Construction Market Trends Series: Price (1)
In this issue of the Construction Market Trends series, we will focus on the construction cost from a variety of perspectives.
What does the term construction cost refer to?
The term construction cost is often used in everyday life, but what do you think of when you hear the word “construction cost”?
In fact, in Japan, the term construction cost does not have a clear definition, so it has different meanings depending on how it is used. Therefore, when you hear the term construction cost, it is important to understand what it means. Similarly, when using the term construction cost, it is important to define the meaning of the term before using it in order to avoid misunderstandings.
Three meanings of the term construction cost
The meaning of construction cost can be broadly classified into three categories: price, cost, and price level. For example, if the client of a construction project says, “The construction company asked me to increase the construction cost because of the rising labor cost,” the “construction cost” refers to the “price” in the contract agreed upon between the client and the construction company for the individual construction. On the other hand, when a construction company says, “We will reduce the construction costs by promoting rationalization and efficiency in construction,” the “construction cost” refers to the “cost” of the construction work undertaken by the construction company. In addition, when the news and media say that “construction costs are rising due to the impact of a sharp increase in construction demand,” it refers to the price level in the market, not the “price” or “cost” of a specific construction project.
Definition of construction cost in this chapter
As mentioned above, construction cost is used in a variety of ways, and its meaning varies depending on the position of the person using the term and the way it is phrased. Therefore, in the current section, we will define construction cost as “the contract price agreed upon between the client and the contractor (builder) for a specific construction project.”
Let’s take a look at what the construction cost contains
Now, let’s take a look at the details of the construction cost when you actually place an order for construction work. First, the construction cost includes the direct cost of construction such as the materials needed to build the building and the labor to install them, the indirect cost of construction which is not directly related to the act of building itself but includes the site office, temporary fencing, electricity and water supply for construction, site management, and the profit of the construction company.
In general, the direct costs are called direct construction costs, while the indirect costs are called common expense. Direct costs are categorized into building construction, which consists of building frame construction and finishing work, and facility construction, which consists of electrical and air conditioning work. On the other hand, common expenses consist of three items called common temporary facilities, on-site management expenses, and general management expenses.
In addition, construction cost is composed based on work sectional breakdown structure or elemental breakdown structure when it is composed in the breakdown sheet, and its characteristics are briefly introduced below.
Construction Cost using work sectional breakdown structure
Construction cost by work sectional breakdown structure is a method of construction based on the type of work performed by the specialist contractor who actually performs the work, such as fittings or waterproofing. Therefore, it is a convenient method for contractors who prepare breakdown sheets based on estimates obtained from subcontractors, and it is the most commonly used composition method. However, from the standpoint of the client or designer, it is difficult to understand or confirm the contents of a breakdown report prepared based on this method.
Construction Cost using elemental breakdown structure
On the other hand, the elemental breakdown structure is a method in which the construction cost is based on the parts or areas that make up the building, such as the roof, exterior walls, and rooms. This method is characterized by the fact that it allows the client or designer to know how much is spent on a specific part of the building within the overall construction cost and is therefore used for the purpose of examining and confirming the appropriateness of the cost for this part of the building. In actual projects, this method is often used to calculate approximate construction costs when the details of the design, such as the basic plan and basic design, have not yet been finalized.
Introduction of standard forms based on the two types of composition methods
Here, we will introduce the standard forms published by the Ministry of Land, Infrastructure, Transport and Tourism for the detailed composition of construction cost based on these two composition methods. First of all, the work sectional breakdown structure method is divided into building construction and facility construction as the Standard Form for Public Building Construction Breakdown, and the elemental breakdown structure method is published as the Standard Form for Calculating Estimated Construction Cost. The standard forms introduced here are the standard forms used by the Ministry of Land, Infrastructure, Transport and Tourism. The breakdown forms used in actual projects are basically the same as these, but the detailed structure and expressions are different, and each construction company uses its own form.
In this first installment of the “Pricing” series, we covered the meaning of the term “construction cost” in Japan, defined it, and introduced its contents based on the way the construction cost is structured. In my next column, we will focus on the general calculation method of construction costs and explain it in an easy-to-understand manner.
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