Cost model: Small projects

Introduction

This feature provides cost models for three different building types - an office fit-out for a London professional firm, a care home and an affordable housing apartment block.

New build office construction is suffering from a lack of confidence and a scarcity of development financing. Occupiers looking for space are currently more likely to be professional or media organisations than the large financial institutions of yore.

As the population continues to age, the need for more care homes for the elderly and infirm will continue to grow. This cost model looks at the cost of providing a 50-bed unit, at the lower end of the normal project size that usually caters for somewhere between 50 and 100 beds.

Housing continues to be a political problem as the number of households in the UK continues to grow, through net immigration and subdivision of existing families. In most parts of the country house prices may still be falling but for many remain unaffordable. Last year’s Comprehensive Spending Review slashed the budget of the department for communities and local government but the government recognises the need to build more affordable housing and insists that it will continue to invest in such homes through new and improved means.

Market conditions

The construction market remains highly competitive as workload in virtually every sector has fallen sharply over the last three years.

The market forecast (28 October, page 46) found that construction prices have been fairly static during 2011 but, with workload forecast to fall further in 2012, prices in most parts of the country are likely to come under even greater pressure and some small further cost reductions are forecast. In London there may be more activity but the substantial rise in office construction that seemed likely at the beginning of the year now seems less likely to materialise so prices are anticipated to stay flat for the next 12 months.

Most contractors and subcontractors have plenty of spare capacity, none more so than at the smaller end of the market. Small and medium-sized contractors have seen workloads fall quarter on quarter for the last three-and-a-half years, according to the latest Federation of Master Builders state of trade survey. But few large firms too have much capacity committed into 2012.

Contractors specialising in public housing provision have seen improved levels of activity over the last 18 months, with construction output in that sector running at over £1bn a quarter, the strongest workloads in real terms since 1980. But most also operate in other sectors in which workload has fallen, necessitating a competitive outlook.

Office fit out

The office fit-out sector remains reasonably upbeat despite the downturn, with the South-east and, in particular, the central London market performing the strongest. Elsewhere in the UK the number of fit-out projects remains limited.

Occupiers continue to revisit their overhead costs and prefer to consolidate, with few companies having much appetite to implement growth strategies. In addition, there is a lack of new completed office developments coming onto the market and the availability of grade A space is at record low levels. Potential new landlords are reducing incentives to attract new tenants whereas, in contrast, existing landlords are increasing incentives to retain tenants.

The general preference is therefore to adopt new ways of working such as “flexible/agile working”, with a tendency to reconfigure or refurbish existing space.

The consequence of this is that there is a limited number of large fit-out projects of over 100,000ft2, although in the West End of London there is an increasing number of smaller schemes under 100,000ft2. The larger financial and corporate occupiers that traditionally undertake fit-out projects in excess of 100,000ft2 continue to take on smaller scale projects, such as refresh and restack work, as well as mechanical and electrical infrastructure schemes.

Taking account of the above, there is a tendency for the larger fit-out contractors to bid for work that they would not have historically been interested in. This has resulted in increased competition for the smaller projects helping to keep tender prices at very low levels.

The cost model is based on a notional scheme that is typical for a West End-based professional firm. The design is of a high specification, with a mixture of open planned and cellularised office use. It should be noted that the cost of internal finishes can vary considerably and is dependent on a client’s aspirations. The cost model assumes that the floor space has been taken from shell and core with a negotiated landlord contribution for the category A installation.

Other project-related costs that have been excluded are furniture, other client direct procured items, audio-visual, security installations, IT hardware equipment, staff migration costs, out of hours working, client contingencies and landlord contributions.

The office fit-out model is presented as a cost breakdown by functional area rather than in a traditional elemental format.

The fit-out is designed to provide the following areas:

(m2 usable area)
Open plan / circulation areas 1,300
Client meeting rooms 280
Client reception 80
Cellular offices 1,000
Staff meeting rooms 500
Tea points 40
Staff dining 150
Kitchen 60
Comms / data rooms 60
Ancillary areas 175
Total usable area 3,645 m2

Care home

The Office for National Statistics forecasts that the number of people over the age of 60 is to increase by 7 million over the next 25 years.

