Cost Management – Part 1

Cost Management - Part 1

INTRODUCTION

Strategic and operational cost management is a critical aspect of property development to create value. Given the same revenue, developers with a lower cost structure will achieve a higher profit margin. This chapter covers the control of gross development costs, construction costs, mechanical and electrical costs, architectural costs, civil and structural costs, capital contributions and compliance costs.

Cost management is not just about savings or reducing costs. It is also about avoiding expenditure on unproductive deals or projects that you may end up aborting. Likewise, avoid unnecessary and redundant work — such as re-strategising, re-planning and re- executing existing projects — to ensure timely completion of your project.

Having less diversification is preferred for cost management purposes as this allows you to manage your scope of work better. By focusing on similar types of products in the same locality or customer segment, you tend to build up stronger expertise to achieve superior performance.

GROSS DEVELOPMENT COST

While gross development value (GDV) is the aggregate market value of the proposed development, gross development cost (GDC) is the total cost of undertaking a development. The top two biggest property development expenses are construction and land costs, which comprise roughly 60% to 65% of GDV for both high-rise and low-rise developments in the Klang Valley. Controlling the biggest cost components will result in the most substantial savings. Stringent cost control is essential in order to achieve the targeted profit margin. Good cash flow management is also vital in property development. You need to set realistic targets and sell enough properties to see your project through to completion.

Though specific expenses may differ from project to project, it is important to benchmark the cost structure against relevant projects to enable the marketing team to set a proper budget and to price the products appropriately. For example, sales and marketing expenses may add up to 3% to 5% of GDV, especially if you build a sales gallery with show units when you expect sales to be slow.

While construction and land costs are the biggest expenses, this does not mean that other cost components are unimportant. On the contrary, controlling costs on all fronts is of vital importance. However, focused effort on the biggest cost components will yield larger results, as you apply the 80/20 rule to utilise scarce management time and the resources available to achieve the best results.

Most senior management personnel are very busy with daily operational matters. The best approach is to draw up a priority list for the other cost components — apart from construction and land costs — after a careful study and feedback from various departments. Focus on the low hanging fruits which are the easiest to implement quickly and have the biggest financial impact.

While some branded developers may spend up to 5% of GDV on marketing cost, you can spend 1.5% less if there is no need to have a sales gallery and show units. One option is to put your showroom in your office. Developers with small projects typically spend less on marketing costs. Outsourcing project marketing to external real estate agencies is also becoming more popular now.

CONSTRUCTION COST

Construction cost is the single largest cost incurred in delivering completed properties to purchasers, and it can amount to 45% to 50% of GDV. For the latest cost estimates for projects, refer to JUBM and Langdon Seah Construction Cost Handbook for Malaysia which is published annually. The recent movement in foreign exchange rates has resulted in a cost increase of up to 20% for some imported items.

The construction cost per square foot of residential developments in Kuala Lumpur is also one of the lowest in this region. For example, it can be 3 times and 4.5 times more costly to construct premium high-rise residential apartments in Singapore and Hong Kong respectively than it is in Kuala Lumpur.

The major construction costs include civil and structural (C&S) works, mechanical and electrical (M&E) works, architectural works and piling works. For mid-level high-rise residential projects, C&S cost can be the highest at 30% of construction cost. For luxury highrise, residential projects, architectural cost can be the highest at 28% of construction cost. For high-end office developments, M&E cost can be the highest at 32% of construction cost. These figures are rough estimates for value engineering purposes, as each project is unique and different from one another. You can manage construction costs by simplifying the design, using reasonably priced quality materials, and choosing the right equipment and construction methods. These will be discussed in details later in this chapter.

 

Factors Affecting Construction Works

The key performance metrics for property developers include quality, time, cost and safety. The selection of reliable contractors and a capable project management team are crucial to delivering quality products within the planned timeline and budget. Upholding safety is paramount for construction and property development projects. There are many factors affecting construction works. Some of them are highlighted below.

Consultants

Ensure completeness of construction drawings. For instance, use Building Information Modelling (BIM) along the construction value chain to promote collaborative interaction among the various stakeholders. Enable the ease of construction and efficient use of resources. For example, improve buildability during the design development stage to facilitate construction through a visualisation of the building designs.

