Valuation Methods - Residual and Contractors Methods

Residual Method

The residual principle has been referred to in the context of rental values of shops and

agricultural land, where the analysis of land price appears fairly consistent with the economic theory of rent as a surplus. This concept is employed in valuing building land, where a logical approach to land value is to estimate the ‘output’ value in terms of the price which can be expected for completed buildings, and to deduct ‘input’ costs, such as site preparation, building costs, fees and finance charges. If there is then a surplus, it can be expected that the entrepreneur (developer) will make a bid for the land, subject first to an allowance for profit and risk.

Contractors Method

The Contractors method of valuation can be used for buildings are designed to be used by Town Councils or public sector/healthcare/military workers, and are therefore quite unique and it’s simply not appropriate or possible to value it for a commercial use.  These properties very rarely change hands and because of this, almost no comparable evidence is available.

The contractor's method works on the basis that a property's value can be equated to its cost. That is, the cost of the land plus the cost of the buildings upon it equals the value of the property as a whole. Moving to a different site and having a similar building constructed would have little change on the value of the property. This is because no significant market forces exist for the building so its value is likely to be similar whichever comparably sized site is used. In other words, the value of the property is based on its use which intrinsically has no commercial application. Examples of this are fire stations, hospitals and bus depots.

The basic equation for the contractor's method of valuation is:

Value of existing property = cost of building + cost of site - depreciation and obsolescence allowances

Valuation Methods - Investment Method & Comparative Method

Investment Method

The principle rests on the thesis that the capital (as opposed to rental) value of real estate will relate directly to the income that it generates or can be expected to generate. Values in the market will vary with:

a.     The quantum of income;

b.     The quality of security of the income;

c.      The duration of the income;

d.     Expectation about the future trends in the income.

These variables will be in part a function of the wider economy (market risk), in part a function of the local economy (expressed through demand and supply for the premises), and in part a function of the particular building under consideration.

Comparative Method

The most commonly used form of valuation; it uses direct comparison with prices paid for similar properties to the one being valued. This principle rests on the assumption that:

a.     Valuation is an estimate of what the market will pay;

b.    What has been paid for a similar interest in similar accommodation under similar economic conditions is the best indicator of market value.

The principle is applied as follows:

a.     The valuation for rent of common types of premises.

b.     The valuation for sale or purchase of common types of premises.

c.  The comparison of investment yields from sales of investments as described below.

d.     Sometimes in the comparison of undeveloped land prices (this should normally be checked against a residual valuation, described later).

e.   Turnover estimates for specialist premises valued on the basis of profits. The relationship between expected profits and capital values is examined later.

Different methods of Valuation

Valuation is a means of providing an assessment of the capital value of, or the income arising from a property investment. There is a range of possible investment opportunities from works of art through oil futures and gold to shares, government stocks and property. The point of investment is that it provides the investor with an income, growth in capital value of the investment, or both. Thus investment involves an initial payment (a capital outlay) so that an income can be received in the future over a period of time.

The valuation of real estate is central tenet for all business. Land and property are factors of production and, as with any other asset, the value of the land flows from the use to which it is put, and that in turn is dependent upon the demand (and supply) for the product that is produced. Valuation in its simplest form is the determination of amount for which the property will transact on a particular date.

Purpose of Valuation

1.     Sale report

2.     Accounting purposes

3.     Loan security

4.     Minimum price or auction reserve

5.     Insurance

6.     Taxation

7.     Compulsory purchase

Valuation Models

1.     Investment method

2.     Comparative method

3.     Residual method

4.     Contractors method

Construction work of world’s largest floating wind farm in the coast of Scotland is begin

It is now set to begin off the construction work of world’s largest floating wind farm in the coast of Scotland. Which can supply renewable energy for around 20,000 homes in 2017.

The named called Hywind is about to generate 30MW and solution to the North Sea’s huge wind energy potential without fixing of high cost turbines to the deep water seabed.

It is expected spend $245 m as first investment on this project by Hywind’s developer, Norway’s oil company Statoil. The right holder, Crown Estate granted a lease to the area known as Buchan Deep to the developer.

