Topic 2 - Cost Index

8/12/2019 Topic 2 - Cost Index

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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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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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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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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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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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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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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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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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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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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=1585


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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

Topic 2 - Cost Index

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