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COST INDICESBy Puan Sarah Mazhar Iqbal Khan
QSM 556 Construction Economics II 1
QSM556
Introduction Sources of Cost data are usually from completed
projects thus make it a historical data.
When these data are used to prepare cost plans or estimates, this information has to be adjusted using indices.
The index numbers are used to update the information of historical cost to the current value or to forecast price trend and future cost.
Thus, Cost Data & Cost Indices are interconnected!
Historical Cost Data
Cost Indices
Current value/updated
cost data
a) Cost Planning
Forms of cost planning: approximate estimate, cost plan, cost of element, total project cost.
Requires wide range of historical cost data.
By using indices, updated cost data can be apply toproduce an accurate cost planning.
Quick Ex 1: An office was constructed in 2007 at RM 2,200.00/m2
GFA. Another new office will be constructed in the middle of 2010. Calculate the new rate and the percentage in the change of rate if the current index given is 224 and the base index is 194. Other factors remain unchanged.
Formula:
New Price/rate (current)= Base Price X Current IndexBase Index
Answer:
New Rate (current) : RM 2, 200.00 /m2 GFA X 224
194
: RM 2, 540. 21/m2 GFA
% Index Change: 224- 194 X 100 : 15.46%
194
% Change in Price : 2, 540.21 – 2, 200 X 100 : 15.46 %
2, 200
Quick Ex 2: A school was constructed in 2006 at RM 1,600.00/m2
GFA. Another new school will be constructed in the early of 2010. Calculate the new rate and the percentage in the change of rate if the current index given is 215 and the base index is 180. Other factors remain unchanged.
What is the formula??
Answer:
New Rate (current) : RM 1, 600.00 /m2 GFA X 214
180
: RM 1, 902.22/m2 GFA
% Index Change: 214- 180 X 100 : 18.89%
180
% Change in Price : 1,902.22 – 1, 600 X 100 : 18.89 %
1,600
b) Prediction The pattern or trend of the
current index may be extended to a certain date in near future. i.e. for projects 1 or 2 years ahead
HOWEVER, the prediction has to be done cautiously.
Prediction can be accurate when market condition and price are stable.
Less reliable when prediction are made for a longer period due to inflation of rate.
0
20
40
60
80
100
120
140
160
2005 2006 2007 2008 2009 2010 2011
Index
c) Adjustments to price fluctuation
Is used to calculate the increase in the construction cost for contracts that consist FLUCTUATION CLAUSE.
Contract that provides for the increase in the cost of the contractor’s resources like materials, labour wages, etc.
I.e.:-
(find standard form that allow this)
i.e. evaluate the increase or reduction in cost of 15 materials to the contractor since the tender date to avoid loss to the contractor
d) Price comparison The cost of different materials
and processes does notchange at the same fixed rate.
To identify when acomponent appears to be abetter proposition thananother
Therefore, indices can beused to measure suchchanges and observe changesin cost between componentsat a stipulated duration.
0
100
200
300
400
500
600
2007 2008 2009 2010
Ready Mix Concrete
Cement
e) Evaluation of market trend/condition To forecast the tender price
Market condition will affect the price charged to the client
Trend of indices might not be the same as cost index, e.g.cost of material increases but due to lack of jobs, pricemay be competitive
c) Cost Index Is an input index that measures changes over time
in resource costs such as labour, plant, material
Cost for CONTRACTORS i.e.: Measures the changesin cost which is spent by the contractor.
The cost index can be prepared for the total cost ofbuilding or type of building to reflect generalincrease in cost.
Location is also a factor that effect cost index
COST TO CONTRACTOR!
c) Cost Index HOWEVER it is difficult to apply cost index to reflect total
cost of building due to numerous methods ofconstruction, variety of materials used and types ofbuilding. (except for some of government project-e.g:Schools)
Application is easier when cost index is in the forms ofelement: i.e.: concrete work, substructure, or specificmaterials i.e.: cement, sand, aggregate, etc.
Sources? : Department of Statistics, Malaysia- producedmonthly:
a) Special Release 1 for Civil Engineering Work
b) Special Release 2 for Building and Structural Works
http://www.statistics.gov.my
Cost Index ------------- Price Index
Cost incurred during construction
Price for the completed building
a) Price Index Also known as Tender Price Index!
The most common form of index used by the quantitysurveyor. (that works with QS firms)
The best index which should be used by QS because the clientis most interested in how much he has to pay to thecontractor .
The main uses of this index are to update historical cost datafor estimating purposes.
Factors like building cost, market condition, profit and pricefluctuations is included in the preparation of price index. (dodiagram)
Amount to be paid by CLEINT!
b) Price Index Manage & produce by PWD- produced for standard
government buildings once every six months.
