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In addition to the actual cost of constructing a building, which must be considered in relation to the financial capacity of the farmer, the total annual cost of the building should be determined. When the annual cost is then compared to the expected increase in income or the saving in storage costs, it forms the basis for deciding whether or not the new building is a worthwhile investment, i.e., the economic feasibility of the building is determined.
To derive the true annual cost of a building, a number of factors must be considered. These include the estimated life of the building, annual repairs and maintenance, interest on the investment, insurance and in some countries real estate taxes. With the possible exception of repairs and maintenance, these are "fixed" costs that occur whether the building is used or not. Consequently it is important to carefully plan the use of the building as well as the construction. The building may be thought of as a production cost and the potential income from the enterprise housed in it must be great enough to justify the cost of building. It must be stressed, however, that there may well be other than economic reasons for constructing a building. For instance, a dwelling cannot be justified in terms of profitability, but the amenity and welfare considerations may outweigh other factors.
Building Life (Depreciation Period)
All building components have a limited life. After a time materials will deteriorate to a point at which they can no longer fulfill their function. Repair, replacement and maintenance can extend the life, but eventually the overall deterioration becomes excessive.
The life span of a building is influenced by its design and construction. In general, more costly materials such as steel and concrete are likely to last longer than timber and other organic materials. The physical life for agricultural buildings may range from two to five years for the simplest structures and up to fifty years or more for the more substantial ones. An average figure may be between 10 and 20 years.
Although a building may last for many years, it may cease to be economically sound at an earlier time for any of several reasons. It may be that the design has become obsolete and not suitable for new mechanization or perhaps it is too small because the farm has grown, or a new enterprise requiring a new layout or interior partitions and supports simply cannot be moved to accommodate the new requirements. General purpose buildings will therefore have a longer economic life than those built for a specific enterprise.
It is impractical to expect any enterprise to pay the full cost of a new building in the first year after construction. Therefore the capital cost of the building is allocated or depreciated over several years. The number of years is determined by the write-off life, that is, the number of years over which it seems feasible to spread the original cost, but never fewer than the duration of a loan. The writeoff life must also be no longer than the estimated physical or economic life to avoid the position of having a useless building for which the original cost has not yet been fully paid.
Economic conditions change rapidly and the risk of a large investment is reduced considerably if the depreciation can be taken over a relatively short write-off period. Ten years is considered short, 1 5 to 20 years medium and 20 to 30 years a long period. This means that a building that is still physically sound and economically practical after the depreciation has been completed can be considered an economic bonus for the farm.
For cost estimating, depreciation is usually taken on a "straight-line" basis, that is, equal annual amounts over the write-off life. The annual straight-line depreciation cost is the original cost of the building divided by the years of write-off life. There are a number of alternative methods for assessing depreciation, most of which result in greater costs in early years and decreasing costs over the life of the building.
The cost of the money used to construct a building must be considered whether the financing is by means of a loan or by cash on hand. If money is borrowed, the interest cost is obvious. However, if the farmer invests his own money, he is foregoing interest income from a bank or the possibility of other investments. Consequently, interest is still a real expense and should be included as an annual building cost. The interest rate used is either the rate actually being paid or the prevailing rate for mortgage loans in the area. The interest charge is assessed during the years of depreciation, and during that period the amount invested (principal) is gradually written off from the full cost at the start to zero at the close.
The annual interest charge is therefore usually based on the rate times the average investment (original cost divided by two or the original cost and half the rate). It should be pointed out that either a long term mortgage with equal monthly payments (interest plus principal) or compounded bank interest will result in a larger interest expense.
Repairs and Maintenance
All buildings will require some maintenance, but the cost will vary with the type of building, the climate and environment, the materials used in construction and the use of the building. Although the cost for repairs and maintenance will vary from one year to another and generally increase with the age of the building, it is common practice to assume a uniform annual allowance throughout the life of the building.
One to three percent of the initial construction cost has been typically allowed for repairs and maintenance. While this is true in a monetary economy, it may not apply in a subsistence economy.
