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Improving Mid-Term, Intermediate, and Long-Range Cost

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ISBN 978-0-309-67344-0 | DOI 10.17226/25972
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GET THIS BOOK Jorge Rueda-Benavides, Cesar Mayorga, Auburn University, Arizona State
University Cliff Schexnayder, Ghada Gad, California State Polytechnic
University, and Daniel D Angelo, Applied Research Associates, Inc.; National
FIND RELATED TITLES Cooperative Highway Research Program; Transportation Research Board; National
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Improving Mid-Term, Intermediate, and Long-Range Cost Forecasting: Guidebook for State Transportation Agencies
N AT I O N A L C O O P E R AT I V E H I G H W AY R E S E A R C H P R O G R A M
NCHRP RESEARCH REPORT 953

Improving Mid-Term,
Intermediate, and Long-Range
Cost Forecasting
Guidebook for State

Transportation Agencies
Jorge Rueda-Benavides
Cesar Mayorga
Auburn University
Auburn, AL
Cliff Schexnayder
Arizona State University
Tempe, AZ
Ghada Gad
California State Polytechnic University
Pomona, CA
Daniel D’Angelo
Applied Research Associates, Inc.
Champaign, IL
Subscriber Categories
Administration and Management • Finance
Research sponsored by the American Association of State Highway and Transportation Officials
in cooperation with the Federal Highway Administration
2020
Copyright National Academy of Sciences. All rights reserved.

NATIONAL COOPERATIVE HIGHWAY NCHRP RESEARCH REPORT 953

RESEARCH PROGRAM
Systematic, well-designed, and implementable research is the most Project 10-101
effective way to solve many problems facing state departments of ISSN 2572-3766 (Print)
transportation (DOTs) administrators and engineers. Often, highway ISSN 2572-3774 (Online)
problems are of local or regional interest and can best be studied by ISBN 978-0-309-67344-0
state DOTs individually or in cooperation with their state universities Library of Congress Control Number 2020945172
and others. However, the accelerating growth of highway transporta-
© 2020 National Academy of Sciences. All rights reserved.
tion results in increasingly complex problems of wide interest to high-
way authorities. These problems are best studied through a coordinated
program of cooperative research.
Recognizing this need, the leadership of the American Association COPYRIGHT INFORMATION
of State Highway and Transportation Officials (AASHTO) in 1962 ini- Authors herein are responsible for the authenticity of their materials and for obtaining
tiated an objective national highway research program using modern written permissions from publishers or persons who own the copyright to any previously
scientific techniques—the National Cooperative Highway Research published or copyrighted material used herein.
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full cooperation and support of the Federal Highway Administration understanding that none of the material will be used to imply TRB, AASHTO, FAA, FHWA,
FTA, GHSA, NHTSA, or TDC endorsement of a particular product, method, or practice.
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and TRB.
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COOPERATIVE RESEARCH PROGRAMS
CRP STAFF FOR NCHRP RESEARCH REPORT 953

Christopher J. Hedges, Director, Cooperative Research Programs
Lori L. Sundstrom, Deputy Director, Cooperative Research Programs
Ann M. Hartell, Senior Program Officer
Jarrell McAfee, Senior Program Assistant
Eileen P. Delaney, Director of Publications
Natalie Barnes, Associate Director of Publications
Janet M. McNaughton, Senior Editor
NCHRP PROJECT 10-101 PANEL

Field of Materials and Construction—Area of Specifications, Procedures, and Practices
Ben T. Orsbon, South Dakota Department of Transportation, Pierre, SD (Chair)
Bismark Agbelie, Catholic University of America, Washington, DC
Ashley Anderson, Florida Department of Transportation, Bartow, FL
Teresa L. “Teri” Kennedy, Arizona Department of Transportation, Phoenix, AZ
Scott J. Lawry, Wisconsin Department of Transportation, Madison, WI
Robert J. Munchinski, H. W. Lochner, Inc., Bothell, WA
Richard B. Duval, FHWA Liaison
Alex Clegg, AASHTO Liaison
Nelson H. Gibson, TRB Liaison
AUTHOR ACKNOWLEDGMENTS
The research reported herein was performed under NCHRP Project 10-101, “Improving Mid-Term,
Intermediate, and Long-Range Cost Forecasting: Guidance for State Departments of Transportation.”
Principal Investigator Dr. Jorge Rueda-Benavides, Assistant Professor, Department of Civil Engineering,
Auburn University (AU) led the research. All research efforts were performed with the support of the
AU Highway Research Center. The co-principal investigators in this project were Dr. Cliff Schexnayder,
Arizona State University, Tempe, AZ (retired); Dr. Ghada Gad, Assistant Professor, California State
Polytechnic University, Pomona, CA; and Daniel D’Angelo, Principal Civil Engineer, Applied Research
Associates, Inc., Champaign, IL. Cesar Mayorga, doctoral candidate in the Department of Civil Engineer-
ing at AU, served as a graduate research assistant on this project.
The research team also acknowledges the valuable support and contributions made by the AASHTO
Technical Committee on Cost Estimating, which served as an expert advisory panel for this study.
The Minnesota Department of Transportation, Colorado Department of Transportation, and Delaware
Department of Transportation also made valuable contributions to this study by providing the research
team with sufficient historical bid data to develop and assess the long-term performance of various cost
forecasting approaches.

FOREWORD
By Ann M. Hartell
Staff Officer
Transportation Research Board
NCHRP Research Report 953 presents a cost forecasting method for use by state trans
portation agencies that better accounts for cost variability and economic volatility over
time. The method will be of interest to those responsible for developing and updating
cost forecasts for mid-term State Transportation Improvement Programs (3 to 5 years),
intermediate-range plans (up to 15 years), and Long-Range Transportation Plans (20 years)
as well as those who manage transportation investment programs, administer the bid-letting
process, and oversee contracts.
The ability to create accurate forecasts of project costs is a core competency for state
departments of transportation (DOTs). Cost forecasting is used to develop and update
transportation plans; program projects; manage transportation improvement programs;
administer the bid-letting process; and oversee contracts. Forecasts are used to demonstrate
fiscal constraint and to track performance measures of on-time, within-budget delivery.
Reliable and accurate cost forecasts help agencies improve decision-making and transparency
and build trust by supporting reliable program delivery.
Because transportation investment programs have extended time horizons, state DOTs
must forecast costs well into the future. This poses a serious challenge: the longer the
time horizon, the more uncertainty and risk that forecasted costs will vary from actual,
future costs. The sources of forecasting uncertainty include variation in market conditions,
construction conditions, and inflation of costs for materials and labor, which increase or
decrease at different rates over time and by region.
NCHRP Report 953 presents a multilevel construction cost index (MCCI) for use by state
DOTs to develop forecasts from initial cost estimates. The MCCI can be used to improve
the accuracy of cost forecasting by accounting for differences in inflation rates for different
materials and work items included in a program as well as regional differences within a state.
By incorporating these differences and drawing from state-specific data, the MCCI offers
considerable improvement over the use of a single, generalized inflation rate to forecast the
future cost of a transportation investment program.
Under NCHRP Project 10-101, “Improving Mid-Term, Intermediate, and Long-Range
Cost Forecasting: Guidance for State Departments of Transportation,” Auburn University
was asked to review current practice in cost forecasting and develop a practical approach to
improving cost forecasting methods. The resulting method—the MCCI—was developed in
partnership with three DOTs that contributed data and vetted the method: the Minnesota
DOT, the Delaware DOT, and the Colorado DOT. The AASHTO Technical Committee on
Cost Estimating also provided feedback.

The guidebook is accompanied by a spreadsheet-based toolkit for using the MCCI.

NCHRP Web-Only Document 283 details the research activities and methods. Recorded
presentations and accompanying slides that summarize the research are also available.
These materials can be accessed on the TRB website at http://www.trb.org/main/blurbs/
181093.aspx.

CONTENTS
1 Chapter 1 Introduction
1 1.1 Introduction and Background
2 1.2 Overview of Guidebook
3 1.3 Business Case for Implementation of Effective Cost Forecasting Programs
3 1.4 Inflation Rates and Cost Indexes
4 1.5 Factoring Inflation Rates into the Cost Forecasting Process
6 1.6 Current Practice Versus Ideal Practice
8 Chapter 2 Framework for Selecting a Cost Forecasting

Approach
8 2.1 Introduction
8 2.2 Module 1: Cost Index Selection
8 2.3 Module 2: Standard Inflation Rate Selection
11 2.4 Modules 3 to 5: Midterm, Intermediate-Range, and Long-Range
Forecasting Method Selection
15 Chapter 3 Cost Indexing Alternatives

15 3.1 Introduction
15 3.2 Use of Macroeconomic Indexes
16 3.3 External Traditional Construction Cost Indexes
16 3.4 In-House Traditional Construction Cost Indexes
17 3.5 Limitations of Traditional Construction Cost Indexes
19 3.6 Multilevel Construction Cost Index
20 3.6.1 Collection and Cleaning of Historical Bid Data
23 3.6.2 Defining Basket of Pay Items for the Multilevel Construction
Cost Index
23 3.6.3 Configuration and Calculation of the Multilevel Construction
Cost Index
28 3.6.4 Development of Scope-Based Construction Cost Indexes
31 3.6.5 Regional Considerations and Price Inputs for Multilevel
Construction Cost Index
33 3.7 Identification of Suitable Construction Cost Index
33 3.7.1 Representative Pay Items and Analysis Period
34 3.7.2 Bid Data Point Clouds
34 3.7.3 Base Power Regression Curves and Base Unit Price Estimates
35 3.7.4 Index-Based Data Point Clouds
35 3.7.5 Average Distance Between Bid Data and Index-Based Data
Point Clouds and Identification of the Most Suitable Cost
Indexing Alternative

37 Chapter 4 Index-Based Cost Forecasting Approaches

37 4.1 Introduction
37 4.2 Linear and Exponential Regression
38 4.3 Moving Forecasting Error
39 4.3.1 Moving Forecasting Error: Step 1
45 Chapter 5 Cost Forecasting Tool Kit

45 5.1 Introduction
45 5.2 Overview of Cost Forecasting Tool Kit
46 5.3 Tool 1: Forecast with Inflation Rate
47 5.4 Tool 2: Index-Based Forecast with Moving Forecasting Error
48 5.5 Tool 3: Index-Based Forecast with Regression Analysis
54 Acronyms
55 References
Note: Photographs, figures, and tables in this report may have been converted from color to grayscale for printing.
The electronic version of the report (posted on the web at www.trb.org) retains the color versions.

CHAPTER 1
Introduction
1.1 Introduction and Background

“Although project cost escalation is usually caused by lack of project scope control and
factors external to the state highway agency, it results in cost-estimation practice and cost-
estimation management approaches that do not promote consistency and accuracy of cost
estimates across the project development process” (Anderson et al. 2007). This quote effectively
characterizes the reasons that motivated the research efforts that led to the development of
this guidebook. There are always a number of cost-influencing factors that are beyond the
control of state transportation agencies (STAs) and that generate unavoidable uncertainties
that prevent these agencies from accurately estimating future construction costs. No cost
estimating approach would ever provide a completely accurate and reliable construction
cost estimate. However, there is still considerable room for improvement in current cost
forecasting practices. The accuracy of cost forecasting can still be improved by better address-
ing avoidable sources of uncertainty, and unavoidable risks can still be better modeled and
understood to facilitate informed planning decisions. That is how this guidebook is intended
to assist STAs.
Construction cost forecasting is, and will always be, a challenging process and becomes
increasingly challenging as the planning time horizon increases. For some transportation
planning programs, the planning horizon could exceed 20 years. The existing literature is
mainly focused on short-term cost forecasting (1 to 2 years) and leaves a knowledge gap for
more extended forecasting periods, where more help is needed. This guidebook discusses
cost forecasting practices for midterm (3 to 5 years), intermediate-range (up to 15 years), and
long-range (more than 15 years) forecasting time horizons to help STAs select the cost fore-
casting approaches that best meet their needs. It takes into consideration program-specific
requirements, desired forecasting time horizons, data quality and availability, information
technology (IT) and staff capabilities, and the risk tolerance of the STA. The guidebook
recognizes that the most effective cost forecasting approach may not always align with the
agency’s needs, preferences, or constraints. Thus, it provides guidance on a range of cost
forecasting alternatives as well as a framework for selecting a cost forecasting approach to
help to identify the most suitable approach for each agency.
This guidebook is one of two deliverables from NCHRP Project 10-101, “Improving Midterm,
Intermediate, and Long-Range Cost Forecasting: Guidance for State Departments of Trans
portation.” The other deliverable is a final report that summarizes all research efforts and
major project findings. All cost forecasting approaches presented in this document are also
discussed in the final report, but this guidebook is mainly directed to estimators. It explains
the cost forecasting process at a higher technical level and includes a detailed description
of mathematical and statistical procedures. The users of the guidebook are also encouraged to
1

2 Improving Mid-Term, Intermediate, and Long-Range Cost Forecasting: Guidebook for State Transportation Agencies
read the NCHRP Web-Only Document 283: Improving Mid-Term, Intermediate, and Long-Range
Cost Forecasting for State Transportation Agencies (Rueda-Benavides et al. 2020) which includes
additional background information that facilitates a better understating of the forecasting
methodologies presented in the following chapters.
1.2 Overview of Guidebook

This document provides guidance to STAs on the effective implementation of various mid-
term (3 to 5 years), intermediate-range (up to 15 years), and long-range (more than 15 years)
cost forecasting procedures. Guidance is provided on traditional practices as well as on novel
cost forecasting procedures aimed to produce the ideal process discussed in Section 1.6. The
framework for selecting a cost forecasting approach in Chapter 2 serves as a map to guide
STAs through all available alternatives while assisting them in the identification of the set of
practices that best meets their needs. This is a five-module framework. All five modules are
presented in Chapter 2, but they refer guidebook users to additional information provided in
Chapters 3 and 4.
Module 1 starts by guiding STAs in the selection of a suitable cost indexing alternative. The
alternatives considered by this module and discussed in detail in Chapter 3 include traditional
construction cost indexes (CCIs), as well as an alternative cost indexing approach called mul-
tilevel construction cost index (MCCI). Chapter 3 also presents a protocol for the quantitative
comparative analysis of indexing alternatives. This protocol can be used to find the best MCCI
configuration or to evaluate the suitability of traditional external and in-house CCIs. Thus, the
STA that decides not to implement the proposed MCCI system could still use this methodology
to identify the most suitable non-MCCI alternative.
Module 2 provides standard inflation rates based on results from three case studies conducted
under NCHRP 10-101. These inflation rates are expected to be used by STAs that prefer not to
incur the effort of using a cost index to analyze the construction market to produce an appli-
cable inflation rate—in other words, the users of Module 2 made the decision in Module 1 to not
use any type of CCI.
Modules 3 to 5 are intended to guide STAs in the selection of the mathematical method for
producing an applicable inflation rate from the cost indexing alternative selected in Module 1.
Each of these three modules corresponds to a different forecasting time horizon. These
modules also provide guidance on the determination of lookback periods (number of years
of index data) and the type of inflation rate that should be used for each forecasting period.
The modules also indicate the levels of uncertainty to be expected from the different cost
indexing alternatives included in Module 1. All the cost forecasting approaches considered
in Modules 3 to 5 are further explained in Chapter 4. Modules 2 to 5 provide separate sets
of guidelines and information for two different types of work: asphalt and concrete paving.
Future research will aim to replicate the research efforts conducted under NCHRP 10-101 for
other types of work.
Finally, Chapter 5 describes a cost forecasting tool kit that consolidates most of the find-
ings from NCHRP 10-101 into three spreadsheet-based tools. The tool kit is available to STAs
on the TRB website (trb.org) on the summary web page for this guidebook. Estimators can
use this tool kit to better understand the calculations behind the proposed cost forecasting
techniques and to replicate the process in their own customized spreadsheets. The tool kit
allows the use of both MCCIs and traditional CCIs and facilitates the generation and analysis
of project- and program-specific CCIs from an MCCI, but it does not help with the actual
creation of the MCCI system.

