Tutorial: Understanding Preliminaries in Construction for Cost Accountants (CAs)

As a finance manager at a large general contractor (GC), it’s critical to ensure that cost accountants (CAs) understand the concept of preliminaries in construction projects. Preliminaries are often a significant portion of a project’s budget and can make or break profitability if not managed correctly. This tutorial provides a comprehensive explanation of preliminaries, their importance, and detailed examples across various construction project types. It includes tables for clarity and practical application.

What Are Preliminaries in Construction?

Preliminaries, often referred to as "prelims," are the indirect costs associated with setting up, managing, and maintaining a construction project that are not directly tied to specific construction activities (e.g., pouring concrete or installing windows). These costs are essential to facilitate the project but are typically time-related and cover the general operational and administrative requirements of the site.

Preliminaries are included in the project’s tender or bid documents and are usually expressed as a percentage of the total project cost or as a lump sum. They encompass:

• Site establishment

• Management

• Temporary facilities

• Other overheads required to execute the project efficiently

Key Characteristics of Preliminaries

• Time-Based: Many preliminary costs are incurred over the duration of the project (e.g., site office rental, staff salaries).

• Project-Specific: Preliminaries vary depending on project size, complexity, location, and duration.

• Non-Physical Works: Unlike direct costs (e.g., materials, labor for construction tasks), preliminaries support the project’s operational framework.

• Critical for Budgeting: Misestimating preliminaries can lead to cost overruns or underbidding, impacting profitability.

Why Are Preliminaries Important for Cost Accountants aka Contracts Admins?

As contract admins, your role is to track, allocate, and forecast costs accurately. Preliminaries are often a significant portion of the project budget (typically 10-20% of the total cost, depending on the project). Understanding and managing these costs ensures:

• Accurate budgeting and forecasting.

• Proper allocation of overheads to avoid under- or over-recovery.

• Identification of cost-saving opportunities (e.g., optimizing site setup or resource sharing).

• Compliance with contract requirements and client expectations.

Categories of Preliminaries

Preliminaries can be grouped into several key categories, each with specific cost items. Below is a breakdown of the main categories, followed by detailed examples:

• Site Establishment and Setup: Costs to prepare the site for construction, including temporary facilities and infrastructure.

• Site Management and Supervision: Costs for personnel managing the project on-site.

• Temporary Works and Facilities: Temporary structures, utilities, and services required during construction.

• Administrative and Overhead Costs: Costs for project administration, documentation, and compliance.

• Health, Safety, and Environmental Compliance: Costs to ensure the site complies with safety and environmental regulations.

• Demobilization and Site Handover: Costs to wrap up the project and restore the site.

Detailed Breakdown of Preliminaries with Examples

Below, we explore each category with examples for three different project types:

Project Types

• Commercial Office Building (e.g., a 10-story office tower in an urban area)

• Residential Development (e.g., a 50-unit apartment complex in a suburban area)

• Infrastructure Project (e.g., a highway extension project)

Each example includes estimated costs and explanations to help CAs understand how to quantify and track preliminaries.

1. Site Establishment and Setup

These are the initial costs to prepare the construction site for work, including mobilization and setup of facilities. Examples and Costs

Explanation

• Commercial Office Building: Urban sites require robust fencing and security due to high foot traffic and safety concerns. Mobilization costs are higher due to large equipment like tower cranes.

• Residential Development: Smaller sites in suburban areas require less extensive setup, but access roads and fencing are still necessary.

• Infrastructure Project: Large-scale projects like highways require extensive temporary infrastructure to support heavy machinery and long project durations.

CA Task: Track mobilization costs against the project timeline to ensure they align with the planned schedule. Overruns in mobilization can indicate inefficiencies in planning.

2. Site Management and Supervision

These costs cover the personnel required to manage and oversee the project on-site, including salaries and associated expenses.

Examples and Costs

Explanation:

• Commercial Office Building: High-rise projects require more supervision due to complex logistics and multiple subcontractors.

• Residential Development: Smaller projects need fewer staff, but a project manager and supervisor are still essential.

• Infrastructure Project: Large-scale projects require multiple managers and supervisors due to the project’s scale and duration.

CA TaskMonitor labor costs monthly and compare them to the budget. Ensure staff costs are proportional to project progress to avoid overstaffing.

