QSM556

COST INDICES
By Puan Sarah Mazhar Iqbal Khan

QSM 556 Construction Economics II 1

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

Current
value/updated
cost data

Cost
Indices
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 to
produce 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 Index

Base 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 Index
 The pattern or trend of the 160
current index may be 140
extended to a certain date in
near future. i.e. for projects 1 120
or 2 years ahead 100
 HOWEVER, the prediction 80
has to be done cautiously.
60
 Prediction can be accurate
when market condition and 40
price are stable. 20
 Less reliable when prediction 0
are made for a longer period
2005 2006 2007 2008 2009 2010 2011
due to inflation of rate.
c) Adjustments to price fluctuation
 Is used to calculate the  I.e.:-
increase in the (find standard form that
construction cost for allow this)
contracts that consist
FLUCTUATION
CLAUSE.
i.e. evaluate the increase or
 Contract that provides reduction in cost of 15
for the increase in the materials to the contractor
cost of the contractor’s since the tender date to avoid
resources like materials, loss to the contractor
labour wages, etc.
d) Price comparison
 The cost of different materials 600
and processes does not
change at the same fixed rate. 500

 To identify when a 400

component appears to be a Ready Mix
better proposition than 300 Concrete
another Cement
200
 Therefore, indices can be
used to measure such 100
changes and observe changes
in cost between components 0
at a stipulated duration. 2007 2008 2009 2010
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, price
may 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 changes
in cost which is spent by the contractor.

COST TO CONTRACTOR!

 The cost index can be prepared for the total cost of

building or type of building to reflect general
increase in cost.
 Location is also a factor that effect cost index
c) Cost Index
 HOWEVER it is difficult to apply cost index to reflect total
cost of building due to numerous methods of
construction, variety of materials used and types of
building. (except for some of government project-e.g:
Schools)
 Application is easier when cost index is in the forms of
element: i.e.: concrete work, substructure, or specific
materials i.e.: cement, sand, aggregate, etc.
 Sources? : Department of Statistics, Malaysia- produced
monthly:
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 Price for the completed

construction building
a) Price Index
 Also known as Tender Price Index!
 The most common form of index used by the quantity
surveyor. (that works with QS firms)
 The best index which should be used by QS because the client
is most interested in how much he has to pay to the
contractor .
Amount to be paid by
CLEINT!

 The main uses of this index are to update historical cost data
for estimating purposes.
 Factors like building cost, market condition, profit and price
fluctuations is included in the preparation of price index. (do
diagram)
b) Price Index
 Manage & produce by PWD- produced for standard
government buildings once every six months.
Cost /m2 for Building Construction, 2004 & 2007, PWD
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
b)Location Index
 Used to adjust the building cost according to its
location:
Region A B C D E F
Locality 1.1134 1.0652 1.000 1.0811 1.0582 1.0580
Factor
[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.
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
£ £ Index on
individual
Bricks 20 28 140
element
Mortar 2 3 150
Labour 8 10 125
Average Index 138.34 /3 415
a) Cost Index
 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:
Index Base Year Extension
Weighting
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 Index per
element

Published
Source the Weighting
Materials most reliable Average?

Types of labour?
Weighting
Labour Working Hours? Paid
Average?
Holidays? Insurances,

Plant Hiring rates? Weighting

Average?

Final Index-change in cost Weighted Again (for

in time for the typical total building cost) Total
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 price

the 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 Index
Introduction:
 Indicates tender price of building works.
 Compiled by comparing tender rates from acceptable tenders
with Base Schedule Rates
 Measures changes in materials, labour and plant, and the
influence of economic conditions operating at the time of the
tender
 More useful in updating prices compared to cost indices because:
a) TPI considers price to client actual amount he should pay
for the building not building construction cost only
b) TPI measures economic market trend/market conditions
e.g. cost increases but price may remains the same or
reduces 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 compile
average 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.
 Index for a particular project

Contractor 1 Contractor 2 QS for Client

Priced BQ Priced BQ using

Each section- Base schedule of
take the largest Obtain index for
value items prices
every element
until a total of
25%
Cost and Cost
Current Index

Increase / decrease in cost to

the client within the current
tendering market
Average Index for publication

Up to 80
priced tender

Index by average

Current Index

Increase / decrease in cost to

the client within the current
tendering market
The formula
The TPI for a period is the geometric mean of the project
indices of all samples for that period

(A) (M)

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.
Uses of TPI
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.
Advantages of TPI
1. It measures the changes of project over time, taking
into account market conditions in addition to the
change in cost to the contractor.
2. Simple to operate once a base schedule of prices has
been obtained.
3. It allows comparison for a specific project with
national or regional building price trend.
4. It allows relationship between the market for
buildings of different function and locality to be
plotted.
Problems associated with TPI
1. 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.
Factors to be considered include in the
construction of an index
 Items included in the index
Items that are selected must be readily achieve the
purpose of the index, adequately representing the type
of work they are trying to describe. It is necessary to
select items that adequately measure the changes that
are likely to occur, and items with long utilization life
span.
 Weighting of items
Items in the index must be weighted in accordance
with their proportional importance.
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 should
be chosen as the base year. The selection of a sound base year is
important so that allowance for the increases or decreases may
be soundly based for the subsequent years.

• Method of construction
One common method relies on pricing the same items from a
typical bill of quantities. These same items are then re-priced at
some future date. An index is produced that expresses how the
same items have changed in price during the period under
examination. The more complex indices can be based on
complex mathematical formulae and require computers to
process 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 same
quantity and common source should be used. However,
problem can arise where an original significant component
ceases to be used or cannot be used any longer (e.g.
asbestos) there will be a need to substitute an alternative in
its place, but this may give rise to inaccuracies as we are no
longer comparing the same components.
e)Taste and fashion
Indices that remain unchanged in content over a long period of
time are likely to be subject to inaccuracy due to changes in
taste and fashion that alter the mix and extent of items in the
index. The content of the index should be reviewed at
reasonable intervals to judge whether the balance of items as
originally 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.