Challenges in pricing preliminaries costs for contractors: An Australian case study

The estimation of project preliminaries is an essential aspect of construction cost calculation. There are several methods for the calculation of preliminary items. First, some industry guidelines should be considered while estimating preliminary items. For instance, The CIOB Code of Estimating Practice (CIOB 2018) comprises comprehensive guidelines for estimating project overhead items (Chan and Pasquire 2002). According to this Code, project overhead costs consist of certain time-related expenses (e.g., rental charges, salaries) and fixed costs (e.g., installation, dismantling costs) (Chan and Pasquire 2002; Shittu et al. 2022). Fixed charges are generally independent of duration, while time-related charges depend on the project’s duration (Shittu et al. 2022). By identifying and categorising these cost items, estimations can be made similar to unit rate calculations (Chan and Pasquire 2002); various textbooks use the CIOB Code as a basis for estimating project overheads.

To establish reliable and accurate preliminary costs, contractors can employ various approaches such as using one-off, time based, provisional sum or measurable items as much as possible (Abas et al. 2016). Thorough planning and understanding the complexity of the construction project are crucial for the effective management of preliminaries. The distinction between variable and fixed costs is crucial for determining the relevant costs for changes in contract quantities. Variable costs change in proportion to the volume or quantity of construction activity, while fixed costs remain constant, regardless of the fluctuations in volume. Most activities involve a combination of variable and fixed costs. For example, job-site shops have fixed costs, such as setup expenses and variable costs, including wages paid to workers based on the number of items fabricated. General and administrative costs, such as office rent and salaries, are typically considered as fixed costs within a specific time period, even though they may vary across different periods.

Furthermore, estimating project overheads as a percentage of the contract value is common, especially for small-scale, repetitive works (Chan and Pasquire 2002). However, this approach may lead to underestimation, as many preliminary items do not exhibit a linear relationship with the value of works. Researchers have explored different methods and models for estimating project overhead costs. Chao (2010) developed a case-based reasoning (CBR) model for supervision cost estimation. The model was compared with other existing methods, highlighting the need for more accurate and sophisticated estimation approaches. Abas et al. (2016) mentioned that, sometimes, preliminaries are commonly priced using summation rates based on loose general descriptions and the contractor’s own interpretation. They suggest that breaking down the lump sum item into smaller items could provide better accuracy and be defined in simpler terms with basic components, which would anticipate risk costs and prevent overrun costs. Additionally, some researchers have explored the use of artificial intelligence (AI) and other advanced estimation models, such as ANN and fuzzy modelling, for cost estimation (Nabil and El-Riyati 2015) and the advantages of using building information modelling (BIM) (Naderi et al. 2024).

The Australian New Zealand Standard Method of Measurement (ANZSMM) for Building Works guides quantity surveyors to a list of measuring preliminaries for pricing by contractors. This is based on the client’s requirements and likely contractor’s costs broken into two main categories, being Contractual and Site Conditions, with 42 individual subcategories (see Table 1).

The method provides for several other guidance rules of measurement that invoke drawing attention to such things as, adjoining buildings, limitations on access to working or storage space and the requirements of the contract in relation to these preliminary items. Table 2 provides an alternative approach to the listing of preliminaries by individual Contractors rather than professional client-side quantity surveyors.

The constructability choice of the project delivery method has a direct impact on the allocation of risk among parties involved in the contract, which in turn affects the estimation of overhead costs, loading criteria and recording efforts (Singla and Sridharan 2022). Different project delivery methods, such as design-build (DB), design-bid-build (DBB) and item rate contracts, have varying degrees of risk allocation between the client and contractor, which can affect the control of overheads and the accuracy of quantity estimation. For instance, DB projects with lump sum payments require tight monitoring and control of overhead costs to achieve cost savings and increase profit margins. By contrast, DBB projects and item rate contracts shift the risk of quantities to the client and compensate the contractor for any increase in original quantities. However, fixed sum or lump sum contracts used in DB projects do not have such provisions, necessitating greater control on overhead costs regardless of any quantity estimation errors during bid submission (Singla and Sridharan 2022). Interviewees agreed that project delivery models have a significant role in overhead estimation efforts and accuracy, although little research has been conducted in this area (Singla and Sridharan 2022).

