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Cost Index
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The Cost Index
Sources of cost data are usually fromcompleted projects thus it is a historical
data.
Thus this information has to be adjustedusing indices.
The index numbers are used to update the
information of historical cost to the current
value or to forecast price trend. Chose a base date and the cost at that date
is usually given the value of 100, all future
increases or decreases being related to this
figure.
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Cost Index - Example
The cost of employing a labourer on site at
base rate was RM60 per day and the current
figure is RM70.
RM60 would be given the index value 100.
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Use of Index Numbers
There are number of uses to which
these indices can be used in the
construction industry, among others as
follows: Updating for research
Extrapolation of existing trends
Calculation of price fluctuations Identification of changes in cost
relationships
Assessment of market conditions
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Use of Index Numbers
Cost planning Cost planning requires effective use of historical
cost information
Updating elemental cost analyses The total cost/unit rate of elements can be
updated using the following formula
From the above, % of price change can be
calculated
Current price/rate = Bvase price x current
index
base index
% of change = Current index base index x
100%
Base index
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Use of Index Numbers
Tender information of past projects can bebrought up to current costs for budgeting
purposes
Example Office was constructed at RM1,800/m2
GFA during year 2000. Another new
office will be constructed at the end of
2013. Calculate the new rate & % ofchange in rate. Current index is 215 and
the base index is 198. Other factors
remain unchanged.
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Use of Index Numbers
Prediction
By plotting the pattern of costs measured
by an index, it may extrapolate a trend
into the futureAdjustments to price fluctuation
Index is used to calculate the increase in
the construction cost for contrats with
fluctuation clauses.
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Use of Index Numbers
Identification of changes in costrelationships
Cost index is prepared for different
components of a building It is possible to see the changes in the
relationship between one component and
another to identify which solution appears
to be a better proposition
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Use of Index Numbers
Evaluation of market trend/condition The condition of market will influence the
sum to be paid by client
Updating for research
Values in the indices could be used to updatethe price in the BQ to current value/futurevalue
Larger sample of cost information can beobtained at a number of different points intime by using an index
Market trend index = Tender price indexBuilding cost index
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Cost Index / Factor Cost
Index Measures the changes according to
time for resources used like cost oflabour, materials and plant.
Types of cost index including Materials cost index by category of
building and region
Unit price index for specific material such
as cement, aggregate, sand etc. Building material cost index by work
section and region
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Cost Index / Factor Cost Index
Limitations of factor cost indices
It takes little or no account of the
tendering market.
It does not directly measure the change inthe price the client must pay
It does not measure the change in cost of
a specific building under consideration
It is unlikely that the typical buildingwill
have the same mix of resources as the
clients project.
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Cost Index / Factor Cost
Index Uses of factor cost indices
It is very suitable for identifying trends in
resource costs and relationships
It is useful for evaluating cost fluctuationsin contracts which allowed for
reimbursement of any changes in cost to
the contractor that occurred during the
contract period.
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Cost Index / Factor Cost
Index
Base year
(RM)
Current
(RM)Index
Bricks 20 28 140
Mortar 2 3 150
Labour 8 10 125
415
Average Index = 415/3 = 138.34
Method of Constructing Cost Index
Cost per square metre of wall
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Cost Index / Factor Cost
Index
IndexBase year
weightingExtension
Bricks 140 20 2,800
Mortar 150 2 300
Labour 125 8 1,000
30 4,100
Average Weighted Index = 4,100/30 = 136.67
Method of Constructing Cost IndexLaspeyres index
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Cost Index / Factor Cost
Index
IndexCurrent year
weightingExtension
Bricks 140 28 3,920
Mortar 150 3 450
Labour 125 10 1,250
41 5,620
Average Weighted Index = 5,620/41 = 137.1
Method of Constructing Cost IndexPaasche Index
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Tender Price Index
Measures the changes in tender price.
Serves as an indicator for the
movement of tender prices for building
projects. Will consider building cost, market
condition, profit, price fluctuations etc.
