A robust development appraisal holds the key to a financially successful property development project. In this article we explain why it's so important and...Read more +
How to produce an Order of Cost Estimate
Producing an OCE for an initial Development Appraisal or to determine Site Residual Value
In this article, we looked at how effective cost management was dependent on the consistent use of the correct terms throughout a project. This included what an order of cost estimate is and what information is needed to prepare one.
The order of cost estimate is such an important tool used to assess the affordability of a proposed development, that it’s worth looking at in more detail.
What is an Order of Cost Estimate?
Order of Cost Estimate (OCE) is a term using by the Royal Institution of Chartered Surveyors (RICS) under the New Rules of Measurement, specifically NRM 1 for capital building projects.
An OCE is prepared as an intrinsic part of RIBA Stage 1: Preparation and Briefing. The purpose is to establish if the proposed building project is affordable and if so, to set a realistic cost limit for the development project.
The cost limit is the maximum amount that the employer is prepared to spend in relation to the project.
NRM1 recognises three estimating methods. These are:
- floor area method;
- function unit method (i.e. per house type);
- elemental method.
The key constituent parts of an Order of Cost Estimate are:
- Facilitating Works (i.e. demolition of existing buildings, contamination removal etc.)
- Building Works
- Main Contractor Preliminaries / Construction Management Site Services and Facilities
- Main Contractor’s OH&P or Construction Management Fee
- Project and Design Team Fees
- Other Development Costs (i.e. land acquisition costs, planning fees, building control fees, CIL contributions etc.)
- Risk Allowances / Contingency
- Tender and Construction Inflation
Now you have a good understanding of what an Order of Cost Estimate is, let’s look at a worked example.
Order of Cost Estimate Worked Example
A developer is looking to construct 12 houses in a linear design with a mix of four- and five-bedroom detached homes in Chelmsford, Essex.
The Gross Internal Area of the 12 units is 2,700m2 and the overall site is 13,000m2.
The developer is looking to achieve a high price for each property contributing to a £8.7m Gross Development Value (read more about that here).
The properties have integral garages and driveways for two cars to the front of the property. The remaining frontage and rear gardens are soft landscaped.
There is an access road of approximately 100m, which runs parallel to a main road and is connected by a small bell-mouthed entrance.
The site was previously used for agricultural use and comprises eight outbuildings, incoming electricity and water. The site is relatively flat but is overgrown with grass, brambles and shrubbery.
In order to work out a ‘rough’ order of cost estimate that will inform a development appraisal for either meeting funding criteria, or for a selling agent to determine the residual site value, the area method is adopted.
The following worked example base date is the second quarter of 2020 (2Q20) with no allowance for tender inflation, construction inflation or value-added tax (VAT). Due to the higher specification finishes required, upper quartile cost data for Chelmsford, Essex has been used.
|1||Facilitating Works Estimate|
|Demolition of eight outbuildings, allowance @ £5k per building||40,000||14.81||1.38|
|Strip vegetation and level site||5,000||1.85||0.17|
|2||Building Works Estimate|
|Plots 1 – 12 (using upper quartile data), 2700m2, base date 2Q20||3,847,500||1,425.00||132.39|
|Access Road 6m wide, 100m long||81,180||30.07||2.79|
|E/O for NR&SWA to connect entrance||10,000||3.70||0.34|
|SUDs and drainage||40,000||14.81||1.38|
|Hard and soft landscaping||120,000||44.44||4.12|
|3||Site Facilities and Site Services Estimate|
|Construction Management Preliminaries @ 12%||497,242||184.16||17.11|
|4||Construction Management Fee Estimate|
|(or alternatively use Main Contractor overhead & profit) @ 5%||232,046||85.94||7.98|
|Works Cost Estimate||4,872,968||1,804.80||167.66|
|5||Project / Design Team Fees Estimate|
|Project/Design Team Fees plus surveys @ 9%||438,567||162.43||15.09|
|6||Other Development Cost Estimate|
|(excluded – to be included in Developers appraisal i.e. building warranty, S106, etc.)||Exc||Exc||Exc|
|Base Cost Estimate||5,311,535||1,967.23||182.75|
|7||Risk Allowances Estimate|
|Design Development Risk Estimate||265,577||98.36||9.14|
|Construction Risk Estimate||265,577||98.36||9.14|
|Employer Change Risk Estimate||Exc||Exc||Exc|
|Employer Other Risk Estimate||Exc||Exc||Exc|
|Cost Limit (excluding Inflation and VAT)||5,842,689||2163.95||201.03|
What does this example of an Order of Cost Estimate mean?
Based on the information available at this early stage, the cost limit for the planned development in our example is £5.85m (rounded).
However, it’s important to remember that there is no provision for inflation and a number of exclusions have been noted. This means that the actual cost limit may be higher, and more accurate figures will be developed as the project is developed.
Exclusions such as those shown in Section 6 of the Order of Cost Estimate example, are largely in the control of the developer/employer and should be included in the overall development appraisal. More control can be exercised over the exclusions noted in Section 7 (this section may be more commonly recognised to a lay-person as the contingency) although allowances must still be allowed.
A comprehensive Order of Cost Estimate, prepared during the early stages of establishing project viability, will provide a reliable cost limit for the project and allow the developer to demonstrate the margin that can be achieved.
With robust allowances being made for abnormals, design development and issues such as unavoidable delays, the developer will be able to enter into the project with the full backing of well-informed lenders and/or investors.