Introduction 3
1.3 Business Case for Implementation of Effective

Cost Forecasting Programs
Cost forecasting is just one part of the overall cost estimating process, but it is an essential
component of an STA’s planning and programming processes. Accurate cost forecasting early
during project development is critical to making sound financial decisions and optimizing the
use of limited available resources (Anderson et al. 2007). Long-range transportation planning
programs are intended to ensure that all investment decisions are part of a long-term strategic
plan whose ultimate objective is maximizing the performance of transportation infrastructure
and value for taxpayers’ money. The lack of effective cost forecasting methodologies to support
transportation planning efforts may be preventing STAs from ensuring efficient use of public
resources (Janacek 2006).
Effective planning and cost forecasting seem to be more needed than ever due to the increasing
gap between available resources and the level of resources required to maintain the national
transportation infrastructure in a state of good repair. The 2013 Report Card for America’s
Infrastructure, published by the American Society of Civil Engineers (ASCE), estimates that
“32 percent of America’s major roads are in poor or mediocre condition, costing U.S. motorists
more than $67 billion a year . . . in additional repairs and operating costs” (ASCE 2013). Likewise,
ASCE found that roads and bridges across the country would need an average annual investment
of about $170 billion to reach acceptable performance levels by 2028, but annual investment
levels at that time were only around $91 billion. There is little STAs can do to improve their
funding streams, but they can still improve their funding allocation procedures to attempt to use
their limited available resources in the best possible manner. That can be achieved by improving
cost forecasting procedures, which would translate into better funding allocation decisions
(Byrnes 2002).
Following are four possible negative scenarios that could be prevented with better cost
forecasting practices (Pakalapati 2018):
• Overrun budgets: When more funds than those originally estimated are required to success-
fully complete construction activities anticipated in a program, an STA is forced to reallocate
its budget, postponing, or even canceling, needed approved projects.
• Underrun budgets: Although some may argue that under-budget situations are the result of
effective management and budget control, at a program level, they could actually be a sign
of inadequate cost forecasting procedures. Those situations reduce the ability of an STA to
ensure value for taxpayers’ money, since more funds than required are allocated for planned
construction activities, which prevents the STA from executing more projects with the same
amount of resources.
• Unreasonably high estimates: Poor cost forecasting could result in unreasonably high
construction cost estimates, thereby inflating cost–benefit ratios and leading to the rejection
of investments that should be accepted.
• Unreasonably low estimates: Poor cost forecasting could also result in unreasonably low
construction cost estimates, thereby understating cost–benefit ratios and leading to the
acceptance of investments that should be rejected.
1.4 Inflation Rates and Cost Indexes

There are two key elements usually involved in construction cost forecasting: inflation rates
and cost indexes. Inflation refers to the overall increase in the price of goods and services at a
microeconomic (for an individual, group, or industry) or macroeconomic (national economy)
level (Munday 1996); inflation rates are an average measure for those price fluctuations during

a period of time (usually annual rates). A negative inflation rate is called deflation, and it
corresponds to an overall decrease in the price of goods and services.
Calculating a single inflation rate for a group of goods and services is a challenging process,
since it usually involves a wide variety of inputs with different levels of relevance. For example,
a transportation-related combined inflation rate calculated for asphalt and steel would be more
affected by a 10% increase in the price of asphalt than by the same percentage increase in the
price of steel. That is because asphalt is significantly more relevant for STAs than steel. Although
that may be easily concluded from the hypothetical scenario, the quantification of the impact
of the different inputs on the inflation rate is a more complicated process. The first step in
quantifying an inflation rate with these two commodities would be determining how much
more relevant asphalt is as compared with steel. After determining the relative relevance of each
commodity, the agency would need to find a mechanism to facilitate an “apples-to-apples”
integration of these two commodities into a single inflation rate. That mechanism is a cost
index, which can then be used to generate the required inflation rate. Cost indexes can track
prices for a single item or can be designed to integrate multiple cost inputs into a single eco-
nomic indicator that takes into consideration the level of relevance (relative weight) of each
item. In this example, a cost index developed with asphalt and steel prices could be used to
estimate an overall combined inflation rate for both commodities, which in turn could be
used to forecast a combined cost.
Cost indexes developed with construction-related inputs are called CCIs. A CCI is a time
series aimed to quantify average price fluctuations in the construction market or a specific
sector of the construction industry. Although cost indexes are popular cost estimating tools
among STAs, they are not commonly used for cost forecasting purposes. Most agencies seem
to rely on standard inflation rates suggested by external entities, such as FHWA, other federal
or state agencies, or financial consultants. Externally suggested inflation rates are most likely
estimated from the quantitative analysis of cost indexes. However, that analysis is not internally
performed by STAs, who decide to accept the suggested rates, ignoring their associated implica-
tions and limitations.
The 4% annual inflation rate proposed by FHWA is being used by a number of STAs.
However, according to FHWA, preference should be given to the use of in-house or external
CCIs to generate applicable inflation rates (FHWA 2017a). Some external CCIs available to
STAs include the National Highway CCI (NHCCI) calculated by FHWA and CCIs published by
the Engineering News-Record (ENR) and RSMeans. A number of STAs have developed their
own CCIs, but only in a few cases have they used these to support forecasting efforts over long
periods of time. As explained in Chapter 3, there are a number of limitations associated with
the use of traditional in-house or external cost indexes. Chapter 3 of this guidebook provides
information on the development and implementation of an MCCI system that has been
designed to overcome the limitations of traditional CCIs and allow the implementation of the
ideal cost forecasting process described in Section 1.6. NCHRP 10-101 found that MCCIs are
significantly more effective at tracking price fluctuations in the construction market and, hence,
are a more reliable source of inflation rates than traditional CCIs (Rueda-Benavides et al. 2020).
1.5 Factoring Inflation Rates into the

Cost Forecasting Process
Inflation rates are used to estimate future construction costs in “year of expenditure dollars.”
Basically, when used in cost forecasting, an inflation rate is assumed to represent an anticipated
future market behavior inferred from the analysis of relevant historical cost data. However,

Introduction 5
there are different approaches used to incorporate inflation rates into the cost forecasting
process. There are two main types of inflation rates:
• Simple annual inflation rate (not compounded) and
• Compound annual inflation rate.
An annual inflation rate represents the average expected annual growth in construction
prices during the intended forecasting period. Some STAs use simple inflation rates, while
others prefer compound rates. When a simple inflation rate is used, the projected cost is
increased by the same number of dollars every year. The magnitude of the equal annual
increase is equal to the cost estimate in current dollars multiplied by the simple annual infla-
tion rate. For example, some agencies were found to use a simple annual inflation rate of
3% to forecast construction costs. Assuming that this inflation rate is reasonably accurate,
the cost of a $10 million construction program (current-dollar estimate) would be expected
to increase by $300,000 per year ($10 million × 0.03) for a total increase of $1.5 million in
5 years. Equations 1-1 and 1-2 show the calculations for this example.
FCE n = CCE + ( CCE × i × n ) Eq. 1-1
FCE5 = 10,000,000 + (10,000,000 × 0.03 × 5 ) = $11,500,000 Eq. 1-2
where
n = length of forecasting time horizon in years,
FCEn = forecast cost estimate over n years (in future dollars),
CCE = current cost estimate (in current dollars), and
i = fixed annual inflation rate.
On the other hand, a compound annual inflation rate is applied every year to the cumulative
inflation up to the previous year. Other agencies were also found to use a 3% annual inflation
rate but compounded annually. Equations 1-3 and 1-4 show how a 3% compound annual
inflation rate would be applied to develop a 5-year forecast for the same current-dollar estimate
used in Equations 1-1 and 1-2.
FCE n = CCE × (1 + i )n Eq. 1-3
FCE 5 = $10,000,000 × (1 + 0.03)5 = $11,592,740.74 Eq. 1-4
where
n = length of forecasting time horizon in years,
FCEn = forecast cost estimate over n years (in future dollars),
CCE = current cost estimate (in current dollars), and
i = fixed annual inflation rate.
Figure 1-1 shows the difference between a 5% simple and a 5% compound inflation rate
when applied to the same $10 million program over 20 years. Even though the two curves start
deviating from each other after the first year, the difference between them starts becoming
evident after the fifth year, which suggests that there is no significant difference in applying
a simple or a compound inflation rate for midterm forecasts. The difference between these
two types of inflation rates increases as the forecast time horizon is extended. Therefore, and
given that the linear regression process is slightly more straightforward than the exponential
regression approach, the framework for selecting a cost forecasting approach presented in the
next chapter gives preference to the use of simple inflation rates for midterm forecasts and
compound rates for intermediate and long-range time frames.

$24,000,000
$22,000,000
$20,000,000
$18,000,000
$16,000,000
$14,000,000
$12,000,000
$10,000,000
$8,000,000
0 2 4 6 8 10 12 14 16 18 20
Number of Years
5% Simple Inflation Rate 5% Compounded Inflation Rate
Figure 1-1. Compound inflation rate versus simple inflation rate.
1.6 Current Practice Versus Ideal Practice

Figure 1-2 illustrates the typical cost forecasting process currently followed by STAs. Once
the scope of a given program has been defined, a cost estimate in current dollars is performed
and then projected into the future by using a given inflation rate to generate a single-value
estimate. These types of outputs, also called deterministic outputs, tend to ignore the unavoid-
able uncertainty inherent in the cost forecasting process.
Ideally, inflation rates are determined as a function of the intended scope of work, but that
is not usually the case. In fact, most agencies, if not all, use standard one-size-fits-all inflation
rates to forecast costs for all transportation programs, regardless of the anticipated scope
of work. Those rates are either externally suggested or internally calculated by STAs from
an in-house CCI. Agencies supporting cost forecasting procedures with traditional external
or in-house CCIs tend to assume that the selected CCI is applicable to all scopes of work.
As discussed in Chapter 3, this assumption significantly affects the performance of cost fore-
casting procedures.
Results from NCHRP 10-101 allowed the definition of an ideal cost forecasting process,
which is illustrated in Figure 1-3 (Rueda-Benavides et al. 2020). It was found that an ideal
cost forecasting system should be able to handle different scopes of work at various levels of
detail and for different forecasting time horizons. STAs are dealing with a certain degree of
variability in the level of detail in the scope of construction activities forecast across long time
Define Estimate Construction Define Inflation Forecasted Cost Estimate

Program Scope Costs in Current Dollars Rate (single value)
One-size-fits-all inflation
rate or derived from a
non-scope-based CCI
Figure 1-2. Current typical cost forecasting process.

Introduction 7
Risk-Based Forecasting Timeline
Estimate Range ($)

Define Estimate Construction Define Scope-Based
Program Scope Costs in Current Dollars Inflation Rate Estimate
Range ($)
Collect and clean Develop

relevant in-house scope-based Forecasting Time Horizon
historical cost data CCI
Figure 1-3. Ideal cost forecasting process.
periods. For example, long-range programs usually involve a broad scope of work. However,
sometimes they could include specific capital projects defined at a higher level of detail and
whose associated costs are forecast over 20–25 years. An ideal cost forecasting process should
also provide decision-makers with a forecasting timeline showing the progression of the cost
forecast as it moves across the desired forecasting time period. Likewise, traditional fore
casting practices need to evolve from deterministic into risk-based outputs to account for
estimating uncertainty and to facilitate the communication of such uncertainty to different
types of stakeholders and decision-makers. The combination of those ideal requirements led
the research team to develop a methodology that facilitates the generation of reliable risk-
based forecasting timelines, such as the one shown in Figure 1-3. That methodology, which is
discussed in Chapter 4, is called moving forecasting error (MFE).
From FHWA’s perspective, an ideal cost forecasting system would use in-house historical cost
data as the main reference for the determination of applicable inflation rates. “Local historic
cost data and experience with cost inflation are valuable data sources for use in projecting future
rates” (FHWA 2017b). This logic explains the use of in-house historical cost data suggested
in Figure 1-3.
The ideal cost forecasting methodology also requires the implementation of flexible cost
indexing techniques that allow the customization of CCIs to the specifics of each project,
such as the scope-based CCIs shown in Figure 1-3, which in turn facilitate the generation
scope-based inflation rates. Cost indexing systems with that level of flexibility have been
developed by separate studies conducted for the Minnesota Department of Transportation
(DOT) (Gransberg and Rueda-Benavides 2014) and the Alabama DOT (Pakalapati 2018). Those
studies demonstrated the ability of an innovative cost indexing system to overcome the limita-
tions of traditional CCIs. This innovative system is the MCCI mentioned earlier in this chapter.
An MCCI consists of a group of indexes organized in a multilevel arrangement that allows
the forecasting of each cost element in a program or project with the MCCI index that best
matches its scope. Thus, costs for different programs or projects are forecast with different sets
of indexes, which offers great flexibility in customizing the forecasting process to the specifics
of each scope of work.
As explained before, the framework for selecting a cost forecasting approach presented in the
next chapter is intended to guide STAs on a wide range of cost forecasting options; however,
not all these options would allow the ideal cost forecasting process shown in Figure 1-3. That
ideal process offers the best cost forecasting performance, but it is also associated with greater
staff and IT efforts and requirements that may discourage some STAs from taking that path.
The ideal process in Figure 1-3 is mainly associated with the use of the proposed MCCI and
MFE methodologies explained in Chapters 3 and 4, respectively.

CHAPTER 2
Framework for Selecting

a Cost Forecasting Approach
2.1 Introduction
The framework for selecting a cost forecasting approach presented in this chapter is
intended to serve as a map to guide planners and estimators through different sets of guide-
lines and tools according to the unique set of requirements, preferences, and constraints of
each state transportation agency (STA) in terms of data quality and availability, information
technology (IT) and staff capabilities, the intended cost forecasting time horizon, and risk
tolerance. The five-module framework is intended to be the first stop for any STA interested in
implementing the guidance and tools described in this guidebook. The flow chart in Figure 2-1
shows the role of each module as part of the overall cost forecasting process.
In summary, the planning team starts with Module 1, which assists STAs with the selection
of a suitable cost indexing alternative that meets the needs and capabilities of the agency.
The agency could opt for the use of a standard inflation rate without the analysis of a cost
index. In that case, the planning team would be referred to Module 2, which is a compilation
of annual inflation cost indexes that showed an effective performance for the three case studies
conducted under NCHRP 10-101 (Rueda-Benavides et al. 2020). If an index-based forecast-
ing process is selected in Module 1, the framework would direct STAs to Module 3, 4, or 5,
depending on whether the intended cost forecast corresponds to a midterm, intermediate,
or long-range forecast, respectively.
2.2 Module 1: Cost Index Selection

Module 1 is illustrated in Table 2-1. This is the first step in the process of selecting a cost
forecasting approach. This module is intended to guide the planning team in the selection of
the cost indexing alternative that best fits its needs, preferences, and capabilities.
Module 1 details the requirements and implications associated with the cost forecasting
approaches listed in Table 2-2. This table also shows the four major aspects considered to assess
the implications and requirements of each indexing alternative. The primary conclusion drawn
from Module 1 is that the higher the level of resources and efforts invested in the improvement
of cost forecasting procedures, the higher the effectiveness of the cost forecasting achieved
by the STA. However, that statement is only valid if cost forecasting resources and efforts are
properly and thoughtfully invested following the guidelines presented in this document.
2.3 Module 2: Standard Inflation Rate Selection

This module is summarized in Table 2-3. The module provides low, medium, and high
standard annual inflation rates for midterm, intermediate, and long-range forecasting processes
for both asphalt and concrete paving activities. Those standard inflation rates are provided with

Framework for Selecting a Cost Forecasting Approach 9
Module 1.
Cost Index Selection
Standard or
Index-Based
Inflation Rate?
Index-Based Standard
Module 2.
Standard Inflation
Forecasting Rate Selection
Time Horizon
Mid-Term Long-Range
Horizon Horizon
Intermediate-Range Horizon
Module 3. Module 4. Module 5.

