Preliminaries & OR Costs
DO YOU KNOW
WHAT PROFIT YOU MAKE?
When speaking to subcontractors and even smaller builders, I often get asked advice on the market profit margins? It is a touchy question as the answer is not a simple one-liner. The easy way out – is to state that every business is different and the answer always depends on “what the market is prepared to pay”. Obviously the market changes due to a number of factors however I get the feeling that bench marketing from previous projects often plays a major part in their strategy moving forward (especially with smaller players).
Now don’t get me wrong – Benchmarking has its place… BUT ONLY – IF you do the same service on the same type of job in the same area, in the same environment, with the same staff, same client, etc. – Benchmarking is a very easy way and a business that knows their market so well that Benchmarking is quite acceptable. But if any variable changes or something is missed, the risk to your bottom line skyrockets.
So estimators start working with a business’, their initial focus is just to cover off the risk on trade pricing. When closing out a tender, a conversation takes place regards to the strategy of how you are going to win the tender regards to risk & margins, etc. Now that mythical number is a bit unfair to be asked as it is a three-pronged answer that takes some time to understand – So at that point, you are relying on the client having a clear direction on margin and overheads and a track record of a winning margin on past projects.
Then you get a client that has won tenders in the past however have no idea if they are cheap or expensive, or even making a profit as they have used a trial and error approach winning tenders. (or another way of explaining it – they have used a benchmarking formula that is devoid of science and basically sailing on a wing and a prayer).
To have a chance of answering or give some type of science in answering the margin question – the estimator needs to know the recipe for running costs of managing their business to have a hope of mathematically working out the “Bottom Line”. This is where it gets a bit sticky… this information is really sensitive to the business and they might not like to let that information out of closed doors.
How do you price your Preliminary costs?
Do you know want your Overhead Costs are?
Where do you recoup your overhead cost?
What are your risks?
Granted, the answers to the above questions are very sensitive, but some quick sanity checks and a little reverse engineering math to understand the indirect costs can be the difference in making a profit or not. But these are the “Indirect Cost” headline you are working towards:
- Preliminaries (Time-related site costs)
- Business overhead/running costs (normally in the order of 5% TBC)
- Risk
- Actual margin (This number includes business tax)
On a need to know basis and estimator needs to capture items 1, 2 & 3. The owner (Client) needs to review 1, 2 & 3 and make then final decision on item 3 actual margin in relation to their business plan. The seasoned Estimators &/or Cost Planners will delve deeper into the financial management and so doing add value to the business as the risk elements can be quantified, correct reporting can be made, and business becomes more sustainable and competitive in the market. (No more Russian roulette).
Preliminary costs and Overhead Recoverable costs.
Preliminaries are normally all the time-related costs associated with managing projects in a safe, expedient manner.
ORs are the cost associated with the running of the business that is normally based on yearly turnover, Costs like insurance, office & office staffing and general administration, etc. From an accounting point of view – these costs can be recovered in a number of ways (including a business Tax return) but are one way or another they still need to be captured and paid.
PRELIMINARIES
COSTS
Preliminary costs are mostly time-related costs. As they are time-related – by definition, time has risk. The question is how we control time? The answer – well you cant, but good methodology planning with a critical path program is a start.
Clients have got smarter over the years and normally ask for a set pricing schedule and programs or duration to compare one builder to another. This is one way that clients compare builders and intern to manage their own risk. A client wants to know that they are talking to a building professional who can demonstrate that they understand the methodology and managing all the complexities of the project considering all stakeholders. Apples for Apple approach..
A program may or may not be required at tender but is almost always required, but in post-tender discussions prior to contract signing.
But a good construction program that has been reviewed by both an estimating and contracts department prior to tender being submission is always the best practice to reduce risk. (Plus it engages the Contracts department into the tender they may have to build). In my experience – who does the program mainly depends on workload, but the task normally falls on either the Senior Estimator, Contracts Manager, project manager or a programmer. The appearance/format of this program is normally the same every time but the client milestones are normally illustrated first at the top of the page.