Contractors

Use suitable construction methods, technology, equipment and tools to do the work right — the first time. Adopt a “no rework” mindset — take a preventive approach instead of having to resort to corrective works. It is also important to have a safe work method statement. Utilise project management tools to handle the organising, collaborating, communicating and monitoring of work progress, issues and quality control. Employ skillful, motivated and disciplined workers.

Administrator

Undertake strategic planning of site works. For example, optimise the number of tower cranes and operators’ schedules to reduce idling time or overtime claims.

Coordinate the various contractors’ works. Coordination of the development project and the quick resolution of any issues that may arise amongst the developer, consultants and/or contractors. The handling, transportation and storage of materials. For instance, protect materials upon delivery and installation, e.g. countertops, bath tubs, sanitary ware. Carry out a post mortem session at the end of every project to establish lessons learnt and to develop best practices for future projects.

Good Project Management

Good project management during the construction stage is crucial in order to deliver the properties according to the specified product quality in a timely manner and within the approved budget. Successful project management requires the developer, project team, consultants and contractors to share the same goals for the project.

The relevant approvals, permits and requirements by the authorities must be complied with. A clear plan with the agreed responsibilities, scope of work and timeline should be utilised to monitor the progress of the project. Regular coordination meetings, effective communication among the people involved (including contractors and suppliers) and the use of project management tools are important for tracking progress and resolving any issues that may arise.

The project director and senior management team also need to support the project team to settle conflicts or disputes, reduce potential risks, maintain strong teamwork and make timely decisions to move the project forward. In short, various stakeholders must work together seamlessly to deliver the completed properties to the satisfaction of the purchasers.

MECHANICAL AND ELECTRICAL COST M&E

cost is a major expense for developers, especially for high-rise projects. Conduct a life cycle cost analysis on systems in your buildings that consume a lot of electricity and water, or that require significant cost to operate or maintain even in a good working condition. Take into consideration the downtime, loss of productivity, reputation of the building and complaints from building occupants.

Essentially, design the M&E systems for minimal and easy maintenance. Bear in mind that energy cost comprises the bulk of a building’s operating expenses over a 25 to 30-year period. Excellent technical expertise and experience in value engineering are required to carry out design enhancement initiatives to reduce redundant costs.

For a premium high-rise office development, the air conditioning and ventilation system can be the highest cost, amounting to 32% of M&E cost. However, for midrange and luxurious high-rise residential projects, the electrical costs can be the highest, amounting to 28% and 30% of M&E cost respectively. These figures are rough estimates for value engineering purposes.

Optimising M&E

Cost Building services and facilities are the systems installed in buildings in order to provide a comfortable, functional, efficient and safe environment. Such systems include air conditioning and mechanical ventilation (ACMV), escalators and lifts, fire detection and protection, water supply, drainage and plumbing, communications, telephones and ICT networks as well as security and alarm systems.

Design the building services to suit your building’s grade, type of occupants and their requirements. For instance, an office building should have certain facilities for it to operate efficiently and safely for the comfort and convenience of its occupants. Negotiate a preferential rate during the tender stage for a 5 to 10-year optional maintenance package after the defect liability period expires, especially for lifts.

 

Consider providing more sophisticated building systems to meet the requirements of the target market segment. A higher initial investment in quality systems will give you the potential to attain lower operating costs in the long run. Moreover, your upfront capital investment in building services will eventually reflect on the expected selling price of your building.

Passive Building Design

Always start with the passive building design, which is an approach to influence the building architecture to minimise energy consumption. This helps to reduce dependency on mechanical systems (or active systems such as ACMV systems) in order to maintain occupants’ comfort at all times. Passive building designs include daylighting, natural ventilation, and solar energy.

Passive design strategies have to be applied at the early stages of a development. The building orientation and façade materials are some of the earliest features to be determined. The building should be designed to face the north and/or the south; more windows can be placed on these sides. Many developers in Malaysia prefer their buildings to face south. Reduce heat gain from the sun by reducing the number of glass windows at the east and west-facing façades. The light colour external wall will absorb less heat than a dark colour wall. You also need to select the glass material for better thermal conductivity (preferably U-value < 4 and SC < 0.35).

