guide for adjustment of prices in construction cost estimates for

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Guide for Adjustment of Prices in Construction Cost

Estimates for Inflation and Changes in MarketConditions

for

Transport Scotlands Major Rail Projects Programme

Date: Q1 2006


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Contents

Page

Introduction 1

Cost and Price 1

Reason why adjustment of prices is required 1

Impact of price inflators on estimates 2

Recommendations 2

Methodology 4

Appendices

A Suggested Price and Cost Adjustment Factors (at Nov 2005) 6

B The RICS BCIS indices 7

C Network Rail Suggested Inflation Allowances (Compared with RPIand BCIS TPI)

9

D Vi f j t ti t lt t d ith th 10


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Introduction

This guide has been prepared to provide a basis for implementing escalationadjustments to the estimated costs of projects in Transport Scotlands Major RailProjects portfolio.

There are two distinctly different adjustment aspects:

1. Adjustment to reflect the way in which prices move and2. Adjustment to reflect the way costs move.

We have summarised in Appendix A the annual adjustment rates for use on theTransport Scotland major projects.

Cost and Price

As a preface to this Guide, it is worth highlighting the difference between cost andprice as both terms are used extensively throughout this paper:-

Cost in the context of the adjustment of estimates, the term cost is commonlyused when in reality the focus is on the price likely to be paid for the work ratherthan how much the input resources may cost to use. Strictly speaking, cost is thecost of labour, plant, materials, etc before any addition of the supplier or contractorprofit, overheads and risk margins. However, the term cost is also used in thecontext of the more global sense of prices paid for construction work aggregatedacross a part or whole of the construction industry.

Price is the cost of the work in the marketplace after the addition of the supplier or


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on specific materials (a good example of this recently was in respect of steelprices which were being driven up by strong demand from China relative to

world capacity)

on specific components (lifts and escalators are a good example of wherebecause of long lead-in periods supply is unable to flex easily to meet suddenpeaking in demand and this can impact on prices)

on trades (whilst prices can be affected by national wage agreementsavailability of skilled craftsmen in particular localities where there is a period

of high construction activity can impact on prices)

on tender prices (this can also be localised and or regionalised and may varyaccording to the type of construction work)

Impact of price inflators on estimates

Estimates, if prepared months or possibly a year or more ago, will need to be re-

based to current price levels to make the figures meaningful - not just in terms of theoverall total price likely to be paid, but also in respect of the individual work items inthe estimate. This is particularly important for processing adjustments that havearisen because of design or scope changes since the original estimate was preparedand also for when designs and implementation strategies for specific parts of theproject are discussed and reviewed. In these instances recourse to the detailedbreakdown of estimate figures is needed and these figures must also be at currentprice levels to ensure any subsequent adjustments are realistic. The adjustmentfactors in these instances can be assessed from actual historic informationconcerning how construction prices actually moved over the period since the


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5. project organisation (promoter costs, project management costs,designer and other consultant costs, etc)

Use the following indices/adjustment rates for the above categories (seeAppendix A):

Work Category Adjustment to later estimate

date or to date of tender

Adjustments for cost

inflation duringconstruction period

Civils Average of Tender Price

adjustments from four of theleading construction costconsultants

Network Rail Civil,

Structures and Pwaysuggested inflationallowances

Building Average of Tender Priceadjustments from four of theleading construction costconsultants

BCIS General BuildingCost Index

Signalling %TP adjustments ascalculated above + 1.2

Network Rail Signallingsuggested inflationallowances

Electrical & tractionpower; telecomms

%TP adjustments ascalculated above + 1.0

Network Rail Electrificationand Telecomms suggestedinflation allowances

Organisation/

Management

%RPI + 1.5 %RPI/Government inflationforecast + 1.5


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signalling and electrical works respectively, over and above the adjustment ratesgenerated from the TP calculation for civils and building works. This percentage

premium is in recognition of these additional pressures on specialist labour prices.

Organisation and management prices: adjustment of these figures is related more tomovement in salaries. Salary increases are at least partially linked to cost of livingrises and it is considered that RPI/Government inflation projections are a reasonablebasis for assessing adjustments to organisation and management prices. However,in a rising construction market, these rises are likely to run ahead of RPI/inflation andtherefore an addition of 1.5 should be added to the adjustment rates calculated from

the RPI/inflation forecasts.

(Note: although the DTI does track salaries in the construction industry, it only doesso historically i.e. no forecasts are provided. This is one of the reasons why theRPI/Government inflation projections are felt to be more suitable as a basis)

Adjustments for cost inflation during construction period:-

Civil and Building works: Network Rails suggested inflation allowances for civil,

structures and permanent way should be used.

Signalling: Network Rails suggested inflation allowances for signalling should beused.

Electrical/traction power and telecoms: Network Rails suggested inflation allowancesfor electrification and telecoms should be used.

O i ti d t i d i d b RPI/G t i fl ti


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Update prices from estimated date of tender of 4Q05 to estimated date of end of

construction of 4Q06:

Building Estimate 150,000 at 4Q05

BCIS General Building Cost index change: 246.2 to 255.2; increase of 3.66%

150,000 + 3.66%/2 = 152,745 (on the basis of expenditure being a straight line

we reduce the percentage uplift by half to, in effect, apply it at the mid point of theprogramme)

Regular reviews

Reviews of the assessment of movements in tender prices and in costs should bemade regularly to ensure the indices and adjustment factors are kept up to date andremain realistic.

References:

BCIS website and BCIS On-line

DTI website

Association of Cost Engineers The Cost Engineer dated September 2005.