Intermediate-Range
Mid-Term Forecasting Long-Range Forecasting
Forecasting Method
Method Selection Selection
Method Selection
Figure 2-1. Overall framework for selecting a cost forecasting approach.
their associated forecasting error ranges. Module 2 is intended for agencies that decide not to
calculate applicable inflation rates from the internal assessment of a cost index but rely instead
on other STAs’ experiences.
The three levels of magnitude for construction market inflation (low, medium, high) were
identified on the basis of the three case studies conducted under NCHRP 10-101 (Rueda-
Benavides et al. 2020). They were considered in Module 2 to facilitate more effective forecasting
outputs for STAs on the low and high ends of the spectrum. The use of medium annual inflation
rates could be considered by agencies that do not have reliable information from which to
infer the level of magnitude of upcoming inflation rates. However, it should be noted that the
forecasting error ranges in Table 2-3 are applicable under the assumption that the agency would
appropriately place itself in one of the inflation magnitude categories. An error in doing so
would increase the level of uncertainty and thus widen the forecasting inflation rate. To illustrate,
for an intermediate-range forecast of concrete paving activities, if the agency considers that the
inflation rate is going to be high for this forecasting period, Module 2 would suggest a compound
inflation rate of 4%. On the basis of the forecasting error ranges in Table 2-3, the agency could
expect, with a 90% confidence level, a ±30% forecasting error. It should be noted that this error
is associated with the forecast value. For example, if the forecast estimate obtained for a given
concrete paving program with this inflation rate is $10 million, the agency could expect, with
a 90% confidence level, to have an actual program cost between $7 and $13 million.
Although Module 2 constitutes an improvement in the quality of guidance for users of
standard inflation rates, a better cost forecasting performance can still be achieved by calculating
annual inflation rates through more formal quantitative procedures that use the guidelines
provided in this guidebook. Formal quantitative approaches allow a more effective calculation
of annual inflation rates on a case-by-case basis and result in a considerable reduction of cost
forecasting uncertainty.

Table 2-1. Module 1: Cost index selection.
In-House Multilevel In-House Construction

External Construction Standard Inflation Rate
Construction Cost Index Cost Index
Cost Index (No CCI)
(MCCI) (Traditional CCI)
Effectiveness in Tracking
High Medium Low N/A
N/A
Market Price Changes
Effectiveness in Addressing
Project-Specific
High Medium Medium-Low Low
Requirements and
Geographic Conditions
Data Management Effort
for Development,
Maintenance, &
High Medium Low None
Implementation
• Reasonably constant stream • Constant stream of pricing • Reliable
CCI source with a
of in-house historical bid data for a small set of record of consistency in
Data Requirements
data from a large set of representative basket of pay terms of quality of index and N/A
representative basket of pay items timely publication of
& Considerations items updates
• Limited ability to handle
• Capable of handling certain missing data • Limited ability to handle
level of missing data missing data
Staff and IT Efforts for

Development & High Medium Low Very Low
Maintenance
• In-house or outsourced • In-house or outsourced

advanced mathematical and average mathematical and
statistical skills statistical skills
• Above-average computer • Average computer hardware
Development
hardware specifications and specifications and processing

processing capacity capacity
• Spreadsheet applications are • Spreadsheet applications are
sufficient sufficient
• STA’s good data • STA’s good data
Staff and IT management practices management practices
Requirements facilitate MCCI development facilitate MCCI development
and efforts efforts
Considerations
• In-house or outsourced average mathematical and •A staff member or office/ •Astaff member or office/
statistical skills group should bear the group should bear the
responsibility of tracking responsibility of checking on
Maintenance
• Average computer hardware specifications and processing

capacity for maintenance updates on the CCI by the a regular basis with the
external entity entity suggesting the
• Spreadsheet applications are sufficient, but STAs are adopted standard inflation
encouraged to develop customized IT applications to rate (if any) for possible
automate MCCI maintenance changes in this
• STA’sgood data management practices facilitate MCCI recommendation
maintenance efforts
Table 2-2. Module 1: Cost index selection—cost forecasting

approaches and assessment factors.
Cost Forecasting Approaches Assessment Factors
• In-house MCCI (see Chapter 3) • Effectiveness in tracking market price changes

• In-house traditional CCI • Effectiveness in addressing project-specific
(see Chapter 3) requirements and geographic considerations
• External traditional CCI • Required data management efforts for development,
(see Chapter 3) maintenance, and implementation
• No CCI (standard inflation rate) • Staff and IT requirements for development and
(see Section 2.3) maintenance
Note: MCCI = multilevel construction cost index; CCI = construction cost index.

Table 2-3. Module 2: Standard inflation rate selection.

Mid-Term Intermediate-Range Long-Range
Forecasting Time Horizon
(3–5 years) (up to 15 years) (20 Years)
Type of Inflation Rate Annual Simple Annual Compounded Annual Compounded
Inflation Expected Level Low Medium High Low Medium High Low Medium High
ASPHALT PAVING
Recommended Rates 2% 3%–4% 5% 2% 3%–4% 5% 3% 4% 5%
@50% CL ±15% −25% to 30% −30% to 35%
Expected Forecasting
@70% CL ±25% −30% to 40% −35% to 40%
Errors
@90% CL ±35% −40% to 45% −40% to 50%
CONCRETE PAVING
Recommended Rates 2% 3% 4% 2% 3% 4% 2% 3% 4%
@50% CL ±15% ±15% −20% to 30%
Expected Forecasting
@70% CL ±20% ±20% −25% to 35%
Errors
@90% CL ±30% ±30% −30% to 45%
Note: CL = confidence level.
2.4 Modules 3 to 5: Midterm, Intermediate-Range,

and Long-Range Forecasting Method Selection
If the agency decides to use an index-based inflation rate, the next step in the framework
would be the definition of the intended forecasting time horizon—midterm (3 to 5 years),
intermediate-range (up to 15 years), or long-range (more than 15 years). Modules 3, 4, and 5
illustrate the process of selecting the methodology for midterm, intermediate, and long-range
forecasts, respectively. These modules are illustrated in Tables 2-4 to 2-6.
These three modules use a flowchart to guide the planning team in the selection of the fore-
casting method that would produce effective inflation rates from the cost indexing approach
selected in Module 1. In the case of midterm and intermediate-range forecasts, the process
begins with a visual inspection of the selected cost index. At least 10 years of index values are
plotted, and the resulted time series is then inspected to determine whether the most recent
data show an abnormal market behavior, such as a deflation situation or an apparent devia-
tion from the regular long-term market trend. These abnormal behaviors are usually referred
to as “market corrections.” If that is the case, the planning team, using its knowledge of the
agency, the state history, and the local economy, analyzes whether there are any reasons to
believe that these market corrections will continue during the intended forecasting period.
If so, Modules 3 and 4 would indicate that a more suitable approach could be a regression
analysis following the guidelines provided in Chapter 4 and with a lookback period covering
only the period with the abnormal market behavior. NCHRP 10-101 (Rueda-Benavides et al.
2020) found that the appropriate use of regression analysis to model market correction in
midterm and intermediate-range cost forecasting could narrow the forecasting errors ranges
in Table 2-4 by 60% and 40%, respectively.
When regression analysis is being used to project market corrections into the future, it is
important to consider that most corrections last less than 5 years (according to observations
by Rueda-Benavides et al. 2020). Thus, the projection of an observed 3-year downward trend
for more than 2 years into the future would anticipate an unlikely scenario. Likewise, the
usual length of abnormal market conditions makes it inappropriate to forecast construction
costs with 5 years of historical bid data or less. A 5-year lookback period could contain a
downward trend that could be projected into the future over a midterm, intermediate, or
long-range forecasting period, also representing scenarios that are unlikely. To prevent this
issue, this report suggests the use of a lookback period of at least 10 years for both midterm and

Table 2-4. Module 3: Midterm forecasting method selection.
Midterm Forecasting Method Selection

(with selected cost index)
Minimum CCI
lookback period
10 Years
Type of inflation rate Annual Simple
Selection of
forecasting approach
Expected Forecasting Errors (%)

In-House MCCI
Confidence level 50 70 90
Asphalt paving ±12 ±20 ±30
Concrete paving ±10 ±15 ±25
In-House or External CCI (traditional CCI)
Asphalt paving −20 to 15 −25 to 20 −35 to 30
Concrete paving −15 to 25 −20 to 30 −30 to 40
intermediate-range forecasts, and between 15 and 20 years (20 years ideally) of historical bid
data for long-range forecasting procedures. As mentioned in Section 1.5, simple annual infla-
tion rates could be used for midterm forecasts, while compound rates are more appropriate
for intermediate and long-range time horizons.
If no recent abnormal behavior is identified, or if it is not expected to continue along the
intended forecasting period, the moving forecasting error (MFE) method would be more
appropriate. The MFE method, which is explained in detail in Chapter 4, is an innovative data-
driven cost forecasting approach proposed by NCHRP 10-101 (Rueda-Benavides et al. 2020).
This methodology proved to be effective at producing forecast values from the analysis of
historical bid data. The MFE method is designed to produce forecasting outputs in the form of
risk-based forecasting timelines, such as the one shown in Figure 1-3.
All forecasting error ranges in Tables 2-4 to 2-6 are associated with the use of the MFE
approach. Those tables show different sets of error ranges for the two different types of work
under consideration as well as for two different sources of market data: the innovative MCCI
approach or traditional CCIs. A comparison of the latter two reveals a clear reduction in cost

Table 2-5. Module 4: Intermediate-range forecasting method selection.
Intermediate-Range Forecasting Method Selection

Minimum CCI
lookback period
10 Years
Type of inflation rate Annual Compounded
Selection of

In-House MCCI
forecasting uncertainty if an MCCI is used instead of a traditional CCI. Likewise, a comparison

between MCCI forecasting error ranges in Tables 2-4 to 2-6 and those in Table 2-3 shows the
considerable reduction in cost forecasting uncertainty that an STA could achieve by implementing
the proposed MCCI and MFE methodologies.
The MCCI forecasting error ranges in Tables 2-4 to 2-6 actually correspond to worst-case
scenarios found in the case study results on both ends of each range. An STA would likely
obtain narrower forecasting error ranges after the actual application of the MFE method with
its own data. Results obtained from the application of traditional CCIs are not as promising
as those provided by the MCCI. However, those also represent the worst scenarios across
all case studies. A number of cases in NCHRP 10-101 showed a narrower error range with
traditional CCIs than those shown in Table 2-3 (Rueda-Benavides et al. 2020). A refined and
more reliable forecasting error range would also be obtained after applying the actual MFE
method to the intended CCI.

Table 2-6. Module 5: Long-range forecasting method selection.
Long-Range Forecasting Method Selection

Minimum CCI
lookback period
15 to 20 Years
Type of inflation rate Annual Compounded
Selection of

In-House MCCI
Asphalt paving ±10 ±15 ±25
The main difference between the proposed MFE method and regression analysis techniques
lies in their assumptions of risk. The MFE can be classified as a more conservative, or risk-
averse, approach, since it produces a cost forecasting output that combines results from
several forecasting scenarios created within the available data. However, regression models are
the result of a single configuration of the available data, making them more appropriate for
risk-seekers who decide to rely on a single scenario and thereby underestimate cost forecasting
uncertainties. That is the classification used in Module 5 (risk-seeking versus risk-averse) to
help STAs decide between the MFE method and regression analysis techniques. In the case of
intermediate-range forecasts, and in view of evident market corrections, Module 4 suggests
the assessment of both MFE and regression analysis (linear and exponential), if possible. The
final inflation rate selection would be made after reviewing the different MFE and regression
analysis outputs.

CHAPTER 3
Cost Indexing Alternatives
3.1 Introduction
This chapter discusses cost indexing alternatives available to state transportation agencies
(STAs) to support cost forecasting procedures. In order from the least- to the most-effective
cost indexing method for construction cost forecasting, these alternatives are as follows:
1. Macroeconomic indexes,
2. Traditional external and in-house construction cost indexes (CCIs), and
3. The innovative multilevel construction cost index (MCCI) system.
The benefits and drawbacks associated with each alternative are addressed.
It should be noted that two different CCIs would most likely always yield different inflation
rates (Rueda-Benavides 2016), even if they had been developed for the same purpose and with
the same inputs. Output differences depend on several factors, including, but not limited to,
data sources, data processing and cleaning procedures, index composition, and index calcula-
tion approach. This poses a challenge for STAs when an inflation rate needs to be determined.
How can an STA know which cost index is offering the best inflation rates? To help with that
challenge, the last part of this chapter describes a protocol for the comparative analysis of cost
indexing alternatives that is designed to identify the best cost indexing approach among a set of
available alternatives.
3.2 Use of Macroeconomic Indexes

A number of agencies that use cost indexes for forecasting purposes use the Consumer
Price Index (CPI) or the Personal Consumption Expenditures (PCE) Price Index. Those are
macroeconomic indexes published by the Bureau of Labor Statistics (BLS) and the Bureau of
Economic Analysis (BEA), respectively. The CPI is calculated from monthly price fluctuations
of about 80,000 items in a market basket of goods and services purchased by urban consumers
(BLS 2018a). Input items considered for the calculation of this index include, but are not
limited to, milk, shampoo, rent, housekeeping supplies, apparel, gasoline, medical care, recre-
ation services, college tuition and fees, and funeral services (BLS 2018b). The PCE price index
is calculated for a slightly different market basket and uses other quantitative methods under
different assumptions than those applied to the CPI, but it is still based on a broad set of goods
and services regularly consumed by the general public. Although the CPI and PCE are not
calculated with construction-related inputs, they seem to be a popular option for supporting
cost estimation among STAs.
Macroeconomic trends could align with construction market trends during some periods,
but macroeconomic indexes such as the CPI and the PCE would not effectively perceive the
15

impact that a drastic change in asphalt prices would have on the construction industry. Likewise,
some STAs have found that “construction inflation generally outpaces consumer inflation”
(Duncan et al. 2017), implying that the use of the CPI or PCE could lead to an underestimation
of future construction costs.
3.3 External Traditional Construction Cost Indexes

FHWA has made it clear that its recommendation of a 4% inflation rate (see Section 1.4) is
a suggestion to be considered only in the absence of better information or methods. FHWA
considers that the use of cost indexes to produce inflation rates would be more appropriate
than blindly relying on recommended standard inflation rates, even if the available cost index
is an external CCI. An external CCI is a cost index developed with construction-related input
but not developed by the agency or exclusively for the agency.
Some external CCIs are published by the Engineering News-Record (ENR), RSMeans, and
FHWA itself, which publishes the National Highway Construction Cost Index (NHCCI) on
a quarterly basis (Pakalapati 2018). NCHRP 10-101 found that external CCIs are widely used
by STAs for contract price adjustments or to support other cost estimating tasks but are less
commonly used in cost forecasting as a means of developing inflation rates for midterm,
intermediate, or long-range forecasting (Rueda-Benavides et al. 2020). Table 3-1 outlines some
examples of external CCIs.
3.4 In-House Traditional Construction Cost Indexes

NCHRP 10-101 also found that a large number of STAs currently maintain in-house CCIs,
but, again, that only a few of them use these for cost forecasting purposes (Rueda-Benavides
et al. 2020). Even though FHWA is in charge of maintaining and publishing the NHCCI, it is
aware that its cost index is more suitable for application at the national level, such as in assessing
the performance of the construction market at the national level. The NHCCI might not represent
local construction markets effectively.
As noted in Section 1.6, “local historic cost data and experience with cost inflation are valu-
able data sources for use in projecting future rates” (FHWA 2017b). Using their own historical
Table 3-1. External traditional construction cost indexes.
Index Components Applicability Frequency

FHWA: NHCCI • Bid data from highway construction National Quarterly
contracts executed by STAs
RSMeans: CCI • 9 types of buildings National and regional Annual
• 66 construction materials
• Wage rates for 21 different trades
• 6 types of construction equipment
ENR: Building cost index • Cement National and regional Monthly
• Structural steel
• Lumber
• Labor
ENR: Building cost index • Cement National and regional Monthly
(CCI) • Structural steel
• Lumber
• Labor
(Combined in different proportions than
the building cost index)

Cost Indexing Alternatives 17
bid data to develop in-house CCIs enables STAs to indirectly account for the unique conditions
of the local construction market (to a certain extent): “Pricing changes in any single state can be
affected by influences that are muted or lost in national prices and price indexes. One example
of this is contractor competition, which has a strong influence on prices but has only a local or
regional effect” (Molenaar et al. 2013).
3.5 Limitations of Traditional Construction

Cost Indexes
As recommended by FHWA (2017a), preference should be given to the use of in-house
historical bid data in making inferences about the future of local construction markets.
However, traditional methods of processing these data into the calculation and maintenance
of CCIs limit their capacity to handle the complexities of the construction market. Many of
those traditional CCIs are calculated with one of the three price index equations shown in
Equations 3-1 to 3-3 (FHWA 2017b).
Laspeyres Price Index:
∑ j =1 p j,t q j,0
n
L( p) = n Eq. 3-1
∑ j =1 p j,0q j,0
Paasche Price Index:
∑ j =1 p j,t q j,t
n
P ( p) = Eq. 3-2
∑ j =1 p j,0q j,t
n
Fisher Price Index:
∑ j =1 p j,t q j,0 ∑ j =1 p j,t q j,t

n n
F ( p) = × n Eq. 3-3
∑ j =1 p j,0q j,0 ∑ j =1 p j,0q j,t
n
where pj,t is the prevailing price of item j in period t and qj,0 is the quantity of item j purchased
in period 0.
Research results from NCHRP 10-101 revealed a significant issue associated with these typical
procedures for calculating a price index (Rueda-Benavides et al. 2020). These equations are not
able to factor the economies of scale principles into the cost indexing process. “Economies of
scale refers to a reduction in total cost per unit as output increases” (Betts 2007); that is, lower
unit prices should be expected for larger quantities of work, and vice versa.
It is important to understand that these traditional price index equations were proposed in
the 1920s, or even earlier (Fisher 1922)—before the era of computers, when the estimation of
index values was limited to hand-made calculations, which constrained data processing and
analysis capabilities. This could explain the simplicity of these equations and the reason why
they are unable to consider the principles of economies of scale. Their limited ability to factor
the relationship between unit prices and quantities is better illustrated with the following
simple example.

