Last Updated on July 8, 2022 9:48 pm by Editor
Construction is the one industry in Barbados where you can be assured of a rip-off. In this instalment, we look at construction cost estimation which begins at the point of application for a mortgage.
Until we were convinced by banking interests to borrow to build, Barbadians did their building a little at a time; they started in the back, moved to the “shedroof” then the “front house”; in other words, moving forward poco a poco.
With the advent of consumer banking, Barbadians joined the rest of the consumer world in taking on hefty mortgages with long pay back periods: 10 to as much as 30 years.
Strategically, this provided an opportunity not only for the banks but for all of the “related and supporting industries”, to use a Michael Porter phrase. The list includes quantity surveyors, artisans, full-service construction firms, hardware and specialist building suppliers (e.g. tile retailers) as well as the infamous contractor.
The fundamental problem with the construction industry is that it is highly politicized and at the same time, under-regulated.
As a result, interests in the construction industry have organized around their specialty and there is a measure of tacit collusion between vertical specialties. In this first instalment on the construction industry, we take a look at the top (or bottom depending on your perspective) of the pork barrel.
Quantity Surveyors
If you are planning to take a mortgage to build, the first shock you get – after dealing with stress of Town & Country Planning – is with quantity surveyors (QS).
The bank will ask you the client to get a valuation on the construction cost of the property you have had designed. For this purpose, you will be presented with the bank’s preferred list of quantity surveyors.
For the record, quantity surveyors and land surveyors are not the same. Quantity surveyors deal with the costing of construction such as buildings and bridges whereas land surveyors, as the name suggests, deal with the mapping and quantification of land .
The fact that the bank issues these instructions suggests that there are quantity surveyors and quantity surveyors! In other words, one can assume that part of the reason for the bank’s stipulations is perhaps due to their experience of finding themselves in the invidious position of having the actual construction cost exceed the estimated building “cost” as provided by a QS.
Whether that was due to incompetence of the part of the quantity surveyor or the QS trying to “help out” the mortgage applicant, the effect was the same. That has its own implications for the internal operations of the bank but we will not discuss those here.
The following is an extract about quantity surveyors from page 11 of the FTC (Fair Trading Commission) document “The Construction Industry: Its Impact on Consumers” (2014)
As we said earlier, there is minimal government regulation of quantity surveyors in Barbados. In the absence of a proper system of regulation, quantity surveyors have done what is expected: organize themselves to pursue their own interests.
One of the main areas in which the impact of that organization has been felt is in the level of fees charged to clients; in the case of a mortgage, this refers to the potential mortgage client of the bank.
But what is even more interesting is the methodology employed by quantity surveyors to arrive at a construction cost for your dream home. The foregoing FTC excerpt implies that the quantity surveyor uses a particular methodology – “Bill of Quantities” (BOQ) to measure “the cost of the construction work”.
Our thesis is that no such methodology is used in providing bank clients with estimates of cost of construction!
Let us begin by defining the concept Bill of Quantities. According https://engineeringcivil.org/ a Bill of Quantities is a document formulated in the construction industry to specify materials, labour, and their cost. A very basic BOQ therefore, looks something like this.
We will center our discussion on an actual QS document. Click here to see a redacted version of a paid-for QS document by a local quantity surveyor.
If you are shocked by the method used to arrive at a cost for the construction of this house, welcome to the club! So were we! If you thought that the QS was going to actually sit and estimate the cost by calculating the cost of every single piece of material and for every hour of labour as we implied in the demo BOQ you are mistaken but commiserations!
Cost versus Value
If you google the term “quantity surveying methods” you will note that there are at least four different ways of estimating the cost of a project. We recommend that the reader do this. It is not important to understand those methods in any detail.
Part of the reason why you may be shocked at the methodology employed in the actual QS document is because it is not just a costing document but a property valuation document. In point of fact, it is more of a valuation document than a survey of construction costs!
To help you understand and appreciate this point, we are going to introduce you to some very basic cost/valuation concepts. In accounting, the cost of assets (for example, a building) can be valued on at least four different bases:
- historic cost,
- replacement cost,
- book value and
- market value.
A simple illustration should clarify the differences:
Historic Cost: You buy a vehicle for $40,000. That is called its historic cost.
Book Value: Four years later, because of depreciation, wear and tear etcetera it is valued at $32,000. This is because $2000 is being deducted for depreciation each year; in other words, $8,000 over the 4 years. Hence, the book value of the vehicle is (40,000 – [2000 x 4]) or $32,000.
Market Value: Meanwhile, at the end of the four years you attempt to sell the vehicle only to find that the average asking price of a similar vehicle is $26,400. This is a measure of the market value of the vehicle. In this case it is below the book value. Sometimes the opposite occurs.
Replacement Value: The fourth value is the replacement value. This is what you would have to spend to buy a new vehicle of the same type and quality, not necessarily the same brand. In this case let’s say the replacement cost is $62,000.
Take a look again at the QS document we showed you earlier and this time notice how the QS arrives at the “cost” of construction. Note the expression “construction/ replacement cost”.
Take note also of the following points:
- The BOQ method is not applied at all in these calculations! What these quantity surveyors do is call up a price called “building cost per square foot” and in some cases, use it to prorate the value they have already worked out to make it look as though a real BOQ was performed. Nobody knows how this cost per square is arrived at. There is no individual or organization that collects and analyzes these construction costs. If there is, it is only known to the quantity surveyors!
- The value of the land is added into the valuation of the house. Presumably, if the house is destroyed by fire you will have to replace the land too! In the actual conversation with the QS who did this valuation, the justification used was that this is done to take into consideration having to look for land in another location. My thought back then (as it is now) was: “So I must be Queen Nefertiti, then!”
- Note that the “value” of similar houses nearby is factored into the determination of the “cost” of your project. Now that you know there are four different values that can be placed on a property, the questions that arise are (i) which one applies to the nearby properties? (ii) from where did the quantity surveyor get those value?
- Finally notice that what you pay for this valuation is based on the overall value of the property. But this value includes the cost of the land which is not part of the cost of construction of the house itself! The FTC stipulation for quantity surveyor charges is either erroneous or out-of-date. In actual practice quantity surveyors charge on a sliding scale. This is the scale that was used in the valuation to which we have been referring. If you figured that the charge should have been $881.25 rather than $998.75 which was actually paid, you have been tracking!
Conclusion
Since the so-called “cost of construction” provided by quantity surveyors is obviously inflated, it means that all other things being equal, the client will have to make a larger down payment (if one is required) and /or borrow more money either of which favours the bank.
In other words, when you look at it carefully, the potential house owner is going to get screwed or ripped off just at the very beginning of the construction process! Take your pick!
Moreover, after receiving the mortgage, the client now has to get a real BOQ construction cost estimate which can be pricey. The alternative is to hire a contractor who is going to hire a quantity surveyor who will use the same cost per square foot measure and valuation described above! Therefore, you end up paying an inflated price to build your home.
Everybody else wins except you! There is no reason why the house in question could not have been built for at least 100,000 less! That is a lot of money to save! Of course, we have a lot of people around who like boast about how much it costs to build their house. There is no accounting for ignorance!
In the sequel to this (Part 3) we will have much to say about contractors and how you can pay less to build your dream house; that is, if you don’t have money to throw away!
