Construction Market Trends Series: Price (4)
In the third installment of the Construction Market Trends series, we introduced a concrete method for calculating rough estimates of construction costs that are widely used in actual projects. In the fourth installment, we will focus on the factors that affect the construction cost.
The five main factors that affect construction costs
There are five major factors that affect the cost of construction, as shown below. In general, these factors are used as the basis for determining the contract price agreed upon between the client and the contractor (builder) for a specific construction project, with each having a greater or lesser impact on the construction cost.
- Construction contents
- Market conditions
- Contractor abilities
- Conditions of ordering/procurement and contract terms
- Others
The construction company calculates the cost of materials and labor required for the construction work based on the major factors listed here, and then adds the company’s profit for the construction work to present the quoted price or bid price to the client as the construction cost. Now, we will take a step further and introduce these factors in detail.
1. Factors related to the content of construction
Factors related to the content of the construction can be largely divided into content of the design drawings and specifications and site conditions. As shown in the charts below, the contents of design drawings and specifications can be categorized into type of construction, use, scale, structure, shape, number of floors, building grade (grade of equipment and interior/exterior), etc. On the other hand, site conditions can be categorized into region, shape and topography of the site, ground conditions, surrounding environment of the site, etc. Each of these conditions will affect the construction cost.
The contents and conditions of construction work that affect the construction cost
1) Content of design drawings and specifications
| item | contents and conditions |
|---|---|
| Type of construction | New construction, renovation, stratification, extension, tenant occupancy, demolition |
| Use | Residential, condominium, office, commercial facility, other |
| Scale | Small scale, medium scale, large scale |
| Structure | Wooden, reinforced concrete, steel-frame, other |
| Shape | Simple, complex (curved surface, etc.) |
| Number of floors | Low-rise, mid-rise, conceptual, high-rise, basement floor |
| Building grade | Economical, standard, high-class, super high-class |
| Others | Seismic damping/isolation structure, special equipment, evaluation certification (CASBEE, etc.) |
2) Site conditions
| item | contents and conditions |
|---|---|
| Regions | Tokyo, Osaka, Nagoya, Fukuoka, etc. |
| Site shape | Simple, complex (e.g., sloping site) |
| Ground conditions | Good, bad (soft ground, etc.) |
| Surrounding environment | Downtown, suburb, city, etc. |
| Shape | Width of the front road, secure material storage areas and construction routes |
For example, in terms of the contents of design drawings and specifications, the type of construction, use, scale, building grade, and structure are of course important, but even if the plans are similar, the amount of time and effort required is different between plans where the building shape is simple and can be handled by repetitive work and plans where the shape of each layer is different and cannot be handled by repetitive work. The latter tends to be more expensive.
Likewise, even if the scale of the building is the same, the more floors there are, the more scaffolding and exterior finishing areas are required, etc. Furthermore, even if there are similar four-story plans, the construction cost is generally higher for a plan with four floors above ground and a plan with three floors above ground and one floor below ground because of the need to excavate underground.
Next, in terms of site conditions, the cost of materials and labor may be different in different regions. In addition, the shape and topography of the site and the surrounding environment will affect the ease of construction, and the ground conditions will affect the construction cost.
2. Factors related to market conditions
The factors that affect the market situation are supply and demand in the construction market and the labor and material price conditions. For example, when there is an excess of demand, the amount of construction work that contractors have on hand increases, and there is enough work to be done without fierce competition among contractors, so construction costs tend to be high.
On the other hand, when there is an oversupply in the market, the amount of work on hand decreases and the desire to receive orders increases, which accelerates competition among contractors to win new projects. The former is called a seller’s market and the latter is called a buyer’s market.
In addition, labor and material prices directly affect construction costs when their levels rise and fall. However, if the level of a particular labor cost or material price rises sharply or has a long-term upward trend, the construction company will consider this as a risk of price increase during the construction period and calculate the construction cost. This will have a strong impact on the construction cost.
3. Factors related to builder’s ability
Factors that affect the ability of a builder include the builder’s construction capacity (technical capability), experience in similar construction projects (use, size, etc.), and the builder’s track record in the target area. For example, when multiple contractors calculate the construction cost of a specific project, the construction cost calculated by the latter contractor tends to be higher than that calculated by the former contractor if the latter contractor has a high construction ability level and the former contractor does not, or if the former contractor has a wealth of experience in similar projects and construction results in the target area while the latter contractor does not.
This is because when calculating the construction cost, there are more technical issues, problems peculiar to the region, and uncertain factors to be considered in the construction work than those of the former contractors, and these factors are included in the construction cost as risks in undertaking the work.
In addition, builders who have a good track record in the target area have friendly relationships with subcontractors in the area and are able to secure quality contractors with high technical capabilities.
4. Factors related to the conditions of orders, procurement and contracts
The main factors that affect the construction cost are the selection of the construction company, the construction order method, and the contractual arrangement. In development projects, contractors are selected through a variety of methods, including competitive bidding, in which one contractor is selected from multiple contractors through a bidding process, and the specific order method, in which only one contractor is selected before receiving a quote. In the latter case, there is no price competition, so the construction cost is generally higher.
Similarly, there are various methods of ordering construction work, such as the separate design and construction method, integrated design and construction method, separate order method, and cost-on method, and the best method is selected comprehensively depending on the purpose and situation of the project. However, the construction cost will be affected by the order method adopted. Please refer to this column for a detailed description of how the difference in the order method affects the construction cost.
Also, contractual arrangements refers to the contents of the contract when the construction contract is concluded with the builder (prime contractor). For example, if the contents of the contract allow one to charge the amount of the price increase during the construction period of the subject work, or if it does not, the latter will generally be higher than the former because the construction company includes the amount assumed to be the price increase in the construction cost. In addition, if the contractual arrangements such as defect warranty period, method of payment (percentage/presence of advance payments), construction period (standard or short construction period), etc. are disadvantageous or risky to the builder, they will be included in the construction cost in the form of an amount, which may have a small or large impact.
5. Other factors
Other factors include the relationship between the client and the construction company, the completeness of the blueprints and specifications, the level of interest in the project, and the terms and conditions of the tenant construction. For example, if the client is a regular customer who has been awarded similar projects many times, or if the client is a new customer, the construction cost tends to be higher in the latter case.
This is because regular customers who have received orders for similar work many times understand the characteristics of their customers, such as the level of quality required of construction companies and the points at which complaints occur, while new customers are uncertain about these requirements. However, even in the case of a new customer, there are times when a construction company positions a new customer as one that has the potential to receive a large number of orders in the future and tries to win the order even at a reduced profit for the purpose of building a relationship.
In the latter case, the construction company will assume the parts of the building that are not fully described in the drawings and specifications and include the estimated amount on the safety side, so the construction cost will generally be higher.
In addition, if the project is a high profile one, such as a building that will become a symbol of the town, the construction company will try to receive the order even if they ignore the profit of the project because the construction of the building will be a promotion and advertisement for their company, which will affect the construction cost.
We introduced the main factors that affect the construction cost, citing specific examples. In the next column, we will introduce approaches to understanding the level and trend of construction costs as the final part of the “Price” section.
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