Overall, while the literature highlights the importance of project delivery methods on overhead estimation efforts and accuracy, further research is needed to identify specific factors and approaches to improve these processes in different types of construction projects. After analysing the existing resources, it is concluded that the literature in this area is heavily focused on examining correlations based on the type of projects and is almost exclusively based on overseas construction markets, such as India, Nigeria, Iran, UK, Poland, and Palestine (Akintoye and Fitzgerald 2000; Odeyinka and Yusif 2003; Enshassi et al. 2008; Plebankiewicz and Leśniak 2013; Hesami and Lavasani 2014; Jaya and Frederika 2015; Nabil and El-Riyati 2015; Erri Pradeep et al. 2019; Saini et al. 2021; Shittu et al. 2022; Singla and Sridharan 2022). As a result, a gap in research on Australian construction projects was detected, which should take multiple factors into account beyond merely the project type, or a specific estimation approach.

A significant benefit of accurate preliminary estimation is its role in preventing future claim disputes. Claim disputes often arise when the estimated costs and resources allocated for preliminary estimation prove to be insufficient or inadequate. This can lead to delays, additional expenses and disagreements between project stakeholders. Saini et al. (2021) highlighted that the indirect cost incurred during a project is often overlooked, and it is one of the major causes of various claims with respect to contract conditions.

Chan (2012) emphasises the importance of proper planning and identification of cost items, including the preliminaries at the tender Stage. The author highlighted that failure to do so may result in unnecessary claim disputes, particularly in the case of protests or strikes from the public. And that this could lead to an adverse effect on the image of the project owner and a delay in the project, which would result in additional project overhead expenses borne by the contractor.

In some contracts, contractors are instructed to spread or allocate their overhead and profit costs across all pay items in the schedule of values, and this leads to disputes and claims in the construction industry (Nabil and El-Riyati 2015). In addition, the authors highlighted the importance of solid evidence and documentation instead of vague presentations to resolve overhead disputes. This behaviour positively affects the resolution of claims of suspension, delay by the owners and termination, minimising disputes with the owners in determining contractor financial damages. Furthermore, Haupt and Pillay (2016) emphasised the significance of indirect costs of injuries and fatalities that should be considered while estimating for project overheads. These costs included loss of productivity, disruption of schedules, administrative time for investigations and reports, training of replacement personnel, wages paid to the injured workers, clean up and repair, adverse publicity, third-party liability claims and equipment damage.

The importance of considering price escalation of buildings while estimating construction preliminaries is critical. The preliminary costs are affected by factors such as inflation, escalation and risk, which require estimation and contingency planning. Chan (2012) explains that local contractors manage their projects on a portfolio basis to maximise their returns, and in times of economic down-turn, project overhead costs become more vulnerable to escalation. The regional economic situation plays a vital role, and contractors need to stay alert in the dynamic business environment. The importance of assessing escalation and contingencies is emphasised by Dell’isola (2003), because these factors are real costs that have not been specifically identified at the time an estimate is prepared. Dell’isola (2003) also notes that risk is a significant factor in determining a project’s cost and any transfer of risk to a contractor will likely result in a higher price for the work. Lastly, it is mentioned that inflation affects construction costs, and other factors like demand and economic boom also play a role in determining the price of construction (Hesami and Lavasani 2014).

Increasingly, in a climate of heightened inflationary cost pressures, contractors are pushing for the risk of cost escalation to be directly addressed in construction contracts, no longer comfortable with common mitigants such as one-off contingencies. In the absence of an appropriate cost escalation clause, there is a greater risk of disputes arising as increased costs become practically unmanageable, and contractors consider walking away from projects (with or without a legal right to do so). This can have a significant impact on project delivery.