Five 6MW turbines will bow near Aberdeen 25km away from the offshore of Peterhead, in up to 120m deep water.

The preliminary area will cover up around 4sq km of the North Sea where wind have an average speed of 10 meter per second according to Statoil.

Hywind is scheduled to begin generating electricity by the end of next year.

Project director for Hywind of Statoil, Leif Delp said “We are very pleased to develop this project in Scotland, in a region with a huge wind resource and an experienced supply chain from oil and gas.”

“Through the hard work of industry and supportive government policies, the UK and Scotland is taking a position at the forefront of developing offshore wind as a competitive new energy source.”

Before taking the final decision for invest in Hywind Scotland in November last year, Statoil has been testing the conception of a floating turbine in a demonstration project off the Norwegian coast.

The conception includes mounting the turbines on fluctuating ballasted cylinders, each tied by three lines to the seabed.

Statoil says its proprietary pitch-motion control system is integrated with the turbine’s control system to mitigate the loss of generating capacity caused by excessive wave motion.

In March this year Statoil awarded UK-based Balfour Beatty an $8m (£5.5m) contract for the electrical system interface on Hywind. The contract includes engineering, procurement, construction and installation for the onshore cable and substation in Peterhead.

Photograph: Statoil’s illustration of floating Hywind turbines off Scotland (Statoil)

How to calculate the Gross Development Cost (GDC) and How to make an investment decision based on GDC

Assume the Gross Development Value to be £ C.

Hence, A = Gross Development Cost + Developer’s Profit

                           

GDC = Land Cost + Professional Fee + Cost of Construction + Interest on

               Financing

Assume that the Developer proposes to finance the entire development with borrowed funds.

Land cost   -   £   145,000/= (Data)

Let us assume the cost of construction as £ 540.00

Assume the Gross Floor Area of the Complex to be G m²

Hence, the Cost of Construction = £ 540 G

Professional Fee   =   10% of Construction cost (Data)

=    £ 0.1 x 540 G

=    £ 54 G

Interest on short term financing        =       17% per annum (Data)

Projection Duration                          =       18 months (Data)

Hence, interest payable           =       C x 1.5 x 0.17

                                                =       £ 0.255 A

Therefore,  GDC            =       £ 145,000 + £ 540 G + £ 0.255 C + £ 54 G

                                      =       £ 145,000 + £ 594 G + £ 0.255 C

Developer’s Profit                   =       15% of GDV (Data)

                                      =       0.15 C

Therefore,   C                          =       £ (145,000 + 594 G + 0.255 C + 0.15 C)

                                      =       £ (145,000 + 594 G + 0.405 C)

Hence, 0.595 C              =       £ (145,000 + 594 G)                                           

Consider the expected revenue

Gross Floor Area                    =       G m²

Non Lettable Area                             =       20% (Data)

Hence, Lettable Area                         =       0.80 G m²

Estimated Rent                        =       £ 75/- per m² per month

Hence, estimated rent per month      =       £ 0.80 G x 75

                                                =       £ 60 G

ie. Estimated rent per year                =       £ 60 G x 12

                                                          =       £ 720 G

Capitalization of rent                        =       8% (Data)

Assume that this will be set aside when considering the rent receivable and the Developer wishes to recover the cost in one year.

Hence, total receivable                      =       £ 0.92 x 720 G

                                                          =       £ 662.4 G

For the development to be justifiable, let us assume that the Gross Development value should be at least six (15) times the cost of Land.

Accordingly,                            A                 =       £ 15 x 145,000

                                                          =       £ 2,175,000.00

Hence, using the equation 0.595 C             =       £ (145,000 + 594 G)

                                      G                 =       0.595 x 2,175,000 - 145,000

                                                                                      594

                                                      =       2033.4 m²

Hence, the Cost of Construction              =       540 G

                                                ie.      =       £ 540 x 2033.4

                                                          =       £ 1,098,036.00

Hill International has been awarded a US$ 42m contract by Qatar Railways

A Hill International has been awarded a US$ 42m contract by Qatar Railways to manage the project of Lusail Light Rail Transit (LLRT) system near Doha. A Hill International is made a joint venture with Italian state railway engineer Italferr and Qatar based project management firm Astad to win this job.