Asphalt Concrete
$1,000 $1,000
$900
$800
$800
Price [USD]
Price [USD]
$600 $700
$400 $600
(250, $495.24)
(200, $134.06) $500
$200
$400
$0 $300
0 500 1,000 1,500 2,000 0 1,000 2,000 3,000
Quantity [tons] Quantity [CY]
Note: CY = cubic yards.
Figure 3-1. Asphalt and concrete quantity versus unit price curves for Period 1.
Figure 3-1 shows two curves that represent the market conditions for two commodities for
a given STA: asphalt and concrete. These curves were created with historical cost data from
a given indexing period (Period 1). To illustrate, the highlighted point in the asphalt curve in
Figure 3-1 indicates that the average unit price for 200 tons of asphalt during that period was
around $135 per ton. For the purposes of this example, it is assumed that market conditions
remain unchanged during the next indexing period (Period 2). Thus, the same curves would
also represent the market in Period 2, as shown in Figure 3-2. Since the market has not changed
in between these two indexing periods, an effective composite cost index calculated with two
inputs should show no change in Period 2 with respect to Period 1. In order words, the index
values for both periods should be the same. However, if only the four data points shown in
Figures 3-1 and 3-2 are used in the calculation of the index values in their respective periods,
the traditional cost indexing equations would perceive an inexistent overall decrease of about
23% [(1.00 – 0.77)/100%] in market prices, as shown in Table 3-2.
There are other limitations to traditional CCIs in addition to their inability to consider
quantity–unit price relationships. Rueda-Benavides and Gransberg (2015) introduced two prin-
ciples that are repeatedly violated when traditional CCIs are used for cost estimating purposes
at the program or project level: the matching principle and the proportionality principle.
Asphalt Concrete
$1,000 $1,000
$900
$800
$800
Price [USD]
Price [USD]
$600 $700
$400 $600 (3,000, $392.63)

(2,000, $91.96) $500
$200
$400
$0 $300
0 500 1,000 1,500 2,000 0 1,000 2,000 3,000
Quantity [tons] Quantity [CY]
Figure 3-2. Asphalt and concrete quantity versus unit price curves for Period 2.

Table 3-2. Traditional cost indexing approaches.
Asphalt Concrete Traditional Index

Period Quantity Price ($) Quantity
Price ($) Laspeyres Paasche Fisher
(tons) (CY)
P1 200 134.06 250 495.24 1.00 1.00 1.00
P2 2,000 91.96 3,000 392.63 0.774 0.777 0.775
The matching principle refers to the degree of similarity between the components used
in the calculation of a CCI and the scope to be forecast. Once the matching principle has
been reasonably met, the proportionality principle comes into play. It refers to the degree of
consistency between the relative weights of index components and the actual contribution of
the same components to the total cost of the intended program/project. Therefore, an ideal,
but unlikely, scenario would be one in which each cost element in the program is represented
by an input element in the CCI, and the relative weight of each element is the same in the
CCI as in the program. It should be noted that a violation of the matching principle implies
a violation of the proportionality principle, since not sharing the same components would
make it impossible to match the weights. Moreover, while there is considerable variability in
the scope and configuration of programs and projects within an STA during the planning and
programming phases, the set of input components in a typical CCI usually remains unchanged
over time. This means that the matching principle cannot always be met.
The lack of ability to meet the matching and proportionality principles is preventing STAs
from developing scope-based CCIs such as those required by the ideal cost forecasting pro-
cess proposed in Section 1.6. The MCCI methodology discussed in the next section not only
addresses this issue by offering a high degree of flexibility to adapt to the specific needs of each
program or project, but also allows the consideration of the economies of scale principle into the
cost forecasting process. Likewise, an MCCI has the capacity to address another problem faced
by STAs in the calculation of cost indexes: the absence or lack of sufficient data with which to
calculate index values at some indexing periods. The following section has more information
about the process of developing MCCIs and about the capabilities of this alternative cost
indexing approach.
3.6 Multilevel Construction Cost Index

An MCCI consists of a group of indexes organized in a multilevel arrangement. Thus, each
cost element in a program/project can be individually represented by its closest matching
MCCI index. After the most relevant group of MCCI indexes for the scope of work under
consideration is selected, they are mathematically combined into a single scope-based CCI,
which is then used to generate annual inflation rates. Costs for different programs/projects are
forecast with different sets of indexes, which offers great flexibility to customize the forecasting
process to the specifics of each program or project.
The rest of this section provides additional information about this alternative cost indexing
approach and details the MCCI development process, starting with procedures for data
collection and cleaning. Some parts of this section use examples from the case studies conducted
under NCHRP 10-101 (Rueda-Benavides et al. 2020), to better illustrate the MCCI develop-
ment process.

3.6.1 Collection and Cleaning of Historical Bid Data

If the intended MCCI is anticipated to be used for long-range forecasting purposes, the
STA should make efforts to collect and clean at least 20 years of historical bid data, since that
is the suggested lookback period for long-range forecasts. To the maximum extent possible
and practical, efforts should be made to collect data from all unit price projects awarded
during that period of time. Doing so would facilitate a considerable amount of data to better
identify the basket pay items discussed in the next section.
All collected data should then be formatted into a tidy format that merges all projects
into a single data set. Figure 3-3 shows a screen capture of a small portion of the tidy data
set created for the Minnesota Department of Transportation (DOT). This was one of the case
studies conducted under NCHRP 10-101 (Rueda-Benavides et al. 2020). “Tidy data sets are easy
to manipulate, model and visualize, and have a specific structure: each variable is a column,
each observation is a row, and each type of observational unit is a table” (Wickham 2014).
There is only one observational unit in this study: pay items included in the collected projects.
Thus, there is only one table, with each row referring to a single pay item used in a given
project. The columns show all the available information associated with each pay item and its
respective contract. Information provided for each pay item on each row includes, but is not
limited to, item identification number, item description, awarded quantity, unit of measure-
ment, contract identification number, project location (e.g., county, district), and unit price
submitted by each bidder.
Any efforts to create a tidy data set are greatly rewarded with easier and more expedited data
manipulation and processing procedures. Although some of the information included in the
tidy data set will not be immediately used for the development of the MCCI, it could be required
for future market or financial analysis or to optimize MCCIs by modeling additional cost
influencing factors.
Data cleaning efforts should also include the identification and removal of outliers, which
would also be considerably easier with a tidy data set. “Usually, the presence of an outlier
indicates some sort of problem. This can be a case that does not fit the model under study, or
an error in measurement” (Cho et al. 2010). Two outlier detection filters strategically selected
and applied to serve different purposes are used in this guidebook. The first filter is the modi-
fied Z-score method (Iglewicz and Hoaglin 1993), which is applied at the pay item level (i.e., to
each row) to identify outliers among the unit prices received for the same item under the same
contract. While some of those errors could correspond to typographical mistakes or the mis-
interpretation of the scope contained within the unit price, a number of them are the result of
unbalanced bids (Rueda-Benavides 2016).
“A bid is considered unbalanced if the unit rates are substantially higher or lower, in relation
to the estimate and the rates quoted by other bidders” (JICA 2000). There are three main reasons
that could lead a contractor to unbalance a bid:
1. To protect its intended profit or fixed cost, which could be partially lost if actual quantities
of work are less than the bid quantities;
2. To maximize profits by taking advantage of errors in the quantities of work listed in the
solicitation documents; or
3. To inflate prices for early activities to reduce financial costs (the cost of borrowing money).
Regardless of the ethical implications usually associated with unbalanced bids, this is a common
practice among construction contractors and could mislead STAs when tracking market
changes over time.

Figure 3-3. Excerpt of Minnesota DOT’s tidy data.
Equation 3-4 is used to apply the modified Z-score method. The reason behind the use of
this method is that outliers are identified by using the sample median (x̃) and the median
absolute deviation, which makes it more suitable for small samples. Since this method is used
on bids submitted by different contractors under the same contract, it is applied to relatively
small samples. The average number of bids received by some agencies for a single contract is
between three and four. Other more commonly used outlier detection methods rely on the
sample mean and standard deviation to identify outliers. However, these two statistics are more
sensitive to extreme values in small samples, which increases the risk of not detecting outliers
that should be discarded (Iglewicz and Hoaglin 1993). On the basis of Iglewicz and Hoaglin’s
guidelines, all unit prices with an absolute modified Z-score greater than 3.5 (|Mi| > 3.5) were
removed from the data set.
0.6745 ( X i − x )
Mi = Eq. 3-4
MAD
where
Mi = modified Z score for observation i,
MAD = median absolute deviation = {|Xi – median|},
Xi = value of observation i, and
x̃ = median of all observations.
The second outlier detection approach is used as a secondary filter to remove outliers over-
looked by the modified Z-score method. The missed outliers could have resulted from unusual
project requirements that may have forced all contractors to bid outside the typical unit price
ranges. Since the modified Z-score method compares unit prices for the same item under a
given contract, it may find no outliers if all bidders are forced to submit unit prices substantially
higher (or lower) than those typically paid by the agency for the same pay item in other projects.
The robust regression and outlier removal (ROUT) method (Motulsky and Brown 2006) is a
suitable second detection filter. This method combines robust regression and nonlinear regression
techniques to identify values that could be significantly apart from the regression equation,
similar to those shown in Figures 3-1 and 3-2.
The ROUT method can be applied with GraphPad Prims 7, a statistical software equipped
with a ROUT function that can be activated during the development of nonlinear regression
models. Figure 3-4 shows an example of the output yielded by this software. All red data
points are outliers detected by the ROUT method and excluded from the regression analysis.
800
600
Unit Price
400
200
0
0 10,000 20,000 30,000 40,000 50,000
Quantity
Figure 3-4. Example of GraphPad Prims 7
output.

3.6.2 Defining Basket of Pay Items for the Multilevel

When the data collection and cleaning are completed, the process of developing the MCCI
continues with the selection of the pay items that will become the foundation of the indexing
system. The larger the basket of MCCI pay items, the better. However, not all items are suitable
to become part of this process, either because they are not relevant or are not frequently used or
because their unit prices are not comparable between projects. The following steps help in the
identification of the largest possible group of significant repetitive MCCI pay items:
1. Discard items whose units do not consistently refer to the same set of specifications or
amounts work (e.g., each, lump sum), and keep those units that are comparable between
projects (e.g., linear feet, cubic yards, tons). Pay items measured on an “each” or “lump sum”
basis are usually not comparable between projects; therefore, it is not appropriate to use
historical unit prices to track price changes in these items.
2. Identify pay items frequently used by the agency, ideally, but not necessarily, at least once
in the first and second halves of each year. Although items used on a semiannual frequency
are preferred, that should not be a strict requirement, since it could lead to the dismissal of
relevant items whose frequency of use might skip a few periods. MCCI systems are able to
handle missing values.
3. Discard items that show no apparent correlation between their unit prices and their respec-
tive quantities of work, as that would be a violation of the economies of scale principle, which
could mean that unit prices for those items are not comparable between projects. The MCCI
methodology has the capacity to consider economies of scale in the calculation of index values.
3.6.3 Configuration and Calculation of the Multilevel

Historical bid data from the selected basket of pay items is then used to develop several cost
indexes organized in a multilevel arrangement like the one shown in Figure 3-5. This figure
illustrates the five-level arrangement with 96 cost indexes developed for the Colorado DOT,
another of the case studies agencies in NCHRP 10-101. The 96 indexes shown in Figure 3-5 were
developed with a basket of 40 pay items. The lowest level in the MCCI is the pay item level, which
contains one cost index for each of those 40 pay items. This level has the most specific cost indexes.
Each of the 40 cost indexes at this level is only intended to be used on its respective pay item.
A bottom-up calculation approach was used, and the Colorado DOT’s indexes at the pay
item level were used to calculate the 28 indexes at Sub-Division Level 1, which are less specific.
Similarly, the indexes at Sub-Division Level 1 were used to calculate 22 broader indexes at
1 Index Agency Level

Bottom-Up Calculation
5 Indexes Division Level
22 Indexes Sub-Division Level 2
28 Indexes Sub-Division Level 1
40 Indexes Pay Item Levels
Figure 3-5. Example of MCCI configuration—Colorado DOT.

