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Construction & Development

Construction Cost

Synonyms: Building Cost، Hard and Soft Costs، Build Cost

Last updated: 2026-09-25

Short Definition

Construction cost is the total amount spent to build a structure until it is ready for occupancy, including direct costs (materials, labour, equipment and the contractor's profit) and soft costs (design, supervision, permits, soil testing, insurance and financing), usually excluding land value.

Overview

Construction cost is the total amount spent to build a structure until it is ready for occupancy, including direct costs (materials, labour, equipment and the contractor's profit) and soft costs (design, supervision, permits, soil testing, insurance and financing), usually excluding land value. It is commonly expressed in riyals per square metre of built-up area, distinguishing the shell ("athm", structural frame) stage from the finishing stage. In Saudi Arabia, cost is driven by steel, concrete and labour prices, by Saudi Building Code requirements such as thermal insulation and fire safety, and by permit-related items such as the soil report, the inherent defects insurance policy and Balady fees. The Civil Transactions Law sets the effect of the pricing method: under a unit-rate (bill of quantities) contract, the contractor must notify the owner immediately if the estimate will clearly be exceeded or lose the right to the excess; under a lump-sum contract based on an agreed design, the contractor cannot claim an increase even if material prices rise, except in general, unforeseeable exceptional circumstances that allow the court to restore the contractual balance. Contracting services are also subject to 15% VAT when the contractor is VAT-registered. Cost should not be confused with value: construction cost is one valuation approach (the cost approach), but market value also depends on location and demand. One of the Saudi Contractors Authority's mandates is to publish indicators of building-material prices and prevailing contractor rates.

Legal Basis

The Civil Transactions Law (Royal Decree No. M/191 dated 29/11/1444H) governs the effect of pricing in construction contracts: Art. 470 (unit-rate estimates, the duty to notify immediately of an apparent overrun, and the owner's right to withdraw if the overrun is grave), Art. 471 (a lump-sum price does not increase with material or labour prices; the court may restore the contractual balance in general exceptional circumstances) and Art. 472 (fair remuneration if no price was set). The Saudi Building Code Implementation Law (M/43) makes code compliance a permit condition, and the Organization of the Saudi Contractors Authority (Cabinet Decision No. 510 dated 23/11/1436H) empowers the Authority to set indicators for building-material prices and contractor rates (Art. 3).

Sources

Practical Example

An owner estimates the cost of a 500 m² villa in Dammam: shell 500 × 850 = SAR 425,000 and finishing 500 × 1,000 = SAR 500,000, giving a direct cost of SAR 925,000, plus 15% VAT on the contract (SAR 138,750) because the contractor is VAT-registered. Soft costs: design 20,000, supervision 25,000, soil test 4,500 and permit fees and inherent defects insurance of about 15,000, i.e. SAR 64,500. A contingency of 5% of direct cost adds SAR 46,250. The total is about SAR 1,174,500, roughly SAR 2,349 per m² including VAT. Because the contract is lump-sum, the contractor cannot later demand more merely because steel prices rose.

Common Mistakes

  • ✗Comparing contractor bids by price per square metre only, without matching specifications, bills of quantities and what the price includes or excludes.
  • ✗Ignoring soft costs (design, supervision, soil test, inherent defects insurance and fees) and a contingency reserve.
  • ✗Not stating whether the price includes the 15% VAT or is exclusive of it.
  • ✗Accepting price-increase claims under a lump-sum contract because of rising prices, although the law only allows this in general exceptional circumstances assessed by the court.
  • ✗Confusing construction cost with the property's market value when financing or selling.

International Differences

Many countries use official construction-cost indices to adjust long contracts, and some international standard forms (such as FIDIC contracts) allow price-adjustment clauses. In Turkey, the Ministry of Environment, Urbanisation and Climate Change publishes annual approximate unit construction costs per square metre by building class. In Saudi Arabia, the default under a lump-sum contract is no increase, with judicial rebalancing possible in general exceptional circumstances, so any price-adjustment mechanism should be written expressly into the contract.

FAQs

What is the difference between shell cost and finishing cost?▾
The shell covers foundations, the concrete frame, walls and roof, while finishing covers plaster, paint, flooring, doors, windows and sanitary and electrical fittings; finishing often costs as much as the shell or more, depending on specifications.
Can the contractor raise the price if steel prices go up?▾
Under a lump-sum contract based on an agreed design, no, per Art. 471 of the Civil Transactions Law, unless general unforeseeable exceptional circumstances upset the contractual balance, in which case the court may restore it.
Is construction cost subject to VAT?▾
Yes. Contracting and engineering services are subject to 15% VAT when the provider is VAT-registered, and the contract should state whether the price includes VAT.
What happens if quantities exceed the agreed estimate?▾
The contractor must notify the owner immediately with the expected increase or lose the right to claim it; if the overrun is grave, the owner may withdraw from the contract and pay for the work already done.
How can I estimate construction cost before contracting?▾
Ask an engineering office for a bill of quantities and specifications, obtain at least three bids on the same bill, and add soft costs, VAT and a 5% to 10% contingency.

In Other Languages

Arabic
تكلفة البناء

تكلفة البناء هي مجموع ما يُنفَق لإنشاء مبنى حتى يصبح جاهزاً للإشغال، وتشمل التكاليف المباشرة (المواد والعمالة والمعدات وربح المقاول) والتكاليف غير المباشرة (التصميم والإشراف والتراخيص وفحص التربة والتأمين والتمويل)، ولا تشمل عادةً قيمة الأرض.

English
Construction Cost

Construction cost is the total amount spent to build a structure until it is ready for occupancy, including direct costs (materials, labour, equipment and the contractor's profit) and soft costs (design, supervision, permits, soil testing, insurance and financing), usually excluding land value.

Turkish
İnşaat Maliyeti

İnşaat maliyeti, bir yapının kullanıma hazır hale gelene kadar inşası için harcanan toplam tutardır; doğrudan maliyetleri (malzeme, işçilik, ekipman ve müteahhit kârı) ve dolaylı maliyetleri (tasarım, denetim, ruhsatlar, zemin etüdü, sigorta ve finansman) kapsar ve genellikle arsa değerini içermez.

Related Terms

Construction Project

A construction project is an organized set of works to build a new building or to extend, renovate or alter an existing one, with a defined scope, budget and schedule, delivered by key parties: the owner (employer), the designer, the supervisor and the contractor.

Cost Approach

The cost approach estimates a property's value by adding land value to the current cost of constructing an equivalent building, less physical, functional and economic depreciation, on the principle that a buyer will not pay more than the cost of an equivalent substitute.

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