Hill International is a 50% partner in the joint venture.

Lusail city is a waterfront development project which is currently under construction just north of Doha and west of well-known Pearl Qatar. The city is designed to be an environmental and self-sustainable community.

This 40km long LLRT rail network will link the residents in Lusail city to Doha via the Doha Metro.

The rail system will consisting of four lines with 25 over ground stations and seven underground stations.

The project is due to be completed over the next four years.

Cost Control of Materials, Machines & Manpower

Cost Control of Materials

Controls of materials are playing a significant role in cost control systems. Controls for materials should be in terms of unit measurements and not in terms of cost.

One easy way in controlling materials is to draw a graph of the quantities of various materials that should have been used, which is calculated from present measurement of the quantities of work carried out. A graph like this would be drawn for major items only. Against this graph for each individual material can be draw a second graph, indicates the quantities of materials that have been delivered to the site.

When reaching agreement with the consultant on the proposed construction programme, Contractor prepares a resource schedule to estimate the material consumption during the construction. This will indicate the major resources required for implementation, quantities to be delivered per month and the time of supplying to the site. When this is submitted to the procurement section, they will take action to supply the resources as per this schedule. It must be understood that the procurement section doesn’t have the freedom to purchase materials at any price. The resource schedule will include the maximum rate payable for each material use for construction. It’s the responsibility of the Purchasing Department to procure the materials within those price limits while conforming to the specifications.

Cost Control of Machines

Many contractors are making greater use of plant with the continual rise in labour costs, both direct and indirect. The use of machinery rarely exceeds seventy percent of it is working capacity. Thus, the contractor requires an intimate knowledge of all types of plan, when each can be used most profitably and of the fullest advantage utilization of plant. A contractor sometimes has to decide whether to hire or purchase plant, and the decision will be influence by the likely future demand for the particular item of plant.

Plant hire offers a wide variety of plant types and the contractor is free from the liabilities attached to the purchase of plant, especially a contractor is short of capital. Hiring plant often ensures maximum economy with full plant utilization and is an aid to quicker building.

Cost Control of Manpower

With regard to labour costs, site staff usually have the responsibility to complete time sheets indicating the number of hours worked by each operative and the amount of bonus earned in that particular period.  Management will monitor the allocation of staff on the various contracts, and will record holidays, sickness or other reasons for absence and overtime payments, and check that staff and overheads charges are kept within the intended budget.

Fundamental differences between the theoretical operations of free market and planned economies.

Free Market Economy: A market economy is a realized social system based on the division of labour in which the prices of goods and services are determined in a free price system set by supply and demand. This is often contrasted with a planned economy, in which a central government determines the price of goods and services using a fixed price system. Market economies are contrasted with mixed economy where the price system is not entirely free but under some government control that is not extensive enough to constitute a planned economy. In the real world, market economies do not exist in pure form, as societies and governments regulate them to varying degrees rather than allow self-regulation by market forces. The term free-market economy is sometimes used synonymously with market economy, but, this does not preclude an economy from having social attributes opposed.

Role of Government

1. Controlling monetary and fiscal policies
2. Provide public services, such as education, health, security
3. Prevent businesses from domination the market and restrict the power of trade unions 
4. Prepare and maintain state properties

Planned Economy: A planned economy or directed economy is an economic system in which the government or workers' councils manage the economy. Its most extensive form is referred to as a command economy, centrally planned economy, or command and control economy. In such economies, the state or government controls all major sectors of the economy and formulates all decisions about their use and about the distribution of income, much like a communist state. The planners decide what should be produced and direct enterprises to produce those goods. Planned economies are in contrast to unplanned economies, such as a market economy, where production, distribution, pricing, and investment decisions are made by the private owners of the factors of production based upon their own and their customers' interests rather than upon furthering some overarching macroeconomic plan. Less extensive forms of planned economies include those that use indicative planning, in which the state employs "influence, subsidies, grants and taxes, but does not compel. This latter is sometimes referred to as a "planned market economy."

