Superficial comparison estimating uses historical information on total costs from past projects of similar building type. For example, the number of beds in a hospital, or number of spaces in a parking garage, or number of courtrooms in a courthouse can form the basis of a project comparison estimate by comparing them to similar scope projects recently done in the same geographic region. Superficial estimating requires the assumption of an approximate gross area for the proposed work and a sufficient historical record of similar building types. The greater the number of prior project combinations for which scope and prices are known, the easier it is to perform project comparisons. The huge range in superficial area rates presents the estimator with some problems. At best, therefore, they can only represent a guide price and must be adjusted to suit local conditions on the basis of the estimator’s personal experience and skill.
Cubic Foot Estimates are another method of developing both preliminary and intermediate budgets based on historical data. This method is effective in preparing fairly accurate estimates if the design is well developed enough to allow measurement and calculation of floor areas and volumes of the proposed spaces. There are several historical databases available to support this method of estimating providing unit costs that are adjusted annually. More accurate estimates made with this method make adjustments and additions for regional cost indices, local labour market rates and interruption between available cost tables. Further adjustments may be made to account for other unique aspects of the design such as special site conditions or design features being planned. Estimates made with this method can be expected to be within 5% to 15% of accurate. However, with building designs becoming more complex there are a larger number of variables to consider in order to arrive at anything approaching a correct price.
Elemental cost planning method. The elemental analysis provides a breakdown of cost by construction elements. Initially, elemental costs should be based on assumption, historical data and calculation. Subsequent submissions must be based on quantity take-off as information becomes available during the development of design. Elemental cost analysis tends to relate the cost back to various building components – the elements that always perform the same function, for example, roof, external walls and external windows, etc. The forecast cost of each element can be calculated in two ways.
- By measuring the approximate quantity of each element and applying a unit rate
- By calculating the proportion of total cost for each element on a similar building and using this ratio to divide the budget for the proposed building into its elemental breakdown
Elemental cost planning should provide a means of controlling costs so that they are kept within the estimated figure. The process may show that the preliminary estimate or budget figure is seriously wrong, in which case it will be necessary to refer to the client for his decision. (1)
Approximate quantities method, it is the most reliable of all forms of preliminary estimate. A contractor needs to produce bills of approximate quantities when tendering for work based on drawings and specifications. The accuracy of this method is related to how far the design has developed. At least the quantities are based on the planned construction and not a previous job and realistic allowances are made for plan shape, height of building, type of ground, quality of finishes etc. There would be little point in attempting to prepare approximate quantities for a project which is yet to have its basic design concepts developed. The only merit of this is where some close correlation may exist with previous projects. It may be desirable under some circumstances to be able to offer some element target costs to which the designer can work and evolve a design page (2)
Many quantity surveying practices use computer software packages or spreadsheets for preparing cost plans. The advantage of using a computer is that an estimate to any level of detail can be updated quickly and efficiently for changes which may be necessary in a revised design. Various sources of historical data are available, such as published price books (Griffiths Building Price Book or Spon’s Architects’ and Builders’ Price Book), cost information publication services, trade journals, and, most important, cost feedback from actual projects The feedback cycle is of critical importance. In order for estimating to be effective, feedback from the job site must occur. Actual costs should be compared with estimated costs to inform the estimator of his or her performance during the estimating phase. Unfortunately, the feedback process is not carried out effectively within the industry. To quote the Business Round Table Report on modern management systems: “Even within companies, a feedback of actual costs is not consistently used to review and adjust the basis for estimating future projects.”(3)
When using historical data to compare bills of quantity great care must be taken as considerable variation in price will be found, this is due to a number of factors. Location of the site, whether it is a rural or an urban build will cause a variation between the bills. The estimator may have deliberately distorted the rate in anticipation of variations or to gain extra financing. Human error, it is more than likely that this can occur. The lack of accurate data, time constraints may mean that the estimator is unable to price all items; companies may have their own work force while others will use sub-contractors. All these variations will have to be considered when using historical data to compare rates.
