Direct Costs
In the field of cost estimating, the direct costs can be defined, in a simplistic way, as all the costs associated with construction activity. If we perform the activity, we incur the costs and vice-versa. Only the resources allocated to construction activities are considered direct costs. Let’s say that we have an excavator to perform excavation on-site in an activity with a quantity and a production rate; the excavator is considered a direct cost. If, on the other hand, we have a bulldozer on the site that is servicing the site (maintaining proper drainage, access roads, granular material stockpile, etc.), the bulldozer will be an indirect cost.
The direct costs fall into one of the following categories:
- Labour
- Permanent material and equipment
- Temporary construction material
- Construction equipment
It is interesting to mention that item 3 above, temporary construction material, can be both direct or indirect cost. If the temporary construction material is only used as a resource for an activity, then it is classified as a direct cost. If, on the contrary, it is allocated to many different activities concurrently, then it should be an indirect cost.
For example, we have scaffolding for access to build a concrete column. We will use the scaffolding to install the formwork and the reinforcing and place and finish the concrete. We will not prorate the cost of scaffolding to allocate it to the many activities we use it for. We do not follow this practice because we cannot precisely determine how much to allocate to each activity. This is important because we need to allocate accurate costs for each activity.
Things get complicated when we act on conceptual and capital cost estimating. Depending on the Project Owner, the definition of direct costs for a capital cost estimate differs from one Owner to another.
Some Project Owners prefer to list all construction costs as direct costs of a capital cost estimate. The construction direct costs are the contractor’s total costs, including the contractor’s indirect costs and profit. Other Project Owners consider the contractor’s indirect costs and profit as indirect costs of a capital cost estimate. It can go even a step further, defining direct costs as all costs associated with the construction of a facility that is incurred on-site.
All approaches are correct from the cost estimator’s perspective. As long as all the required costs are included in the cost estimate once complete, there is no need for debate. It is recommended to clarify the definition of direct costs with the Project Owner early on. This is particularly important if the estimating method used is the unit rate. Most unit rates in a database include the contractor’s indirect and profit costs.
Estimating direct costs is possible using the unit rate or bottom-up cost estimating methods. For cost estimates with very limited design information (1% to 20%, depending on the type of project), we will need to use factored or parametric cost estimating methodology. Extracting the direct costs in a cost estimate that was developed using the parametric or factored methodologies is not required. At that phase of project development, there would be no requirement for a cost breakdown into direct and indirect.
If, for any reason, there is an interest in the direct costs only (validating a high-level construction duration, for example), it can be done with a low level of accuracy. For the experienced cost estimator, the direct costs can be determined using a factored cost allocation per type of project.
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