Sub-Division Level 2, and so on, until the top level was reached, where a single general index was
calculated at the agency level.
All indexes were developed with a semiannual updating frequency, with index values updated
twice every year, once on June 30 and again on December 31. A semiannual recalculation
approach was selected because an exploratory data analysis anticipated an inconsistent quarterly
supply of data for some of the chosen pay items. Likewise, a semiannual updating frequency
was preferred over annual updates because shorter periods can better reflect the volatility of the
construction market (Molenaar et al. 2013).
Even though STAs execute hundreds of contracts per year, it is not possible to ensure that
every item in a representative group of cost items will be used during each index period, which
could result in missing index values. Unlike traditional CCIs, the multilevel arrangement of
MCCIs facilitates a mechanism to avoid missing index values by allowing the use of correspond-
ing upper indexes to fill the gaps.
Calculations to develop MCCIs are divided into two major steps: (1) calculation of all indexes
at the pay item level and (2) bottom-up calculation of indexes at upper levels.
3.6.3.1 Step 1: Calculation of Indexes at the Pay Item Level

Since indexes at the pay item level are single-component indexes (calculated with a single pay
item), there is no need to deal with the challenges associated with the combination of different
types of index inputs. Nevertheless, to effectively track unit price fluctuations at the pay item
level, it is necessary to consider the economies of scale principle, which is done by tracking the
average movements of the regression curve that defines the quantity–unit price relationship.
The following steps summarize the calculation of indexes at the pay item level:
Step 1.1 Extract all historical bid data from the tidy data set (after removing outliers) for all
selected MCCI pay items.
Step 1.2 Identify a 5-year period with sufficient data to effectively model the relationship
between quantities and unit prices for each item. The selection of the same 5-year period for
all items would simplify the calculation process. Quantity–unit price relationships can be
modeled with power regression curves like the one shown in Figure 3-6. Power regression
40
35
30
Unit Price ($/CY)
25
20
y = 29.338x-0.165
15
10
0
0 50,000 100,000 150,000 200,000 250,000 300,000 350,000
Quantity (CY)
Figure 3-6. Minnesota DOT unit price model for common excavation
2008–2012.

curves are commonly used to explain the reduction in construction prices as the quantities of
work increase (Rueda-Benavides 2016, Pakalapati 2018, Molenaar et al. 2013). Power regression
models are defined by Equation 3-5:
unit price = A × ( quantity )

B
Eq. 3-5
where A and B are constant values determined for each set of observations to be modeled. The
power regression models developed with the selected 5-year periods are hereinafter referred
to as “base curves.”
Step 1.3 Base curves are assumed to represent average unit prices for their respective
items at the midpoint of the selected five-year period. It would be June 30, 2010, for the
curve shown in Figure 3-6 (midpoint between January 2008 and December 2012). Thus,
the price variation at each indexing period is calculated as the average deviation from the
base curve. There could be indexing periods before and after the selected 5-year period. For
example, Figure 3-7 shows the average deviation between the same base curve shown in
Figure 3-6, in June 2010, and recorded unit prices for the same item during the first index-
ing period of 1999 (P1 = January to June 1999). The calculation of the average deviation in
Figure 3-7 was performed with Equation 3-6. This equation was applied to each indexing
period for each pay item.
100% n Pijk − Ai × QijkBi

ADij =
n
∑ k=1 A × Q Bi Eq. 3-6
i ijk
where
ADij = average deviation for item i in index period j,
Pijk = unit price for observation k for item i in index period j,
Qijk = quantity for observation k for item i in index period j,
Ai and Bi = constant values for base curve for item i, and
n = number of observations for item i at index period j.
Step 1.4 Use calculated average deviations to define index values for each item at each
indexing period. Starting the index for each item with a value of 100 at the first indexing period
16
14
12 Unit Prices 1999-P1

Unit Price ($/CY)
10 Base Curve 2010-P1
8
Average change:
6 –36%
0
0 50,000 100,000 150,000 200,000 250,000 300,000
Quantity (CY)
Figure 3-7. Example of base curve and calculation of price fluctuations.

in the available data would facilitate a future development of scope-based cost indexes. In the
Minnesota DOT case study, the first indexing period was P1-1999. Thus, this period was assigned
a value of 100 for all pay items. This value was set at the end of that period, June 30, 1999. The
average deviation shown in Figure 3-7 indicates that P1-1999 for that item should be 36%
lower than P1-2010. Therefore, the index value for P1-2010 would be 156.25 [(100/(1 – 0.36)].
The rest of the index values for all pay items can now be calculated by using their respective
P1-2010 index value and the average deviations measured at each index period.
Step 1.5 All four steps detailed above would produce a cost index for each of the MCCI
pay items by using the available historical bid data. After that, the agency needs to establish a
system to constantly update all indexes at the end of each indexing period by repeating the same
calculation process.
3.6.3.2 Step 2: Bottom-Up Calculation of Indexes at Upper Levels

The second major step in the development of an MCCI refers to bottom-up calculations
to define indexes at the upper levels. To calculate the Colorado DOT indexes at Sub-Division
Level 1 (see Figure 3-5), indexes at the pay item level were grouped on the basis of similar
characteristics and aggregated to produce a single overall cost index per group. It means that,
for the Colorado DOT’s MCCI, 28 groups were formed out of the 40 pay item cost indexes,
which resulted in the 28 indexes at Sub-Division Level 1. In a similar way, these 28 indexes were
divided into 22 groups to produce the 22 indexes at Sub-Division Level 2, and so on until the
calculation of a single agency level index with the five indexes from the division level.
Indexes at all levels are grouped according to the coding scheme used by each STA to classify
its pay items. Pay item identification numbers could communicate information about the
scope, materials, and activities associated with each item. Thus, pay items with similar identi-
fication numbers can be assumed to be closely related. STAs’ pay item coding schemes, which
usually align with their standard specification books, can also be used to label each of the cost
indexes in the MCCI.
Table 3-3 shows how some of the indexes were grouped and labeled for the Colorado DOT’s
MCCI. This table only shows identification labels for indexes across the bottom-up pathways of
the 13 pay item indexes under Division 2. Divisions 3 to 6 also have downward ramifications,
but those are not shown in Table 3-3.
In moving from the pay item level to the agency level, the number of digits used to identify
the MCCI indexes is reduced, which means that now the index represents a broader scope of
work; that is, the degree of detail of an index is given by its MCCI level, with the scope becoming
increasingly broader at upper levels. For example, cost indexes 203-00010 and 203-00060 in
Table 3-3 only represent these two specific pay items. Bid data from these two indexes were then
used to calculate Cost Index 203-000 at Sub-Division Level 1, which is intended to represent all
items that start with 203-000. In the same way, Index 203 represents all pay items that start with
203, and Index 2 represents all pay items starting with 2. Division Level indexes in Colorado
DOT’s MCCI align with actual construction divisions from its standard specification book.
All the construction divisions in the Colorado DOT Standard Specification Book are listed
below (Colorado DOT 2019). Thus, in the case of the Colorado DOT, Index 2 represents the
overall market behavior of earthwork activities, comprising all pay items starting with 2.
• Division 2: Earthwork,
• Division 3: Bases,
• Division 4: Pavements,
• Division 5: Structures, and
• Division 6: Miscellaneous construction.

Table 3-3. Colorado DOT’s MCCI levels and configuration.
Pay Item Sub-Division Sub-Division

Level Level 1 Level 2 Division Level Agency Level
202-00035 202-000
202-00210
202-00220 202
202-002
202-00240
202-00250
203-00010
203-000
203-00060 203 2
203-00100 203-001
206-00000 1
206-000
206-00065
206
206-00100 206-001
206-00360 206-003
207-00205 207-002 207
— — — 3
— — — 4
— — — 5
— — — 6
MCCIs developed for different agencies would have different configurations from the one
shown in Table 3-3, but the bottom-up calculation process and upward ramifications would
follow the same general principles. Each STA’s MCCI configuration should be adjusted to its
unique pay item classification system. A complete version of Table 3-3 as well as examples
of MCCI configurations for two other agencies can be found in Appendix B of the NCHRP
Web-Only Document 283: Improving Mid-Term, Intermediate, and Long-Range Cost Forecasting
for State Transportation Agencies (Rueda-Benavides et al. 2020).
The bottom-up process for producing higher-level indexes is just a weighted average calcula-
tion of the grouped items at the lower levels, as shown in Figure 3-8. This figure shows how two
of the Colorado DOT’s pay item indexes (203-00010 and 203-00060) are combined to generate
Note: I comi = combined index value at index period i,

I ji = index value for item j at index period i, and
Wji = weight for item j at index period i.
Figure 3-8. MCCI bottom-up calculation approach.

their corresponding index at Sub-Division Level 1 (230-000). Weights for this calculation are
proportional to the dollar amounts awarded on the items under consideration during each
indexing period within the group. It means that during Index Period 1, 203-00010 contributed
to 25% of the combined awarded amount and 203-00060 contributed to the remaining 75%.
3.6.4 Development of Scope-Based Construction Cost Indexes

This section presents the process for generating scope-based CCIs from an MCCI at both
the project and the program levels. This ability gives MCCIs the flexibility to adapt to different
scopes of work.
3.6.4.1 Project-Specific Cost Indexes

The process of generating a project-specific CCI is illustrated with the asphalt paving
project shown in Table 3-4. This is a real project awarded by Minnesota DOT. In summary,
a project-specific cost index was developed through the combination of individual relevant
MCCI indexes (one MCCI index for each anticipated pay item). Each pay item was paired
with the MCCI index that best represented its scope. Item identification numbers were used
to find matching indexes.
Table 3-4. Minnesota DOT sample of asphalt paving project.
Item Number Description Units Weight (%) MCCI Index

2021501/00010 Mobilization LS 2.3781 2
2051501/00010 Maintenance and restoration of haul roads LS 0.0001 2
2104509/00055 Remove twisted end treatment EACH 0.1203 2104
2104521/00220 Salvage guard rail-plate beam LF 0.1077 2104521/00220
2104601/01011 Haul salvaged material LS 0.0595 2104
2105501/00010 Common excavation CY 0.0773 2105501/00010
2221501/00010 Aggregate shouldering Class 1 TON 1.9326 2
2221604/00010 Aggregate shouldering SY 0.1231 2
2232501/00040 Mill bituminous surface (1.5 inches) SY 0.3325 2232501/00040
2232602/00010 Milled rumble strips EACH 0.3266 2232602/00010
2357606/00010 Bituminous material for shoulder tack GAL 0.0195 2357606/00010
2360501/22200 Type SP 12.5 wearing course mixture (2,b) TON 82.7320 2360501/22200
2411507/00060 Concrete end post EACH 1.5658 2411
2540602/00150 Mail box support EACH 0.1359 2
2554501/00001 Traffic Barrier Design Special LF 0.6992 2554501
2554501/02007 Traffic Barrier Design B8307 LF 0.3703 2554501/02007
2554501/02038 Traffic Barrier Design B8338 LF 0.6268 2554501/02038
2554521/00020 Anchorage assembly-plate beam EACH 0.1364 2554
2554523/00028 End treatment-tangent terminal EACH 0.2610 2554
2563601/00010 Traffic control LS 4.1618 2
2580603/00010 Interim pavement marking LF 0.5916 2580603/00010
2582501/03008 Pavement message (stop ahead) epoxy EACH 0.1567 258
2582502/41104 4-inch solid line white epoxy LF 2.4801 258
2582502/41524 24-inch stop line white epoxy LF 0.0266 258
2582502/42104 4-inch solid line yellow epoxy LF 0.3017 258
2582502/42204 4-inch broken line yellow epoxy LF 0.2770 258
TOTAL 100.00

The final project-specific CCI is just the weighted average of the selected MCCI indexes.
The weighted average calculation is similar to the one shown in Figure 3-8 for the bottom-up
calculation process. However, this time weights were calculated for each item and not for
each indexing period. The weight for each pay item is proportional to its contribution to the
total engineer’s estimate. Actual awarded prices cannot be used to calculate weights because
they will only be known after the project has been awarded. Engineer’s estimates are calculated
on the basis of current prices observed at the moment of developing the project-specific CCI.
It should be noted that, at this point in the process, the relative relevance of each item is more
important than predicting the actual prices to be submitted by the successful contractor at
the letting date.
Table 3-4 shows the weight and MCCI index selected for each item. The latter refers to the
index identification labels in the last column of the table [see the configuration of the Minnesota
DOT’s MCCI in Appendix B of NCHRP Web-Only Document 283 (Rueda-Benavides et al. 2020)].
Those labels are equivalent to the labels shown in Table 3-3 for the Colorado DOT. For example,
an item such as 2580603/00010, interim pavement marking, (Table 3-4) has its own index
at the pay item level. On the other hand, item 2582502/41104, 4-inch solid line white epoxy,
had to move up to the MCCI division level to find its best-matching index. It should be noted
that cost indexes at the Minnesota DOT’s division level are identified with three-digit labels
(e.g., 258). Likewise, the identification number for all Minnesota DOT pay items always starts
with 2; therefore, that is the single-digit label for the Minnesota DOT’s agency level index. Some
indexes in Table 3-4 are used to represent more than one item. For example, MCCI Index 258
represents five items.
Table 3-5 and Figure 3-9 show an example of a project-specific CCI generated for the asphalt
paving project in Table 3-4. All project- and program-specific CCIs developed with the proposed
methodology were set to start with an index value of 100. Therefore, all the selected indexes
in the last column of Table 3-4 should start with an index value of 100 in order to produce the
index shown in Table 3-5.
3.6.4.2 Program-Specific Cost Indexes

The first step in the creation of program-specific cost indexes is to understand the compo
sition of the scope of work associated with the program. Some programs, such as bridge or
pavement management programs, are aimed at planning construction activities for specific
types of work. In those cases, the program-specific cost index could be a project-specific index for
a carefully selected sample project intended to represent the scope of the intended program. For
Table 3-5. Example of project-specific CCI for the Minnesota DOT’s asphalt
paving project.
Date Index Date Index Date Index Date Index

P1-1999 100.00 P1-2004 98.33 P1-2009 167.73 P1-2014 206.80
P2-1999 95.56 P2-2004 107.63 P2-2009 154.21 P2-2014 234.74
P1-2000 104.65 P1-2005 111.53 P1-2010 180.67 P1-2015 232.07
P2-2000 102.32 P2-2005 129.98 P2-2010 211.10 P2-2015 208.51
P1-2001 103.47 P1-2006 137.55 P1-2011 176.54 P1-2016 250.10
P2-2001 119.04 P2- 2006 160.08 P2-2011 135.62 P2-2016 174.95
P1-2002 114.94 P1-2007 146.38 P1-2012 202.39 P1-2017 223.16
P2-2002 100.77 P2-2007 170.48 P2-2012 168.01 P2-2017 236.04
P1-2003 100.13 P1-2008 158.46 P1-2013 205.13 P1-2018 245.06
P2-2003 104.46 P2-2008 162.91 P2-2013 224.80 P2-2018 278.82

300
250
Index Value
200
150
100
50
6/30/1999
6/29/2000
6/29/2001
6/29/2002
6/30/2003
6/29/2004
6/29/2005
6/30/2006
6/30/2007
6/29/2008
6/30/2009
6/30/2010
6/30/2011
6/29/2012
6/30/2013
6/30/2014
6/30/2015
6/30/2016
6/30/2017
6/30/2018
Date
Figure 3-9. Example of project-specific CCI for the Minnesota DOT’s asphalt
paving project.
example, the asphalt paving project in Table 3-4 was initially identified as a good representative
of the Minnesota DOT’s typical asphalt paving activities. Thus, a planning program focused
only on asphalt paving could use the index shown in Table 3-5 to determine a program-specific
inflation rate.
The process for developing program-specific indexes for programs that involve various
types of work has a few additional steps but is still a simple four-step process:
1. Identify the different types of work contained in the program.
2. Approximate the percentage of the total program that corresponds to each type of work.
These percentages will be used as weights in Step 4.
3. Identify a sample project that reasonably represents each type of work and develop project-
specific CCIs for those projects. This step may not always be required, since the agency could
create and maintain a library of generic cost indexes for typical types of work.
4. Using the weights defined at Step 2, combine all project-specific indexes through a weighted
average calculation. This weighted average calculation is also similar to the one shown in
Figure 3-8, but this time it is used to combine multiple project-specific indexes into a single
program-specific CCI.
The simplicity of this methodology also facilitates sensitivity analyses with which to evaluate
multiple scenarios or to quantify the risk of having drastic changes in the anticipated distribution
of work within the program. For example, Figure 3-10 shows three possible program-specific
indexes that could be developed by the Minnesota DOT for a statewide pavement program that
combines asphalt paving and concrete paving activities.
The three program-specific indexes in Figure 3-10 correspond to three different distributions
of the amounts of work associated with each pavement material (50%–50%; 30%–70%; and
70%–30%). These hybrid indexes are the result of a weighted average calculation between an
asphalt paving and a concrete paving CCI. The asphalt paving CCI is the same project-specific
CCI shown in Figure 3-9, which is assumed to represent all asphalt paving activities. Similarly,
the concrete paving CCI in Figure 3-10 is a project-specific CCI for a representative concrete
paving project.