Insurance and Taxes
If an owner carries insurance on his buildings to cover the risk of fire and other hazards, then the cost of that insurance is included as an obvious annual cost. On the other hand, if the farmer does not choose to carry insurance, he is in reality carrying the risk himself and he should still include an annual charge for insurance. Insurance will ordinarily range between i/2 to 1% of the original cost.
In countries where an annual real estate tax is assessed, the taxes must also be included as an annual building cost. Taxes will range from zero where there are none, up to 1 to 2% of the original cost of the building.
The five principal components of the annual cost of a building have been discussed in some detail. A variety of situations produce a rather wide range in the annual cost figures. The greatest variation occurs in the write-off period. This is influenced by the life of a loan, the life of the building, and in some cases, simply the arbitrary decision of the farmer. In the following examples all of the low range values are combined as are all of the highrange values. It should be pointed out, however, that they may fall in any combination. A high depreciation cost and low maintenance or low interest are perfectly possible.
|Depreciation||3.5(29 yr.)||6.25(16 yr.)||10 (10 yr.)|
|Total Annual Cost as % of Original||8%||15%||23%|
*Note: The interest rate is halved as interest is ordinarily based on the average value or one half of the original cost.
Having determined a write-off life and the corresponding depreciation percent, as well as prevailing values for the other costs, the total percent is multiplied by the original cost of the building to obtain the annual cost. Next an estimate is made of the net income from the enterprise to be housed and the result compared with the annual building cost. The income should more than cover the building cost, thus allowing for a reasonable profit.
It should be noted that an existing building already has annual costs and that it is the increased cost of a replacement building which is compared with an increased income. If an entirely new building is planned to house a new enterprise, then it is the total annual building cost that is compared with the total net income from the enterprise.
Cash Flow and Repayments
The annual cost for a building as illustrated in the previous section includes the capital cost in the form of depreciation as well as the carrying cost or interest.
If the farmer is fortunate enough to be able to pay all or most of the original cost of the building, then a comparison of annual building costs with income indicates the length of the period over which the farmer can expect to recapture his investment. However, if the building project must be largely financed by a loan, then cash flow and ability to repay both capital and interest charges must be considered.
Any grantor of a loan will usually demand that repayments start immediately, but due to the problems commonly experienced by farmers in starting up production in a new building, the earnings at this stage may be smaller than expected. In the case of animal housing, the capital needed for the purchase of animals, feed and equipment is often larger than anticipated. The result may be insufficient cash during the first few years after the building has been constructed. Even if a careful analysis has shown the enterprise to be profitable, that is, has shown the expected average annual cost to be lower than the expected average income, the combined interest and principal payments on a long-term loan are likely to be greater than the estimated average annual amounts for the costs.
It is important, therefore, to not only determine whether the cost of a new building can be justified, but whether the necessary cash flow can be generated to cover both interest and capital repayments. While this is more of a business management problem than a farm structures problem, it is no less important to the farmer contemplating a new building.
In the case of farm structures, the future proprietor - the farmer - is normally much more directly involved in any repair or construction process than would be the case with a building in an urban area. Although the farmer may appoint an advisor to help him with planning and design, employ a contractor or local craftsmen and take out a loan to finance the construction, his and his family's participation at all stages will normally be of great importance and serve to lower the amount of cash necessary for the project.
Depending upon the amount of self-involvement by the farmer, his family and any farm labour, and the way the construction is administered, four forms of organization can be distinguished: personal management, divided contract, general contract and turn-key contract.
Personal management is a very common form of organization for repair work and construction of small- to mediumsize farm buildings. The work is carried out by the employer (the farmer and his family) with the assistance of farm labourers and temporarily employed craftsmen. The employer may simply administer the work or he may also participate in the construction work himself.
Figure 6.3 Personal management.
