It is the season for releasing updated editions of major construction cost price books around the world and as these new books arrive in the mail or updated databases are made available on-line it is important to remember how these documents should be used and interpreted. In the fast-paced construction world, industry practitioners often rely on published cost data to prepare feasibility or initial construction cost estimates. In doing so, little thought is usually given to the consequences of these actions or the validity of the professional advice being provided.
Just because the construction cost price book has been prepared and published, by a reputable source does not mean the contents are reliable or a substitute for professional estimating services. This article will consider how these pricing books are really compiled and consequently their benefits and drawbacks.
Sources of Cost Data
So, where does the cost data for a construction cost price book originate? Despite the claims by most publishers, construction cost data can come from only a limited number of sources and each generates slightly different information. Therefore, both the users and compilers need to understand exactly what the basis of the data is.
Tender Price Information – In many ways, this is the best cost information, since it represents the market price secured in a competitive bidding environment. However, modern construction projects have a wide variety of unique features, which means very few tenders are identical (putting aside the different physical nature of the construction work itself) resulting in a whole host of factors which could directly influence the pricing structure. Illustrations of this point would be:
- Contractual Terms and Conditions
- Procurement Route
- Level of Competition
- Local Market Conditions
- Project Desirability
- Nature of Project Participants
- Construction Duration
- Perceived Project Risks
Each one of the above factors will have an impact on how bidders consider and present their pricing. Therefore, whilst tender prices are perhaps the best source of construction cost information, it is essential for the details of the identified projects to be understood by whoever is going to use the data. Simply accepting and using information provided can create significant validity risks.
Another factor affecting the use of tender price information is the quantum of suitable data available. Most construction cost price books provide generic rates, either for project types (roads, schools, offices, etc.) or for individual components (reinforced concrete, reinforcement, blockwork, copper pipe, etc.), this means the authors need to ensure they have a large enough sample size to produce a representative data set.
Here again there are two significant issues; firstly the number of available tenders of a similar type (comparing all school tenders, irrespective of the project type is not going to be appropriate), may not exist, and secondly when the tenders were actually issued / received (often there is a significant time gap between tenders being received and the data being made available to third parties). The consequence of these situations is often that the valid sample size available for the price book compiler is very small (sometimes only 1 or 2 tenders in any specific category).
A further consideration is that most independent cost data compilers rely on tender information provided by third parties, where the validity of the data is hard if not impossible to interrogate, therefore has to be accepted on face value. Where the cost data compiler is an industry firm, the reliability of the data should be better, but in these cases, volume of suitable data will become an even greater issue.
Finally, irrespective of the data compiler, many project owners remain reluctant to release the commercially sensitive contract / tender price information from their projects, which further reduces the available data pool.
Quotations / Supply Prices – Some price books heavily focus on providing cost data relating to a wide range of material, labour or plant / equipment items. These rates are sourced, either from tender prices (as above) or through the solicitation of market quotations / price lists. Although the information collected is traceable and largely consistent (since the format, structure, and conditions relating to the quotation received can be determined by the originator) these rates do not truly reflect the local market conditions.
In most countries around the world, or within large cities for that matter, supply prices will vary depending upon the exact location of the project. In the USA for example, there are often significant State-by-State variances, linked to taxation, transportation, supply availability, or climatic conditions. In Africa, prices in major urban centres will be dramatically different to those found in settings that are more rural. Some of these issues are addressed through regional factor adjustments (discussed below) but fundamentally, the user of the price book needs to know what is the base point used by the cost data compiler. The difficulty still remains that there needs be a large enough sample size to make the cost data credible, which means they often use a wide catchment area.
When quotations / supply prices are used as the basis of a cost price book, it is important that the author use the same sources for each edition of the book; this ensures consistency in the pricing. If different sources are used each time, the cost data is going to be highly unreliable, unless the sample size is statistically significant (so that anomalies can be removed from the data set before averaging takes place).
Regulated / Controlled Prices – In certain markets around the world, the Government or State may impose a capped or regulated price for particular key commodities or services. This price regulation may come from a government monopoly position in that aspect or it may relate to a key item, which could be subject to market price manipulation if not controlled. In each case, clearly stating these controls in the price book is critical. The primary reason is that when the controlled prices are separately adjusted by regional / locational factors (to suit the actual location of the project being priced), the price controls in one location may not apply in the new location, meaning further adjustment to the pricing will be necessary.
Labour Rates – Published labour rates often come in two formats, the pure labour costs (i.e. the amount an individual worker costs) or labour content within a particular rate. The second aspect (labour content within a particular rate) can be a complete topic by itself, but in simple terms, they are usually a theoretical value based upon the perfect worker performing the specific task in the most efficient manner (therefore exceedingly rare in practice).
Pure labour costs may seem to be a simply obtainable value, especially where there are union controlled, or government dictated minimum wages. However, this is not the case. Firstly, it is important to understand the basis of the rates being quoted is the amount the worker receives, “take home”, or are they the cost to the company employing the worker. The two are significantly different values. Secondly, the definition of the worker category has to be understood. It is frequently the case that a particular role requires workers of specific skill level, qualification, years’ experience, or trade certification, ensuring that all the rates compared are for exactly the same type of worker is vital. Finally, the working conditions of the different labour rates has to be considered, they should all be based upon the same working hours (without overtime), similar shift patterns (day productivity is usually better than night working), and operating conditions (whether below ground or at high level).