With the effects of unprecedented financial pressures affecting the provision of housing for older people through reductions in funding, withdrawal of support for housing private finance initiatives, local authority grant cutbacks, welfare reforms and the abolition of primary care trusts, the challenge of housing an ageing population is an ever-increasing problem.

Organisations need to identify housing solutions that work around government reforms to meet the demands of the challenge of housing an ageing population. It is therefore vital that local authorities, registered providers, developers and the health sector continue to develop effective partnerships and work closely to find solutions for housing and care provision for the elderly.

The cost model is for a 50-bed unit housed in a two-storey building of 3,000m2 gross floor area, including kitchen and communal areas, built in outer London. The model assumes a competitively tendered design and build contract and traditional masonry construction. However, timber frame solutions are also frequently employed at generally similar cost.

The model allows for achieving Lifetime Homes, Building for Life, Design and Quality Standards and Code for Sustainable Homes level 3. Solar panels could be added to improve the project’s green credentials but have not been included in the cost model.

Affordable housing

The Homes and Communities Agency funding allocations presented mixed news for registered providers but either way there will be an increasing demand for alternative investment models that bring value through market rent or market sale to replace the need for grant and assist cross subsidy for affordable housing.

Reform to Local Authority Housing social grant comes into effect on 1 April 2012, as the government is set to abolish the housing revenue account subsidy system and introduce self-financing for council housing. The reforms are expected to pass control of over £300bn of rental income to local authorities over the next 30 years that could free up over £50bn for new housing and improvements to the existing stock.

The New Homes Bonus (NHB) has been introduced to encourage local authorities to facilitate housing growth. Local authorities will receive a grant equal to the council tax levied on each new home for a period of six years with an enhancement of £350 per annum where the new home is an “affordable home” as defined by Planning Policy Statement 3 (PPS3). The NHB will also be paid on empty homes brought back into use as well as on student accommodation. It is anticipated that this will bring over £1bn into the sector over the next six years.
According to the communities department, 60,630 additional affordable homes were supplied in England in 2010-11, the vast majority of which were new build. This was a 5% increase on the previous year, the highest number since 1995-96 and an 84% increase over the lowest number in 2002-3 and there has been steady year-on-year growth. Since then the majority of the schemes have been built through the HCA. Unsurprisingly, the number of affordable homes delivered through Section 106 agreements has plummeted since 2007-8 as private housebuilding starts have halved.

The Homes and Communities Agency aims to invest £4.5bn in affordable housing through 2011-15 through the affordable homes programme (AHP) and previous commitments. The HCA announced in July details of the successful bidders who they expect to deliver the first 80,000 homes under the AHP. The majority of these are in London and the south of the country.

Previous cost models in this series have presented costs for two-storey, two and three-bedroom houses. For this reason this model is for a three-storey apartment block providing 18 one and two-bedroom apartments. It is assumed that the block is part of a larger development providing a mix of housing types. The flats are assumed to be for social rent rather than low cost home ownership. The model uses traditional masonry construction but a timber frame could be used at similar overall cost.

The scheme will comply with the requirements of the Housing Corporation’s Design and Quality Standards and assumes a design to Code for Sustainable Homes level 3. In the first three months of this financial year, 76% of dwellings issued a certificate under the Code for Sustainable Homes were code level 3. To achieve code level 4 may incur additional costs of about £4,000 a flat.

The costs assume a competitively let design and build contract in outer London.

Affordable homes programme 2011-2015

HCA operating area : Total affordable homes

East and South-east: 14,432
London: 21,856
Midlands: 13,545
North-east Yorkshire and The Humber: 8,135
North-west: 9,311
South and South-west: 12,721
Total 80,000

Cost adjustments

All the models exclude the cost of demolitions, site preparation, abnormals, external works loose fittings and furniture, professional fees (except where stated) and VAT. The figures in all three cost models represent competitive 4th quarter 2011 costs. The office fit-out cost model has a central London location while the care home and affordable housing ones are modelled on an outer London location. The costs can be adjusted to other regions by using the following indicative location factors (it should be remembered that costs within a region can also vary quite widely):

Location Factors

Inner London 1.07
Outer London 1.00
South-east 0.99
South-west 0.97
East Midlands 0.93
West Midlands 0.92
East Anglia 0.98
Yorkshire and Humberside 0.95
North-west 0.92
North 0.90
Scotland 0.95
Wales 0.91
Northern Ireland 0.70