Nature and Types of Construction Costs

Construction cost refers to the overall cost for the development of a facility or an asset. Estimation of construction cost is a complex process since it involves many variable factors. Cost in construction can be of tangible costs or intangible costs.


Tangible costs are the cost that can be measured in monetary terms. All the labour, material costs etc are an example of tangible costs.

Intangible costs are costs that are difficult to measure in monetary terms. Examples are service-related cost and goodwill. Costs in construction can be direct costs and Indirect cost.


Direct costs are costs that are directly attributed to a specific project element.


Indirect costs are costs that are not attributed to a specific project element but are indirectly related to the performance of the project. Direct and Indirect costs can be fixed or can be variable also.

Here are few examples for Indirect Cost,


Overheads are anything that is required for the delivery of the project and that cannot be included in the direct costs. Generally, overheads costs are 8% to 10% of the contract value. Few overhead costs are;

  • Salaries and benefits
  • Insurance policy – Group workmen policy, Contractors all risk (CAR) policy, equipment policy, provident fund, premium etc.
  • Financing cost – Interest, guarantees, warranties, bonds, penalties etc.
  • Progress photographs and videos
  • Conveyance cost – Cost for the transportation of labours to and from the site, senior engineers for their site inspection, employees transportation cost etc.
  • Travel and transfer cost
  • Visit of headquarter personnel.
  • Temporary site installations and facilities like labour colonies, parking, site offices etc.
  • Client and consultant requirements for their office space, office staff etc.
  • Utilities like electricity, water, drainage etc which are temporary for the site offices, labour colonies etc.
  • Taxes and Duties
  • Miscellaneous expenses

Risk is the probability of any happening and Contingency is the backup money or future money that we keep aside. The difference between risk and contingency is that in Risk, we spend time and money in advance for a given risk condition whereas in contingency we set aside money that we do not spend now and invest them when needed. Contingency reserve is known-unknown where we set aside amount for things that we know or not know whereas management reserve is unknown-unknown where there is no idea about the things. Risk and Contingency are usually 2% to 5% for normal projects whereas it increases up to a maximum of 10% if the project is uncertain at the time of tender.

A general term for the combination of general office overheads, risk and contingency are Markup. Markup is expressed as a percentage of the total cost.

Bid Price = Total Cost + Markups
Total Cost = Direct Cost + Indirect Cost

If the markup is expressed as a percentage of the bid price it is called Offtop.
For example, if 100Cr is the bid price, 10Cr Markup, 90Cr as Total cost, then 10/90 will be the markup (Ontop) and 10/100 will be Offtop.

Markups are loaded in different ways in different projects. The types of markup loading are;

  • Uniform distribution of markups (For eg; 15% for all components)
  • Front loading of markup (Here more percentage of markup will be charged at the initial stages of the project for initial works since major works come in this time and later the markup percentage will be reduced.)
  • Backloading of markup (This is the reverse of front-loading where more loading of markup will be given to the last stages. This is to protect the project from any escalation, uncertainties etc.)
  • Uneven loading of markup (This loads markup only to those work packages that are going to incur a loss in a project)

These costs can be monitored and controlled by adopting suitable Key Performance Indicators. Read about Key Performance Indicators and their types and application in any construction project.

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1 thought on “Nature of Cost in Construction”

  1. Pingback: What is Cost Estimation? 3 steps to perform cost estimation explained!! – Civilophilia

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