Year Tender Price Index
1/ 2003 249.97
2/ 2003 246.81
1/ 2004 243.69
2/ 2004 288.59
1/ 2005 312.09
2/ 2005 312.56
1/ 2006 393.64
2/ 2006 412.62
1/ 2007 415.44
Cost /m2 for Building Construction, 2004 & 2007, PWD
b)Location Index Used to adjust the building cost according to its
location:
[A=Perak,Kedah,Perlis], [B=Perak], [C= KL,Selangor, N.S, Melaka],[D=Johor],[E=Pahang], [F=Kelantan,T’ganu]
This index is gathered from the tender price index.
E.g.: The total cost for a 2 storey office building in Kuala Lumpur will be different from a similar building in Pahang.
Region A B C D E F
LocalityFactor
1.1134 1.0652 1.000 1.0811 1.0582 1.0580
d) Maintenance Index Is an output index that measures changes in the cost
for maintenance works only. No such index is
prepared in Malaysia
a) Cost Index Index for resources like plant, material, and labour.
The average index can only be prepared if cost of each resource of a ‘typical building’ is monitored over time
Construction of a simple index for cost of a brick wall-
Cost per square meter of wall:
Base Year Current Index
£ £
Bricks 20 28 140
Mortar 2 3 150
Labour 8 10 125
Average Index 138.34 /3 415
Index on individual element
However- no account has been taken of the fact that bricks have more effect on the cost of a brick wall.
All the three sources was given an equal status.
Thus if very rapid rise in cost of one of the resources, the index will be uneven.
To overcome this- resources need to be ‘weighted’ accordance to their importance:
a) Cost Index
Index Base Year Weighting
Extension
Bricks 140 20 2,800
Mortar 150 2 300
Labour 125 8 1,000
Average Index: 136.67 /30 4,100
Construction of Cost Index
Total
MaterialsPublished Source the
most reliable
LabourTypes of labour?
Working Hours? Paid Holidays? Insurances,
Plant Hiring rates?
Weighting Average?
Weighting Average?
Weighting Average?
Index per element
Weighted Again (for total building cost)
Final Index-change in cost in time for the typical
building chosen
Importance points about cost index: What is the cost index is actually measuring? It measures
the change in the cost of resources to a contractor for a ‘typical building’.
It does not directly measures the change in in the pricethe client must pay
It does not measure the change in cost of specific building
Although resources for even ‘typical building’ will not have the exactly same resources, but the main resources are usually very similar.
Suitable for identifying trends in resource costs.
b) Tender Price IndexIntroduction:
Indicates tender price of building works.
Compiled by comparing tender rates from acceptable tenderswith Base Schedule Rates
Measures changes in materials, labour and plant, and theinfluence of economic conditions operating at the time of thetender
More useful in updating prices compared to cost indices because:
a) TPI considers price to client actual amount he should payfor the building not building construction cost only
b) TPI measures economic market trend/market conditionse.g. cost increases but price may remains the same orreduces due to competition
b) Tender Price Index Directly relevant to Quantity surveyor that provides service
for client. (not for QS that will works with contractors)
Why TPI and not CI? Because cost index takes no account of the tendering market. (tendering market: how many projects that are available to enter for tender?- will influence the competitiveness and the pricing of profits)
The source? The tender documents itself (priced tenders by contractors)
By monitoring the tendering markets, more useful to client in updating prices that suite his budget.
Construction of TPI• Based on priced BQ of successful tenderer :i.e. contract document.
• Not final account figure because
• Has to wait 2/3 years for completion therefore
• Limited application
• Unreliable result
• Does not reflect the price level at the completed date
• Tender price = price at the time of the tender close
• Purpose is to predict tender figure
• When to construct TPI
• Preferable immediately after the contract is signed
• JKR – within 1 month after the contract is signed
• JKR/ISM – 80 price indices are considered reliable samples to compileaverage index (TPI)
• To prepare quarterly i.e. every 3 months or half yearly
Preparation of TPI
• Projects of new building works tendered for competitively in the
form of Bills of Quantities under conventional contractual
arrangement are used as samples.
• Housing projects, Civil Engineering Works, Mechanical and
Electrical Works are not included in the samples.
• Random samples from around peninsular Malaysia, includes
samples from both private and public sectors.
• Bills of Quantities of selected new building projects are re-
priced at a Base Level (Base Schedule – JKR Schedule Of Rates
For Lump Sum Tenders) and the re-priced amount compared to
the actual tender amount to produce a Project Index.
Sampling procedure for TPI Measured works = Contract Sum Less Non-measured
works(prelim, PC Sum, Prov Sum, Profit and Attendance, Contingencies).