The main uses of this index are toupdate historical data for estimating
purposes.Graph refer to:
https://www.jkr.gov.my/pwcic/?page_id=158
https://www.jkr.gov.my/pwcic/?page_id=1585https://www.jkr.gov.my/pwcic/?page_id=1585https://www.jkr.gov.my/pwcic/?page_id=1585https://www.jkr.gov.my/pwcic/?page_id=1585https://www.jkr.gov.my/pwcic/?page_id=1585https://www.jkr.gov.my/pwcic/?page_id=1585https://www.jkr.gov.my/pwcic/?page_id=15858/12/2019 Topic 2 - Cost Index
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Tender Price Index
The tender figure is compared with afigure produced by pricing the sametender document using standard rates atthe base year prices.
From the two resultant figures an indexcan be calculated showing the increaseor decrease in cost to the client within
the current tender market. It record what is happening in the market
place and therefore should be moreuseful in updating prices for a design
budget.
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Tender Price Index
Limitations of the tender-based index The questionable validity of BQ rates.
A large number of projects are required for each index. Itissuggested at least 80 are required for a suitablesample.
The difficulty of obtaining priced BQ for jobswhich are comparable except for date of tender. Lack of projects at any one time results the average
index rely on unbalanced sample containing more jobs ofone particular functions and location. This may lead toerror in the trend plotted
The amount of work involved in analysing all therates in scores of BQs. A large number of projects are required for each index.
The index relies heavily on the base year schedule whichwill be regularly revised to take into account newproducts, new measurement.
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Tender Price Index
Uses of the tender-based index It measures the change in the cost to the
client of a particular project over time,
taking full account of market conditions inaddition to the change in cost to the
contractor.
It is relatively simple to operate once a
base schedule of price has beenobtained.
It allows comparison of price obtained by
tender for a specific project with thenational or re ional buildin rice trend.
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Tender Price Index
Uses of the tender-based index It allows the relationship between the
market for buildings of different function
and locality to be plotted. It is not based on other indices and
therefore any inherent inaccuracies are
not compounded.
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Tender Price Index
Constructing a tender-based index The accepted tender figure based on the
pricing BQ is a record of the market price at aspecific point in time.
The measured items in the BQ re-pricedusing a standard schedule of base yearprices, then an index can be constructed bycomparing the current tender figure with the
new derived base year total. For each section of the format pick up the largest
value item, then the second, and so on, until a total of25% of the section value is achieved.
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Which type of index to use
For a short-term forecasting, allowance forfluctuations, etc., the factor cost index can be
used
For general estimating and cost planning
purposes a tender-based index will more reliablymeasure of the change in the cost to the client. It
also has the advantage of being able to measure
the performance of a tender, region or building
type against the national average. For a very long-term forecasting and budgeting
the use of unit price index based on cost per
square metre or unit accommodation may be
more applicable.
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Challenges
Based on past data Indices are constructed based on past data with
the assumption that the past trends will largelycontinue in the future. The projection can bewrong if the trends of price movement changes
drastically.
Composition
The composition of the index is based upon a
representative samples or combination ofcomponents. If the composition do not reflectthe location, or becomes outdated, or veryunique project, then it will not reflect the pricemovement accurately.
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Example: Index to Find Out
Fluctuation
Project Kuala Lumpur
Month/Year of tender Closed 1-Jan-07
Date of Valuation 30-May-07
Month/Year Current Index Applicable 30-May-07
Applicable
Category ofBuilding Index
Base
Index
Current
Index
Material
Factor
Fluctuation
Factor
Applicable
value of
Workdone todate
Application
value of
workdone toprevious
month
Applicable
value of
workdonefor the
month
Increase/D
ecrease
for themonth
Total
increase/d
ecrease
up toprevious
month
Total
increase/d
ecreaseup to date
D x (C-B)/B F-G E x H J+K
Low residential 121.2 125.8 0.66 0.0250 150,000.00 140,000.00 10,000.00 250.50 448.00 698.50
High residential 122.6 128.0 0.66 0.0291 300,000.00 285,000.00 15,000.00 436.05 269.00 705.05
Hotel 0.66 - - -
Office 125.9 133.5 0.54 0.0326 250,000.00 232,000.00 18,000.00 586.75 253.20 839.95
Commercial 0.66 - - -
Industrial 0.78 - - -Education 0.64 - - -
Health 122.3 127.7 0.67 0.0296 450,000.00 435,000.00 15,000.00 443.74 241.00 684.74
Total 1,150,000.00 1,092,000.00 58,000.00 1,717.04 1,211.20 2,928.24