The process of estimating construction preliminaries faces several administrative challenges. Akintoye and Fitzgerald (2000) identified several factors that lead to inaccuracy in cost estimation, including insufficient tender document analysis, lack of understanding of project requirements, poor comprehension of site requirements and lack of historical data on past estimates that can be counted as administrative challenges involved in the estimation of project preliminaries. They also noted the shortcomings in skills, knowledge and data for cost estimating, such as a lack of training, practical experience and knowledge of computer applications. The authors further discussed the move from analytical estimating to commercial estimating, the variability in subcontractors’ prices and the de-skilling of estimators, who rely on subcontractors for specialist knowledge. Chen et al. (2008) noted that the low-profit margin in the construction market adds pressure to produce accurate estimates (Chen et al. 2008). Eldosouky et al. (2014) stressed the need for effective risk management to turn knowable unknowns into known unknowns.

Furthermore, Abas et al. (2019) advised ensuring that all vague or indeterminate areas are clarified, and uncertainties are excluded from tender documentation, to minimise associated administrative challenges. To estimate at a detailed level, the estimator must mentally construct a project, select materials, methods, equipment and crews to fit the design, and estimate the costs of performing the required work using the best information available. The estimator should not select information for its convenience or appearance of objectivity but should base it on the realities of the current project. The estimator must have the vision to see beyond the obvious components and their primary costs of construction.

Administrative challenges in estimating preliminaries can be related to understanding client expectations. Enhancing communication and collaboration with clients, conducting thorough needs analysis, and clarifying project requirements can help mitigate challenges associated with complexity and ensure successful project delivery (Abas et al. 2016). This was confirmed from the responses of the experts in this project; it is evident that the most significant administrative challenge is the ‘Understanding of client main expectations, goals, and specifications’, with a mean of 3.29 among all respondents (see Table 7). These findings align with the existing literature that emphasises the role of complexity in construction projects and the importance of understanding client expectations.

At the conceptual stage of design, close collaboration between the owner and the designer is crucial for establishing the scope and general characteristics of a project. Moreover, as the design progresses and the project moves towards the construction phase, it becomes essential to have contract prices based on adequate estimating detail. The findings again align with existing literature, and ‘Late responses from Designers/Engineers to queries raised’ was rated as the second most relevant concern for the experts with a high mean of 3.24 on the 5-point Likert scale. The challenges arising from late responses by designers/engineers to queries raised can disrupt the flow of information and decision-making processes, potentially leading to delays in project progress and coordination issues. Timely and efficient communication between stakeholders, particularly between designers/engineers and other project team members, is crucial for ensuring smooth project execution and minimising the impact of such challenges.

The third most crucial factor among the listed aspects of administrative challenges is ‘External Factors, Unions, Pandemic (COVID)’, with a mean of 2.84. It is also worth mentioning that this factor is sometimes perceived as very important since it cannot be foreseen during the preliminary items’ estimation. However, in the event of this factor, it can be very critical for administrative personnel. The literature emphasises the importance of effective risk management in dealing with uncertain events and factors that cannot be predicted during the preliminary estimation of items (Eldosouky et al. 2014). While some risks can be identified and managed through proper risk identification and mitigation strategies, there are unknown unknowns or emergent risks that cannot be anticipated until they actually occur (Eldosouky et al. 2014).

When considering both important and very important factors, the fourth crucial challenge is the ‘Insufficient preparation time during the tender period’. By contrast, the least significant factors among administrative challenges in estimating preliminaries are ‘Lack of itemised Bills of Quantities for Prelims’, followed by ‘Ambiguities/Omissions within the tender or contract documents’ and ‘Providing for project IT services and Client expectations on reporting’.