A divided contract implies that the employer engages different contractors for the construction work and for installation and fitting work. This form of organization differs from personal management mainly in that the building construction work is carried out on a contract. Self involvement by the farmer can be arranged either by excluding some operations from the contract, such as earth work and external work, or by giving the farmer some form of "employee" status with the contractor. The latter is more easily arranged when current-account payment is used for the contract (see Section Forms of Payment). Building materials may be purchased by either the employer or the contractor. The contractor for the building construction work may be appointed to function as a coordinator for the various contracts.
Figure 6.4 Divided contract.
A general contract implies that the employer engages one contractor to carry out all of the building construction operations. The contractor may in turn engage subcontractors to carry out work, such as fittings and installations, which his firm lacks the skill or capacity to undertake. This form is uncommon for farm building construction, except for the largest projects.
A turn-key contract differs from the general contract in that the planning and design of the building is also included in the building contract. This form is very uncommon for farm building construction, except perhaps for completely prefabricated buildings in which the manufacturer serves as the contractor for erection.
Figure 6.5 General contract.
Figure 6.6 Turn-key contract.
Forms of Payment
The contract or agreement between an employer and a contractor may state that the payment for the contracted work shall be made either at a fixed price, with or without installments forwork completed, or on a cost-plus basis to a ceiling figure, or with a running account for cost of materials purchased plus an agreement on labour costs.
A fixed price is common for general and turn-key contracts and often practiced with divided contracts. The advantage of a fixed price to the employer is that he will know at an early stage what the construction is going to cost. However, the contractor will require comprehensive documentation in the form of drawings and specifications to be able to give a quotation for a fixed-price contract.
incomplete documentation will cause problems and frequent negotiations to decide on details and variations usually involving additional expenditure. Therefore the running account is frequently practiced where the documentation is insufficient or where it is difficult to make a satisfactory description of the work beforehand, as in the case of repair and maintenance work. If the running account is given a ceiling, the employer will be guaranteed a maximum cost and will benefit, compared to a fixed price contract, should the work be less costly than the maximum expected.
The objective of tendering is to obtain proposals for construction work from different contractors and quotations for building materials from different suppliers. Their competition to present the most favorable offer should result in a less expensive building for the farmer.
The Tender Procedure
When the farmer has decided to proceed with the proposed structure, he and his advisors will prepare the tender documents, which usually consist of a letter of instructions, the necessary drawings and specifications and perhaps a bill of quantities, and send them to various contractors and suppliers.
A contractor, or his estimator, will cost all building materials, volumes and labour and after adding an allowance for supervision, overhead, insurance, contingencies and profit, prepare a tender which is sent to the prospective employer in a sealed envelope. During the preparation of the tender the contractor will visit the proposed building site to consider possible difficulties, in particular: access to the site and the necessity for temporary roads; storage of materials; type of ground; arrangements for siting any temporary office or welfare buildings; availability of labour in the area; arrangements for security of the work from theft and vandalism. He may also request funkier written documentation from the employer and, where subcontractors are to be employed, obtain tenders for their work.
A supplier of building materials or equipment will require less documentation and usually will not have to visit the site in order to prepare a quotation. His offer may or may not include transport to the site.
When the period to reply as stated in the tender instruction has expired, all the sealed envelopes containing the offers from the contractors and suppliers are opened. The contractors/ suppliers may be invited to attend the opening and be given names, prices and other relevant information contained in the offers. After careful evaluation of the offers the most favourable, which may not necessarily be the cheapest, is accepted and a contract is written.
Methods of Tendering
Open tendering. The prospective employer advertises in the press, giving brief details of the work, and issues an open invitation to contractors to apply for the necessary documents. The advertisement should state that the employer is free to select any or no bid that may be tendered. Tenderers are normally required to submit references and to pay a deposit for the documents which is returned on receipt of a serious tender. Open tendering is uncommon for farm construction work.
Selective tendering. Competitive tenders are obtained by drawing up a list of 3 to 5 serious contractors or suppliers in the area and inviting them to submit quotations. Normally the farmer and his advisor will know of a sufficient number of contractors who have the skill and experience to construct farm buildings and are also known to have integrity. Hence the lowest tender can usually be accepted.
