Understanding Project Costs When Developing Your Home

Summer House, Neil Kahawatte Architects

What is the difference between Construction Cost and Project Cost?

The ‘Construction Cost’ is the cost of employing a Contractor to carry out the works, and should include for all fixtures, fittings, materials, labour, supervision and management. This cost should also include the Contractor’s overheads and profit for the job, but excludes VAT. The costs of any ‘Client Supply’ items, or other elements of the project commissioned outside of the main building contract (i.e. joinery or landscaping), should also be included within the Construction Cost.

To this you would need to add the cost of any professional fees (Architects, Engineers, Surveyors etc.), fees for statutory approvals, and also VAT (where applicable). The ‘Project Cost’ is the total amount of money that you should allocate for the project, to include a reasonable allowance for all the costs listed above.

It is important to note that the construction industry generally uses the Construction Cost (i.e. excluding VAT, fees, other costs and contingency) when discussing the cost of works, fixtures, fittings and materials. If in doubt, always check whether any figures you have been given are inclusive or exclusive of VAT & other costs.

Contingency & Other Costs

You should also allow a contingency sum, typically of at least 10% of the Construction Cost, to cover any unforeseen variations to the scope of work, which may become necessary. You may also need to factor in additional costs of temporary accommodation, storage and finance etc.

Does my planned Scope of Work fit within my budget constraints?

It is common, and very understandable, for homeowners commissioning projects to start with an inaccurate perception of the budget necessary to achieve a particular scope of work. For this reason, it is essential to align the scope of work and any budget expectations from the outset of the project.

The most effective way to address any discrepancy is to obtain a cost estimate from a Quantity Surveyor (QS) at the earliest stage of the project. This estimate can then be adjusted as the scheme progresses and becomes more precise throughout the design and specification process.

To maintain cost flexibility, it is generally advisable to identify aspects within the defined scope of work that could be adjusted or omitted if required to lower the ‘Construction Cost.’ Examples may include fitted joinery elements or external works, which are often relatively simple to remove and reinstate later if the budget permits. In some cases, work can be divided into phases, helping to minimise initial costs while still accommodating the full scope of work in the future.

Longview House, Neil Kahawatte Architects

Why is cost contingency important?

Contingency is a portion of your budget that must be set aside for unexpected costs. While your design and construction teams should help minimise unnecessary use of this, it is important to recognise that some unforeseen costs are normal and should be expected in almost any construction project.

You may need contingency due to the condition of an existing building or site, errors or omissions in surveys, designs, or data, regulatory requirements, non-performance by suppliers or construction teams, statutory requirements, weather conditions, political or economic influences, national or global events, or other unpredictable circumstances.

How to plan for cost contingency?

There are two key considerations when planning your cost contingency:

The first is whether your contingency sum should be accounted for within your project budget or if you have separate funds available that could be used if necessary. If your budget is fixed and no additional funds are available, then contingency must be included in full within the project budget. However, if greater budget flexibility exists, you may consider allocating some or all of your cost contingency outside of your initial budget.

The second is to determine the appropriate contingency percentage. Many in the construction industry suggest 10%, but for higher-risk projects it may be advisable to increase this figure. With the right team and processes in place, the likelihood of unforeseen costs typically decreases as the project advances, particularly in the construction phase. If you have any remaining contingency funds towards the later stages of the project, you may decide to reallocate this to enhance other aspects of the scope of work (e.g. increasing the budget for fixtures and fittings).

How to control costs and minimise contingency spend?

Contingency is a designated sum set aside for unexpected costs and unforeseeable financial demands. While it is necessary to have contingency funds available, steps can be taken to lower the chances of needing to use it.

In some situations, a less risky scheme can be developed by avoiding reliance on elements of an existing building or site that are not fully understood. Conducting thorough investigations and background checks of the existing site and buildings early on should help to identify potential issues in advance, allowing for better planning. An expert team of designers and consultants should be appointed to strengthen the effectiveness of designs and project processes. Preparing a comprehensive and detailed package of design information will reduce the chances of variations during construction, as will selecting a suitable building Contractor.