According to Table 8, it can be concluded that for the respondents, the most important constructability challenge in estimating preliminary price is the ‘Complexity of work, e.g. site restrictions, high lifting, material handling (Cranages, Alimaks, etc.)’ with a 53.33% rate. The second most important factor is ‘Different methodologies adopted within Contractors and Subcontractors’ with a 46.47% rate. Examining the important factors in the buildability/constructability challenges list for estimating prelims, it is clear that ‘Access and temporary works required in each construction stage’ with a 53.33% rate, is the third most important factor. ‘Alternative construction methods suggested by the construction manager’ is also considered a very important challenge among the list of potential constructability challenges for estimating preliminaries. On the contrary, some factors that can be challenging for estimators are ‘Regulatory issues, codes and byelaws affecting site operations (Dust, Noise, etc.)’ with a 60.00% rate, and ‘Poor responses from Designers/Engineers to technical queries raised’ with a 53.33% rate. This finding underscores the impact of project complexity on the estimation process and highlights specific factors that contribute to the challenges faced by construction professionals.

Q7 and Q8 were related to the main concerns on cost uncertainties when pricing preliminaries, threats and opportunities (Overrun & Savings), not including the costs associated with the construction methodology and programme. Interestingly, respondents highlighted that site staffing, including general labour, was the main cause of cost increase/overrun. On the contrary, activities such as Site setup, including accommodation, hoardings and gantries, and General running costs were highlighted as the potential to gain savings (Tables 9 and 10).

Based on the chart presented, it can be inferred that the most probable cause of cost increase or overrun in the preliminaries is related to ‘Site staffing including general labour’ which constitutes 43.33% of all the listed categories. The next most significant factor contributing to a potential cost increase is ‘Cranage including associated labour’, which accounts for 20.00% and highlights the importance of the ‘Complexity of work e.g. site restrictions, high lifting, material handling (Cranages, Alimaks, etc.)’ as a constructability challenge during preliminaries estimation.

Other factors on the list, which together account for less than 40%, include ‘Site setup including accommodation, hoardings, gantries, etc.’, ‘Cleaning, Defects Liabilities, handover and commissioning’, ‘General running costs’, ‘Permits, securities, insurances, etc.’ and ‘Waste during Construction, Rubbish removal etc.’

Regarding Q9 on the construction methodology and the impact of the involvement of construction managers during the tendering stage, supporting the pricing process of estimating preliminary costs, the comments received highlighted that the smarts introduced by the construction managers are critical to understanding the solutions that will be used to build the project and the need for temporary identification and proper pricing of the required preparatory works. However, respondents highlighted that some construction managers can increase the preliminary allowances, including extra contingency items that will take the risk of a less competitive bid proposal. Some of the comments received: –

‘The input of the Construction Managers is critical to price the necessary temporary works needed to build each solution. However, their involvement can also sometimes increase the preliminary allowance due to some conservative approaches’.

Based on the results of the survey, there is no clear consensus among experts regarding whether preliminaries costs should be front-loaded. Approximately one-third (33.33%) of the respondents believe that the costs may or may not be front-loaded, while just over one-fourth of the experts (26.67%) believe that preliminaries costs should be front-loaded in payment schedules. The remaining votes were split equally (13.33%) between those who strongly agree, strongly disagree or have a probable disagreement with front-loading preliminaries costs (see Table 11).

Table 12 presents the annual escalation rates of building prices for various categories of Preliminaries over a period of 12 months. The categories include the establishment and disestablishment of the site, insurances, permits, paperwork, supervision, site staff, admin staff, labourers, running costs, final cleaning and handover, and office overheads and other finance-related costs. The mean values of these categories range from 6.8 to 5.07, with ‘supervision, site staff, admin staff, and labourers’ experiencing the highest annual escalation rate.

It is worth noting that the experienced annual price escalation rates for these categories are almost equally weighted, indicating a balanced impact on the overall cost of the project. However, the higher escalation rate for ‘supervision, site staff, admin staff, and labourers’ means that this category has a more significant impact on the cost of the project over time. Furthermore, the ‘establishment and disestablishment of the site’ category has the lowest experienced annual price escalation rate. This may be because the costs associated with this category are mainly one-time expenses and do not change significantly over time.

