KOLEJ KEMAHIRAN TINGGI

MARA
SRI GADING

UNIT 3
BUILDING ECONOMICS
NAME : MUHAMMAD ZULKIFLI BIN CHE LAH
H/P: 013-7105133
EMAIL: mzclss89@gmail.com

KOLEJ KEMAHIRAN TINGGI

MARA
SRI GADING

Part 1
NAME : MUHAMMAD ZULKIFLI BIN CHE LAH
UNIT 3: CAPITAL PLANNING AND BUDGETING IN
BUILDING
H/P: 013-7105133
EMAIL: mzclss89@gmail.com

SET INDUCTION

LEARNING OUTCOME
The Learning outcome of this unit are able to:
1. List the process of capital planning and budgeting
2. Explain briefly regarding Planning Period in
Building economics

3.1 CAPITAL PLANNING AND

BUDGETING
Capital budgeting process able to:
1. Identifies Prospective investment .
2. Select investment based on some
decision criteria.
3. Plans for the implementation and
financing of the selected investment.

3.1 CAPITAL PLANNING AND

BUDGETING

With specific reference to buildings, capital

budgeting evaluates the impact of the
facilities on the ability of the enterprise to
meet its long term goals and objectives.

3.1 PROCESS OF CAPITAL PLANNING

AND BUDGETING
START

3.1 PROCESS OF CAPITAL PLANNING

AND BUDGETING
START

Evaluate
priorities, timing
and strategies

Identify
financing
sources

Define planning
period

Estimate costs
and benefits

Assess risks

Establish
decision making
criteria

Define capital
improvement
needs

Make decision

Define planning
period

The planning period for the current or operating

budget of an organization is usually the fiscal or
calendar year.
Generally the strategic plans extend much
further into the future than a single year.
There are no definite rules as to how far this
future plan should extend other than that it
should have a close relationship to the
organizations long term strategic plans.

Define planning
period

The definition of the planning period for facilities is

often influenced by the nature of the institution, the
size of the capital investment, and the relationship of
the building to the organization.
A general guideline is to establish a planning period
of about five years and then update that plan
annually.
Even though the costs and benefits of investing
buildings last much longer than five years, the
uncertainty of future events makes a longer planning
period unacceptable to most decision makers.

ANY
QUESTION?
Copyright Gordon 2012

QUESTION :
Fill in the blanks

Copyright Gordon 2012

3.1 PROCESS OF CAPITAL PLANNING

AND BUDGETING
START

Answer:
START

LESSON SUMMARY

Copyright Gordon 2012

3.1 PROCESS OF CAPITAL PLANNING

AND BUDGETING
START

3.1 CAPITAL PLANNING AND

BUDGETING
Capital budgeting process able to:
1. Identifies Prospective investment
2. Select investment based on some
decision criteria.
3. Plans for the implementation and
financing of the selected investment.

Define planning
period

The planning period for the current or operating

budget of an organization is usually the fiscal or
calendar year.
Generally the strategic plans extend much
further into the future than a single year.
There are no definite rules as to how far this
future plan should extend other than that it
should have a close relationship to the
organizations long term strategic plans.

Define planning
period

The definition of the planning period for facilities is

often influenced by the nature of the institution, the
size of the capital investment, and the relationship of
the building to the organization.
A general guideline is to establish a planning period
of about five years and then update that plan
annually.
Even though the costs and benefits of investing
buildings last much longer than five years, the
uncertainty of future events makes a longer planning
period unacceptable to most decision makers.

Copyright Gordon 2012

KOLEJ KEMAHIRAN TINGGI

MARA
SRI GADING

Part 2
NAME : MUHAMMAD ZULKIFLI BIN CHE LAH
UNIT 3: CAPITAL PLANNING AND BUDGETING IN
BUILDING
H/P: 013-7105133
EMAIL: mzclss89@gmail.com

SET INDUCTION

LEARNING OUTCOME
The Learning outcome of this unit are able to:
1. List 4 Criteria used to evaluate long term capital
investment
2. Explain

briefly

regarding

Establish

making criteria in building economics.

decision

Establish
decision making
criteria

Conceptually, the objective to make decision is

to minimize total lifetime costs while maximizing
benefits
The problem of defining decision making criteria
for capital budgeting can itself becomes a
significant problem.

