CA3214 Construction Economics
Week 1 - Introduction
Dr. Mingzhu Wang
BSc, PhD, FHEA
Assistant Professor
Department of Architecture and Civil Engineering
City University of Hong Kong
Email: [Link]@[Link]
Outline
• Course Introduction
• Client Needs
• Development Types
• Development Process
• Overview of Cost Plan and Control
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About this Course
• Construction Economics explores the economic
principles behind planning, procuring, and executing
construction projects.
• It teaches how cost influences decisions across the
project lifecycle—from the client’s initial objectives to
design choices, procurement strategies, budgeting,
cost control, and beyond.
• Students learn to analyze client needs, design with
cost-effectiveness in mind, manage budgets, and
assess procurement methods
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About this Course
ØAnalyze Clients’ Needs & Motivation
• Understand why clients commission projects
• what are their goals, constraints, and motivations?
Learn to interpret those needs to guide economic
decisions across the project lifecycle.
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About this Course
ØExplore Cost Implications of Design and
Construction
• Study how design decisions (e.g., choice of
materials, structural systems) and construction
methods (e.g., prefabrication, modular build)
affect costs.
• Learn to evaluate these factors in economic
terms.
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About this Course
ØMaster Key Economic Tools & Techniques
• Pricing and cost estimating (preliminary to
detailed)
• Procurement strategies
• Tendering processes
• Cost planning and budgeting
• Project cost control and monitoring Construction
• Life-cycle and cash-flow cost modelling stage
These are essential quantitative tools to manage
and forecast costs effectively
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About this Course
ØCritically Appraise Procurement Systems
• Examine different procurement approaches (e.g.,
Traditional, Design & Build, Management
Contracting)
• assess how they influence project success
• understand principles guiding their selection and
application.
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Course Outline
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Course Outline
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Introduction
Construction economics:
• Consists of the application of the techniques and
expertise of economics to construction projects.
• In general is about the choice of the way in which
scare resources are and ought to be allocated
between all their possible uses.
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Introduction
Objectives:
• To secure cost-effectiveness for the client
• To identify and to evaluate the probable
economic outcome of the proposed
development
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Introduction
• Analysis may be evaluated in the following terms:
ØTo achieve maximum profitability from the
project concerned
ØTo minimize construction costs within the
criteria set for design, quality and space
ØTo maximize any social benefits
ØTo minimize risk and uncertainty
ØTo maximize safety, quality and public image
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Client Needs
Who are the Clients?
• An occupier
• A property company
• An investor
• Local authority
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Client Needs
What are an occupier’s needs?
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Client Needs
What are an occupier’s needs?
• An occupier’s need is to provide a building:
– best suited to their particular needs
– carry on their business
• Motivation: function, efficiency, comfort, image.
• Profit is indirect, through better operations,
productivity, or brand value.
• Less concern for resale market value
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Client Needs
What are a property company’s needs?
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Client Needs
What are a property company’s needs?
• Prime objective is to make a direct financial
profit from development
• Develops to sale or lease
• May specialize (residential, office, hotel, industrial)
• Profit is quantifiable and central — if profit margin
too low, project is abandoned.
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Client Needs
What are an investor’s needs?
• Looks for long-term returns (rental yield, capital
appreciation).
• Decisions based on financial modelling, risk, and
ROI.
• More sensitive to market cycles than occupiers.
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Client Needs
What are the Local authority’s needs?
• Examples
– Housing authority
– Hong Kong Hospital authority
– Airport authority
• Objective is different from property company:
– Public accountability
– Needs of the community
– social welfare, safety, accessibility,
sustainability.
• Cost-effectiveness ≠ profit, but value for money
and accountability.
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Development Types
• Profit development
– Profit making
• User development
– e.g private house, office
building / factory for a large
corporation
• Social development
– It is usually in the publicly
funded sector
• Mixed development
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Development Types
Profit development (private developer / property
company)
• The only purpose is to make a profit
(quantifiable).
• If adequate profit cannot be foreseen, the
development will not be undertaken
• Once a final decision has been made on income
levels, the cost will have been determined and
must not be exceeded.