Negotiated contracts are obtained by contacting one or two contractors or suppliers, who have been found satisfactory in the past. The price to carry out the work or deliver the material is negotiated until an agreement is reached. Negotiated contracts are also commonly used where the magnitude of the contract may be unknown at first, such as repair work, excavation in unknown ground or where the tender documents are insufficient. In these cases, the negotiation will normally aim at establishing reasonable task rates for a contract with a running account. With a fixed contract, a contractor would have to safeguard himself against the unexpected and his large allowance for unforeseen expenditures would lead to a high contract price.
Evaluation of Tenders
Quotations submitted to the prospective employer are likely to contain reservations, exceptions, additions and other conditions for the work or delivery of materials. A contractor may also suggest an alternative design or building method. If the letter of instructions for tender has stated that all such divergencies from the tender documents should be priced separately, it will be quite simple to recalculate the tenders so that they are comparable. In other cases they will have to be costed by the employer.
The letter of instruction will normally request the contractor to submit references from similar projects he has constructed in the past. For large projects, a bank reference and a performance bond are advisable. These should be examined to establish the contractor's practical and financial ability to undertake the proposed work.
A contract is a legal document signed by both parties before witnesses. The essence of a contract for construction work is the promise of a contractor to erect the building as shown on the drawings and in accordance with the detailed specifications in return for a specified amount of money known as the contract sum. A variety of standard forms for building construction contracts are available, but it would be desirable to develop a standard contract form specifically applicable to farm-building construction.
If a bill of quantities is included in the documents attached to the contract, the employer will be responsible for any errors of measurement or shortcomings that occur in the bill. However, the selected contractor can be asked to control the bill and accept responsibility for it as being final. In the case of contracts without a bill of quantities, the bill is prepared by the contractor and any errors are then his responsibility.
A standard contract form may include the following information, but each clause in it should be studied prior to signing and any clause that fails to meet the specific requirements of the project should be modified or deleted:
The specifications document supplements the drawings. The drawings should describe the geometry, location and relationships of the building elements to each other. The specifications set out quality standards for materials, components and workmanship that cannot be written on the drawings. For example, if the drawing states that concrete Type 1 should be used for a floor, the specifications may set out a mixing ratio, quality standards for aggregate and water, compaction and curing practices and quality standards for joints and finish. Minimum requirements for capacity and reliability of equipment as well as calculations relating to design, insulation, ventilation, etc. may be included as appendices.
In small projects, typical of many farm structures, many of the specifications may be included on the drawings, but in large scale projects the specifications may run to many pages.
Since much of the information in the specifications will be similar from one project to another, it can be generalized to apply to most buildings. The building industry or government agencies in many countries have therefore developed a "General Specification for Building Works". This normally covers the majority of materials, types of construction, fittings, furnishings, etc. for the types of buildings and other structures built in urban areas. While some of the information included may also be applicable to farm structures, in general, a list of specifications will need to be developed for the particular structure.
The advantage in the use of a general specification is that all parties are expected to have access to a copy and that they are familiar with the quality standards required in the various sections. Any planner/designer writing specifications for a building may refer to the section numbers in the General Specification without repeating the text of those sections. In addition, particular specifications which supplement, amplify or amend the provisions of the General Specification will be required for each specific project.
To avoid confusion arising from discrepancies between the various building documents, the drawings will normally prevail over the General Specification, particular specifications override both drawings and the General Specification and building code regulations will override all other documentation.
Occasionally when the government is the employer or when buildings are financed with government loans or subsidies, the General Specification is considered statutory, but in all other cases its provisions can be used and amended as and when required.
A progress chart is a schedule, used to coordinate the sequence and timing of the operations in a building production process. It helps to ensure a timely supply of manpower, materials, equipment, machinery and subcontracted services by providing information on what dates and in what quantities they will be required so that they can be ordered in good time. Furthermore it can be used to monitor the progress of the work and ensure that the schedule is being adhered to.
The chart is often divided into three parts:
The first part is produced by the farmer or his advisor and covers all work up to the time site operations start. It will include the sketching, any applications to authorities, final working drawings, tendering and ordering.