280
260 Aphalt Paving CCI

Concrete Paving CCI
240
Program-Specific CCI (50% AP; 50% CP)
220 Program-Specific CCI (30% AP; 70% CP)
Program-Specific CCI (70% AP; 30% CP)
200
Index Value
180
160
140
120
100
80
6/30/1999
6/29/2000
6/29/2001
6/29/2002
6/30/2003
6/29/2004
6/29/2005
6/30/2006
6/30/2007
6/29/2008
6/30/2009
6/30/2010
6/30/2011
6/29/2012
6/30/2013
6/30/2014
6/30/2015
6/30/2016
6/30/2017
6/30/2018
Date
Figure 3-10. Example of program-specific CCI—Minnesota DOT Paving Program.
3.6.5 Regional Considerations and Price Inputs

for Multilevel Construction Cost Index
One of the objectives of NCHRP 10-101 was testing the hypothesis that different geographic
regions within a state could be affected by different inflationary trends, so that different inflation
rates should be applied to different regions. The study confirmed that hypothesis and found
that different MCCI versions would better represent local construction markets for different
regions within the case study agencies. All MCCI versions developed for the Colorado DOT
followed the same configuration shown in Table 3-3 and Figure 3-5. The difference between
versions lies in their geographic scope (statewide or regional) and their type of price input:
awarded unit prices (submitted by the selected contractors); average unit prices per project;
median unit prices per project; and all unit prices received from both successful and unsuccessful
contractors. Table 3-6 shows the 20 different MCCI versions developed and evaluated for the
Colorado DOT, and Figure 3-11 shows the Colorado DOT’s four geographic regions.
The different MCCI versions in Table 3-6 correspond to additional partitions to the available
data in an attempt to analyze price volatility at the regional level and to determine the most suit-
able index calculation input. For example, the Colorado DOT’s “statewide MCCI with awarded
unit prices” was developed with historical data from all available projects across the state and
using only unit prices submitted by the awarded contractors. On the other hand, the Colorado
DOT’s “northeast MCCI with awarded unit prices” was also built with low-bid proposals, but
only with bid data from the northeast region in Colorado. Therefore, this MCCI is only applicable
to this region.
Similar geographic classifications and MCCI versions were developed and evaluated for the
other case study agencies in NCHRP 10-101 (Rueda-Benavides et al. 2020). Case study results
showed that statewide MCCIs tend to outperform regional MCCIs, which could be explained by

Table 3-6. Classification of the Colorado DOT’s multilevel construction

cost indexes.
Geographic Classification Description

Statewide MCCI with awarded unit prices
Statewide MCCIs Statewide MCCI with average unit prices per project
Statewide MCCI with median of unit prices per project
Statewide MCCI with all unit prices
Region Description
Northwest MCCI with awarded unit prices
Northwest MCCI with average unit prices per project
Northwest
Northwest MCCI with median of unit prices per project
Northwest MCCI with all unit prices
Northeast MCCI with awarded unit prices
Northeast MCCI with average unit prices per project
Northeast
Northeast MCCI with median of unit prices per project
Regional MCCIs
Northeast MCCI with all unit prices
Southwest MCCI with awarded unit prices
Southwest MCCI with average unit prices per project
Southwest
Southwest MCCI with median of unit prices per project
Southwest MCCI with all unit prices
Southeast MCCI with awarded unit prices
Southeast MCCI with average unit prices per project
Southeast
Southeast MCCI with median of unit prices per project
Southeast MCCI with all unit prices
Figure 3-11. Colorado DOT geographic regions.

the fact that statewide indexes are developed with larger data sets that allow for a more effective
representation of construction market changes. The only region that showed an overall better
performance of regional indexes was Colorado’s northeast region. This could be because this
region is the most densely populated in Colorado; it leads the Colorado DOT in spending large
portions of its annual construction budget in that part of the state and in making its regional
historical bid database sufficiently large to produce reliable cost indexes.
Although regional MCCIs were not the best option for most regions, it was found that
different statewide MCCI versions were more suitable for different regions within the same
state. This finding still allowed the study to conclude that construction activities in different
geographic regions could be affected by different inflation patterns. In other words, it would
be reasonable to consider the use of different inflation rates for different regions across the
state. Those different regional inflation rates would be the result of using a different construction
cost index in each region. Thus, as part of the MCCI development process, this guidebook
suggests the development of and evaluation of various MCCI versions, mimicking the case study
methodology in NCHRP 10-101 (Rueda-Benavides et al. 2020). To optimize implementation
efforts, STAs could evaluate only statewide MCCIs, considering regional versions only for those
parts of the state that consume considerable portions of the construction budget. Implementa-
tion efforts could be further optimized by considering only MCCIs developed with awarded unit
prices and with all the unit prices received by the agencies. The most suitable MCCIs for 10 of
the 11 regions evaluated in the case studies were built with those two price inputs.
After it has developed all MCCI versions under consideration, an STA can proceed to
perform a comparative suitability analysis by using the protocol presented in the next section.
This protocol helps in identifying the most suitable MCCI alternative for each region. It can
also be used to assess and compare the performance of traditional cost indexing alternatives.
In fact, the case study methodology in NCHRP 10-101 included the application of this protocol
to a large group of alternatives, including various MCCIs and a number of traditional CCIs
(Rueda-Benavides et al. 2020).
3.7 Identification of Suitable Construction Cost Index

NCHRP 10-101 designed a protocol to assess the degree of suitability of available cost
indexing alternatives. The proposed protocol is not aimed at finding the best possible CCI
(Rueda-Benavides et al. 2020). It is instead intended to facilitate a comparative analysis to
identify the most suitable alternative among a set of available options, even if all options
are traditional CCIs affected by the limitations discussed in Section 3.5. This means that the
protocol can still be used by STAs that decide not to implement MCCIs.
It should be noted that the proposed protocol for the assessment of cost indexes is not intended
to evaluate their cost forecasting capabilities. Those capabilities are ultimately provided by the
forecasting methodologies discussed in the next chapter. The protocol is instead intended to
identify the indexing alternative that most closely resembles the observed behavior of the
construction market, which should be the most suitable source of historical pricing data
for the intended cost forecasting process. Figure 3-12 illustrates the proposed comparative
suitability analysis protocol. Each step in this protocol is discussed in the following sections.
3.7.1 Representative Pay Items and Analysis Period

The pay items used for the comparative analysis of cost indexing alternatives do not neces-
sarily need to include all the pay items used for the development of MCCIs. The analysis could
involve only the most relevant pay items—ideally, a group of pay items representing the most

Identify a set of Use power regression curves to

representative pay items estimate the unit price for each
and define the analysis bid quantity advertised along the
period analysis period
Adjust estimated unit prices to

Create a bid data point
their respective bid dates using
cloud for each selected pay
each of the cost indexing
item
alternatives under consideration
Develop a power regression Compare adjusted estimated unit

Identify the cost indexing
curve for each selected pay prices and actual awarded prices
alternative with the lowest
item for the first year of the with a weighted MAPE value for
adjusted MAPE
analysis period each indexing alternative
Figure 3-12. Cost indexing comparative suitability analysis protocol.
relevant construction division. Table 3-7 shows the items selected for the Minnesota DOT’s case
study. These items were selected to represent the three main construction activities performed
by the Minnesota DOT: asphalt paving, concrete paving, and earthwork.
Likewise, the analysis period used for the identification of the most suitable cost indexing
alternative does not need to be the same 20-year period suggested for the development of
MCCIs. The analysis period for the proposed protocol should be long enough to include a
good amount of cost indexing data, but not too long, so that the indexing alternatives are still
evaluated on their suitability to the current construction industry. If a given cost index shows
the best effectiveness at tracking price fluctuations over the past 20 years but a different one is
found to be more effective over the past 10 years, preference should be given to the latter. Thus,
the guidebook suggests an analysis period of about 10 years.
3.7.2 Bid Data Point Clouds

The bid data point clouds are created with actual awarded unit prices recorded for each
selected pay item along the analysis period. This results in a set of separate three-dimensional
clouds, one per selected pay item. The three parameters that give the location of each point in
the cloud are (1) letting data, (2) bid quantity, and (3) recorded awarded unit price.
3.7.3 Base Power Regression Curves and Base Unit Price Estimates
The base power regression curves used in the comparative analysis of cost indexing alter
natives are similar to those used to develop the MCCI in Section 3.6.3, but they are built with
bid data from projects awarded during the first year of the analysis period. In the case of the
Table 3-7. Selected relevant items for Minnesota DOT comparison

analysis.
Item ID Description Relative Weight (%)

2106507/00010 Excavation—common 17
2301507/00010 Structural concrete 33
2360509/23200 Type SP 12.5 wearing course mixture (3,B) 21
2360509/23300 Type SP 12.5 wearing course mixture (3,C) 19
2360509/24500 Type SP 12.5 wearing course mixture (4,E) 10

Minnesota DOT case study, one power regression curve was developed for each of the items
listed in Table 3-7. The analysis period for that case study started in January 2007 and ended in
December 2018; therefore, base power regression curves were created with historical bid data
from 2007.
Those curves are then used to estimate base unit prices for all bid quantities awarded for each
of the selected pay items throughout the analysis period. Since the regression curves were devel-
oped with data from the first year of the analysis period, all unit price estimates produced with
those curves are assumed to yield average unit prices in the middle of that year. Thus, the
Minnesota DOT’s base power regression curve for structural concrete (second item in Table 3-7)
was used to estimate a unit price for a quantity awarded in 2018, but the output corresponded
to the average price for that amount of structural concrete in mid-2007.
3.7.4 Index-Based Data Point Clouds

All base unit price estimates from the previous step are then adjusted to their respective letting
dates, creating another data point cloud for each pay item called the index-based data point
cloud. Each cost indexing alternative under consideration is used to create a separate set of
index-based data point clouds. Each point in the index-based data point clouds has a cor
responding point in the original bid data point clouds created with the actual historical bid
data. Equations 3-7 to 3-9 define the location for each point in its respective index-based data
point cloud. Equations 3-7 and 3-8 show that the letting data and quantity for each observation
(each recorded awarded unit price) remain unchanged for all cost indexing alternatives. Those
are given by their actual letting dates and awarded quantities. Equation 3-9 shows the calculation
of the based unit price estimate described in the previous section and the subsequent adjustment
with each indexing option.
Lkij = Lki Eq. 3-7
Qkij = Qki Eq. 3-8
I jt
Pkij = Ai × (Qki )Bi × Eq. 3-9
I j0
where
Lkij = location in letting date axis for observation k for item i with index j,
Lki = actual letting date for observation k,
Qkij = location in quantity axis for observation k for item i with index j,
Qki = actual awarded quantity for observation k,
Pkij = location in unit price axis for observation k for item i with index j,
Ai and Bi = constant values for base curve for item i,
Ijt = index value for index j at letting date, and
Ij0 = base index value for index j.
3.7.5 Average Distance Between Bid Data and Index-Based

Data Point Clouds and Identification of the Most Suitable
Cost Indexing Alternative
The next step is the calculation of the average distance between corresponding points for the
cost indexing option. The shorter the average distance, the larger the overlap between the bid

data and the index-based data point clouds and the more suitable the cost indexing alternative.
It should be noted that corresponding points have the same letting date and awarded quantity.
Thus, the average distance between them is only the difference between the actual awarded unit
price and the index-based unit price.
Average distances between the bid data and the index-based data point clouds were quan-
tified in the form of mean absolute percentage error (MAPE) values: one MAPE value per
pay item per indexing alternative. MAPE values are commonly used in the cost estimating
literature to measure and compare accuracy between cost estimating approaches (Gransberg
et al. 2015), but in this study, those values were aimed at indicating the degree of overlap
between data point clouds for each selected pay item. For instance, for the Minnesota DOT
case study, five MAPE values (one per pay item listed in Table 3-7) were calculated for each
cost indexing alternative under consideration. Equation 3-10 was used to calculate the MAPE
for value under each cost index.
100% n Paki − Pekij

MAPE ij =
n
∑ k=1 P Eq. 3-10
aki
where
MAPEij = mean absolute percentage error for item i with index j,
Paki = awarded unit price for observation k for item i,
Pekij = index-based unit price for observation k for item i with index j, and
n = number of observations for item i.
The MAPE values associated with each cost indexing approach are then combined into
a single overall MAPE that takes into consideration the relative weight of each pay item
shown in Table 3-7 for the Minnesota DOT’s case study. The result of this combination is a
weighted MAPE, which is just the weighted average of all pay item MAPE values, as shown in
Equation 3-12. The relative weight for each item is calculated with Equation 3-11.
Tai
Wi = Eq. 3-11
Ta
W_MAPE j = ∑ i =1 MAPE ij × Wi
n
Eq. 3-12
where
Wi = relative weight for item i,
Tai = total amount ($) awarded for item i during analysis period,
Ta = total amount ($) awarded for all items i during analysis period,
MAPEij = MAPE for item i with index j,
W_MAPEj = weighted MAPE for index j, and
n = number of items.
After the steps explained above are repeated to generate a weighted MAPE for each cost
indexing alternative in each region, the most suitable alternative for each region is then assumed
to be the one with the lowest-weighted MAPE.

CHAPTER 4
Index-Based Cost
Forecasting Approaches
4.1 Introduction
This chapter provides guidance on quantitative cost forecasting methodologies that can
be used to generate effective inflation rates from the suitable cost indexes identified by the
protocol explained in Chapter 3. Chapter 2 has already explained the implications associated
with the methodologies addressed in this chapter as well as the circumstances under which
they would be more appropriate. This chapter mainly covers some technical aspects of those
methodologies.
4.2 Linear and Exponential Regression

Linear and exponential regression analyses are common mathematical methods for assessing
simple and compound inflation trends, respectively. Linear regression forecasting models
assume a linear relationship between the length of forecasting periods and recorded construc-
tion prices, usually represented by index values. Statistical software packages for conducting
regression analysis usually produce linear regression models defined as shown in Equation 4-1.
This equation does not immediately provide a simple annual inflation rate, but one can be
easily calculated, as shown in Equation 4-2.
y = a + bx Eq. 4-1
b
simple annual inflation rate = Eq. 4-2
a
where
y = forecast index value,
x = intended forecasting time horizon,
a = slope of linear function, and
b = current index value.
Similarly, Equation 4-3 shows a typical exponential regression output yielded by statistical
software packages. As occurs with linear regression analysis, the outputs of statistical software
packages do not typically provide annual compound inflation rates, but Equation 4-4 shows
how to calculate them from an exponential equation.
y = ae bx Eq. 4-3
fixed annual compound inflation rate = e b − 1 Eq. 4-4
37

330
Simple Annual Inflation Rate = 10.21%

280
R2 = 0.863
Index Value
230
180
130
80
6/29/1999 3/25/2002 12/19/2004 9/15/2007 6/11/2010 3/7/2013 12/2/2015 8/28/2018
Date
Figure 4-1. Minnesota DOT asphalt paving CCI—linear regression model.
where
y = forecast index value,
x = intended forecasting time horizon,
a and b = constants, and
e = exponential constant.
Figures 4-1 and 4-2 show the simple and compound annual inflation rates obtained from a
linear and an exponential regression model, respectively, for the scope-based asphalt paving
construction cost index (CCI) developed for the Minnesota DOT in Section 3.6.4. A visual
comparison of these models and their R2 values suggests that an exponential equation would be
more suitable for modeling the Minnesota DOT’s long-term market trends. The same conclu-
sion was obtained from all case studies for both asphalt and concrete paving activities.
4.3 Moving Forecasting Error

The moving forecasting error (MFE) methodology is a novel cost forecasting approach
proposed by NCHRP 10-101 (Rueda-Benavides et al. 2020). It proved to be effective in gener
ating scope-based inflation rates and in quantifying cost forecasting uncertainty in the form of
330
Compounded Annual Inflation Rate = 5.4%
280
R2 = 0.877
Index Value
230
180
130
80
6/29/1999 3/25/2002 12/19/2004 9/15/2007 6/11/2010 3/7/2013 12/2/2015 8/28/2018
Date
Figure 4-2. Minnesota DOT asphalt paving CCI—exponential regression model.

Index-Based Cost Forecasting Approaches 39
risk-based forecasting outputs. This is an iterative process designed to maximize the value of
the available data.
For instance, a state transportation agency (STA) with only 20 years of historical bid data with
which to produce long-range forecasts would be forced to rely on this single 20-year data set to
predict the market behavior during the next 20 years. It seems to be common knowledge that
not all 20-year periods would show the same market trends. Thus, in an ideal world, the agency
would have access to multiple 20-year periods to consider multiple possible scenarios. Unfor-
tunately, that is not the case for most STAs. The MFE method recognizes that there are several
3-, 5-, 10-, and 15-year periods within the available data and takes advantage of those smaller
data partitions to better infer long-range market conditions. The proposed MFE methodology
is applied to any cost index through the following six-step process:
4.3.1 Moving Forecasting Error: Step 1

Apply the protocol for the comparative suitability analysis of cost indexing alternatives
explained in Chapter 3 to identify the most suitable cost index for the region under consid-
eration. That index would be assumed to effectively represent its respective local construction
market. It should be noted that if a better market representative were found for that region,
that would become the most suitable index.