• If the expected profit is not made, the project will
be a failure from the client’s point of view
Ref: (cost planning of buildings – Douglas j. Ferry) 21
Development Types
For social development
• Public sector (Schools, hospitals, police stations)
• Social benefit (unquantifiable)
• Cost is not a clear-cut measurement of the
effectiveness of the project
• Cost planning can only help to improve the
effective funds allocation; Improve the
accountability in the expenditure of the public
money.
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Development Types
User development
• Client builds for own use
(e.g. factory, office HQ,
private house).
• Motivations: operational
benefit, image,
efficiency.
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Development Types
Mixed development
• Combines different objectives (profit + social +
user).
• Examples:
ourban renewal
opublic-private partnerships
oairport cities.
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Development process
Property development:
• an industry that produces buildings for
occupation by bringing together various raw
materials of which land is only one. Others are
building materials, public services, labour,
capital and professional expertise.
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Development process
Construction industry :
• One of the main pillars of H.K.’s economy
• Accounted for 6.3% of HK GDP (in 2023)
• Employs over 630,000 site workers (as of 2023)
• Employment level for the building and
construction is over 400,000, including the
professionals as contractors, engineers,
consultants, surveyors and other construction
related professionals.
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Development process
The development process may be divided into four
phases:
• Evaluation
• Preparation
• Implementation
• Disposal
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Development process
Evaluation
• Evaluation encompasses :
o Analysis of the market – market research
o Financial assessment of the project
• Evaluation should be carried out before any
commitment is undertaken (developer can
retain flexibility)
• Evaluation involves the combined advice of the
development team and the developer; decide to
go ahead or not (bear the risk or not)
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Development process
Implementation involve: (Refer to the RIBA
work plan)
• Preliminary design stage
• Detail design stage
• Tendering stage
• Contract award stage
• Construction stage
Source: [Link] 29
work?srsltid=AfmBOoroof0ZC0UFAaoOPSR11FZB16fKGeLQ8bWdeXcHXPdCHGCKtMZR
RIBA work plan 2020
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RIBA work plan 2020
Procurement is the strategic process of acquiring all
necessary goods, services, and resources, including
materials, equipment, and labor, to successfully
complete a construction project.
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Development process
Disposal
• The development can be either :
• Sale, or
• Lease
Process involve:-
• Selling strategy
• Financial arrangement
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Overview of Cost Plan and Control
INCEPTION PRE-CONTRACT CONSTRUCTION
Influence Decision Influence Cost, Risk Maximise Return on
to Build & Reliability Investment
• Cost planning • Payment admin
• Development • Risk management • Cash flow forecasting
appraisal • Value engineering • Cost reporting
• Strategic advice • Procurement strategy • Agreement of final costs
• Design economics • Taxation advice • Negotiation of capital
• Development • Tender and contract admin allowances
strategy • Planning/programming
• Specification writing
Overview of Cost Plan and Control
1. Initial (Order- 2. Outline Cost Plan 3. Detailed Cost 4. Pre-tender
of-Magnitude) elemental cost Plan Estimate
Estimate breakdown refine elemental check technical
based on (substructure, cost, include details,
functional unit superstructure, preliminary specifications, and
costs (e.g., finishes, MEP). allowances, risk drawings against
HK$/m²) Ensure concept fits contingencies. budget.
Test affordability budget. Check design Form basis for tender
and viability development stays pricing.
within cost limits.
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Overview of Cost Plan and Control
5. Cost Control 6. Final Account 7. Post-Project
monitor contractor’s agree on contract Cost Analysis
interim valuations, sum, settle benchmark actual
variations, claims. variations, finalize cost vs estimates,
Update cash flow costs. feed back into
forecasts. future projects.
Keep project within
agreed budget.
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Pre-contract Cost Management
Project brief and development appraisal
Cost Plan
Design Economics
Cost Advice
Cost Planning Process Tendering
Pre-tender estimate
Tendering process and evaluation
Contract
Finalization of the Contract award award
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Summary
• Client Needs
• Development Types
• Development Process
• Overview of Cost Plan and Control
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