Natural ventilation can be one of the best strategies to reduce the cooling load, which consumes the bulk of electricity in a building. Minimise the need for airconditioning and consider using natural ventilation in areas like car parks, toilets, staircases or lift lobbies, depending on the grade and requirements of the building.

Active Building Design

Active energy-efficient building design encompasses the measurement, monitoring and control of electricity consumption through the use of energy-saving devices, equipment and control systems. Focus on the system in the following section that consumes the largest amount of energy in order to achieve more savings.

Air Conditioning And Chiller System

Choosing the right type of air-conditioning system for your building is crucial. Cooling load contributes to the lion’s share of a building’s energy consumption (at least 50%). There are several types of air-conditioning systems that you can select from. Refer to Table 3.1 for an overview.

You need to consider the trade-off between higher initial capital investment against lower operational costs and vice versa. Longer operating hours such as in a hotel or shopping mall environment can result in a faster payback period. On a budgetary cost basis – RM per refrigerant tonne (RT) – a variable refrigerant flow (VRF) system can cost double that of split units while a water-cooled chiller system can cost 30% more than a VRF system. Refer to suppliers for the latest pricing due to recent foreign exchange rate fluctuations.

In addition, review chiller plant design to right-size the air conditioning system. For buildings with a high cooling load and long operating hours, consider the use of high-efficiency chillers and pumps, and variable speed drive (VSD) for chilled water pumps, condenser water pumps, and cooling tower fans. Allow zoning for temperature control because temperature requirements may vary in different areas of the building. You can increase the temperature (1 to 2˚C higher) during lunch time. Additionally, small details like the placement of the thermostat can affect the consumption of cooling energy. Place the thermostat in the right area, away from light fittings and any heat source.

ACMV Piping And Ducting

Design AHU/FCU to have an even distribution of cool air. This allows the system to use less energy if the air diffuser is working well. There are some interesting strategies that can be applied to optimise the design of piping and ducting in the air conditioning system to make it more energy-efficient. The material commonly used in piping for water distribution is pre-insulated black steel, while the use of galvanised iron (GI) with rock wool is common in the supply air duct. Seek to design your piping and ducting by balancing the initial capital investment (CAPEX) and operational cost (OPEX).

Essentially, you want to achieve the ideal range for water flow, which is between 1.8 m/s to 2.5 m/s for a 500mm pipe, for example. The basic principle is that a bigger pipe size will offer a better flow and therefore contribute to higher system efficiency. However, bigger pipes also mean higher costs.

As for air distribution, you want to achieve the ideal flow range of between 0.07 m/s and 0.1m/s (water gauge per 100 ft run). You would normally use 0.07 m/s if noise pollution can be an issue in your building. Prevent bends by having straight piping. When necessary, bending sprinklers pipe is better than bending your ducting, which operates at least 10 hours/day.

Mechanical Ventilation

Good indoor air quality is of the utmost importance for the comfort and health of occupants. Use CO2 sensor to determine the fresh air requirements. Reduce unnecessary fresh air intake because it needs to be treated. Monitor your CO2 indoors to be at the optimal level of below 1,000ppm.

Furthermore, you should install CO sensors in the car park (to keep the CO at below 90ppm) and switch on ventilation fans when necessary. Explore the use of a semi ducted design to minimise ducting length.

A good approach to avoid oversizing the mechanical ventilation system is to follow the usage-based fire size method. Calculate the potential smoke to be generated to determine the size of the smoke management system. Ideally, you would use 1.5 mw for car park and 2.5 mw of fire size for offices. An alternative and less accurate approach is the dilution method, whereby you multiply the entire car park area with 10 air change. The fire size method could potentially help you save up to 50% of capital cost by sizing your system right.

Seek to reduce the humidity in your building for the comfort of the occupants. Colder air reduces humidity, as it is dryer. However, this can come at a cost of reduced fresh air intake and higher energy consumption.

