CHAPTER 7

INDICES AND TRENDS

LEARNING OUTCOMES

After reading this chapter, you should have an understanding of building cost indices
and trends. You should be able to:
■■ understand the purpose of index numbers
■■ be aware of how indices can distort facts
■■ distinguish between building cost and tender price indices
■■ appreciate regional differences in costs
■■ measure and forecast trends in costs and prices using different techniques

7.1 INTRODUCTION

Cost information is recorded and collected over a period of time. During this period of
time, building costs, market conditions and inflation will change for a variety of reasons.
The collected data therefore, if they are to be of any use to the construction industry, must
be converted to a current date or appropriate future timescale. This conversion process is
normally achieved both in theory and in practice by means of index numbers. These index
numbers, of which there are many different types, are used in comparing price, production,
employment or population changes, etc. over a certain period of time. An index number will
measure the change that has occurred from one period to another.
All index numbers require the selection of a base period, i.e. a date to which all of the
other numbers in the series can relate. For all general purposes this is set at 100 to allow for
a decrease in the value of the data as well as an increase. The base date could be set at 1, but
this might result in negative values which could become cumbersome to handle.
Simple index numbers do not take into consideration the relative importance of various
items concerned. These are known as unweighted index numbers and are generally
meaningless. The majority of the index numbers used in the construction industry include
weighted items in the order of their importance within the index. They are calculated on the
principle known as ‘the basket of goods’.

7.2 CONSTRUCTING AN INDEX

When constructing an index the following four factors need to be considered.

Purpose of index The purpose must be considered carefully since it will affect all
decisions relating to the other factors. The use of the index will be restricted to that purpose.
Building cost and tender price indices (see p. 118) are two common indices associated with
115
116 Cost Studies of Buildings
the cost study of buildings. While they have some similarities they are different and one
cannot be used to predict values for the other.

Selection of items There is a difficulty in capturing the spirit of an index by measuring

a limited number of items. It is not possible to include every item but only a representative
sample that hopefully will predict future values. The correct solution lies in defining the
purpose of the index carefully and then selecting the items that best achieve that purpose.

Choice of weights The balance between the importance of the individual items in the
index is achieved through weighting the different values.

Choice of base year A typical rather than a freak year should be selected since this is
more likely to provide an honest and reliable index.

7.3 USES OF INDEX NUMBERS

Index numbers are used either for updating historic cost data to current pricing levels or for
predicting future trends in costs and prices. The following are some of the more common
applications.

7.3.1 Cost planning

The process of cost planning requires the efficient use of large quantities of historic cost
data. In order for these to be used properly the data will need to be updated by use of
indices. The total cost of a project, the all-in rate or the prices for an individual element can
each be updated as follows:

Cost per m2 GIFA in cost analysis = £298.31

Index for this scheme 271
Current index applicable to proposed scheme 327
The formula for updating is as follows:
CI
PR = OR ×
OI
where PR is the proposed rate, OR is the original rate, CI is the current index and OI is the
original index.
327
PR = £298.31 × = £359.95 per m2
271
The percentage difference between the two rates can be calculated as follows:
CI – OI
× 100
percentage change =
OI
327 – 271
= × 100
271
= +20.66%

7.3.2 Forecasting

The pattern of the existing indices can be extended to a date at some time in the future. This
extrapolation of existing indices must be done with great care. Some subjective allowance must
 Indices and Trends 117
also be made for the difference between the conditions prevalent in the past and the future.
The projection of existing indices is a simple matter under stable conditions, but the erratic
behaviour of inflation rates in recent years has made forecasting a very difficult occupation.
Even experienced economic commentators have found themselves in difficulty over this
matter. The methods used for forecasting trends are discussed more fully later in this chapter.

7.3.3 Variation of price clauses (fluctuations)

Indices are used to calculate the increased costs of construction under a fluctuation-type
contract. It is possible to evaluate to a tolerable level of accuracy the increases in the costs
of resources to the contractor. This method has distinct advantages over the traditional
‘actual’ cost reimbursement clauses found in many construction contracts. The method is
easily understood, is quick to calculate, reduces administrative time and costs and results in
earlier payment to the contractor. The single disadvantage is that it does not provide an exact
reimbursement of the contractor’s increased costs.

7.3.4 Comparison of cost relationships

The costs of different materials and processes do not change at the same rate. Indices can
therefore be used to see the changes in the relationship between one component and another
over a period of time.

