Now, if there were valid benchmarks for construction costs . . .

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MIKE WOOTTON

MIKE WOOTTON

I don’t want to promote any debate over whether the cost of extensions to Makati City Hall or its facilities, or for that matter the Iloilo Convention Center, is correct, reasonable or fair. But the cost of construction work around here really is a bit of a mystery to say the least even accepting that every construction project is unique!

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Over the last three weeks, I’ve been trying to update some construction cost estimates. What a challenging job it is. There is very little data available on unit cost and what can eventually be accessed is usually ambiguous. Can a cubic meter of concrete really cost five times more on one job than it does on another?

According to international commodities databases, cost of steel recently dropped by about 50 percent over a few months—nobody will give you a supply price that reflects that commodity price reduction though “old stock [was]bought when prices were much higher so we have to sell at the old price otherwise we would lose money.” Obviously, it is considered to be the buyer’s responsibility to protect suppliers from any loss.

The same sort of contrary rationale seems to hold for gasoline prices as well, with the Philippines seemingly unable to catch downward commodity price adjustments, only upward!

At a higher level, according to Energy Regulatory Commission papers, cost of development of small hydropower projects varies between about $2.50 and $8 per megawatt (MW). Working backward from the feed in tariff set by the regulator as the allowable generation cost of various renewable energy technologies, it looks as if the maximum economically viable development cost for small on-grid hydroelectric projects is about $3/MW. How then can somebody propose to develop a scheme that costs $8/MW? Surely, it must be a loss-making proposition.

The conclusion that seems most likely is that construction prices are based on the maximum that the captive market can stand without any relevance to actual costs, or even in the philosophy of St. Thomas Aquinas—selling at a fair price with a reasonable profit.

This “what the market will stand” approach to pricing is more suited to street traders than to established businesses. The street trader has many potential customers passing by and the likelihood that any of them will return, or even that the street trader will stay in the same place for long enough to attract repeat customers, is very small. Thus, he must make whatever he can from the passing trade and does not need to reckon the potential for repeat business in his business strategy.

A street-trading approach to pricing combined with the potential for collusion between “competitors” and the cancer of corruption is quite enough to make construction cost estimating in the Philippines the great guessing game it really is.

As if this is not enough, consultants, who set themselves up in the business of collecting historic cost data to provide as a service to clients who develop things and thus need to make cost estimates, treat their data like gold. They won’t give you a peep at their information unless you pay and commit to their services first. Information is money not to be squandered in discussion.

In other more advanced economies, books are readily available and give comprehensive lists of expected construction costs at many levels of detail, from cost/square meter for buildings of different types right down to the cost of nuts and bolts. The ready availability of this type of information, aside from allowing developers to fairly and accurately calculate the cost of building something and enabling a “shall we do it or not” decision, also tends to guide the contractor market in its pricing approaches and maintains stability and transparency in construction costing. If such information were readily available in the Philippines, there would not be any issue about the cost of Makati City Hall extensions, Iloilo Convention Center or any of the other projects that end up as useful fodder for those who want to accuse their enemies of dirty deeds.

It’s another take on freedom of information really and underlines the point that there is an awful lot of information that needs to be made more widely available, the release of which will among other things bring about consistency and fairness in construction pricing and the ability to evaluate the deal, the offer or the actual achieved cost. Or for that matter, the likely level of incentive considerations, which may have changed hands!

This is another of those Philippine conundrums where you really don’t know if the lack of availability of construction cost information is a deliberate strategy to sustain the street-trader approach to pricing and keep the punters in the dark, or is just something that hasn’t been done in any publicly available way.

But then again, as many of the rich and famous in the Philippines seem to have started their business careers selling things from handcarts in the street, perhaps the street-trader mindset just persists as the norm without the necessity for any deliberation.

Mike can be contacted at mawootton@gmail.com.

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2 Comments

  1. Daniel B. Laurente on

    The variation of unit cost always differs every location considering the material and labor cost. In Metro Manila a small difference occurs and depending on the volume of concrete to be used where discounted price comes into play. The reason there is a small difference in concrete cost in MM its becuase in a competitive market price, a concrete supplier cant go down much to undermine other concrete supplier price.

    In regards to Government projects unit price is almost standard. Bureau of Public Works and other City Engineering Offices always updates their records on the fluctuating market cost of materials and labor cost, It is done periodically in weekly, monthly and quarterly basis. The profit range level is standard percentage meaning it is fixed. If the cost of the two goes high at certain period then of course expect the unit cost will be up. It is just like other commodities. Why Iloilo Convention Center and Makati Buildings almost have the same Project cost? Because the unit cost of Government projects utilizes same unit cost. What makes the project cost up while in the making because of other incidental cost that have occured. One is the cost of materials during the progress of the works has gone up. Contractor will always opt for variation orders than losing or having no profits at all.

  2. If you are working for projects led by private enterprises (eg. Ayala, Megaworld, etc.), estimating the construction cost are pretty much straight forward and consistent, i.e., material cost (A) + labor & installation costs (B) + competitive mark-up or profit (C) + other incidental costs (D)…(A) & (B) are sort-of public data, (C) is pretty much of a narrow-range, and (D) while limited data, are kept to minimum because private enterprises don’t like having too many unknowns because too many unknowns means it’s a risky business. There is also correlation of material cost & labor cost as you go further away from city centers.

    It’s when working for government/public projects where these becomes f*cked up because while (A) & (B) data are pretty much standard rates, it’s in (C) & (D) data where it becomes a ‘black art’ in estimating construction cost.