Role of Government

1. Make the major decisions regarding economic
2. Plan, organize and coordinate the process of all productions

Cost Control Process by Employer & Contractor

Cost Control Process by Employer

If the Employer’s brief is accurate and the variations are limited, the construction cost can be easily controlled. Contract sum is known at the time of awarding the contract and if it’s revised with every approved variation, the Employer can be confident that the construction cost is within the budget.

With every interim application of the Contractor, it’s possible to ascertain the financial progress and also predict the future need fairly accurately. As a result, the Employer will be in a position to effectively manipulate his funds for his benefits without affecting the cash-flow to the project.

Cost control Process by Contractor

A Contractor’s cost control process is much more difficult than the Employer. He is already committed to accomplish a contract within the established contract sum and duration and to the expected quality.

The assessment of the profitability of a particular contract consists basically of knowing precisely the value of work executed at a specific date, compared with the actual costs incurred in achieving that value of work. The difference between the two figures will be the amount available to allocate to the off-site overheads of the company, to fund it is working capital and make a profit. In an adverse situation the difference may show that off-site overheads are not being covered and that no profit is being made.

Many construction companies become insolvent through bad estimating and planning, ineffective contract control or inadequate cost control in site. The factors to be controlled include the tangible physical resources of operatives, materials, plant & machineries and subcontractors. Equally important are the non-tangible items such as progress and productivity cost (Time & money), quality, safety, information, methods and the performance of subordinate management.

See-through hard hat launched in Europe and US

See-through hard hat launched in Europe and US.........

Irish company name Portwest, who is making work wear has introduced new see-through hat, and mentioning that it will boost site safety by allowing work staff to easily see what is around them.

Made of transparent poly carbonate material, the hat allows the wearer to see from any angle without unnecessary head angling and rotating the cap back to front.

The name called “revolutionary” for the hat, and it is that kind of hat first to European and American markets as per the company.

This hat is fully certified to European and US safety standards and it comes with a range of colours, Portwest said.

Called Peak View, the hat is light and UV400 stabilized, offering protection against UVA and UVB radiation.

Use of Cost Control

Amount of detail and the time interval between cost control reports must be considered, which is different according to the level of management for which they prepared. For a site manager, it is necessary to receive the cost report on weekly basis.

After preparing the reports based on the cost data collected, it is important to project the cost in to future and to estimate or re-estimate the cost of the work yet to be completed. Any new information must take in to account since the commencement of the contract. Thus, a suitable reporting system is important part of a cost control system. The estimator would become more reluctant in the future to use cost data that have been fed back from the site if an adequate reporting system is used. In addition, the estimator can save same time to determine sufficient detail about the data and conditions they acquired.

There are two areas within to check whether the cost control reporting system is efficient or not. First, is to check on the profitability of the work. The value of the work that will be returned is compare with the cost of the work that was carried out. This is a straightforward comparison between the valuation figure and the total expenditure to check on profit or loss if no detailed cost control is used.

The second would be check on efficiency, carried out against the standard of the output rates that were used by the estimator in compiling the estimate. Efficiency is concern with the site management and supervisory staff, whereas the profitability is concern with the contract management level and above.

Why Cost Control? Purpose of Cost Control

Why Cost Control?

The cost control is a process that should be continued through the construction period to ensure that the cost of the building is kept within the agreed cost limits. All expenditure limit control must be related to the functional requirements of the particular building type, but it is perhaps less obvious that functional cost limits may be expressed in a variety of units. The cost control can divide in to two major areas, the control of cost during design stage and the control of cost by the contractors once the construction of project has started.

The main aims of the cost control are probably:

1. To give Employer good value for money – A building which is soundly constructed, of satisfactory quality and appearance and well suited to perform the functions for which it is required, combined with economic construction and layout, low future maintenance and operating costs, and completed on schedule as lost time is also lost money and in accordance with the agreed brief.

2.   To achieved a balanced and logical distribution of the available funds between the various parts of the building. Thus the sums allocated to cladding, insulation, finishes, services and other elements of the building will be properly related to the class of building and to each other.

3.  To keep total expenditure within the amount agreed by the client, frequently based on an approximate estimate of cost prepared by the quantity surveyor in the early stages of the design process. There is a need for strict cost discipline throughout all stages of design and execution to ensure that the initial estimate, tender figure and final account sum are all closely related. 

