Components of a Unit Rate
In a previous article, we discussed what a unit rate is, the various types of unit rates, use of a unit rate and approaches to estimating a unit rate. You can read the article here: What is a Unit Rate?
When dealing with construction contracts, quantity surveyors usually build-up unit rates for construction and related engineering works to forecast the cost of a proposed project. Usually, when tenders are sent out to contractors, they include a bill of quantities with the rates column left blank. The bidders (contractors) are required to fill in the rates which are the costs they will incur to execute the works as described by the contract and specifications.
Unit Rate Components
To build an accurate unit rate, an estimator needs to have a thorough knowledge of quantity surveying, construction technology, architectural design, prices of construction materials, machines and equipment in the market, among others. They also need to have an understanding of what comprises a unit rate.
A unit rate is composed of direct and indirect costs involved in the project as well as profits and overheads for the contracting firm. These components of a unit rate are discussed in detail as follows:
Unit Rate = Cost of Materials + Cost of Plant & Equipment + Labor + Profits + Overheads
1. Direct Costs
In accounting, a direct cost is an expense that can be tied directly to the production of certain goods or services. They often tend to fluctuate depending on the levels of production. In construction, examples of direct costs can be the direct cost of materials (e.g. cement), direct labour (that is, payment of the construction workers), cost of fuel for machines and equipment, the cost for hire or purchase of equipment, among others.
However, some labour and equipment costs are classified as indirect costs as they cannot be tied to a specific item of production. Let’s see what indirect costs are.
2. Indirect Costs
Indirect costs are not directly attributable to the production of a specific good or service, but they make the production of those items possible. Whereas the cost of hiring/purchasing a concrete mixer is a direct cost, the cost associated with the repair, maintenance and deprecation of the mixer becomes an indirect cost.
Indirect costs can be further classified into project overheads and general overheads. Project-based overheads are the site related costs which can be estimated by carrying out a detailed analysis of the site related activities and their costs.
General overheads form the costs that are used to support the overall activities of the project. They are estimated as a percentage of the total costs.
For example, indirect costs associated with construction equipment include depreciation, repairs, maintenance, taxes and insurance premiums. Labour related indirect costs are things such as workmen compensation.
3. Profits and Overheads
Profits and overheads fall in the category of indirect costs.
Contractors are businessmen who are interested in making profits and having cashflow to continue running their projects. In your costing, you need to include a percentage to cater for your profit margins, site-based overheads and head office overheads.
Worked Out Example (Video):
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