7.3.5 Assessment of market conditions

In addition to the costs of building, market conditions will affect the price charged to the
client. The tender price index takes this into account. A relative market condition index can
be calculated by dividing the tender price index by the building cost index.

7.3.6 Pricing

Index numbers can be used for updating prices in bills of quantities or other published
sources, to current or future dates. The process used is identical to that used in cost planning.

7.4 LASPEYRE’S AND PAASCHE’S INDICES

Some index numbers are known by the names of their authors. The Laspeyre index is a base
year weighted index expressed by the formula
current price × base quantity
× 100
base quantity × base price
Paasche’s index uses current year quantities in its computation:
current price × base quantity
× 100
base price × current quantity
Laspeyre’s index is more frequently used, mainly because of the difficulties of establishing
current quantities. A third option is to use an index calculated by the formula
current price × current quantity
× 100
base price × base quantity
This will measure changes in price other than inflation factors alone.
118 Cost Studies of Buildings
7.5 DIFFICULTIES IN THE USE OF INDICES

■■ An index number can at best provide only a general indication of the changes in value of
a commodity. It cannot therefore be considered to be very precise. The retail price index
(RPI), for example, provides only a general indication of the changes in the costs of
household goods. It is an index based on an average or typical household, few of which
probably exist in practice.
■■ The composition of an index is based on typical commodities that should reasonably
measure the appropriate change. They may in practice be totally unrepresentative of the
things they hope to measure.
■■ Commodities which may be considered to be important may be outside the scope of the
index.
■■ In an attempt to measure real comparisons, the same item, same quantity and same
source for the commodity must be used. When any of these are altered, inaccuracies may
result, from factors other than the change one is trying to measure.
■■ If the original commodities cease to exist then inaccuracies can occur due to the
substitution of alternative items.
■■ The correct balance of items that were chosen initially may now prove to be false,
because of the changes in fashion etc. that have occurred over a period of time. For
example, a housing cost index constructed in 1900 may have included slates and
stonework as predominant items. It would not have included heating, electricity, double
glazing, insulation, etc. The purpose of the index will influence how often the index itself
needs to be revised.
■■ Individual weightings should be applied to reflect the importance of certain items in the
index.
■■ Inaccuracies in the data can occur because of errors in computation or because users
supplied false returns. They may do this to conceal information they do not wish to
disclose.
■■ Although indices may attempt to measure a change in the overall pricing level, they
can provide misleading results. For example, Table 7.1 gives the hypothetical costs
of employing labour. The company costs, which include a bonus payment, show no
change in the costs of employing labour for each of the five years. The nationally agreed
wage rates show that costs have been rising by 10 per cent. The use of the latter would
therefore provide misleading information as far as this company is concerned. Table 7.2
also gives some misleading data. The indices show that costs have apparently increased
by 10 per cent this year when compared with last year. The actual costs show no change
in the true values.

Table 7.1 Costs of employing labour

Year
2 3 4 5
National rate    5.00    5.50    6.05    6.66    7.33
National index 100 110 121 133 146
Company rate    5.00    5.50    6.05    6.66    7.33
Bonus    3.00    2.50    1.95    1.34    0.77
Total rate    8.00    8.00    8.00    8.00    8.00
Index 100 100 100 100 100
 Indices and Trends 119
Table 7.2 Misleading statistics

Costs Last year This year

Bricks £12.00 £18.00
Concrete £20.00 £14.00
£32.00 £32.00
Indices
Bricks 100 150
Concrete 100 70
Average 100 110

7.6 COST AND PRICE INDICES

Indices are indicators of the performance or behaviour of a factor that is indexed. They are
a very useful tool available for estimators in order to capture cost and price behaviour of
the whole industry, building materials, labour or plant. Figure 7.1 indicates the behaviour of
some of the most prominent indices available for the UK construction industry.

7.6.1 Building cost index

The building cost index measures changes in contractors’ costs. It is constructed on a

combination of actual wage rates, material costs and plant and overhead charges (see Figure
7.2). The combination of these different items is complex in attempting to measure reality. It
is therefore based on the principle of a ‘basket of goods’ in order to represent typical ratios.
The reality of the representation depends upon the type of goods selected, since not all items
can be included, and their respective amounts or ratios. The task is difficult owing to the
variety of different materials and methods of construction that are available.