Turner & Townsend (T&T) won a Dubai airport extension Contract

UK consultant Turner & Townsend has won a contract to facilitate cost management services for the expansion of Dubai’s Al Maktoum International Airport.

The firm was selected by Dubai Aviation Engineering Projects (DAEP), the engineering arm of the state-owned Dubai Aviation City Corporation.

The expansion is in passenger terminals including larger immigration hall, providing 55 control counters, extended departure area with 91 check-in desks and additional 12 boarding gates and lounges, a new outbound baggage handling building and additional parking and approach roads.

The expansion is part of a wider $ 32bn development program that can be accommodate more than 200 million passengers a year when finished in 2027, making it the biggest in the world.

Mike Collings, T&T’s Middle East managing director, said: “We’re honored to be working so closely with DAEP once again, and this assignment further fortifies our aviation profile in the Middle East.  

“Our experience of providing complex programs in live airports will help us run the ongoing extension while minimizing the impact on day-to-day operations, and allow DAEP to plan for future growth.  

“We have built a strong reputation working on some of the world's largest aviation projects, and I’m delighted that we are now building momentum in the rapid growth of Dubai as an international hub for air travel.”

LEED Certification for Commercial Buildings

In order to achieve LEED certification, commercial buildings must meet stringent standards as determined by the Green Building Certification Institute. This independent organization conducts third-party inspections of commercial buildings in accordance with ISO international certification standards. Building owners can achieve a number of different levels of LEED certification depending on the degree to which the building complies with environmental standards.

• Certified buildings must achieve 40 or more points out of a possible 110.
• Silver certification is available to buildings that achieve 50 or more points.
• Gold-certified buildings have achieved 60 or more points.
• The highest level is Platinum certification, which requires 80 or more points.

The best way to achieve LEED certification is to incorporate environmentally friendly construction methods, sustainable materials and energy-efficient systems into the overall building plans.

• Energy efficient lighting systems can be an important element in achieving LEED certification, as these systems use much less energy than traditional lighting methods.
• Insulation and ENERGY STAR-rated windows can add points to the overall certification totals.
• Low-flow water fixtures reduce utility bills and protect the environment.
• Modern heat pumps and energy efficient HVAC systems can pave the way for LEED certification.

Making environmentally sound choices is the first step toward LEED certification and can provide significant financial benefits for building owners as well.

Required Information for LEED Analysis

• Total gross building footage
• Total area of the building footprint
• Total property area
• Total area to be conditioned
• Estimated number of occupants of the building
• Detailed design layout with dimensions of windows and doors
• Details of flow and flush water fixtures to be used

The LEED and GBCSL Green Building Rating System mainly address 7 topics as mention below

• Social and cultural awareness (Regional priority)
• Innovation and design process
• Indoor environmental quality
• Materials and resources
• Energy and atmosphere
• Water efficiency
• Sustainable sites

Benefits of LEED Certification

LEED certification can provide a number of benefits for building owners. Along with the obvious environmental advantages, LEED-certified buildings cost less to operate and are more desirable for commercial and residential occupants. They also may qualify for significant financial benefits through tax rebates and incentives, making these green-friendly buildings an even better investment. Buildings that incorporate energy efficient lighting systems and low-flow bathroom fixtures can provide lower utility bills for tenants while ensuring a healthier environment for residents and occupants.

Buildings can achieve LEED certification in five primary areas:

• Energy use, including energy efficient lighting and HVAC systems
• Location of the building and sustainability of the immediate environment
• Indoor air quality and use of daylight to reduce lighting costs
• Water conservation and reduced-use mechanisms
• Use of sustainable materials during construction

Construction Procurement System Types Contd.........

Design and Build - A design and build contract is a contractual agreement whereby the contractor offers to design and build a construction project for a contract sum which is all-encompassing of both the design and construction costs.

In design and build procurement the client may choose to keep hold of the services of an architect and quantity surveyor to act as independent professional advisers for the client to offer essential advice in terms of cost, time and quality, and also to evaluate the building contractor's proposals with consideration to both design and cost, and to scrutinize the work on site.