3. Temporary Works and Facilities

These include: temporary structures, utilities, and services needed to support construction activities.

Examples and Costs

Explanation:

• Commercial Office Building: High-rise construction requires significant scaffolding and crane usage, driving up costs.

• Residential Development: Smaller-scale projects need less extensive temporary facilities.

• Infrastructure Project: Long durations and large sites increase the need for temporary utilities and equipment.

CA Task: Track rental agreements and utility bills to ensure costs align with the contract. Negotiate bulk discounts for long-term rentals to reduce expenses.

4. Administrative and Overhead Costs

Overview: These cover project administration, documentation, and compliance costs.Examples and Costs

Explanation:

• Commercial Office Building: Urban projects require extensive permits and insurance due to high risk and regulatory scrutiny.

• Residential Development: Smaller projects have lower administrative costs but still require permits and insurance.

• Infrastructure Project: Complex projects need significant documentation and compliance due to environmental and safety regulations.

CA Task: Verify that permits and insurance are paid on time to avoid penalties. Track administrative expenses to ensure they remain within budget.

5. Health, Safety, and Environmental Compliance

These costs ensure the site complies with safety and environmental regulations.

Examples and Costs

Explanation:

• Commercial Office Building: Urban sites require robust safety measures due to high worker density and public proximity.

• Residential Development: Smaller sites have lower safety costs but still need PPE and basic environmental controls.

• Infrastructure Project: Large projects require extensive safety and environmental measures due to scale and regulatory requirements.

CA Task: Audit safety and environmental expenses to ensure compliance with regulations. Track PPE usage to avoid overstocking.

6. Demobilization and Site Handover

These are costs associated with wrapping up the project and restoring the site.

Examples and Costs

Explanation:

• Commercial Office Building: Urban sites require careful demobilization to avoid disruption, plus detailed handover documents.

• Residential Development: Smaller projects have lower cleanup and restoration costs.

• Infrastructure Project: Large-scale cleanup and environmental restoration are significant due to the project’s scale.

CA Task: Ensure demobilization costs are planned early to avoid last-minute expenses. Verify that handover documentation meets client requirements.

How to Estimate Preliminaries

Estimating preliminaries requires a combination of historical data, project-specific requirements, and industry benchmarks. Here’s a step-by-step guide for CAs:

Review Project Scope and Contract:Analyze the project’s size, duration, location, and complexity.Check the contract for specific preliminary requirements (e.g., client-provided facilities).

Use Historical Data:Refer to past projects of similar size and type to estimate costs (e.g., preliminaries for a previous office building project).

• Break Down Costs by Category:

  - Use categories (site establishment, management, etc.) to create a detailed cost breakdown.

  - Assign costs as lump sums or time-based rates (e.g., $5,000/month for site offices).

• Apply Industry Benchmarks:

  - Preliminaries typically range from 10-20% of the total project cost, depending on complexity:

  - Simple Projects: 10-12% (e.g., residential developments).

  - Complex Projects: 15-20% (e.g., high-rise or infrastructure projects).

• Account for Risks and Contingencies:

  - Include a contingency (e.g., 5-10% of preliminaries) for unexpected costs like weather delays or regulatory changes.

• Validate with Stakeholders:

  - Collaborate with project managers and site supervisors to ensure estimates are realistic.

Sample Construction Preliminary Budget for a $10M Commercial Office Building

Below is a sample preliminary budget for a $10M, 18-month commercial office building project, assuming preliminaries are 15% of the total cost ($1.5M).

Note: This budget assumes a well-managed project with no major disruptions. Adjust for site-specific factors like remote locations or regulatory complexity.

Common Issues and Tips for CAs

• Underestimating Time-Based Costs: Failing to account for project delays can lead to cost overruns in preliminaries like site office rentals or staff salaries.

• Ignoring Contract Requirements: Some clients specify which preliminaries are included or excluded, so always review the contract.Overlooking Small Costs: Items like signage or PPE can add up if not tracked properly.

• Not Adjusting for Project Type: Preliminaries for a high-rise differ significantly from those for a road project.

Wrapping Up

Preliminaries are a component of construction project costs often overlooked. As construction finance resource at your GC firms, your role is to ensure these costs are accurately estimated, tracked, and managed. By understanding the categories of preliminaries, using historical data, and collaborating with project teams, you can help maintain project profitability and avoid costly overruns.