It is becoming increasingly apparent that to predict cost accurately is a problem which is common to all industries. Throughout the construction industry there are extra difficulties due to the complexity and uncertainty of the type of work involved. The difficulty with all the methods used is in the selection of the appropriate rate to be applied. Considerable expertise on the project concerned is therefore desirable to obtain consistently reliable results and meet the requirements of the client’s budget
2a Explain the functions of the real estate market
Real-estate markets involve participants from virtually every walk in life. They range from single persons living in one-room studio apartments to large-scale manufacturers seeking low-cost public utilities near major transportation facilities. Real Estate Markets provides an introduction to the fundamental forces at work in this important business sector. Three major real-estate markets exist (residential, commercial, and industrial).
From very early ages real estate has been recognized as one of the forms of private property and as a legitimate object of sale and purchase. As soon as the private right to the exclusive use of real estate was established, it became an object of desire and consequently an object of exchange. In the market economy, land values and use are determined simultaneously. Subject to the imperfections of the real estate market land or the use of land will always move to its most profitable use. (4) However, land values can move up, down or remain static. Mark Twain was reputed to have said.
“Buy land; I here they are not making it any more”. (5)
In developed market economies, the function of the real estate market is to bring buyers and sellers together in allocating and reallocating land resources. In a perfect market this means reaching the equilibrium price, were quantity demand meets quantity supply. Simply put, if there are 100 houses for sale and 110 people want to buy, the price of the houses will increase until 10 people can not afford to purchase. This shows that the market is motivating prices not just acting as an indicator. Price has allocated the scarce resource to those most able and willing to buy. The market is the means of access to real estate and tends to ensure that there is a range of opportunity and choice in terms, for example, of location, types of premises, tenures, and terms and conditions for occupancy across economic sectors.
Most economic activity requires land. If the country’s economy is to grow and prosper in a sustainable manner, there needs to be a mechanism whereby land resources are allocated to satisfy demand. Because supply is finite this implies that land will be reallocated from those whose use is less productive to more productive users. A recent example of this can be found at St Andrews Quay, Hull, where an unsuccessful leisure complex has now been redeveloped into luxury apartments. The demand for luxury apartments out stripped the need for a leisure complex. Market forces achieve this reallocation through the process by which different parties bid for the available resources. The most productive, or resource rich, users are able to make higher bids than the less productive so that resources tend to be allocated to them. Thus the market reflects preferences and allocates available supply accordingly. For market forces to achieve this efficiently there should be the minimum of interference from the government as such intervention can distort resource allocation and undermine the efficiency with which the process functions. There is, however, a role for the government to ensure equity and access.
A mature real estate market can act as a store of wealth by providing opportunities for investment in property assets, provided the value of those assets increases. Real estate is one of a number of competing investment vehicles. Opportunities to invest in it, permits increased opportunities for diversification of portfolios. Real estate has characteristics, which are not wholly duplicated by other investments, for example, its longevity and immovability make it a valuable store of wealth on a long term basis. This makes real estate an important part of portfolios whose objectives include provision for the distant future, for example, pensions or inheritance.
Real estate can be used in ways independently of any occupancy of it by the owner. In particular, land can be used as collateral to support borrowings. In these ways, the real estate market and the financial sectors become interdependent. This can be both strength and a weakness for the wider economy. The use of real estate as collateral enables firms and households to realise part of their wealth in real estate to enhance investment or consumption.
To conclude, the function of the real estate market is to ensure that land will reach its must profitable use, this occurs because competition in the market induces owners to switch resources to the use which yields the highest net return. The market also motivates prices until a state of equilibrium is reached.
2b Identify how its efficiency could be improved.
Before we can identify ways in which the efficiency of the real estate market can be improved, we must examine what conditions make a perfect market and whether these conditions apply to current market activities. The exact requirements of perfect market competition can contrast with the actual conditions that prevail. Government intervention occurs when the market is not working optimally i.e there is a Pareto sub optimal allocation of resources, the market may not always allocate resources efficiently.