Establish
decision making
criteria

There are three methods that have been utilized

for developing funding levels. judgments about
the future of and organization.
One traditional approach is to increment the
previous years budget base by a percentage
that is fixed by consideration such as inflation,
fluctuations in programmatic needs and so on.
The problem with this approach is that the
capital budget is not evaluated against identified
renewal needs.

Establish
decision making
criteria

The second approach called formula budgeting

has also been employed as a mechanism for
replacement needs as a formula that takes into
account a variety of factors that indirectly relate
to an assessment of building needs
The problem with this approach is that the
capital budget is not evaluated against identified
renewal needs also.

Establish
decision making
criteria

The third approach is to develop a list of specific

capital improvement projects based on actual
survey or facilities needs.
Although this project may be more time
consuming, it is perhaps the only valid
mechanism to assess capital investment needs
and priorities accurately.

Establish
decision making
criteria

Criteria used to evaluate long term capital

investment
Economic investment criteria
Political implications
judgments about the future of and organization
strategic decision making in order to minimize
total lifetime costs while maximizing benefits.

ANY
QUESTION?
Copyright Gordon 2012

LESSON SUMMARY

Copyright Gordon 2012

Establish
decision making
criteria

Conceptually, the objective to make decision is

to minimize total lifetime costs while maximizing
benefits
The problem of defining decision making criteria
for capital budgeting can itself becomes a
significant problem.

Establish
decision making
criteria

Criteria used to evaluate long term capital

investment
Economic investment criteria
Political implications
judgments about the future of and organization
strategic decision making in order to minimize
total lifetime costs while maximizing benefits.

Copyright Gordon 2012

KOLEJ KEMAHIRAN TINGGI

MARA
SRI GADING

Part 3
NAME : MUHAMMAD ZULKIFLI BIN CHE LAH
UNIT 3: CAPITAL PLANNING AND BUDGETING IN
BUILDING
H/P: 013-7105133
EMAIL: mzclss89@gmail.com

SET INDUCTION

LEARNING OUTCOME
The Learning outcome of this unit are able to:
1. List 2 types of capital improvement projects.
2. Explain briefly regarding Cost reduction for capital
improvement needs.

3.1 PROCESS OF CAPITAL PLANNING

AND BUDGETING
Process

Define capital
improvement
needs

There

are essentially two types of

capital improvement projects which
are
1. Cost reduction
2. Income producing projects

Define capital
improvement
needs

1.COST REDUCTION

Cost reduction projects generally do not involve

programmatic changes in day to day operations. The
goal of costs reduction is to provide the same level of
building service at a reduced cost.
Many of these projects are technically focused and do
not require interdisciplinary collaboration.
Energy saving or labour saving capital projects fall into
this category.

Define capital
improvement
needs

2.INCOME PRODUCING PROJECTS

Income producing projects usually entail (keperluan) a

change in the programmatic goals of an organization and
for that reason usually demand the active participation of
multiple disciplines.
In these situations, the facility capital investment
proposal may become an integral part of a larger
investment in facilities, equipment and people.

Define capital
improvement
needs

Maintenance and repair cost are not considered

part of a capital budgeting process in that they
do no constitute new investment.
Their only goal is to maintain the existing quality
of a facility and hence should be a part of the
current budget.

ANY
QUESTION?
Copyright Gordon 2012

LESSON SUMMARY

Copyright Gordon 2012

Copyright Gordon 2012

KOLEJ KEMAHIRAN TINGGI

MARA
SRI GADING

Part 4
NAME : MUHAMMAD ZULKIFLI BIN CHE LAH
UNIT 3: CAPITAL PLANNING AND BUDGETING IN
BUILDING
H/P: 013-7105133
EMAIL: mzclss89@gmail.com

SET INDUCTION

LEARNING OUTCOME
The Learning outcome of this unit are able to:
1. Explain briefly regarding Estimate costs and
benefits
2. Explain

briefly

regarding

timing and strategies

Evaluate

priorities,

Estimate costs
and benefits

All cost and benefits of capital improvement

alternatives should be part of the proposal
during establish a company.
Cost estimates will provide the assessment of
the level of resources required to achieve the
intended function of the proposal.
These costs should include not only initial capital
costs and long term costs, but also can analysis
opportunity (chance) costs and marginal
(Sedikit perubahan) costs.

