W2 - Cost Index
W2 - Cost Index
W2 - Cost Index
COST INDICES
By Puan Sarah Mazhar Iqbal Khan
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:
COST TO CONTRACTOR!
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]
Published
Source the Weighting
Materials most reliable Average?
Types of labour?
Weighting
Labour Working Hours? Paid
Average?
Holidays? Insurances,
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)
Up to 80
priced tender
Index by average
Current Index
(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.
• 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
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.