Construction is a tricky business. From pricing, procurement and program to site issues and product quality.
It comes as no surprise that developers around the world endure a constant battle with this critical phase of the development lifecycle.
In Australia, construction costs typically represent the largest cost item within a feasibility, usually accounting for over 50 per cent of the total project costs.
Miscalculating your construction cost is the quickest way to stifle the financial viability of your project.
Leading quantity surveyors Mitchell Brandtman has drawn on 50 years of experience to explore three of the most common mistakes that developers make when estimating their construction cost.
One of the most common ways to estimate the construction cost of a project is to apply a square metre rate ($/sq m) to the project design.
A common calculation to set a feasibility number is applying a “cost per square metre rate” by the building area (typically FECA [Fully Enclosed Covered Area] or GFA [Gross Floor Area]).
For example, a standard townhouse development of 1,000 square metres would be multiplied by a rate of $1,600 per square metre resulting in an estimate of $1,600,000.
But what does this even represent? How are you measuring the quantity (i.e. square metres) and what does the rate allow for?
For a typical residential development, you could be measuring the GFA total building area (car parking, common areas, internal areas, balconies, rooftops, etc) or you could be measuring the internal areas only (FECA). The difference is significant.
When it comes to the $/sq m rate, the same logic applies. What benchmarks are you pulling this rate from, what is the quality of your project, how are key elements like structure and services impacting the rate?
You should constantly be asking yourself: What’s included? What’s excluded? Where does the rate come from? How am I measuring this?
So just remember, there are square metre rates and there are square metre rates!
In a similar way that square metre rates pose a “one-size-fits-all” risk, so does the “per unit” methodology for estimating construction.
For example, a developer assessing a new site might say: “I’ll build a 100-unit project at $300,000 per unit, equating to a construction estimate of $30,000,000.”
There may be evidence to support this estimate, but the risk lies in a number of variables that can dramatically change the per unit estimate, such as:
• Number of dwellings
• Product mix
• Product quality
• Building height
• Number of basements
• Level of amenity and common facilities
• Site constraints
The same logic will apply with commercial, industrial and retail development, however the needle tends to swing more aggressively in residential development.
As market forces change and the residential development sectors transitions from an investor-led product to more boutique, owner-focused projects, the traditional square metre rate and cost per unit methodologies need to be scrutinised to ensure you are considering all of the project variables.
Don’t forget about the “other costs”…they can add up to a big number.
In most construction estimates there exists a section dedicated to ‘other costs’ or exclusions. While the individual numbers may not kill a project’s viability, the sum of these costs can often add up to a hefty figure.
Some examples of these will include:
• Costs associated with procurement (such as tender costs)
• Contingencies
• Design contingencies for consultants
• Direct contingencies for known and unknown risk factors
• Service connection fees
• Rock anchors, crane over-sail rights and / or other approvals
• Excavation in rock
• Legal fees
• Escalation
• GST
These costs are often overlooked when setting up an initial construction cost budget but are significant to and integral to the project success.
To learn more about the construction process, check out our upcoming Construction Essentials Workshop to be hosted in Brisbane, Sydney and Melbourne and proudly delivered in association with Mitchell Brandtman.