Evaluate
priorities,
timing and
strategies

Projects financially desirable from on investment

standpoint may be undesirable because of a
shortage of financing or other non economic
reasons.
Clearly, establishing priorities (Keutamaan) and
developing timing strategies can clarify the
decision about a prospective investment.
(Contoh: Bulan 1,2,3,4 lain dengan bulan
5,6,7,8)

ANY
QUESTION?
Copyright Gordon 2012

QUESTION :
What are their priority?

Copyright Gordon 2012

Evaluate
priorities,
timing and
strategies

Evaluate
priorities,
timing and
strategies

Evaluate
priorities,
timing and
strategies

LESSON SUMMARY

Copyright Gordon 2012

Estimate costs
and benefits

All cost and benefits of capital improvement

alternatives should be part of the proposal
during establish a company.
Cost estimates will provide the assessment of
the level of resources required to achieve the
intended function of the proposal.
These costs should include not only initial capital
costs and long term costs, but also can analysis
opportunity (chance) costs and marginal
(Sedikit perubahan) costs.

Evaluate
priorities,
timing and
strategies

Projects financially desirable from on investment

standpoint may be undesirable because of a
shortage of financing or other non economic
reasons.
Clearly, establishing priorities (Keutamaan) and
developing timing strategies can clarify the
decision about a prospective investment.
(Contoh: Bulan 1,2,3,4 lain dengan bulan
5,6,7,8)

Copyright Gordon 2012

KOLEJ KEMAHIRAN TINGGI

MARA
SRI GADING

Part 5
NAME : MUHAMMAD ZULKIFLI BIN CHE LAH
UNIT 3: CAPITAL PLANNING AND BUDGETING IN
BUILDING
H/P: 013-7105133
EMAIL: mzclss89@gmail.com

SET INDUCTION

LEARNING OUTCOME
The Learning outcome of this unit are able to:
1. List 2 types of financing sources in building
economics.
2. List 4 sources of risk in building economics.

3.1 PROCESS OF CAPITAL PLANNING

AND BUDGETING
Process

Identify
financing
sources

The source of capital investment funds in a

major consideration in the capital budgeting
process.
Financing sources can be divided into two types
which are internal and external sources.
Internal sources may be derived from
depreciation changes, capital replacement
reserves, or retained earnings.
External sources of funding are primarily
through the sale of bonds, stocks, and
mortgages.

Identify
financing
sources

Innovative financing methods such as the sale of

the facility and then leasing it back should be
considered for their increased liquidity and
possible tax advantages.
Because the cost of financing is intimately
related to prevailing interest rates, a general
economic evaluation should be conducted to
assess he likelihood of future interest rate
changes.

Assess risks

Each capital investment proposal will

involve a different level of RISK. Sources
of risk include:
1. The accuracy of cost and benefit
estimates
2. The purpose of the investment
3. Reuse and resale potential of the facility
4. The risk rapid facility obsolescence (tak
boleh guna)

Assess risks

THE ACCURACY OF COST AND BENEFIT

ESTIMATES
The accuracy of costs and benefits will depend
on various factors, including the expected time
horizon for the investment, past experience
with similar facilities, level of available
construction and management skills, and future
regional economic conditions.

Assess risks

THE PURPOSE OF THE INVESTMENT

The purpose of the investment may also have
an impact on risk. Remodeling an older
structure is normally a higher risk project than
new construction because of unknowns that are
only apparent after construction has begun

Assess risks

REUSE AND RESALE POTENTIAL OF THE

FACILITY
Reuse and resale potential factors are related to
both the design of the building and the general
real estate market.

Assess risks

THE
RISK
RAPID
FACILITY
OBSOLESCENCE.
all facilities are subject to obsolescence caused
by technological change.
For example, some newly constructed office
buildings will shortly become obsolete because
of their inability to adapt to recent changes in
telecommunications technology.

ANY
QUESTION?
Copyright Gordon 2012

QUESTION :
List 2 types of financing
sources in building
economics

Copyright Gordon 2012

Identify
financing
sources

Answer:
1.