If you need a project planning service, check out Solid Support from Sydney. I have used their services on some pretty complicated tenders and found them very professional. They offer training in programming software and were fortunate to receive some solo training and secondary group training. They have always very informative & very professional. http://solidsupport.au/company-profile/
PRELIMINARIES
CHECK LIST
Below are some “Tabs” that illustrate the headline sections of a standard preliminary list in tendering. The tabs expand to reveal an additional layer of sub headings. For most of the heading I have also added some checks and reminders that may be helpful.
Builders need the total construction cost of all buildings and for record-keeping a constant method of measuring building areas. I would suggest that you use CFA= UCA + FECA
If you wish to read more about
GFA, NLA, CFA=UCA + FECA – Click Here
Complete Floor Area (CFA) This is different from GFA.
These three areas can be used to check pricing over a variety of trade and for the historic record for benchmarking on future projects.
Key durations include the following:
- Design & approvals
- Procurement lead times
- Nett construction time
- Wet Weather
- Maintenance period
- Staff & Hire Equipment durations
A critical path program sets a number of key durations from which the staffing and hire equipment can be calculated.
These are very site-specific and need to be checked every tender:
- Water design fee
- Sewer and water fees
- and Gas connections
- Power (Consumer Mains)
- Internet & Phone
You will find that most projects have a small number of connections and inspections fees. These can sometimes be included within the respective services subcontractors.
Things to Check:
- Consumer Mains & Transformers
- Services upgrade generally
- Note connection paid by end-user on power & Internet.
Again, very site-specific and need to be checked every tender:
- Building over sewer fees
- Operational works
- Footpath bonds
- Building zones
- Road closures
- Flesh water acts
- Miscellaneous Inspection fees
- Fire department inspection fees & sign off.
- Fire brigade call out risk
- Hydrant & FHR flow test
- Pressure tests
- Hazardous material design
- Road services design fees
- Dilapidation Reports
- Additional Reporting required.
If a DA approval is available you may have a DA Matrix that spells out builders’ responsibilities. If not the Estimator has to sift through all written documents and make a number of phone calls to capture the costs of these items.
It should be noted that sometimes a formal application must be submitted before an authority can quote the services. So either clarifications or allowance should be considered for such items.
Things to Check:
- Site-specific report inspection points & fees.
- Additional Reporting required.
NSW – Long Service Leave Levy is 0.35% of building GST inclusive price of the building component.
Paid by the owner / Client.
This is an industry contribution scheme for site workers only. This fee is normally paid by the client however may be included in the tender price.
The rate should be checked and confirm with your local state.
Within a boundary including surveying and drafting of the following:
- Adjoining property and Boundaries
- Setting out for grid lines and Reduced levels
- Masonry Pinning & structure
- Floor, Eaves and roof certificates
- Final survey
This is surveying not associated with subdivisions and easements.
This section is mainly to capture consultant costs associated to Design and construct tenders. However, QS & Estimating costs could also be captured as well. The list would include:
- Quantity Surveying & Estimating Services for tender and ongoing construction works.
- Architect, & Design manager
- Civil Engineer
- Structural Engineer
- Mechanical Engineer
- Other consultants
This could be an overhead recoverable or a direct cost.
Check:
- QS and Estimating cost may need to be considered outside normal ORs and captured in preliminaries especially if the may need a staff member 100% of the time.
- Design Manager
- Service Manager
- Construction Manager
- Project Manager
- Contracts Manager / Administrator / Cadet
- Project Engineers / Sfety Manager
- Reception
- Accounting
- Estimating
Construction Program durations applied to weekly rates.
Note:
The biggest mistake I find is in most businesses is that weekly rate is spread over 52 weeks in a year. This Science is obviously incorrect when you consider public holidays and 4 weeks holiday – so the actual time on site is less than 45.6 weeks in a year.