Lifts

Through lift traffic analysis, fine-tune the design of your vertical transportation system to adhere to CIBSE guidelines. Determine the suitable average waiting time and handling capacity requirements for the intended class and use of your building. Seek to increase the number of lifts in your building compared to increasing the speed of your lifts. For example, it can be more cost-effective to install 3 lifts with a speed of 4m/s than 1 lift with a speed of 8m/s. Factors such as lift car size and number of floors served are vital in deciding the type and speed of lift to use. Nonetheless, in many instances, having more lifts will decrease the net lettable area of a commercial building. Thus, you need to balance between the number of lifts and the target building efficiency.

It is good to utilise the sleeping mode function (that comes with your lift) to save energy consumption during idle time. Always remember not to use heavy stone finishes in your lift car to reduce its weight. In a mixed-use integrated development, having separate lift lobbies for each component of your building would be a necessity.

Escalators

Escalators are mostly used in retail and convention centre developments where crowd dispersibility and smooth traffic flow are crucial. The speed of the escalator is vital to ensure the comfort and convenience of customers. Use escalators with an eco-mode or energy-saving feature, especially when passenger traffic is low or zero. This can help to reduce energy cost.

It is common to use super escalators in retail developments and convention centres as the floor-toceiling height is usually more than 6m. Super escalators are more expensive than the normal escalators. Additionally, a 30˚ gradient is a preferred inclination for these escalators. Choose an electric motor with a high efficiency of IE2 class at a marginal cost increase from IE1 class, which provides a standard efficiency (IE is defined as International Efficiency).

Fire-Fighting System

A fire-fighting system and sprinklers are required in all commercial buildings, including serviced residences, in order to meet MS1910 standards. Sprinklers are not compulsory in residential buildings. Generally, the design and requirements of the fire-fighting systems have to follow the Uniform Building By-Law (UBBL) set by the Fire & Rescue Department of Malaysia. An advantage of promoting natural ventilation in your buildings is that you can reduce the installation of sprinklers. Strive for a ceiling space of not more than 800mm so that you do not have to install 2 layers of sprinklers.

Plumbing

Similarly, you can select high-efficiency pumps, such as the IE2 class, for plumbing services. The 3 common pipes found in buildings are cold and hot water domestic water pump, sump pump and ejector pump. In hot water distribution, use PPR instead of pre-insulated copper pipe, whereas in cold water distribution, use high-density polyethylene (HDPE).

Electrical

Use actual equipment selected to calculate the power requirement rather than the conventional method based on area. Choose the transformer based on total load.

200kVA is a common size with a competitive price. Many developers prefer to use cast resin transformers because it is the dry type. Oil type transformers are cheaper but are less efficient, the maintenance cost is higher and more dangerous if an oil spill occurs. Cast resin, on the other hand, is safe and smaller, and results in 3% to 4% higher efficiency. It does not cause the room temperature to be as hot as when using the oil type of transformer.

Bus duct is commonly used in retail malls and office buildings for power distribution. It is 20% more expensive than using sub-mains and it is suitable for fluctuating power usage (tenant-oriented building). Sub-mains are usually used in residential buildings, hotels, convention centres and landed houses.

Genset is crucial as it provides backup to MSC-status developments, hotels and convention centres. The most economical range for a genset is 500kVA and 750kVA. You can synchronise 2 gensets’ frequency that can fit to one sub-main, using an auto- synchroniser.

The choice of lighting is dependent on your return expectations. The use of T8 lights (compared to T5 lights) offers 40% savings and has a shorter payback period. On the other hand, LED lights save more energy, but at a higher cost, therefore requiring a longer payback period.

Car Park System

In a retail mall, it is recommended that you invest in a car park guidance system to assist drivers to locate available parking bays. Efficient traffic flow in your car park will reflect positively on the management of the retail mall. Car park system readers can be a short range in commercial buildings as it is less costly compared to long-range readers. However, you can choose to install long-range readers in your residential development car park.

Turnstiles

Turnstiles are used as part of the building security control system. Bi-direction turnstiles are more costeffective and reduce the number of lanes. Similarly, swing doors are more efficient compared to flip doors.

 

 

This article was first published in the iProperty.com Malaysia December 2016 Magazine. Get your copy from selected news stands or view the magazine online for free at www.iproperty.com.my/magazine. Better yet, order a discounted subscription by putting in your details in the form below!

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