The perfect market is said to be ‘atomistic’ and that it is composed of ‘homogeneous’ (the same) products. Infact the market is ‘heterogeneous’ (different), groups of market participants can be identified in the various sectors i.e residential, commercial and industrial. These groups have distinctive real estate and together may have a substantial impact on the over all market. If we examine the boom – bust cycles of the residential market it is easy to see that this cycle has had a massive affect on the economic market over the last 30 years. It is assumed that perfect information exist within the market, however the market is made up of local land agents who have a limited knowledge of national market place. Information plays an important role in the operation of real estate markets. A survey carried out by Tu and Maclennan 1996 suggested that the infrequent involvement in the real estate market means that buyers are poorly informed about current market conditions. In general, therefore, it appears that all buyers, whether new entrants or repeat purchasers, enter the market with imperfect information. Readily available information from other sources, such as prices, is likely to be both imprecise because of the heterogeneity of real estate, and dated because of the dynamic nature of the market. All real estate transactions, therefore, enter into a potentially protracted, expensive and time consuming search process in order to gather relevant market information.
Free entry into the market is assured, however to maximise profits large building companies in the authors oppinion are acting in much the same way as a Cartel.(A cartel is a group of producers whose goal it is to fix prices, to limit supply and to limit competition.) House-building is an unusual industry in that companies are speculators in land prices as well as manufacturers of property; and it is their success in the former that has traditionally determined their profits. As a result, the industry faces what economists call "perverse incentives". When prices are rising, most industries have an incentive to produce more; but house-builders have an incentive to produce less, to hang on to their land and release it more profitably later. Prof Muellbauer's solution is a tax on land through reform of the business rates system. The tax could be levied on the value of land held by all companies, including house-builders, above a certain threshold, perhaps £10,000 a hectare, to exclude most farmland. "If the holding cost of land is somewhat higher, builders have an incentive not to hold on to land so long, and that is going to change the supply response," he says. (6)
The real estate market has some specific characteristics, which make it a unique market: lack of sufficient information; a reaction lag as compared to the other sectors of the economy; non-standardised product; lack of mobility of real estate, as well as, buyers and sellers; limited number of transactions in one’s lifetime; the whole industry is fragmented by regional variations and professional organisation. E-commerce could play a part in elevating some of the inefficiencies; the internet has enabled purchasers to increase their knowledge of the market, giving them the ability to ‘cut-out’ the middle-man (agents). E-conveyancing will alleviate the lags involved within the market, and perhaps even speed the process up.
No real market has ever achieved perfect competition; the conditions are only a bench mark which helps identify sources of inefficiency. In a perfect market there should be no, or limited Government intervention, however if the Government had to intervene it can do so in a number of ways. Taxation (direct or indirect) can reduce the inequity of income distribution. The enactment of legislation can regulate prices such as rent controls, which are employed in and attempt to make housing more affordable to those of lower incomes; farmers, in the past, have received subsides which allowed them to leave fields fallow. The Government could introduce price ceilings which would change the equilibrium price, therefore altering demand and supply. There are incentives offered to developers who are prepared to build on brown-field sites, by-passing the planning system, which has become a delaying practice.
References
1:- Alan Ashworth, Pre Contract Studies
2:- Alan Ashworth, Cost Studies of Buildings
3:- Business Round Table,
4:- College of Estate Management paper 3301
5:- Mark Twain,
6:- Prof Muellbauer,
Bibliography
1:- Alan Ashworth, Pre Contract Studies
2:- Alan Ashworth, Cost Studies of Buildings
3:- Estimating and Tendering for Construction work, Martin Brook
4:- Lipsey and Chrystal, Principles of economics
5:-
6:- www.cpre.org.uk/campaigns/ planning/kate-barkers-review.htm
7:-
8:- econpapers.hhs.se/article/jreissued/ v_3A6_3An_3A3_3A1991_3Ap_3A381-393.htm
9:- econ.bu.edu/gilchrist/teaching/ ec102fall04/lectures/pdfs/supplyanddemand2.pdf
10:- www.sheffield.gov.uk/your-city-council/council-meetings/ cabinet/agenda-10th-sept-2003/balancing-supplydemand
11:-
12:- netec.mcc.ac.uk/WoPEc/data/Papers/wpawuwpfi9810004.html
13:-
14:-
Recommended reading
1:- Improving the Efficiency and Flexibilityof theUK Real Estate Market An Industry Briefing Document for HMT By the Investment Property Forum
British Property Federation
RICS
September 2003
