RMK 363

Construction Economics 1

Assoc. Prof. Dr.

Mohd Hanizun
Hanafi
 Cost Indices
• Show changes of costs over time by upgrading the cost of similar
facilities from the past to the present

Cost indices show the changes of a certain facility’s costs over time
Year 1913 = 100, …Year 2007 = 4432

If Facility A is similar to my ‘wish’ facility and I know the value of Facility A at 1913,
I can assume my ‘wish’ facility’s value at 2007.
 Cost Indices
• Show changes of costs over time by upgrading the cost of similar
facilities from the past to the present

• Used to determine the general construction costs of structures

• Published periodically by Engineering News Record (ENR) and

other publications

• ENR’s Building Cost Index (BCI): Changes of facility’s costs over

time
– Facility’s components are:
• 1,088 Board Feet of Lumber (2x4, 20-city Average)
– 1 Board Feet = 1’ x 1’ x 1” = 144 in3
(e.g., 2×4 - 10 ft long contains [(2×4)×10] × 12] = 960 in3 → 6.67 board feet)
• 2500 Pounds of Structural-Steel Shapes (20-city Average, Base Mill Price before
1996, Fabricated after 1996)
• 1.128 Tons of Portland Cement (Bulk, 20-city Average)
• 66.38 Hours of Skilled Labor (20-City Average of Bricklayers, Carpenters, and
Structural Ironworkers)
Building Cost Index Data (1990–Date)
ANNUAL
JAN. FEB. MARCH APRIL MAY JUNE JULY AUG. SEPT. OCT. NOV. DEC.
AVG.

1990 2664 2668 2673 2676 2691 2715 2716 2716 2730 2728 2730 2720 2702

1991 2720 2716 2715 2709 2723 2733 2757 2792 2785 2786 2791 2784 2751

1992 2784 2775 2799 2809 2828 2838 2845 2854 2857 2867 2873 2875 2834

1993 2886 2886 2915 2976 3071 3066 3038 3014 3009 3016 3029 3046 2996

1994 3071 3106 3116 3127 3125 3115 3107 3109 3116 3116 3109 3110 3111

1995 3112 3111 3103 3100 3096 3095 3114 3121 3109 3117 3131 3128 3111

1996 3127 3131 3135 3148 3161 3178 3190 3223 3246 3284 3304 3311 3203

1997 3332 3333 3323 3364 3377 3396 3392 3385 3378 3372 3350 3370 3364

1998 3363 3372 3368 3375 3374 3379 3382 3391 3414 3423 3424 3419 3391

1999 3425 3417 3411 3421 3422 3433 3460 3474 3504 3505 3498 3497 3456

ANNUAL
JAN. FEB. MARCH APRIL MAY JUNE JULY AUG. SEPT. OCT. NOV. DEC.
AVG.

2000 3503 3523 3536 3534 3558 3553 3545 3546 3539 3547 3541 3548 3539

2001 3545 3536 3541 3541 3547 3572 3625 3605 3597 3602 3596 3577 3574

2002 3581 3581 3597 3583 3612 3624 3652 3648 3655 3651 3654 3640 3623

2003 3648 3655 3649 3652 3660 3677 3684 3712 3717 3745 3766 3758 3694

2004 3767 3802 3859 3908 3955 3996 4013 4027 4103 4129 4128 4123 3984

2005 4112 4116 4127 4167 4188 4194 4196 4209 4218 4265 4312 4329 4203

2006 4333 4338 4330 4335 4332 4340

2007 4432 Base: 1913=100
Building Cost Index Data (Prior to 1990)
 Cost Indices Time Conversion

• Example:
– Warehouse Estimate: Assume you have an estimate to a similar
warehouse located nearby and completed in 1993 for a cost of
$4,200,000. We are planning to build a new warehouse in Feb. of
2007. The Building Cost Index from ENR for 1993, relative to the
base date of 1913, was 2996% and Building Cost Index from
ENR for Feb. 2007 is 4432%. What is the estimated project cost
if you establish the estimate using Building Cost Index from
ENR?
Cost Indices Time Conversion

• What Information Do We Need?