Advantages of Design and Build System

• There is a single point responsibility
• Offer shorter overall time
• Fixed priced bids are used. So financial commitment known by client early in the process.
• Achieve high level of buildability
• Reduce variations and destruction to the original design
• Design becomes a competitive element
• Client's financial risk is minimal

Disadvantages of Design and Build System 

• Comparison of bids can be complicated
• There are lower level of competitions at the tender than in other arrangements
• It requires a detailed brief
• The tender process can be expensive to bidders
• There is a lack of independent professional advice to the client at the time of tender
• These forms often lack broad experience or expertise
• Change can be expensive as valuation of variations
• Aesthetically important buildings are not recommended to procure this method

There are several methods available under the Design and Build system

Turnkey - It means a program, project, solution or system where the contractor or provider undertakes the entire responsibility from design through completion and commissioning. This client only has to turn the proverbial key to make everything function as it should.

Package deal - feasibility also done by contractor & client is able to see the actual examples before making decision. 

Construction Procurement System Types

A number of different procurement routes and options exist in the construction industry;

1.     Traditional (Design - Bid - Build)

2.     Design and Build

3.     Management Contracting

4.     Construction Management

5.     Design and Manage

Traditional System - The traditional structure for project procurement is seen as a sequential method because the employer takes his scheme to an advanced stage with his professional team before appointing a contractor. The designer is employed to advise the client, design and ensure that the work is kept within the budget and that it complies with the standards required. A Quantity Surveyor can be engaged to give assistance on design costs and budgets, prepare bills of quantities, check tenders, prepare interim valuations and advise on the value of variations.

Advantages of Traditional System

• Competitive tendering is possible with detailed documentation
• High quality of functional standard are possible
• There is cost certainty at the start of construction
• Independent advice is given on most aspects of the process
• BoQs  make for ease of valuation of variations and high level of cost control and monitoring
• There is a flexibility for design changes in the construction stage
• A combination of the best design and construction skills is possible

Disadvantages of Traditional System

• Decision processes are slow and convoluted
• Total project time is the longest of all options and no parallel working is possible
• No integration between design and construction process leads to reduced team spirit & tend to cause problems at construction stage
• The clients’ liability& risk is significant – where the client is inexperienced
• Due to time pressure in the pre contract stage, the documentation may have errors - Cost overruns

Methods in Traditional System

Lump sum method means the contractor agrees to build a project with a specific scope for a fixed price. A lump-sum contract is suitable if the scope and schedule of the project are sufficiently defined to allow the contractor to fully estimate project costs.

Cost plus is a contract agreement wherein the purchaser agrees to pay the cost of the work, including all trade contractor work, labor, materials, and equipment, plus an amount for contractor overhead and profit. These types of contracts are favored where the scope of work is indeterminate or highly uncertain, and the kinds of labor, material, and equipment needed are also uncertain.

With cost-reimbursable alternative contracts, contractors are paid for the work with a mix of reimbursable and fixed or incentive costs. Cost-reimbursable alternative contracts are effective when the general scope of work and schedule are defined, but there is uncertainty in quantities or execution. Under cost-reimbursable alternative contracts, uncertainty in project scope is borne by the client. Cost-reimbursable alternative contracts offer significant flexibility for responding to conditions that are uncertain. There are different variations of basic cost-reimbursable alternative contracts, including cost-reimbursable plus fixed fee, cost-reimbursable plus performance-based incentives, direct cost-reimbursable plus fixed construction management costs, and others.

Unit price means this kind of contract is based on estimated quantities of items included in the project and their unit prices. The final price of the project is dependent on the quantities needed to carry out the work. In general, this contract is only suitable for projects in which the scope is reasonably well established, and the different types of items (but not their numbers) can be accurately identified in the contract documents. 

A guaranteed maximum price (GMP) contract is a cost-type contract, in which the construction contractor is compensated for actual costs incurred, plus a fixed fee subject to a ceiling price. The contractor is responsible for cost overruns, unless the GMP has been increased via formal change order as a result of additional scope from the client. Savings resulting from cost under runs are returned to the client.