Network Rails The Calculation of Inflation Allowances for Capital Cost Estimates Guidance Notes

30 9 05 i d 13 10 05


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Appendix A

Suggested Price and Cost Adjustment Factors (at Nov 2005)

Adjustment to later estimate date or to date of tender (expressed in %) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Civils 4.08 5.53 3.15 4.83 4.30 4.55 4.53 4.55 4.48 4.87Building 4.08 5.53 3.15 4.83 4.30 4.55 4.53 4.55 4.48 4.87Signalling 5.28 6.73 4.35 6.03 5.50 5.75 5.73 5.75 5.68 6.07Electrical & Traction Power,

Telecomms 5.08 6.53 4.15 5.83 5.30 5.55 5.53 5.55 5.48 5.87Organisation/Management * 3.30 3.20 4.40 4.50 4.30 4.00 3.90 4.00 4.10 4.10* O/M 2010 detail n/a; 2009 has been repeated

Adjustment for cost inflation during construction period expressed in %2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Civils 0.54 9.59 3.82 6.82 5.26 5.55 5.55 5.57 5.55 5.55Building * 2.60 4.60 5.90 5.60 6.60 4.50 3.20 3.80 3.80 3.80Signalling 5.41 4.13 3.87 4.76 6.48 4.87 4.87 4.88 4.87 4.87Electrical & Traction Power,

Telecomms 2.51 3.92 2.36 7.37 2.62 4.15 4.15 4.16 4.15 4.15Organisation/Management 3.30 3.20 4.40 4.50 4.30 4.00 3.90 4.00 4.10 4.10


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Appendix B

The RICS BCIS Indices

The BCIS (Building Cost Information Service) prepares and publishes a largenumber of cost and tender-price indices as follows:

Cost indices Output Price indicesRegional Tender Price indices Tender Price indicesTrade Price indices BMI Maintenance Cost indices

Construction Plant Hire Associationindices

Measured Term Contract updatingpercentages

Miscellaneous indices Price Adjustment Formula indicesRetail Prices

Indices are available monthly, quarterly and annually. BCIS, in its five year forecast,forward predicts its General Building Cost Index and its all-in TPI.

The BCIS tender price index series measures the trend of contractors pricing levelsin accepted tenders. The Tender Price index series includes:

Index Series Base Index 100 date

All-in TPI + 1985 updated 25.4.2000

Firm Price TPI 1985 updated 20.4.2000

Housing Refurbishment TPI 1991 updated 27.1.2000


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Q1 06 8 PA Guide 06.doc

Network Rail Suggested Inflation Allowances (derived)

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

BCIS All-in Tender Price Index 6.59% 6.74% 3.16% 14.29% 0.00% 4.91% 7.44% 6.02% 6.00% 6.00% 6.00% 6.02%

Retail Price Index 1.05% 2.53% 2.64% 3.43% 2.24% 2.53% 2.53% 2.54% 2.53% 2.53% 2.53% 2.54%

General Management & Design

(incl. Professional Services)

4.60% 3.18% 2.45% 4.16% 4.16% 3.78% 3.78% 3.80% 3.78% 3.78% 3.78% 3.80%

Signalling 5.41% 4.13% 3.87% 4.76% 6.48% 4.87% 4.87% 4.88% 4.87% 4.87% 4.87% 4.88%

Electrification & Telecomms (inc

plant)

2.51% 3.92% 2.36% 7.37% 2.62% 4.15% 4.15% 4.16% 4.15% 4.15% 4.15% 4.16%

Civils, structures & pway 0.54% 9.59% 3.82% 6.82% 5.26% 5.55% 5.55% 5.57% 5.55% 5.55% 5.55% 5.57%

General Building 2.60% 6.09% 4.31% 7.34% 5.98% 3.23% 5.48% 5.23% 5.21% 5.21% 5.21% 5.23% Network Rail Inflation Guides Compared with RPI and BCIS TPI

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

2001 2 002 2 003 200 4 2005 2 00 6 20 07 2008 200 9 2 010 2011 20 12

Years

PercentageChange

BCIS All-in Tender Price Index

Retail Price Index

General Management & Design

(incl. Professional Services)

Signalling

Electrification & Telecomms (inc plant)

Civils, structures & pway

General Building

later years extrapolated on a straight line basis

later years extrapolated on a straight line basis

Annual percentages calculatedDec index to Dec index

Appendix C Network Rail Suggested Inflation Allowances (Compared with RPI and BCIS TPI)


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Q1 06 9 PA Guide 06.doc

Tender Price Inflation - Comparison of Published Data - Year on Year

Year CS DLE % ECH % G&T % Average BCIS % PUBSEC % MIPS % RPI %2000 4.00 9.60 5.00 4.50 5.78 8.40 9.20 8.90 3.002001 4.00 4.50 4.00 3.80 4.08 6.00 3.80 7.30 1.802002 4.00 7.40 7.20 3.50 5.53 7.30 3.70 6.50 1.702003 3.00 3.10 4.00 2.50 3.15 3.20 3.20 3.60 2.902004 4.00 4.60 6.20 4.50 4.83 14.30 3.80 8.10 3.002005 4.00 2.90 5.80 4.50 4.30 4.50 3.70 5.00 2.802006 4.00 4.10 5.60 4.50 4.55 4.50 3.60 6.90 2.502007 4.00 4.90 5.40 3.80 4.53 3.80 3.30 4.602008 4.00 5.90 4.80 3.50 4.55 3.50 3.30 3.802009 4.00 6.10 4.80 3.00 4.48 5.302010 4.00 6.10 4.50 4.87

CS Cyril SweettDLE Davis, Langdon & Everest ECH EC HarrisG&T Gardiner & TheobaldBCIS Buidling Cost Information ServicePUB SEC DTI Public Sector IndexMIPS NHS extrapolation from Pub SecRPI Retail Price Index

Appendix D Views of major construction consultants compared with other published data

guide for adjustment of prices in construction cost estimates for

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