Internal sources may be derived from

depreciation changes, capital replacement
reserves, or retained earnings.
2. External sources of funding are primarily
through the sale of bonds, stocks, and
mortgages.

QUESTION :
List 4 sources of risk in
building economics.

Copyright Gordon 2012

Assess risks

Answer:
Sources of risk include:
1. The accuracy of cost and benefit
estimates
2. The purpose of the investment
3. Reuse and resale potential of the facility
4. The risk rapid facility obsolescence (tak
boleh guna)

LESSON SUMMARY

Copyright Gordon 2012

Identify
financing
sources

The source of capital investment funds in a

major consideration in the capital budgeting
process.
Financing sources can be divided into two types
which are internal and external sources.
Internal sources may be derived from
depreciation changes, capital replacement
reserves, or retained earnings.
External sources of funding are primarily
through the sale of bonds, stocks, and
mortgages.

Assess risks

Each capital investment proposal will

involve a different level of RISK. Sources
of risk include:
1. The accuracy of cost and benefit
estimates
2. The purpose of the investment
3. Reuse and resale potential of the facility
4. The risk rapid facility obsolescence (tak
boleh guna)

Copyright Gordon 2012

KOLEJ KEMAHIRAN TINGGI

MARA
SRI GADING

Part 6
NAME : MUHAMMAD ZULKIFLI BIN CHE LAH
UNIT 3: CAPITAL PLANNING AND BUDGETING IN
BUILDING
H/P: 013-7105133
EMAIL: mzclss89@gmail.com

SET INDUCTION

LEARNING OUTCOME
The Learning outcome of this unit are able to:
1. Explain Briefly regarding making decision in
building economics.

Make decision

Once the projects is reasonable, an economic

analysis should be performed that translates all
costs into a total uniform annual equivalent cost
over the anticipated lifetime of the investment
using an interest rate that has been adjusted
appropriately for the risk category.
This process will help to anticipate the annual
costs that will be needed to maintain the facility
as well as identify expected future sources of
revenue.

Make decision

The assessment of uniform annual costs should

be augmented (Bertambah) with a benefit
analysis. If benefits cannot be translated into
their financial equivalent, then an approach
similar to decision analysis can be helpful in
establishing their relative magnitudes.
With this information, it is possible to determine
the cost benefit ratio resulting from each capital
investment proposal.
Usually, a final decision will be made only after
negotiations with interested parties.

ANY
QUESTION?
Copyright Gordon 2012

LESSON SUMMARY

Copyright Gordon 2012

Make decision

Once the projects is reasonable, an economic

analysis should be performed that translates all
costs into a total uniform annual equivalent cost
over the anticipated lifetime of the investment
using an interest rate that has been adjusted
appropriately for the risk category.
This process will help to anticipate the annual
costs that will be needed to maintain the facility
as well as identify expected future sources of
revenue.

Make decision

The assessment of uniform annual costs should

be augmented (Bertambah) with a benefit
analysis. If benefits cannot be translated into
their financial equivalent, then an approach
similar to decision analysis can be helpful in
establishing their relative magnitudes.
With this information, it is possible to determine
the cost benefit ratio resulting from each capital
investment proposal.
Usually, a final decision will be made only after
negotiations with interested parties.

SUMMARY

UNIT 3

Copyright Gordon 2012

SUMMARY UNIT 3
START

3.1 PROCESS OF CAPITAL PLANNING

AND BUDGETING
START

SUMMARY UNIT 3
START

REFERENCES
Building Economics: Appraisal and Control of Building Design Cost and
Efficiency,
Ivor
H.
Seeley,
London
:
Macmillan,
1983.
The Economics of Building: A Practical Guide for Design Professional,
Robert Johnson, John Wiley & Sons,Inc. New York, 1990.
Economics: A Foundation Course For The Built Environment, J.E.
Manser,
E
&
FN
Spon,
London,
1994.
Design and the Economics of Building, M.Ralph and J. David, E & FN
Spon,
London,
1995.
Construction Economics and Building Design, R. Gregory Turner, Van
Nostrand Reinhold Company Inc, 1986.

Copyright Gordon 2012