These findings align with existing literature, emphasising the significance of price escalations and contingency costs which are real costs that often have not been precisely identified at the time of estimation preparation (Dell’isola 2003).

The results of the survey indicate that the most equitable procurement options for contractors are ‘Cost plus Contracts or Time and Materials Contracts’, which account for 33.33% of the responses. Following closely is ‘Construction Management Agreement/Management Contracting’ with a rating of 25.93% (see Table 13). These options are distinctly more highly rated than the other procurement options, which range from 7.41% to 11.11%. By contrast, ‘Term (unit price/schedule of rates) Contracts’ is considered the least equitable procurement option, with a rate of only 3.70%. According to the existing literature, the procurement arrangement is among the factors that may impact the overall project overheads expenditure and project success (Chan 2012; Shittu et al. 2022; Singla and Sridharan 2022).

Single and multiple parameter estimating methods, also called metrics, such as the square meter of floor area method, as well as ratio factors based on predominant cost components (Odeyinka and Yusif 2003) can be very useful for estimating preliminaries. Hesami and Lavasani (2014) highlighted the significance of site layout factors, such as site shape, site coverage and infrastructure, in determining overhead costs.

Q10 aimed to identify the various values that can be useful for calculating the costs of preliminary items in construction projects, such as ‘Establishment of the site’, ‘Insurances, Guarantees and fees, levies’, ‘Site Supervision and Administration’, ‘Site Running Costs (staff excl.)’, ‘Final Clean and Handover, Commissioning’, and ‘Head Office Overheads and other, Finance’.

Regarding the ‘Establishment of the site’ item, Table 14 indicates that a quarter (26.67%) of the respondents believe that the ‘SITE area m² based’ metric is a useful factor for pricing. However, the majority of the participants who responded in choosing the various options suggest that there are other factors such as ‘project size (GFA) area based’, ‘project size m² HEIGHT and VOLUME considered’, or ‘project value $’ that need to be considered while pricing this item. Additionally, preliminary estimating techniques and indirect cost estimation methods are employed in pricing construction site establishment.

The next item, ‘Insurances, Guarantees and fees, levies’, is almost unanimously (93.33%) believed to depend on ‘project value $’. Regarding this result (Saini et al. 2021; Shittu et al. 2022), discuss various factors affecting the value of preliminaries, which may include the contract sum, size of the building, complexity of the structure, price index and total floor area. These factors can influence the pricing of various project components, including insurance, guarantees, fees and levies.

The ‘Site Supervision and Administration’ cost, according to the majority of the experts, depends also on other factors not listed in the survey. Nonetheless, over a quarter (28.57%) of the respondents suggest that ‘project size m² HEIGHT and VOLUME considered’ can be a useful factor for calculating this item. For the ‘Site Running Costs (staff excl.)’ item, almost a quarter (22.58%) of the respondents suggest that factors other than ‘project value, site and project size m²’ can be a useful factor for pricing this item.

The literature also supports these findings, highlighting the fact that the project size, height and volume are crucial factors for pricing preliminaries, which similarly influence the pricing of site supervision and administration as well as site running costs in construction projects (Odeyinka and Yusif 2003; Chan 2012; Hesami and Lavasani 2014; Saini et al. 2021; Shittu et al. 2022).

For the ‘Final Clean and Handover, Commissioning’ item, 60% of the experts believe that ‘project size (GFA) area based’ can be used as a metric, while another quarter (28.57%) suggests that ‘project size m² HEIGHT and VOLUME considered’ could be useful.

Finally, for the ‘Head Office Overheads and other, Finance’ item, more than half (53.33%) of the experts believe that ‘project value $’ is the most useful factor for pricing, while just under one-quarter suggests that there are other factors that are not listed in this chart.