BQ consists of thousands of measured works – consider only a small number of items, only those financially significant items.
Items should be taken or selected in descending order of value for every section or element.
Priority given to most expensive items, the followed by less expensive items.
Priced BQ using Base schedule of
prices
QS for Client
Cost
Increase / decrease in cost to the client within the current
tendering market
Contractor 1 Contractor 2
Priced BQ
Cost and Current Index
Obtain index for every element
Each section-take the largestvalue itemsuntil a total of25%
Index for a particular project
Average Index for publication
Increase / decrease in cost to the client within the current
tendering market
Current Index
Index by average
Up to 80 priced tender
The formula
(M)(A)
The TPI for a period is the geometric mean of the project
indices of all samples for that period
where
(A) is number of samples
(M) is product value of all indices of the samples
Uses of TPI
1. Cost planning may be improved by bringing the cost of
known projects and historical data to a common level
for comparison purposes using the index.
2. It can be used to set realistic target cost and cost limits.
3. The individual TPI for the project can be used to
evaluate specific price determinants such as location,
building type, method of construction, size of contract
or length of contract.
4. The index of individual project will indicate the
price level against the norm and therefore the
keenness.
5. It indicates the effectiveness of cost planning, e.g.
if the project has a low key index compared to the
norm, and its price level is well above the cost
limit, then it has either been badly cost planned or
the cost limit was inadequate or both.
Uses of TPI
Advantages of TPI
1. It measures the changes of project over time, takinginto account market conditions in addition to thechange in cost to the contractor.
2. Simple to operate once a base schedule of prices hasbeen obtained.
3. It allows comparison for a specific project withnational or regional building price trend.
4. It allows relationship between the market forbuildings of different function and locality to beplotted.
Problems associated with TPI1. A large number of projects are required for each index. It is
suggested at least 80 are required for a suitable sample. Very
few organizations have access to this number of projects and
therefore cannot prepare their own index by this method.
2. The index relies heavily on the base year schedule which will
be regularly revised to take into account new products, new
measurement. This is time consuming and costly task.
3. Lack of projects at any one time results the average index rely
on unbalanced sample containing more jobs of one particular
functions and location. This may lead to error in the trend
plotted.
Items included in the indexItems that are selected must be readily achieve thepurpose of the index, adequately representing the typeof work they are trying to describe. It is necessary toselect items that adequately measure the changes thatare likely to occur, and items with long utilization lifespan.
Weighting of itemsItems in the index must be weighted in accordance with their proportional importance.
Factors to be considered include in the construction of an index
Factors to be considered include in the construction of an index
Which Index?Identify the purpose of the index e.g. building cost index measures costs to contractor whereas tender price index measures cost to client, thus includes the contractor’s profit while building cost index does not include such allowances.
Any index based upon a particular form of construction using a dominant form of material, or combination of components cannot be relied upon to form any realistic assessment other than for that category of work.
Factors to be considered include in the construction of an index• Base year
A typical year with no unusual fluctuations and events shouldbe chosen as the base year. The selection of a sound base year isimportant so that allowance for the increases or decreases maybe soundly based for the subsequent years.
• Method of construction
One common method relies on pricing the same items from atypical bill of quantities. These same items are then re-priced atsome future date. An index is produced that expresses how thesame items have changed in price during the period underexamination. The more complex indices can be based oncomplex mathematical formulae and require computers toprocess the data.
a) Based on past data Indices are constructed based on past data. They are
projected in the future with the assumption that the past trends will largely continue in the future. The projection can be wrong if the trends of price movement changes drastically.
b) Composition The composition of the index is based upon a
representative samples or combination of components. If the composition do not reflect the location, or becomes outdated, or very unique project, then it will not reflect the price movement accurately.
c) Components outside the index Where certain importance materials and components which are
not included in the index, but used in the project with give significant impact in price and this will affect the overall accuracy of using the index. In this situations
d) Substitutes and obsolescence Ideally, to make accurate and realistic assessments for the
various components in the index the same item, the samequantity and common source should be used. However,problem can arise where an original significant componentceases to be used or cannot be used any longer (e.g.asbestos) there will be a need to substitute an alternative inits place, but this may give rise to inaccuracies as we are nolonger comparing the same components.
e)Taste and fashionIndices that remain unchanged in content over a long period oftime are likely to be subject to inaccuracy due to changes intaste and fashion that alter the mix and extent of items in theindex. The content of the index should be reviewed atreasonable intervals to judge whether the balance of items asoriginally established remains valid at a later date.
f) Human error
Where information is collected from a variety of sources using
several people there is always the possibility of errors in
calculations and false submissions, produced either innocently or
consciously.