returns.
- Owner can rent out each of the 8 Units bedrooms as an AirBnB or Hostel for near a busy institution.
- Owner can rent out the first floor as a commercial Kitchen and Lending Library to two different vendors or Build and Operate them as Such
- Owner can rent out the upper attic floor as a Gym for the Residents and people in the neighborhood.
This is a House designed with the idea that it is an income generating machine. It is meant to get the owner to their financial goals within the shortest time possible.
Whereas this is one scenario, there is no limit as to what Solutions can be Designed to meet various Financial Goals.
8 Bedroom maisonette Designed to Maximize Rental Income
(Nobody has the luxury of time, and those who wish to solve the pressing problems of others are prudent to want to obtain their initial sum invested as soon as possible)
More Examples to Follow**
What is Affordable Housing?
There is a maxim of law which states,
“The word is not the thing it represents but gets its meaning from its use“
Early this week, I made a request to a company selling “Affordable housing” and I did receive a quotation of Kshs. 66,000.00 per Square Metre! In other words, a simple 3 Bedroom House of 120 Square Metre in floor area would have cost me approximately Kshs. 7,920,000.00 according to my back-of-the-hand calculation using their rates. And believe you me, the Key Player calls that affordable!
In the same period, I was pricing a Bills of Quantities for a four storey house in Kisumu County and the cost came to about Kshs. 44,000,000.
Why this talking point?
There is vagueness that exists in perception of what is “Affordable Housing”. The vagueness creates room for manipulation and uncertainty both at the policy level and amongst the providers of housing solutions.
In this regard, we wish to clarify and propose a more straight way of looking at things.
Affordable Housing is an Expansive Word not Descriptive!
The word “affordable” is so expansive as to include Ministers affording Palaces, Celebrities affording luxurious real estate, Paupers and Peasants affording homes and the like. The Government built the Official Residence of the Vice-President at a cost of Kshs. 400,000,000.00 because it was an Affordable Presidential Housing. Of course, the tax payer could afford it! You see the absurdity of the word Affordable?
The danger is in including every other Tom, Dick and Harry as to permit expansion of the word affordable. The word is as expansive as words like Mammals, Dinner, Furniture and Persons (Which Lawyers say includes natural persons and legal persons). Dinner includes all categories of food that could be served and Affordable includes every human that can be housed each at his/her own cost.
It is a word that requires qualification. One must state whether the house is affordable to the Poor or affordable to the Middle Class or Affordable to those who can afford anything.
Ordinary Sense of the Word
In the ordinary sense, it means less expensive and reasonably priced. It comes from the word “afford” and “ability” which means “manage to buy or maintain; have enough money (to do something)”. We can therefore state that the word “Affordable Housing” includes all classes of people and the choice is left to the beholder on whether the price is fair or on whether they have capacity to buy and maintain.
Since society is divided into two distinct classes that are shifting and intermeddling, that is the poor and the rich. A descriptive word for a House Type benchmarked on Income or Financial Capacity cannot be left to be Expansive! We should say we have 3 or 4 types of broad categories of house types:
- Affordable Public Housing like the VP’s Home, Prisons and Kibera Slum Upgrading Units which our taxes can “Afford”
- Low-Cost Housing
- Middle-Income Housing and
- Luxury Housing
The houses our fathers and mothers lived in as Maasai Domes, Rammed Earth and Makuti thatched houses were Affordable Houses! Half the population does not know what the Building Industry means when we say we provide “Affordable Housing”. We live in a world where strings of Propaganda and Advertising create endless illusions.
I think the time for blanketing every other structure as an “affordable” housing is up. Where are the real Architect-Citizens who can offer real solutions?
However, I must admit this is a thorny issue. We have among us the rich who pose as the poor (Kings on barefoot) and the Poor who pose as the Rich (Footmen on Chariots). Between the two classes, an endless debate and struggle!
Whatever the case, something needs to be done to address the issue of current high market prices and few choices for home buyers.
What are your thoughts?
– Qs. Nahinga
