How to Calculate Direct Material Cost (Examples).
Steps to identify direct materials, inventorying them and inquiring about their costs, delivery times and payment conditions.
The term materials include.
Types of materials
- Semifinished materials which form the basis for the next stage of manufacture, for example, metal profiles from which a structure is to be constructed.
- Cataloged materials.
- Processed materials, such as equipment, which are assembled within the components already manufactured.
Here the estimator must identify each of the materials and compute them, ask for their prices, delivery times, and payment conditions.
We must complete the above task in a limited period that allows the information to be available at the right time to be incorporated into the offer.
We define the specifications of the required materials in the bidding documents.
In case of doubt, the bidders can make inquiries and request clarifications from the acquirer, up to a certain number of business days before the submission of the proposals.
The contractor’s written responses to the queries and requests for clarification are, as mentioned above, notified equally to all bidders and become part of the bidding documents.
How to Calculate Direct Materials Cost – Raw Materials Inventory
At this stage, it is necessary to stress the importance of carrying out an accurate calculation of the materials required.
Beware, a minimum error in the calculation of expensive material magnifies the error to high values.
Cost of materials
As identifying and counting the materials is completed, the commercial activities of obtaining an estimate for each material, with its delivery times and payment terms, begin.
A common and effective practice to elaborate the quote is to divide the project into categories, subcategories, and items. Each item groups the materials and labor required to execute a specific task.
Examples of categories
Civil works category, piping and equipment category, electrical works’ category, instrumentation and control category, pre-commissioning, and commissioning category.
The specialists of each category will divide each one of them into subcategories and these in unique items and subtopics, for Estimate the Direct Material Cost.
A- Civil works category.
A-1-Subcategory: Reinforced concrete base.
-A-1-1 Item: Excavation and preparation of resistant soil.
-A-1-2 Item: Cutting, bending, and arming of the reinforcing iron.
-A-1-3 Item: Construction and assembly of form-work.
-A-1-5 Item: Casting of concrete.
-A-1-6 Item: Dismantling and cleaning form-work.
B- Category Piping and Equipment – Estimate the Direct Material Cost.
B-1 Subcategory: Aerial piping.
-B-1-1 Item: Identification of materials and construction of prefabricated.
-B-1-2 Item: Hydraulic testing of prefabricated products.
-B-1-3 Item: Painting and transfer of prefabricated elements.
-B-1-4 Item: Assembly of prefabricated, supports, and change sections.
-B-1-5 Item: Final hydraulic test and paint touch up.
C- Electrical Category.
C-1. Subcategory: Placement of buried ducts.
-C-1-1. Item: Excavations.
-C-1-2. Item: Assembly and fixing of conduits.
-C-1-3. Item: Lean concrete casting.
-C-1-4. Item: Assembly of cables and their identification according to technical specifications.
Once the project has been divided into categories, subcategories, and items, we must record the following in each item:
-We examine the drawing or documentation of the item.
-We compute the material under it specification.
-The unit of measurement used and the data from each supplier.
-The unit cost of each material that comes from the sum of:
-The unit cost of the material at the supplier’s premises.
-The percentage of waste per unit.
-The cost of transporting it to the site.
These spreadsheets also record the consumption of hours required work crews to perform each activity per unit of measure.
Chart for recording inventory and material costs of project
The following figure shows a typical template for recording and testing tasks.
In the figure, we highlight the inventory, and direct cost of materials in a red box.
Chart for recording inventory and material costs of project XXX.
TEMPLATE: Material and labor cost per item.
CATEGORY: A | Civil works.
SUBCATEGORY: A-1 | Reinforced concrete base.
How to Estimate the Direct Material Cost (Examples) – Cost Control Tools and Techniques
The most used tool for this task is the Microsoft Excel program, since it allows the use of many formulas and pre-designed templates that save work.
The Excel spreadsheet format is built once and then this template is used for other jobs, adapting it to each project.
Excel also allows you to change any calculation or cost quickly.
But if you want to save even more time and avoid human error in data capture, is convenient to use some software to inventory the data automatically, for example, from Auto CAD.
The advantage of using already integrated applications and tools is that with each change, we update all data without the need to recapture all the information.
Review the next article on How to Calculate the Man Hours.
How to Calculate Direct Material Cost (Examples) – Calculate Man Hours.