– Current Building Cost Index (Feb. 2007) = 4432

– Building Cost Index for Year 1993 = 2996

– Similar Facility’s Cost at Year 1993 = $4,200,000

• We Convert From One Base Period to Another

– 2996 : $4,200,000 = 4432 : $X

– $X = (4432/2996) * $4,200,000 = $6,213,084

Cost Indices Component Calculations

• ENR’s Construction Cost Index:

– Used when labor costs are a high proportion of total cost

– Components:

• 1,088 Board Feet of Lumber (2x4, 20-city Average)

– 1 Board Feet = 1’ x 1’ x 1” = 144 in3

• 2,500 Pounds of Structural-Steel Shapes (20-city Average, Base Mill

Price Before 1996, Fabricated after 1996)

• 1.128 Tons of Portland Cement (Bulk, 20-city Average)

• 200 Hours of Common Labor (20-city Average)

 Cost Indices Use and Accuracy

• Accuracies Within 20% to 30% of Actual Costs

• Negligible Time and Effort

• Valuable for Preliminary Planning

 Cost Indices - Limitations

• Problems could arise if the proportions of the input components

(e.g., lumber) in a building type cost index do not reflect the
resources used on the project in question
– E.g., about 40 % of the costs in a petrochemical project is in piping (pipe
and pipe fitters)

• Problems could arise if the project on which the Index is based has
very little in common with the project under consideration
• Some types of indices do not consider factors such as: productivity,
changes in technology, and competitiveness of contractors
3 BUILDING INDICES

BUILDING INDICES
• History of Index Numbers
• The Concept of an Index
• Construction of an Index
• Use and Applicability
3 BUILDING INDICES
SPECIAL RELEASE 1 & 2
• Compiled by Statistics
Department

SPECIFIC USE AS `UPDATE

FACTOR’
• Updating
3 BUILDING INDICES

Readings/ References

• Seeley – Chapter 9
• Ferry – Chapter 14
• Ashworth – Chapter 9
3 BUILDING INDICES
History of Index Numbers
Early pioneer – Sir George Shuckburgh Everlyn (1751 – 1801) in the
development of indices

• Producing a table in one of his papers to show the depreciation of

money given by reference to the subject of prices of provisions and
the necessities of life at different periods of history

The Department of Environment can be regarded as the pioneer in the

construction industry, using their methodology, in the production of
their Directorate of Quantity Surveying Services (DQSS) index of
building tender prices

• It measures the level of prices in accepted tenders for new building

works in the public sector when compared with standard base prices
3 BUILDING INDICES
The Concept of an Index
There are many ways of expressing the change in cost of a particular
item over time
E.g. Hourly labour rates from 1970 to 1979
Year Rate (pence/hour) Absolute change Percentage Index
from 1 year to the change per year
next (pence/hour)
1970 45 - - 100
1971 50 5 11.1 111.1
1972 65 15 30.0 144.4
1973 68
1974 73
1975 77
1976 84
1977 96
1978 106
1979 115
3 BUILDING INDICES
The Concept of an Index
There are many ways of expressing the change in cost of a particular
item over time
E.g. Hourly labour rates from 1970 to 1979
Year Rate (pence/hour) Absolute change Percentage Index
from 1 year to the change per year
next (pence/hour)
1970 45 - - 100
1971 50 5 11.1 111.1
1972 65 15 30.0 144.4
1973 68 3 4.6 151.1
1974 73 5 7.4 162.2
1975 77 4 5.5 171.1
1976 84 7 9.1 186.7
1977 96 12 14.3 213.3
1978 106 10 10.4 235.6
1979 115 9 8.5 255.6
3 BUILDING INDICES
The Concept of an Index
Index
Base year index (1970) 45 x 100 = 100
45

Subsequent Cost
Index
Index for 1971 50 x 100 = 111.1
45
Base Cost

In mathematical terms the index for any year can be stated as follow

Where,
p1
Price Index = x 100 p0 = Price in the base year
p0 p1 = price in the year under review
3 BUILDING INDICES
The Concept of an Index

How the index might be used?

If a contractor’s total wage bill in 1971 was RM 45 000.00, how much

would it be in 1974?

The formula can be applied as follows:

1974 Index

RM 45 000 x 162.2 = RM 65 698

111.1

1971 Index
3 BUILDING INDICES
The Concept of an Index

How the index might be used?

If a contractor’s total wage bill in 1971 was RM 45 000.00, how much

would it be in 1974?

