Costing

Costing turns quantities into money. Learn rate analysis (materials, labour, equipment, overheads, profit), direct and indirect costs, cost indices and escalation, cash flow, time value of money (NPV, life-cycle cost) and value engineering.

A project's budget is built from thousands of item rates. Each rate combines materials, labour, equipment, overheads and profit. Getting rates right wins tenders without losing money.

Owners also compare options over the whole life of an asset — a cheaper road that needs frequent repairs may cost more in the long run.

An analogy

Costing is like pricing a restaurant dish: ingredients, chef's time, kitchen equipment, rent and profit all go into the menu price.

Direct and indirect costs

Direct costs: materials, labour and equipment for each item. Indirect (site overheads): site office, supervision, temporary works, utilities, insurance. Head-office overheads and profit are added as a percentage (typically 10–20 %).

Rate analysis

For each unit (e.g. 1 m³ of M20 concrete): material quantities × prices + labour crew × hours × wage rates + equipment hours × hourly cost, then add wastage, overheads and profit. Schedules of rates (e.g. CPWD DSR) standardise this for public works.

Cash flow and escalation

Contractors need working capital: costs occur before payments arrive. S-curves of expenditure plan financing. Price-adjustment formulas and cost indices handle inflation over long contracts.

Life-cycle costing and value engineering

Discount future costs to present value to compare alternatives fairly (e.g. flexible vs rigid pavement). Value engineering seeks the same function at lower life-cycle cost through alternative materials, methods or designs — without sacrificing performance or safety.

Formulas

• Item rate: R = (Materials + Labour + Equipment) × (1 + OH&P)
• Present value: PV = C / (1 + i)ⁿ
• Life-cycle cost: LCC = Initial + Σ PV(maintenance) + PV(replacement) − PV(salvage)
• Escalation: C_now = C_base × (Index_now / Index_base)

Worked example: Rate for 1 m³ of concrete

Given: Materials 4500, labour 900, equipment 300 per m³; OH&P 15 %

Find: Item rate.

• Direct = 5700
• Rate = 5700 × 1.15 = 6555 per m³

Answer: 6555 per m³

Worked example: Present value of maintenance

Given: 10 000 resurfacing in year 10; Discount rate 6 %

Find: PV.

• PV = 10 000/1.06¹⁰ = 5584

Answer: ≈ 5584

Common mistakes

• Wrong: Omitting indirect costs and escalation. — Right: Include site overheads, contingency and price adjustment.
• Wrong: Comparing options on initial cost only. — Right: Use life-cycle cost with appropriate discounting.

Applications

• Tender pricing: Contractors build rates and markups to bid competitively.
• Budgeting & cost control: Owners track committed vs actual costs.
• Asset decisions: Life-cycle costing for pavements, bridges and building services.

Key takeaways

• Rate = (M + L + E) × (1 + OH&P).
• Include indirect costs, escalation and contingency.
• Discount future costs: PV = C/(1 + i)ⁿ.
• Decide on life-cycle cost, not first cost.

Going further

• Earned value cost control: Links cost to progress (see Project Planning).
• Whole-life carbon: Carbon costing alongside money for sustainable choices.
• Monte Carlo estimating: Probabilistic ranges (P50/P90) for budgets and contingency.