When reviewing tender returns, it is advisable to consider how well the Contractors have estimated unknowns or potential additions. Provisional costs for additions they consider may be necessary are often included at tender stage by proactive and well-managed Contractors. This initial tender may seem more expensive, but transparency and a thorough understanding of potential costs is essential when reducing the use of contingency and the overall cost of the project.

Which variables will influence my project cost?

The cost of your construction project will be influenced by multiple factors. These include the amount of work being carried out, the standard of workmanship and materials required, and the level of complexity involved. Additional factors may involve constraints on project timelines, phasing or remaining in occupation during works which cause restrictions to working arrangements, delays, variations, or increases to an agreed scope of work. By identifying and considering these variables you will increase your ability to control your project budget.

When planning a project it may also be beneficial to consider options for efficiency and simplification, as these will often present valuable opportunities to control and reduce expenditure. There are several key actions that can help minimise overall project costs:

• Assemble a strong project team with effective project processes.

• Seek expert cost advice throughout the project and adjust your project scope accordingly.

• Develop detailed and comprehensive plans for your building and project.

• Take steps to lower the likelihood of needing to use contingency funds.

Vine House, Neil Kahawatte Architects

Why is it important to assess both cost and value in construction?

Cost is a purely numerical measurement that, if considered in isolation, may overlook other advantages and benefits. In contrast, value can take into account additional indirect gains, both financial and other.

When planning a project for your home, it can be useful to assess the intrinsic value of the work to the occupants. In addition to financial considerations related to market value, this may include qualitative benefits such as enjoyment and well-being. Improvements to quality of life will add value in themselves, but may also lead to financial gain.

Even purely financial aspects may be more complex when considered over time. Higher-quality design and construction may require additional capital expenditure but can reduce long-term running and maintenance costs while also holding greater residual value for future sale.

Clearly articulating your objectives will help your design team to develop your project appropriately. A project aimed at modifying an existing property to make it more personal may provide substantial personal benefits in terms of quality of life, yet it may not generate immediate financial returns. On the other hand, a project focused solely on an extension might offer more financial benefits in the short term but may not deliver the best long-term solution for your family home.

Good design and project management play an essential role in understanding your specific needs, evaluating opportunities and constraints in depth, and creating a home that delivers the highest possible value to you and your family.

Framed Kitchen, Neil Kahawatte Architects

How to understand the Construction Cost of your project?

In the initial stages, comparing your project to other similar ones can provide a general idea of potential costs. However, it is important to assess how closely comparable the two projects actually are and whether the reference project is recent enough for its costs to remain relevant. It is also worth noting that people may not always be fully aware of the complete cost of their own past projects when recalling figures. Additionally, considering the type of project structure, team, and contractor used is highly advisable as these may have a significant impact on overall project cost.

For an initial estimate tailored to your project, a Quantity Surveyor (QS) can provide a preliminary budget estimate based on early project details. While it is not possible to determine exact costs at this stage, this estimate can help gauge the general cost level before advancing too far into the design process. As the design progresses and more details on scope become available, the Quantity Surveyor can refine and provide a more precise estimate. The accuracy of this estimate depends on the amount of available information, so there is a balance to be struck between obtaining data early enough to shape the design process and waiting until key design and specification choices have been made to inform the estimate.

Once the detailed design has been submitted to tender (ideally to three different Contractors), the estimates turn into actual quotations. This will provide insight into the differing price levels of different construction firms. Ultimately, the final cost will only be completely certain upon project completion, as this is when all design modifications and contingency costs become fully known, but with good design, careful management, and a skilled professional building Contractor (and hopefully also some good luck along the way), you should be able to keep this broadly in line with pre-construction estimates.

Quantity Surveyor (QS)

Architects are not able to provide detailed cost consultancy, however as part of our service we can assist you to create a strategy for when to commission estimate(s) and to engage a Quantity Surveyor (QS) for this work. A Quantity Surveyor can also assist with any cost reductions and with any assessment of Contractor’s valuations & quotations.