Cost Indices and Cost Estimates Part 1
Historical cost data is commonly used to help make precise cost estimates for construction projects, but in order for this data to remain relevant, we must consider the changes in price levels that naturally occur over time. These fluctuations in price levels can help cost estimators project future costs more accurately since the input price indices of labor and materials are a direct result of the input components of construction. Conversely, output price indices reflect variances in the price level associated with completed projects, which helps us measure productivity.
Professor Niranjan Swarup defines construction cost indices as “an indicator of the average cost movement over time of a fixed basket of representative goods and services related to the construction industry.” In this two-part series, our Central Florida contractor attorneys will explain the importance of cost indices as applied to cost estimates.
An Introduction to Price Indices
As a weighted aggregate measure of the total cost of goods and services for a project, price indices help us understand changing project costs on a year-to-year basis. Typically, we utilize indicators such as the Gross Domestic Product (GDP) deflators collected by the U.S. Department of Commerce and the consumer price index (CPI) published by the U.S. Department of Labor.
These indicators are utilized to broadly gauge any changes in the cost of production, and the resulting price for consumers, for goods and services. While these indicators are effective for judging price fluctuations in a variety of major U.S. industries, there are specialized price indices for construction professionals that more accurately depict the input and output factors for construction. These specialized indices are more appropriate because the costs related to construction may supersede or lag behind these two, widely used price indices.
What Do Specialized Indices Measure?
There are many sources for finding special price indices for construction. Some of these indices include the Building Material Price and Building Trades Union Wages, two reports compiled by the U.S. Department of Labor to help contractors accurately predict building expenses. You can also find information on the construction cost index and the building cost index in the Engineering News-Record (ENR). On the other hand, cost indices for construction outputs are compiled by Turner Construction Company and Handy-Whitman Utilities and published annually in the U.S. Statistical Abstracts. These specialized indices measure a variety of construction-related costs including:
- The effects of wage rate trends
- The effects of material price trends
- Price changes of all construction input factors measured as constants
- Price changes of construction output
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Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.