The second part is normally produced by the contractor and includes all site improvements and construction operations. Figure 6.3.
The third part covers the starting up of production in the building and would be developed by the farmer and his advisors.
The preparation of a progress chart starts with listing all operations and their expected duration. and identifying operations which must follow each other in sequence.
In the second step a chart is developed showing the input of labour, machinery and equipment for various operations until the completion date is met. While doing this it will be noticed that there is a sequence of operations called critical operations which must follow each other in a specific order and which together determine the total time required to carry out the work.
In the third step, the requirements of resources, in particular that of labour but also machinery, are adjusted so that a fairly uniform work force can be maintained. This is done by amending the timing and sequence of operations that can take place partly or wholly at the same time as the critical operations.
The fourth step consists of following the work, in particular the critical operations, and revising the progress chart as problems or delays arise, e.g., delayed replies from authorities, contractors or suppliers, delayed delivery of materials and sub-contracted services, delay of the site operations due to prolonged bad weather.
Whenever a building is constructed, it is likely that faults and defects will occur due to such things as deficiencies in the building materials, negligence by workmen and mistakes in the drawings and specifications. Occasionally a contractor may be tempted to increase his profit by knowingly producing inferior work. To avoid this as far as possible, the employer or a person experienced in building construction appointed by him, will function as an inspector during the site operations.
Control is normally carried out continuously as the construction work proceeds. In addition more formal inspections are required at the completion of a contract and at the end of any guarantee period to determine whether the contracted payment should be paid.
The duties of the inspector include the following:
Table 6.3 Progress Chart
Accidents may be caused by falling objects, falls resulting from unstable scaffolding or ladders or inadequate guard rails. Unguarded machinery, hazardous materials, carelessly maintained electrical wiring and equipment can also result in injury. Excessive haste may contribute both to accidents and wasteful, poor quality work.
Most accidents can be avoided and safety standards improved considerably with little or no expense if the following basic safety precautions at the building site are observed:
Buildings deteriorate due to age, weathering and use. This necessitates maintenance and repair to allow the building to retain its appearance and serviceable condition.
Cleaning, repainting, reroofing and replacing or repairing broken parts such as window panes, roof tiles, etc. help to maintain the original value of the building.
Maintenance costs can be kept down by using materials suitable for the climatic conditions and with which local builders are accustomed to working. Furthermore, the building should be simple in detail, have easily replaceable parts and be free of unnecessarily complex or sensitive technical installations.
The fabric of a building should be thoroughly inspected once or twice a year to assess the performance of different elements of the building. The inspection will result in a list of repair and maintenance jobs which should be carried out promptly, since insufficient or delayed measures will result in accelerated deterioration. The maintenance work is usually carried out by the farmer himself, but in the case of large repairs it may be done by hired building workers or a contractor. When a contractor is engaged, payment is often made on the basis of time and materials used according to an agreed schedule of prices.
Fullerton, R.L. Building Construction in Warm Climates, Part 2, Oxford, Oxford University Press, 1978.
Miles, D. A Manual on Building Maintenance, Volume 1: Management; Volume 2: Methods, London, Intermediate Technology Publications, Ltd. 1976.
Miles, D. Accounting and Bookkeeping for the Small Building Contractor, London, Intermediate Technology Publications, Ltd., 1978.
Miles, D. Financial Planning for the Small Building Contractor, London, Intermediate Technology Publications, Ltd. 1979.
Miles, D. The Small Building Contractor and the Client, London, Intermediate Technology Publications, Ltd., 1980.
Seeley, I.H. Building Quantities Explained, (3rd ed.), London, The Maxmillian Press Ltd., 1979.
Willis, A.J. and George, W.N.B. The Architect in Practice, (6th ed.), London, Granada Publishing Ltd., 1981.
Willis, A.J. and Willis, C.J. Practice and Procedure for the Quantity Surveyor, (8th ed.), London, Granada Publishing Ltd., 1980.
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