The formula can be applied as follows:

= 162.2 – 111.1 x RM 45 000

OR
111.1
= RM 20 698

Total Wage Bill = RM 45 000 + RM 20 698

= RM 65 698
 3 BUILDING INDICES
Construction of an Index
When constructing an index, four factors need to be considered: -
1) The purpose of the index
- must be carefully considered – It will affect
decisions relating to the other three
e.g. change in building costs must not be used
for revaluing machinery, nor even the
commercial value of a building
2) The selection of the items
- Temporary structure should be included for
constructing the index?
3 BUILDING INDICES
Construction of an Index

3) The choice of weights

- There is difficulty in obtaining a correct balance of the
importance of each of the constituent items within an index

4) The choice of the base year

- Should be a recent year when there had been unusual
occurrences
3 BUILDING INDICES
Uses of Indices

1) Establishing the level of individual tenders

- to obtain the level of tenders within a period of time
- measuring of its competitiveness
- towards the best conclusion from the analysis of the result
of a tender
3 BUILDING INDICES
Uses of Indices

2) Adjustment for time

- Suitable index should be used

The calculation for adjusting a tender, cost analysis, rate or

the like in order that it may relate to a different time period is
as follows: -
Where A = % Change
B = Index number at the date to
A = (B – C) 100 which the tender etc., is being
adjusted
C C = Index number of the tender etc.,
or index number current at date of
tender
3 BUILDING INDICES
Uses of Indices
2) Adjustment for time (cont’d)
Where A = % Change
B = Index number at the date to which the tender etc., is
A = (B – C) 100 being adjusted
C = Index number of the tender etc., or index number
C current at date of tender
Example

Year 1981 – Cost/FS of office project = RM 80.00

Year 1985 – Cost/FS of office project = RM 120.00
If price at year 1981 need to be considered as base value, it will
be given as 100. Cost index at year 1985 will be given as 150

A= (120 – 80) 100 + 100 = 150

80
3 BUILDING INDICES
Uses of Indices (Cont’d)

3) Pricing
- In detail
- Important to know the individual index value of any project
which is to be used as a basic for pricing
- Variation orders

4) Cost Planning
- In the early stages of cost planning, a rate per square
meter etc. cost could be arrived at
3 BUILDING INDICES
Uses of Indices (Cont’d)

5) Forecasting
- Important to the client and contractor
- The results of such forecasting can be used as a basic for
calculating of the following: -
a) The value of the return – Contractor & Client
b) The cost to the client of a new building at some
future time
3 BUILDING INDICES
Uses of Indices (Cont’d)

6) General Comparison
- various types of building; extrapolation of existing trends

7) Comparisons between Published Indices

- to obtain the best references

8) Calculation of cash-flow projection

- The QS will be able to advise the client of his likely monthly
financial commitments
3 BUILDING INDICES
Uses of Indices (Cont’d)

9) Updating Elemental Cost Analysis

10) Updating for research

11) Calculation of price fluctuation
12) Assessment of market condition
3 BUILDING INDICES

SPECIAL RELEASE 1 & 2

• Compiled by Statistics Department

SPECIFIC USE AS `UPDATE

FACTOR’
• Updating
Region
A = Pulau Pinang, Kedah and Perlis
B = Perak
C = Wilayah Persekutuan Kuala Lumpur,
Melaka, Negeri Sembilan and Selangor
D = Johor
E = Pahang
F = Kelantan and Terengganu
3 BUILDING INDICES

• When using SPECIAL RELEASE 1

and 2, the focus should be on the
UPDATE FACTOR
•The UPDATE FACTOR is derived
simply from: -

CURRENT INDEX = NEW INDEX

BASE INDEX OLD INDEX
3 BUILDING INDICES

Example

Say ECA available for 3-Storey RC

Building (pitched roof) in Kedah –
January 1997 (Base Index)

New building to be estimated 4 –

Storey RC Building (pitched roof) in
Pahang – August 2005 (Current Index)
3 BUILDING INDICES

BASE or OLD INDEX

Go to Category 3, Region A, Period
Jan’97 = 120.1

CURRENT or NEW INDEX

Go to Category 3, Region E, Period

Aug’2005 = 117.7
3 BUILDING INDICES

Basic rule, new indices should be

higher numbers than old one,
especially over a period of several
years

ADJUSTMENT
3 BUILDING INDICES

Jan’97 as their Base Year; i.e. Jan’91

= 100

Index for Aug’2005 as their Base

Year; i.e. Julai’02 = 100
3 BUILDING INDICES

SR 2 – Appendix A gives the

Adjustment Factor Table following
the guide and example in Appendix B

Our CURRENT (NEW) INDEX will be

Category 3 Region E – Adj. Factor =
1.2653
1.2653 X 117.7 = 148.9
3 BUILDING INDICES

UPDATE FACTOR, therefore is: -

= CURRENT (NEW) INDEX
BASE (OLD) INDEX
= 148.9
120.1
= 1.23980 (5 decimal places)
It then will be applied to the
relevant cost/m2 of the ECA
(base) to obtain the new cost/m2
 Assignment

Answer the questions bellow: -

• First Semester Examination Question No 1

(Academic Session 2007/08)
• First Semester Examination Question No 1
(Academic Session 2008/09)