ANNEX 4.

5 CONSTRUCTION COST MODULE

1 EXECUTIVE SUMMARY
1.1 General
Unit rates development is based on the Bill items as listed in the respective sections of the
Standard Specification for Road and Bridge Construction (1986) of the Ministry of Transport and
Communication.

1.2 Rates
The unit rates have been derived by considering each item in the Bill of items as an individual
activity, specifically or broadly covered in the contract specifications, and costing inputs required
for completing the activity. The cost components are plant, labour and materials including
associated on- and off- site overheads.

Unit rates adopted for dayworks Bill of items is a reflection of the estimated hire rates for
construction plant/equipment and direct costs of various materials and labour categories. These are
normally utilised, for varied works at short notice, for short durations, which the contractor may
not have mobilized at the start or convenience of a contract.

The methodology used in the derivation of rates is covered in section 3 of this report. While
reasonable efforts have been made in the unit rates derivation, the limitation of this method in
realizing the unit rate has to be appreciated.

1.3 Plant and Equipment

The cost of plant and equipment input for each activity is based on evaluated owning, operating
and running costs. It is assumed that all the plant and equipment are to be imported into the
country for the project.

1.4 Materials
The materials normally required for a project, with the exception of a few selected items not
manufactured in the country are sourced locally. The cost of locally manufactured material and
processed materials such as cement and bitumen, have been determined on the basis of finished
product cost, as per quotes from vendors including transport, other handling expenses at the site
and wastage together with an additional expense to cover for overhead charges and profit. In the
case of the large volume materials that can be produced on site, such as surface dressing chippings
for aggregates and concrete works the cost of production and associated handling charges has also
been taken into account.

1.5 Labour
The labour costs including for the works supervisors and management are assumed to be local. The
cost of labour employed on dayworks basis is based on the expected wage rates, transportation and
other costs the contractor might incur in the employment of labour as well as overheads and
profits.

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2 INTRODUCTION
2.1 Background
Unit rates have been determined using basic cost elements, i.e. labour, materials, plant and
equipment, tools, overheads, on-site costs, profits, etc. for each work item. The unit rates derived
have been compared with rates from recently tendered projects of similar nature in Kenya, and
adjustments have consequently been made to some of the derived rates as necessary.

2.2 Source of Information

2.2.1 Labour Rates
These have been obtained from the Memorandum of Agreement between Kenya Association of
Building and Civil Engineering Contractors and Kenya Building, Construction, Timber, Furniture
and Allied Industries Employees Union which have to be in conformity with the stipulations of the
Employment Act (Cap 226).

However, the contractor is not obliged to go by these minimum rates and, for the sake of
motivating his labour, may opt to pay higher wages. These unit rates, however, have been based on
the minimum labour rates on the premise that, to achieve a competitive bid, the successful bidder
cannot afford to inflate the direct costs for which labour is one.

2.2.2 Plant and Equipment

Details regarding plant cost and productivity have been obtained from M/s Mantrac Kenya Ltd, the
local franchise holder for Caterpillar machinery. Information on Aggregate Crusher and Bitumen
Distributors has been obtained from the respective manufacturers in Britain. For other items of
plant, the relevant information was obtained from dealers/agents based in Nairobi.

Prices of Engineer's office equipment and furniture, survey and laboratory equipment, and
furniture and accessories for staff houses as well as factory-processed construction materials have
been obtained directly from suppliers based in Nairobi.

2.2.3 Taxes and Duties

The applicable rates of Customs Duty and Value Added Tax for the respective items have been
obtained from The Customs and Excise Act Chapter 472 as published by the Government Printer,
Nairobi. For items of plant whose ex-factory cost was obtained from the manufacturers overseas,
the cost, insurance and freight( CIF) was obtained by adding the freight and insurance cost from
reputable shipping agents.

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3 METHODOLOGY
3.1 General
The assignment covers the derivation of unit rates of various road construction activities from the
first principles. Description of the various bill items is based on the methods of measurements used
in standard specifications for Roads and Bridges (1986)

3.2 Methodology
3.2.1 Background
The methodology adopted in deriving these rates involves the summing up of the basic inputs
required for each work item. Each item in the Bill of Quantities is taken as an activity that utilizes
one or a combination of resources namely: equipment, materials and manpower. The derived basic
unit cost for each activity or work item is then factored to include fixed and variable overheads,
on-site expenses, general tools and profits.

3.2.2 Plant Owning and Operating Cost

The cost estimate for the construction equipment is based on rental charges per hour. Two
independent aspects which make up the cost: owning cost and operating cost have been
considered. Labour and material costs have been added to obtain a unit rate for an item of work.

3.2.2.1 Owning Cost

A) Cost of Capital
It is assumed that the contractor is hiring new/existing company owned plant or hiring
plant from external sources. An interest rate of 13.5 % the expected opportunity cost has
been used to determine equipment owning cost. This rate is considered reasonable
because, the 91-day Treasury bill rates normally used as the lending benchmark were on
upward trend for the most of year (2008) averaging 9%.

B) Insurance Cost
The plant owning cost build up has included 6 % insurance and License cost based on the
market value of the equipment.

Private vehicles (similar to those proposed by Engineer's supervision team) comprehensive

insurance varies between 6 - 10 % of their market value and if a fleet is insured there is a
discount. In our case, this view is taken into account and as such a rate of 7.5 % has been
adopted covering vehicle damage, third party property damage, third party injuries, among
others.