Use a 4% annual compound inflation rate to project the first index value into the future. This
step forecasts an index value rather than a cost estimate in dollars. For each forecasting period
in the available data, in 6-month increments, calculate and record the percentage difference
between the forecast index value and the actual index value. Each of those differences is a fore-
casting error measure. At the end of this process, a 20-year data set would produce 39 forecasting
error measures for different forecasting periods (i.e., 0.5; 1; 1.5; 2; . . . 18.5; 19; 19.5 years). Since
the first known index value is calculated after the first 6 months of data (at 0.5 years), a 20-year
data set would not allow the calculation of a forecasting error for a 20-year forecast. The
longest possible forecast would be over 19.5 years. On the basis of Equation 1-3 (Section 1.5),
the forecasting error at each forecasting period would be calculated as follows (Equation 4-5):
I t − I 0 × (1 + i )t
FE t = × 100% Eq. 4-5
I 0 × (1 + i )t
where
FEt = forecasting error over t years,
I0 = first known index value,
It = known index value at time t, and
i = compound inflation rate.

Repeat Step 2, but this time forecasting the second known index value (at 1 year). This second
iteration would generate 38 forecasting errors with a 20-year data set (one less than at Step 1),
with a maximum forecasting time horizon of 19 years. Continue repeating this process in
6-month intervals until forecasting the second-to-last known index value, always calculating
and recording forecasting errors for the different forecasting periods.


At the end of Step 3, the STA would have several forecasting error measures for different
forecasting periods. With a 20-year data set, the agency would have 39, 38, 37, . . . 3, 2, and 1
forecasting error for forecasts of 0.5, 1, 1.5, . . . 18.5, 19, and 19.5 years, respectively. The number
of recorded forecasting errors decreases as the forecasting time horizon increases. With a single
measured error for a 19.5-year forecast, it is not possible to make reliable conclusions about
potential market scenarios associated with long-range forecasts.
Instead of relying on this single long-range forecasting error, the proposed MFE method
takes advantage of the more reliable assessments conducted for shorter forecasting periods,
identifies trends, and extrapolates those trends to the long-range forecasting zone. This is
done by first calculating an average forecasting error for each forecasting time horizon (e.g.,
the average of the 39 recorded forecasting errors for 0.5 years), and then plotting all average
forecasting errors as shown in Figure 4-3. This figure illustrates the average forecasting errors
obtained when the MFE method was applied on a scope-based asphalt paving CCI developed
for the Colorado DOT. Each point in this figure corresponds to the average forecasting error
calculated for each forecasting period from 0.5 to 19.5 years. The negative sign in the average
forecasting errors means that actual market values tended to be lower than those obtained with
the inflation rate under consideration.
Figure 4-3 shows how the more reliable average errors for shorter forecasting periods define
a strong trend that can be projected to long-range periods. Similar outputs were obtained from
the application of the MFE method in 11 case study regions. In most cases, with a 20-year data
set, points tend to start falling off the trend after about 15 years, when average values start to
be calculated with fewer than 10 observed forecasting errors. On the basis of that observation,
the proposed MFE method ignores all values calculated with fewer than 10 observations and uses
regression analysis to project the remaining values into the future to estimate expected errors
for long-range forecasts. That is how the linear projection in Figure 4-3 was created.

The MFE method not only facilitated a better assessment of average forecasting errors
but also allowed the projection of percentiles around average values to establish error ranges
at 50%, 70%, and 90% confidence levels. Figure 4-4 shows the same linear trend of average
Average Forecasting Error
4% Annual Inflation Rate
Forecasting Time Horizon (Years)
Figure 4-3. Example of MFE output: Average forecasting errors

for Colorado DOT’s asphalt paving activities with a 4% compound
annual inflation rate.

Average Forecasting Error

4% Annual Inflation Rate
Figure 4-4. Example of MFE output: Average forecasting errors

with confidence intervals for Colorado DOT’s asphalt paving
activities with a 4% compound annual inflation rate.
errors from Figure 4-3, but this time with its respective confidence intervals. On the basis of
this figure, the Colorado DOT could reasonably assume, with a 90% confidence level, that any
15-year asphalt paving cost forecast estimated in this region with a 4% compound inflation rate
would offer a forecasting error between +12% and −27%.
Confidence levels are defined by assuming that forecasting errors at each forecasting period
follow a normal distribution. Thus, the confidence bands in Figure 4-4 are calculated from
50%, 70%, and 90% confidence intervals from those normal distributions at each forecasting
time horizon. For example, the upper 90% limit in Figure 4-4 is the result of a regression model
developed with the upper 90% confidence intervals of all forecasting time periods from 0.5 to
15 years. Average errors calculated with less than 10 observations are also discarded.

MFE cost forecasting errors, like those shown in Figure 4-4, can now be used to create a
risk-based forecasting timeline (see Section 1.6) of forecasting factors. Forecasting factors are
unitless values that form a generic risk-based forecasting timeline that can be used to estimate
the intended inflation rate. Those generic outputs can also be translated into dollars to easily
obtain a risk-based forecasting timeline for any current-dollar estimate. Figure 4-5 shows the
risk-based forecasting timeline for the forecasting factors estimated from the forecasting errors
in Figure 4-4. Figure 4-5 also shows the 4% compounded projection, which was actually used
as a reference to develop the risk-based output. Table 4-1 details the process to calculate the
forecasting factors for the first 5 years in Figure 4-5 by applying the forecasting errors in
Figure 4-4 to the 4% annually compounded projection of a forecasting factor of 1.
The risk-based forecasting timeline in Figure 4-5 is the result of plotting and connecting the
data points from Rows C and J to O in Table 4-1. The unitless values in this figure can be easily
transformed into dollar values to generate a risk-based forecasting output just by multiplying
all forecasting factors by the given current-dollar estimate. For example, if the current-dollar
estimate for a given asphalt paving program in Colorado is $10 million, the multiplication
of this value by each of the forecasting factors in Figure 4-4 would generate the risk-based
forecasting timeline shown in Figure 4-5. This figure is actually a scaled version of Figure 4-4.
With Figure 4-6, the Colorado DOT could conclude that the expected average value for this
program in 15 years would be around $15.8 million. With a 70% confidence level, the Colorado
DOT could expect this value to be between $14 and $18 million, approximately.

Figure 4-5. Example of MFE output: Risk-based forecasting timeline for forecasting factors.
Table 4-1. Example of forecasting factors calculation.
Row Year (A) 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5

Forecast of FF =1
A 4% CAIR 1.02 1.04 1.06 1.08 1.1 1.12 1.15 1.17 1.19 1.22
(B = 1.04Â)
B Average FE 0% –1% –1% –2% –2% –3% –3% –4% –4% –4%
Average FF
C 1.02 1.03 1.05 1.06 1.08 1.09 1.11 1.13 1.14 1.16
(B * [1 + C])
D 50% CL 25th PCTL –9% –9% –10% –10% –10% –11% –11% –11% –12% –12%
E FE 75th PCTL 11% 10% 10% 9% 8% 8% 7% 7% 6% 6%
F 70% CL 15th PCTL –13% –13% –14% –14% –14% –15% –15% –15% –16% –16%
G FE 85th PCTL 17% 17% 16% 15% 15% 14% 14% 13% 12% 12%
H 90% CL 5th PCTL –19% –19% –20% –20% –20% –21% –21% –21% –21% –22%
I FE 95th PCTL 31% 30% 29% 28% 28% 27% 26% 25% 25% 24%
25th PCTL
J 0.93 0.94 0.96 0.97 0.99 1 1.02 1.04 1.05 1.07
50% CL (B * [1 + D])
FF 75th PCTL
K 1.13 1.14 1.16 1.18 1.2 1.21 1.23 1.25 1.27 1.29
(B * [1 + E])
15th PCTL
L 0.89 0.9 0.92 0.93 0.95 0.96 0.97 0.99 1.01 1.02
70% CL (B * [1 + F])
FF 85th PCTL
M 1.2 1.21 1.23 1.25 1.27 1.29 1.3 1.32 1.34 1.36
(B * [1 + G])
5th PCTL
N 0.83 0.84 0.85 0.87 0.88 0.89 0.91 0.92 0.94 0.95
90% CL (B * [1 + H])
FF 95th PCTL
O 1.33 1.35 1.37 1.39 1.41 1.43 1.45 1.47 1.49 1.51
(B * [1 + I])
Note: FF = forecasting factor; CAIR = compound annual inflation rate; FE = forecasting error; CL = confidence level; PCTL = percentile.

Average Forecast 50% Confidence Level 70% Confidence Level 90% Confidence Level
$35,000,000
$30,000,000
Forecasted Cost Estimate ($)
$25,000,000
$20,000,000
$15,000,000
$10,000,000
$5,000,000
0 5 10 15 20 25 30
Figure 4-6. Example of MFE output: Risk-based forecasting timeline for $10 million program.
Instead of directly producing risk-based forecasting timelines from the calculated forecasting
factors, the Colorado DOT could also use Figure 4-4 to estimate an annual inflation rate for
asphalt paving activities in the region under consideration. This inflation rate could be shared
with other estimators across the region to facilitate cost forecasts without the need of sharing
a spreadsheet with all forecasting factors. Assuming that the target inflation rate is intended to
match the average trend in Figure 4-4, the Colorado DOT could perform a simple statistical
analysis (probably by using Equation 4-4) to find that the average trend in Figure 4-4 would be
matched by a 3.1% annual compound inflation rate, as shown in Figure 4-7.
All case study results presented in this section to illustrate the use of the proposed MFE
methodology were obtained by using an arbitrary 4% compound annual inflation rate as a
90% Confidence Level 70% Confidence Level

50% Confidence Level 3.1% Compounded Projection
3.5
3
Forecasted Cost Estimate ($)
2.5
1.5
0.5
0 5 10 15 20 25 30
Figure 4-7. Example of MFE output: Risk-based forecasting timeline with applicable inflation rate.

point of reference. In a perfect world, any arbitrary inflation rate (even simple inflation rates)
would yield the same results shown in Figures 4-4 and 4-5, but that is not the case. The use
of regression analysis to approximate trends in market average error makes outputs from
different inflation rates slightly different. The results from this study suggest that the use of
reasonable inflation rates as a point of reference produces more accurate results, which is
the reason that motivated the selection of the suggested rate (4%). However, future research
efforts will further investigate this matter to determine whether a different input would offer
better forecasting effectiveness.
Even though the calculation processes presented in this section—or in this guidebook—
may look complicated or highly technical, these are easy quantitative tasks when performed
with the assistance of data processing technologies and tools available today, such as the
Cost Forecasting Tool Kit that accompanies and is described in the following chapter.

CHAPTER 5
Cost Forecasting Tool Kit
5.1 Introduction
The Cost Forecasting Tool Kit consists of three spreadsheet-based tools designed to facilitate
the implementation of both traditional and advanced cost forecasting methodologies:
• Tool 1 is intended for state transportation agencies (STAs) that prefer to use standard
inflation rates.
• Tool 2 can make all moving forecasting error (MFE) calculations discussed in Section 4.3
in a matter of seconds.
• Tool 3 is focused on linear and exponential regression techniques and yields regression
outputs tailored to better serve the forecasting process.
This tool kit is available on the TRB website on the summary web page for NCHRP Research
Report 953 (http://www.trb.org/main/blurbs/181093.aspx).
Although the tool kit itself provides instructions for its implementation, users are encouraged
to review this guidebook and NCHRP Web-Only Document 283 (Rueda-Benavides et al. 2020),
which together provide the theoretical background required to take full advantage of these
tools. For example, that theoretical knowledge would help in identifying the circumstances
under which a regression analysis (Tool 3) would be more effective than the advanced MFE
methodology (Tool 2). It would also facilitate a better interpretation and more effective use
of the tool kit’s outputs.
Even though the assessment of preforecast estimation of risks and uncertainties is outside
the scope of this guidebook and NCHRP Web-Only Document 283, the Cost Forecasting Tool Kit
allows the use of risk-based current-dollar estimates as inputs to the cost forecasting process.
This produces final risk-based forecasting outputs that account for uncertainties that affect all
cost estimating phases. The tool kit provided with this guidebook should be considered a pre-
liminary functional version. It still needs to be adapted to the needs of each agency. One of the
purposes of providing this tool kit as a deliverable from NCHRP 10-101 was to give STAs access
to the complete set of calculations behind the proposed cost forecasting techniques. The provided
tool kit can be used as a reference for developing more sophisticated and effective cost forecasting
spreadsheets or software applications. The tool kit allows for the use of both multilevel con-
struction cost indexes (MCCIs) and traditional CCIs and facilitates the generation and analysis
of project- and program-specific CCIs from an MCCI. However, it cannot be used to actually
create MCCI systems. The use and capabilities of the cost forecasting tools are detailed below.
5.2 Overview of Cost Forecasting Tool Kit

The Cost Forecasting Tool Kit was built in Microsoft Excel, a spreadsheet software widely
used by STAs, so as to make it easier for them to adapt the provided version of the tool kit
45

Table 5-1. Cost-Forecasting Tool Kit worksheets.
Worksheet Description
Introduction Provides an overview of the Cost Forecasting Tool Kit, including a brief description of
each tool.
Agency information Provides a fact sheet with general information about the agency. This worksheet was created
for informative purposes but also serves as a source of information for the cost forecasting
tools. Most drop-down menus in the tools are linked to this worksheet.
Tool 1: Forecast with Facilitates the generation of forecast cost estimates for any simple or compound annual
inflation rate inflation rate along any forecasting time horizon. It is intended for estimators who already
know the applicable inflation rate and for agencies that prefer the use of external standard
inflation rates without the internal analysis of a cost index. Users in the latter group are
provided with a link to suggested inflation rates.
Tool 2: Forecast with Facilitates the generation of simple or compound inflation rates from scope-based or
moving forecasting error traditional CCIs with the proposed MFE methodology. Outputs are provided in the form of
risk-based forecasting outputs with error ranges at 50%, 70%, and 90% confidence levels.
Tool 3: Forecast with Facilitates the generation of simple or compound inflation rates applying linear or exponential
regression analysis regression analyses, respectively. It can use either scope-based or traditional CCIs.
Suggested standard Although this worksheet is available to all users, it is mainly intended to provide standard
inflation rates inflation rates to the users of Tool 1. This worksheet is actually Module 2 in the framework
for selecting a cost forecasting approach (see Section 2.3).
Multilevel CCI Calculations for Tools 2 and 3 in the Cost Forecasting Tool Kit are performed with
project- or program-specific CCIs developed with the MCCI presented in this worksheet.
This is an MCCI for one of the case study agencies in NCHRP 10-101. This MCCI can
be easily replaced by other MCCIs or by a traditional CCI.
Project-specific CCI Facilitates the calculations described in Section 3.6.4 for the development of
project-specific CCIs. The project-specific CCI in this worksheet is developed with
the provided MCCI. Depending on the settings selected by the user, the CCI
developed in this worksheet can be used in forecasting processes in Tools 2 and 3.
Program-specific CCI Facilitates the calculations described in Section 3.6.4 for the development of program-
specific CCIs. The program-specific CCI in this worksheet is developed with the provided
MCCI. Depending on the settings selected by the user, the CCI developed in this
worksheet can be used in forecasting processes in Tools 2 and 3.
to better meet their needs and preferences. Each of the three tools included in the tool kit is
presented in its own worksheet. There are other supplementary worksheets intended to provide
instructions about the use of the tool kit, present relevant information to users, and feed the
cost forecasting tools with required information and data. The provided tool kit includes a total
of nine worksheets. Each of them is briefly described in Table 5-1.
5.3 Tool 1: Forecast with Inflation Rate