- Site Manager
- Head Foreman / Person
- Lead Foreman / Person
- Sub Forman / Person
- Labourers
- Traffic Control
- Staff Consumables
- Safety & PPE
Construction Program durations applied to weekly rates (phones and car allowances TBA)
Note
- Regional Rates and travel allowance may apply.
- The weekly rate should be adjusted to 45.6 weeks when pricing.
- LAFA – Living away from home allowances.
- Tolls
- Planes
- Hire Cars
- Accommodation
- Phones
Construction Program duration.
- Site fencing / Sade Clothe
- Hoardings/crash barriers
- Water Barriers
- Temporary Road crossing and Site Shed Base
- Shaker Grate
- Site Sheds (Meeting Office, Ste Office, Lunchroom, Ablution blocks)
- Site Shed Awning, access stairs, logbook desks.
- Storage Containers
Construction Program duration.
- Services Location
- Electrical Connection & Cap off
- Router set up
- Security camera set up
- Drone Photography
- Builders Boards
- Temporary lighting
- Generators & Consumables
- Service decommission
- Phones & Radio
- Printer Purchase & Printing
Construction Program duration.
- Scaffolding, Ladders, and steps
- Materials Hoist and Materials Platforms
- Suspension Cradles
- Cranes & Crane Base
- EWP, Knuckle booms & Scissor lifts
- Material handling (Telehandler / Forklifts etc)
- Water trucks
- Street cleaners
- Turn Table
- Associated Consumables
Construction Program duration as per Construction Methodology.
OVERHEAD RECOVERABLE
COSTS
For a business to be able to trade as a builder, you can imagine that they would need insurances, Licensing, accreditations, auditing, displays, admin office, banking, marketing, estimating, etc that need to be pay by someone. These operating costs are normally recovered as an Overhead Recoverable or ORs. In my experience builders recover these OR costs in three different ways including:
- Included in the Preliminaries section,
- At the procurement of trades if you win the project
- Or in the margin or washed over the trades as a percentage of the tender.
One or another every business must pay for their operating cost, it is more the question where they hide it. This where the accountants get involved, most overheads are a taxable deduction in the Australia taxation system and the rate is currently operating at 30%. So you can write off a lot of expenses through the tax system but you still need to come up with the money to finance said costs. So most building companies need to juggle cash flow, against contract retentions, Client progress payments and a line of credit.
Even if you have got the recipe perfect – some amount of OR must be managed within a tender but the company owners would also have to manage this OR against wining projects. And that is an article for another day.
OR CHECK LISTS
Below are some “Tabs” that illustrate the headline sections of a standard Overhead recoverable list in tendering. The tabs expand to reveal an additional layer of sub headings. For most of the heading, I have also added some checks and reminders that may be helpful.
- Professional Indemnity Insurance
- Public Liability & all risk Insurance
- Workers Compensation
These costs are normally washed over the turn over builders turn over per year.
The general Milestones are as follows:
- Project commencement
- Practical Completion’
- Defect Liability Period
With most contracts a retention in the form of Bank Guarantees & Insurance Bonds.
These Costs are very important for a builder to trade and the financial outlay is a large expense that is normally based on the contract sum.
The general operating costs of a business can vary dramatically on your size, staffing numbers, and general efficiency. The accounts department would be the best way to isolate these costs and normally the overall recoverable would include the following:
- Office Rental and utilities.
- Office fit-out, Computers, phones, advertising.
- Stationery, Marketing, and websites
- Systems Management and accounting.
- Legal, Banking, and Finance
- Office staff, Wages & Payroll taxes.
- Director dividends and wages
- Training, transport, cars, and equipment.
- Software Licenses and Maintenance agreements
- Etc, Etc.
The bulk of the overhead recoverable is associated with the operating costs of the business. These costs are then washed over the project costs as a percentage in one form or another.
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