Building Cost Estimation and Calculation of Construction Profit - Essay Example

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Summary
While considering an approach towards a construction project, the size, scale of complexity and the final function of the final built product influence the details of contracting out the work, the estimation, tendering and finally, the methods by which a contractor makes profit.
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Building Cost Estimation and Calculation of Construction Profit
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Download file to see previous pages Item rate contracts
Sources of profit specific to item rate contracts:
1. Profit as a percentage of each executed item from tender. Contractors try to reduce low-margin items and increase high-margin items.
2. Profit from sub-contractors.
3. Profit from administrative reimbursable expenses borne by client.
4. Profit from delays caused due to client, or design changes.
Cost plus fee or Cost plus percentage contracts
Sources of profit in cost plus fee contracts:
1. Profit as a percentage of expenditure. Higher the project cost, higher the profit.
2. Profit from efficient material purchase. Material is bought low and contractor's fee is calculated as a percentage of a higher material cost. Profit from material and from administrative charges. Not possible if material bought by client.
Labour contracts
1. Profit from labour.
2. Profit from administration, site office and other reimbursable expenses.
Design-Build Contracts.
Sources of profit in Design-build contracts:
1. Profit on design services.
2. Ability to maximise profit through influencing the design process.
3. Reduction in costs through better coordination and streamlining of execution.
4. Control of costs through easy and efficient tracking of changes and adaptability to change.
PFI (Private Finance Initiative) or BOT (Build Operate Transfer) contracts:
The only way for contractors executing such projects it to maximise revenue by operating the project for a specified period of time that is deemed to be sufficient for the contractor to recoup expenses and a reasonable profit. Such contracts are given for large public projects like roads or power plants.
In conclusion, a contractor has two avenues of maximizing profit from a project; direct and indirect methods. Direct methods are...
Material is bought low and contractor's fee is calculated as a percentage of a higher material cost. Profit from material and from administrative charges. Not possible if material bought by client.
The only way for contractors executing such projects it to maximise revenue by operating the project for a specified period of time that is deemed to be sufficient for the contractor to recoup expenses and a reasonable profit. Such contracts are given for large public projects like roads or power plants.
In conclusion, a contractor has two avenues of maximizing profit from a project; direct and indirect methods. Direct methods are those that are built into the contract, and indirect are those profits that accrue due to an efficient and well managed project team.
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