In each of the above situations, the number of factors potentially influencing the rate outcome is significant and if the cost price book does not clearly set out the assumptions and methodology adopted, the users of the data can be extremely exposed.
Compilation Process
Once the actual data has been sourced and gathered perhaps the hardest part begins. Whilst it may seem obvious to average the complete dataset to produce single value, or perhaps apply more complex statistical analysis processes, the result would not be acceptable. In a perfect world a range of values would be provided in the pricing book (to show the potential spread of outcomes possible), but typically a single value is all that is provided.
The optimum approach to producing a single value is to review the data available for each item in turn. Where there are outlying rates (i.e. particular rates, which stand out from the remaining data as being too high or low), these rates should be either excluded from the calculation or queried with the original data provider to revalidate the information recorded. The rest of the data should then be averaged to produce the single mean value. The fact that this process has to be repeated for every item in the pricing book often means it is not carried out, or there simply is not adequate data available in the first place for every item to determine if the rates provided are consistent.
Timing of Release
Once all the data has been sourced, compiled, analysed, and averaged, it is time for publication. The construction price book hitting the market now is unfortunately unlikely to be representative of the market today (or in the future for that matter); it reflects the market at the time when the data was sourced. Irrespective of the publisher, most price books contain cost data, which is at least 6 months old. Therefore, a 2016 price book published in September probably contains tender price information for projects released to the market in late 2015 or early 2016. In most developed construction markets, this is acceptable since prices do not fluctuate significantly during the course of any given year. However, if there have been major geo-political or economic events, which have influenced exchange rates, material supplies, or government regulations, it is possible the cost data is outdated even before it is published.
Some online systems claim to have “real time” updates on price movements. Whilst this may be technically true to the extent that as new information becomes available the database is updated, it is the timing of the cost data, which is important. Most tender price information will only (or should only) be released once the evaluation process has been completed and a successful award taken place (which usually takes a minimum of at least 1 month from tender submission). Therefore, before any analysis by the cost data compiler can take place at least a month will have elapsed from a tender submission. Then the review and validation process will take a further period before publication can be approved (if the review does not take place the validity of previous data will be called into question). This lag, between submission and publication will depend upon the processes adopted by the price book compiler but in all cases, it will result in cost data, which is based upon historic information. It is therefore the obligation of the data publisher to identify clearly the periods used for the source data.
Regional Factors
As a user of a construction cost price book, it is often inevitable that the project being considered for pricing is not exactly in the location where the price book is based. This means that some sort of adjustment to the information available has to be made to make it appropriate for use. Many publishers assist in this process by usefully providing regional or locational factors, which can be applied to all the prices depending upon the final project location. These factors are typically a percentage (either positive or negative) adjustment to be applied to the published rates.
Although this may seem a quick and simple solution to the problem at hand, the factors provided have to be treated with the same level of caution as all the other information. The general principle behind the location factor is to provide a general guide as to how prices vary from one location to another. Often they are historical averages or simply reflect different legislation patterns. However, the basis must be understood and spelt out in the price book.
As a rule, not every rate or price across all items will fluctuate in the same magnitude from location to location. Whilst as an overall average, the adjustment may be appropriate; if a particular project has, a greater proportion of a particular component than would be the norm, then examining the locational pricing trends of that aspect becomes more important than relying upon just the blended average.
Therefore, it is important to consider not only the physical location of the project, but also the nature of the work being proposed. In geographically large countries, such as China or USA, regional factors become even more suspect as prices will vary significantly from one side of the country to the other. In these situations using published information from the actual market, being considered is more important than relying on generic national data with adjustment factors.
Conclusions
Despite the above concerns, there is a role for construction cost price books, but they have to be handled with great care. Price books provide a valuable source of generic cost information, which allow professionals to gain a rapid understanding of price trends as well as reference point for validating their own estimating.
Provided the users clearly read the basis and methodology provided by the publishers, (assuming this is actually available) then the composition of the cost data can be established. In the case of projects, which are less sensitive to individual market price fluctuations, such as major infrastructure, or civil engineering projects price books are much more reliable. For these projects, the use of a price book can be of significant value to the estimator since it will provide base cost data. This information can then be adjusted to reflect any project specific factors or conditions.
In terms of headline benefits, construction cost price books offer a wealth of market data for those people not actively involved in the construction industry or do not have access to actual project commercial data. However, they must always be viewed as being a guide rather than definitive information and they certainly cannot be regarded as a substitute for obtaining professional advice.
Ultimately, it is always advisable to carry out a cost estimate based upon actual design information, project specific market data (i.e. quotations), and if possible historical cost data for similar projects in that location. There are numerous methods, which can be adopted when preparing a construction cost estimate, the Practical Guide to Estimating provides information, guidance, and advice on how to approach, prepare, and present a construction cost estimate depending upon the level of information available. This guide also includes more information on the use of cost data from both price books as well as in-house databases.
Plateau Group 