C) Residual Value
The resale value is undoubtedly a crucial factor in determining the plant owning cost. It
goes without saying that the higher the resale value, assuming no inordinate capital
expenditure during the machine’s useful life, the better it is for the contractor since this
directly translates to low hourly depreciation charges and low hourly owning costs. This is
significant as it improves the competitive position of the contractor.

The depreciation cost has been included in the machine owning cost and the hourly rate
derived is based on simple straight-line analysis for the number of years or hours the
contractor is expected to use the machine gainfully.

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3.2.3 Operating Cost
3.2.3.1 General
The operating costs incorporated in the applicable rates include Maintenance costs, fuel/lubricant
costs, and costs for minor spare parts as well as operators/drivers wages. Costs for major
replacement such as machine overhauls have not been considered, as they are capital costs.

Maintenance costs, fuel and lubricant consumption rates have been obtained from operating
manuals of respective plant and equipment and vendors as well as past site data.

A) Tyre Cost
Tyre costs are an important part of the hourly cost of any wheeled machine. Since the best estimate
of this item is actually obtained through actual experiences with machine operations at the site, and
depends on uniqueness and the severity of the site in question, the length of tyre life (in hours)
used are estimates from manufacturers and tyre dealers. The estimates range between 3000 to 6000
hours with 5000 hours being adopted. The main assumption in this case is that tyres shall wear
normally at the treads through abrasion; the possibility of premature failures - through rock cuts,
rips, and irreparable tears caused by jagged stumps - has been ignored.

B) Labour to Operate Plant and Equipment

Labour that is required to operate the item of plant or equipment is work input and has been
included in the plant operating cost. Supporting labour to assist in the operation of plant/equipment
and manning workshops/stores has been covered under overheads.

3.2.4 Materials
The cost of materials (tax/duty exempt as well as inclusive) has been obtained directly from
vendors and manufacturers. The cost of some materials produced on-site such as aggregates and
chippings have been determined using basic cost parameters conjunctive to the production plant
and/or equipment (e.g., jaw crusher). Significantly, the cost of manufactured or factory-processed
materials has been taken to be the bulk cost that any contractor would opt for in order to reap the
benefits of the economies of scale in production.

3.2.5 Overheads
Overheads for the project have been estimated to be 13 %

3.2.6 Profit
A profit margin of 13.5% has been allowed based on the opportunity cost of capital in Kenya.

3.2.6.1 Variable Overheads

The general site overheads costs comprising of wastage and efficiency have been built into the
applicable unit rate as follows.

3.2.6.2 Wastage
All construction projects have an element of wastage, which include losses of construction
materials as a result of damage or spoilage during Transportation, storage, handling and
application. Therefore an index for wastage will be included to hedge against anticipated wastage.
Wastage of 2.5 % has been used selectively on items which are considered to have high proportion
of material content.

3.2.6.3 Efficiency
Individual sections of construction can achieve high levels of efficiency .However; the capacity to
translate this aspect to all sections simultaneously is another matter. The overall efficiency of the

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site at any instance can and will affect the productivity. It is anticipated that an experienced firm
can achieve and maintain an overall site efficiency of 85% at any time during the construction
period.

3.3 Dayworks Rates

3.3.1 General
During project implementation the Engineer has discretion to order in writing that additional or
substituted work be carried out on a daywork basis for reimbursement of costs, if in his opinion it
is necessary or desirable.

Generally, the additional or substituted work by its nature or amount relative to the original work
may be small, thus the day work rates may not have direct relationship with work items BOQ (Bill
of Quantities) rates.

3.3.2 Construction Equipment

The dayworks rates for plant and equipment have been derived from first principles putting into
consideration the Owning and Operational costs of the construction equipment. The derived rates
have been adjusted to allow for the additional costs for transport of the plant to site, local cost for
fuel, lubricants and contractors Profits and overhead costs.

3.3.3 Materials
The rates for materials have been calculated on the basis of the invoiced prices, transport, other
handling expenses at the site, and wastage together with an additional expense to cover for
overhead charges and profit.

3.3.4 Labour
The cost for labour employed on dayworks basis has been obtained on the basis of the amount of
wages paid, transportation and subsistence allowance plus costs of inconvenience the contractor
can be expected to incur in the employment of labour as well as overhead and profit.

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4 CONCLUSION
Civil Engineering works are procured and compared effectively through tendering process. The
variations in tender offers are caused by different perceptions of the works, the abilities of the
tenderers to mobilize and utilize resources and the terms and conditions under which the payments
are to be made.

In general, the factors considered by tenderers will include (but are not restricted to) the level of
construction activities, investment risk, the company’s workload and the location of the project.
Others are availability of the construction equipment, human and capital resources of the firm,
availability of the construction materials, and the flexibility in financing the project whilst awaiting
payments.

Every bidder will consider these factors and many others in the preparation of their tender .It
should be noted that, the eventual contract rates will depend on many variables, and attention is to
be given to the conditions prevailing on each project and the levels of incentives operated to
achieve the particular Specifications of the respective project roads.

Moreover, Contractors would tend to make bids that hedge against inflation trends, delayed
payment and overall financial/cost instability of the company hence it is necessary to take great
caution in the assessment and comparing of rates published in different tender documents.

The derived rates are based on optimal use of resources without speculation. These are subject to
change depending on whether the equipment is owned by the tenderer or it is hired and the
vibrancy of the equipment hire market.

5 MODEL
A comprehensive unit rates spreadsheet model is available from the Consultants.