This tool was developed to facilitate the generation of forecast cost estimates for any simple
or compound annual inflation rate along any desired forecasting time horizon. The target
users of this tool are estimators who already know the applicable inflation rate or agencies
that prefer to use external standard inflation rates without internal analysis of the construction
market. Users in the latter group are provided with a link to the suggested inflation rates in
a separate worksheet.
Tool 1, as well as the other two tools, has been designed to forecast either single-value
(deterministic) or risk-based current-dollar estimates. Single-value estimates in Tool 1 generate
deterministic outputs, while risk-based estimates produce risk-based forecasting timelines. The
latter consider only preforecast uncertainties. Risk-based estimates in all three tools are entered
as three-point estimates defined by three parameters: (1) minimum possible value, (2) most

Cost Forecasting Tool Kit 47
Figure 5-1. Tool 1: Forecast with inflation rate—single-value input.
likely value, and (3) maximum possible value. Any of the three tools can easily be modified to
change the way risk-based estimates are represented. For example, they could be modified to use
normal distributions (or any other type of probability distribution) as the value to be forecast.
Screen captures in Figures 5-1 and 5-2 show example calculations for Tool 1 that use single-
value and risk-based cost inputs, respectively. All inputs and outputs in Tool 1 are briefly
described in Table 5-2. Numbering in this table matches the numbers in Figures 5-1 and 5-2.
5.4 Tool 2: Index-Based Forecast

with Moving Forecasting Error
Unlike Tool 1, the second cost forecasting tool does not require an inflation rate provided
by the user. This tool estimates either simple or compound inflation rates by applying the MFE
methodology on a given cost index and then uses those rates to perform the cost forecasting
process. As mentioned before, the tool kit uses an example MCCI to develop project- and
program-specific CCIs, but it could be replaced by either another MCCI or by a traditional CCI.
Also unlike Tool 1, the MFE methodology in this tool allows the generation of risk-based
forecasting timelines from both single-value and three-point estimates. Risk-based out-
puts from the latter show wider error ranges because of the preforecast uncertainty added by

Figure 5-2. Tool 1: Forecast with inflation rate—three-point estimate input.
the three-point estimate, as shown in Figures 5-3 and 5-4. In both cases, outputs are provided
with three error ranges at 50%, 70%, and 90% confidence levels. Screen captures in Figures 5-3
and 5-4 show example calculations for Tool 2 that use single-value and risk-based cost inputs,
respectively. All inputs and outputs in Tool 2 are briefly described in Table 5-3.
5.5 Tool 3: Index-Based Forecast

with Regression Analysis
As explained in Section 2.4, the use of regression analysis techniques seems to be better suited
to risk-seekers. These techniques are more effective for modeling market corrections or when
there is little doubt about the path to be followed by the construction market (and whether that
path can be modeled with a regression model). In those cases, lookback periods should be set
to cover only the period containing the trend to be projected, unlike the MFE method, which is
used with the largest possible amount of data. That is why Tool 3 includes an additional input
to set the desired lookback period. However, regression analysis techniques can also be used for
long-range forecasting, as shown in Figures 4-1 and 4-2. They would just yield less-conservative
outputs than those that would be obtained with the MFE method.
Screen captures in Figures 5-5 and 5-6 show example calculations for Tool 3 that use single-
value and risk-based cost inputs, respectively. All inputs and outputs for Tool 3 are briefly
described in Table 5-4.

Table 5-2. Tool 1: Forecast with inflation rate—inputs and outputs.
Input Description
1. Inflation rate Desired simple or compound inflation rate provided by the user.
2. Maximum forecasting period Maximum forecasting time horizon shown in the horizontal axis of the figures.
3. Desired forecasting time Forecasting time horizon to be used to generate the forecast cost estimates in
horizon the output cells.
4. Type of estimate Drop-down menu to indicate the use of a single-value or a three-point
current-dollar estimate.
5. Current- Single-value Best estimate in current dollars.
dollar Three-point Minimum, most likely, and maximum current-dollar estimates.
estimate estimate
Output Description
6. Forecast cost Single-value Deterministic forecast cost estimate that uses the inflation rate in Input 1 as a
estimates with simple rate at the forecasting time horizon indicated in Input 3.
simple Three-point Minimum, most likely, and maximum forecast cost estimates that use the
inflation rate estimate inflation rate in Input 1 as a simple rate at the forecasting time horizon
indicated in Input 3.
7. Forecast cost Single-value Deterministic forecast cost estimate that uses the inflation rate in Input 1 as a
estimates with compound rate at the forecasting time horizon indicated in Input 3.
compound
Three-point Minimum, most likely, and maximum forecast cost estimates that use the
inflation rate
estimate inflation rate in Input 1 as a compound rate at the forecasting time horizon
8. Forecasting Single-value Deterministic forecasting timeline that uses the inflation rate in Input 1 as a
timeline with simple rate. Highlights forecast value at the forecasting time horizon
simple indicated in Input 3.
inflation rate Three-point Risk-based forecasting timeline that uses the inflation rate in Input 1 as a
estimate simple rate. Risk considered in this output is only preforecast risk. Highlights
forecast values at the forecasting time horizon indicated in Input 3.
9. Forecasting Single-value Deterministic forecasting timeline that uses the inflation rate in Input 1 as a
timeline with compound rate. Highlights forecast value at desired forecasting time horizon
compound indicated in Input 3.
inflation rate Three-point Risk-based forecasting timeline that uses the inflation rate in Input 1 as a
estimate compound rate. Risk considered in this output is only preforecast risk. Highlights
forecast values at desired forecasting time horizon indicated in Input 3.
Figure 5-3. Tool 2: Index-based forecast with MFE—single-value input.

Figure 5-4. Tool 2: Index-based forecast with MFE—three-point estimate input.
Table 5-3. Tool 2: Index-based forecast with MFE—inputs and outputs.
Input Description
1. Type of inflation rate Desired type of inflation rate to be calculated by the MFE method: simple
or compound.
2. Maximum forecasting period Maximum forecasting time horizon shown in the horizontal axis of the
figure.
3. Desired forecasting time Forecasting time horizon to be used to generate the forecast cost estimates
horizon in the output cells.
4. Level of forecast Scope-based CCI to be used with the MFE method. If a project-level
forecast is selected, Tool 2 extracts the required index data from the
project-specific CCI worksheet; otherwise, Tool 2 uses the program-
specific worksheet. This input is not required if a traditional CCI is used
instead of an MCCI.
current-dollar estimate
6. Current- Single-value Best estimate in current dollars.
dollar Three-point Minimum, most likely, and maximum current-dollar estimates.
estimate estimate
Output Description
7. Estimated inflation rate Inflation rate estimated by the MFE method. Depending on type of
inflation rate indicated in Input 1, it would be a single or a compound rate.
8. Forecast cost estimate with Expected forecast cost estimate calculated with the inflation rate in Output
confidence intervals 7 at the desired forecasting time horizon indicated in Input 3. This
estimate is provided with confidence intervals at 50%, 70%, and 90%.
9. Risk-based forecasting Risk-based forecasting timeline that uses the inflation rate in Output 7.
timeline Highlights forecast values at desired forecasting time horizon indicated in
Input 3.

Figure 5-5. Tool 3: Index-based forecast with regression analysis—single-value input.

Figure 5-6. Tool 3: Index-based forecast with regression analysis—three-point estimate input.

Table 5-4. Tool 3: Index-based forecast with regression analysis—

inputs and outputs.
Input Description
1. Lookback period Number of years of index values to be considered for the intended cost
forecasting process.
2. Maximum forecasting period Maximum forecasting time horizon shown in the horizontal axis of the
figures.
3. Desired forecasting time Forecasting time horizon to be used to generate the forecast cost estimates
horizon in the output cells.
4. Level of forecast Scope-based CCI modeled through regression analysis. If a project-level
forecast is selected, Tool 3 extracts the required index data from the
project-specific CCI worksheet; otherwise, Tool 3 uses the program-
specific worksheet. This input is not required if a traditional CCI is used
instead of an MCCI.
current-dollar estimate.
6. Current-dollar Single-value Best estimate in current dollars.
estimate Three-point Minimum, most likely, and maximum current-dollar estimates.
estimate
Output Description
7. Estimated simple inflation rate Simple inflation rate estimated through regression analysis with the
provided CCI.
8. Forecast cost Single-value Deterministic forecast cost estimate that uses the simple inflation rate in
estimates with Output 7 at the forecasting time horizon indicated in Input 3.
simple inflation Three-point Minimum, most likely, and maximum forecast cost estimates that use the
rate estimate simple inflation rate in Output 7 at the forecasting time horizon indicated
in Input 3.
9. Estimated compound inflation Compound inflation rate estimated through regression analysis with the
rate provided CCI.
10. Forecast cost Single-value Deterministic forecast cost estimate that uses the compound inflation rate
estimates with in Output 9 at the forecasting time horizon indicated in Input 3.
compound Three-point Minimum, most likely, and maximum forecast cost estimates that use the
inflation rate estimate compound inflation rate in Output 9 at the forecasting time horizon
11. Forecasting Single-value Deterministic forecasting timeline that uses the simple inflation rate in
timeline with Output 7. Highlights forecast value at the forecasting time horizon
simple inflation indicated in Input 3.
rate Three-point Risk-based forecasting timeline that uses the simple inflation rate in
estimate Output 7. Risk considered in this output is only preforecast risk.
Highlights forecast values at the forecasting time horizon indicated in
Input 3.
12. Forecasting Single-value Deterministic forecasting timeline that uses compound inflation rate in
timeline with Output 9. Highlights forecast value at the forecasting time horizon
compound indicated in Input 3.
inflation rate Three-point Risk-based forecasting timeline that uses the compound inflation rate in
estimate Output 9. Risk considered in this output is only preforecast risk.
Highlights forecast values at the forecasting time horizon indicated in
Input 3.

Acronyms
BEA Bureau of Economic Analysis

BLS Bureau of Labor Statistics
CCI construction cost index
CPI Consumer Price Index
DOT Department of Transportation
ENR Engineering News-Record
IT information technology
MAPE mean absolute percentage error
MCCI multilevel construction cost index
MFE moving forecasting error
NHCCI National Highway Construction Cost Index
PCE Personal Consumer Expenditures
ROUT robust regression and outlier removal
STA state transportation agency
54

References
American Society of Civil Engineers (ASCE). (2013). 2013 Report Card for America’s Infrastructure. http://
www.infrastructurereportcard.org/.
Anderson, S., K. R. Molenaar, and C. J. Schexnayder. (2007). NCHRP Report 574: Guidance for Cost Estimation
and Management for Highway Projects During Planning, Programming, and Preconstruction. Transportation
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questions-and-answers.htm.
Bureau of Labor Statistics. (2018b). Handbook of Methods. https://www.bls.gov/opub/hom/.
Byrnes, J. E. (2002). Best Practices For Highway Project Cost Estimating. Arizona State University, Tempe.
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Colorado Department of Transportation (Colorado DOT) (2019). Standard Specifications Book. https://www.
codot.gov/business/designsupport/cdot-construction-specifications/2019-construction-specifications/
2019-specs-book.
Duncan, G. M., L. M. Sibaja Vargas, P. K. Ram, and K. A. Zimmerman. (2017). Development of a Pavement
Management Manual and Data Quality Plan for the Mississippi Department of Transportation. FHWA/
MDOT-RD-17- 268. Mississippi Department of Transportation, Jackson.
Federal Highway Administration (FHWA). (2017a). Financial Planning and Fiscal Constraint for Transportation
Plans and Programs—Questions & Answers. https://www.fhwa.dot.gov/planning/guidfinconstr_qa.cfm/.
Federal Highway Administration (FHWA). (2017b). National Highway System. https://www.fhwa.dot.gov/
planning/national_highway_system/.
Fisher, I. (1922). The Making of Index Numbers: A Study of Their Varieties, Tests, and Reliability. Boston, New York:
Houghton Mifflin Company.
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Abbreviations and acronyms used without definitions in TRB publications:

A4A Airlines for America
AAAE American Association of Airport Executives
AASHO American Association of State Highway Officials
AASHTO American Association of State Highway and Transportation Officials
ACI–NA Airports Council International–North America
ACRP Airport Cooperative Research Program
ADA Americans with Disabilities Act
APTA American Public Transportation Association
ASCE American Society of Civil Engineers
ASME American Society of Mechanical Engineers
ASTM American Society for Testing and Materials
ATA American Trucking Associations
CTAA Community Transportation Association of America
CTBSSP Commercial Truck and Bus Safety Synthesis Program
DHS Department of Homeland Security
DOE Department of Energy
EPA Environmental Protection Agency
FAA Federal Aviation Administration
FAST Fixing America’s Surface Transportation Act (2015)
FHWA Federal Highway Administration
FMCSA Federal Motor Carrier Safety Administration
FRA Federal Railroad Administration
FTA Federal Transit Administration
HMCRP Hazardous Materials Cooperative Research Program
IEEE Institute of Electrical and Electronics Engineers
ISTEA Intermodal Surface Transportation Efficiency Act of 1991
ITE Institute of Transportation Engineers
MAP-21 Moving Ahead for Progress in the 21st Century Act (2012)
NASA National Aeronautics and Space Administration
NASAO National Association of State Aviation Officials
NCFRP National Cooperative Freight Research Program
NCHRP National Cooperative Highway Research Program
NHTSA National Highway Traffic Safety Administration
NTSB National Transportation Safety Board
PHMSA Pipeline and Hazardous Materials Safety Administration
RITA Research and Innovative Technology Administration
SAE Society of Automotive Engineers
SAFETEA-LU Safe, Accountable, Flexible, Efficient Transportation Equity Act:
A Legacy for Users (2005)
TCRP Transit Cooperative Research Program
TDC Transit Development Corporation
TEA-21 Transportation Equity Act for the 21st Century (1998)
TRB Transportation Research Board
TSA Transportation Security Administration
U.S. DOT United States Department of Transportation

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NCHRP RESEARCH REPORT 953

Guidebook for State

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NATIONAL COOPERATIVE HIGHWAY NCHRP RESEARCH REPORT 953

Published research reports of the

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Learn more about the Transportation Research Board at www.TRB.org.

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COOPERATIVE RESEARCH PROGRAMS

CRP STAFF FOR NCHRP RESEARCH REPORT 953

NCHRP PROJECT 10-101 PANEL

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The guidebook is accompanied by a spreadsheet-based toolkit for using the MCCI.

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8 Chapter 2 Framework for Selecting a Cost Forecasting

15 Chapter 3 Cost Indexing Alternatives

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37 Chapter 4 Index-Based Cost Forecasting Approaches

45 Chapter 5 Cost Forecasting Tool Kit

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1.1 Introduction and Background

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1.2 Overview of Guidebook

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1.3 Business Case for Implementation of Effective

1.4 Inflation Rates and Cost Indexes

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1.5 Factoring Inflation Rates into the

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FCE n = CCE + ( CCE × i × n ) Eq. 1-1

FCE5 = 10,000,000 + (10,000,000 × 0.03 × 5 ) = $11,500,000 Eq. 1-2

FCE n = CCE × (1 + i )n Eq. 1-3

FCE 5 = $10,000,000 × (1 + 0.03)5 = $11,592,740.74 Eq. 1-4

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1.6 Current Practice Versus Ideal Practice

Define Estimate Construction Define Inflation Forecasted Cost Estimate

Figure 1-2. Current typical cost forecasting process.

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Risk-Based Forecasting Timeline

Estimate Range ($)

Collect and clean Develop

Figure 1-3. Ideal cost forecasting process.

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Framework for Selecting

2.2 Module 1: Cost Index Selection

2.3 Module 2: Standard Inflation Rate Selection

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Framework for Selecting a Cost Forecasting Approach 9

Module 3. Module 4. Module 5.

Figure 2-1. Overall framework for selecting a cost forecasting approach.

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Table 2-1. Module 1: Cost index selection.

8 Chapter 2 Framework for Selecting a Cost Forecasting

1.3 Business Case for Implementation of Effective

1.5 Factoring Inflation Rates into the

2.4 Modules 3 to 5: Midterm, Intermediate-Range,

3.5 Limitations of Traditional Construction

3.6.2 Defining Basket of Pay Items for the Multilevel

3.6.3 Configuration and Calculation of the Multilevel