10.0%

5.0%

0.0%
Jul–07 Jul–08 Jul–09 Jul–10 Jul–11 Jul–12 Jul–13 Jul–14

–5.0%

–10.0%

–15.0%

Building costs Tender prices Labour costs Material costs

Fig. 7.1 Year-on-year behaviour of construction industry indices

120 Cost Studies of Buildings
250

Cement Bricks Steel C opper

200

150

100

50

0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Fig. 7.2 Variability in material price indices

A building cost index can be constructed for:

■■ The total construction costs of a building or a type of building;
■■ An element (external walls) or trade (brickwork) within the building process;
■■ A single material, e.g. cement.
The task in the first of these is extremely difficult owing to the variety of materials,
construction methods and types of building available. The available published indices,
of which there are several, provide little more than a general indication of cost trends. In
an attempt to make such indices more useful, building types can be separately classified
according to their method of construction. While this provides for more reliable information,
the index is nevertheless a rather blunt tool.
The selection of representative or typical items is also difficult, because of the wide
variation of constructional methods and materials that can be used. Other problems include
the quantity of data that needs to be collected in order to provide some statistical reliability.
However, in view of the costs involved in collecting data, the amount needs to be restricted.
Table 7.3 lists a range of some of the more common building materials, together with
an index of their costs from 2002 to 2012 (2005 = 100). This table shows that building
materials do not increase at the same rate over time. This is due to the availability of the
supply of the raw materials and the demand for these products, often on a worldwide scene.
This feature can be observed at any point in time. Material price speculators use such data to
trade these materials, sometimes on futures markets, in the hope and expectation that prices
will increase more than expected. The price of doors and windows has been fairly stable for
the full 11-year period considered. The prices went down in 2007 by 13 per cent but started
gradually recovering and reaching 2005 prices by 2012. On the other hand, prices of cement
and steel have increased significantly by 44 per cent and 90 per cent, respectively. The
differences between these materials’ costs can be attributed to many different factors such as
the mining of raw materials, manufacturing and transport costs, open market conditions and
many others. Product development through research, development and innovation is another
factor that influences changes in prices.

7.6.2 Tender price index

The tender price index is based on what the client is prepared to pay for the building. It
therefore takes into account building costs, but it also makes an allowance for market
 Indices and Trends 121
Table 7.3 Typical material price indices, 2005 = 100

United Kingdom 2005 = 100

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
AGGREGATES
 Crushed rock – including 103 103 99 96 95 103 110 116 121 121
levy
 Sand & gravel – including 94 99 101 105 110 117 116 121 122 131
levy

CEMENT AND CONCRETE

Cement 100 92 93 100 109 115 128 139 133 135 144
Ready-mixed concrete 99 96 95 101 108 107 113 111 110 114 118
Pre-cast concrete products 97 91 96 100 102 111 114 119 117 121 123
Concrete reinforcing bars 75 106 100 113 130 158 126 145 169 164

CLAY PRODUCTS
All bricks 90 89 92 98 104 111 109 117 119 119 124
Ceramic tiles 103 95 96 99 102 85 81 83 90 91

TIMBER AND JOINERY

Sawn wood 80 90 97 100 103 122 128 119 135 142 143
Particle board 78 95 96 99 103 113 114 111 117 133 141

METAL PRODUCTS
Fabricated structural steel 68 67 89 100 100 118 137 106 118 132 129
Doors & windows 100 94 97 101 101 88 87 90 91 95 101
Central heating boilers 108 96 97 100 102 105 106 110 113 118 119

PLASTIC PRODUCTS
Pipes and fittings (rigid) 93 93 94 99 104 112 118 121 122 127 132
 Pipes and fittings (flexible 91 94 95 100 104 111 115 130 130 134 137
Sanitary ware 106 96 98 100 101 103 112 114 115 116 118
Doors & windows 98 95 98 100 101 103 106 108 108 111 113

OTHER BUILDING
MATERIALS
Insulating materials 95 93 94 100 102 106 106 104 103 110 118
Paint (non-aqueous) 103 98 97 100 101 103 110 113 114 122 130
 Lighting equipment for 80 82 86 100 99 101 105 112 111 111 114
roads
Electric water heaters 82 77 89 100 112 120 122 133 137 142 147
Kitchen furniture 90 105 107 100 97 100 104 107 109 112 117
Source: ONS

conditions and profit. It may or may not include fluctuations in price, depending on the
terms of the contract. It is usual to provide two separate indices which can either include or
exclude fluctuations. Assuming that they have common base data, the index which includes
fluctuations should display higher values.
These indices therefore take into account the tendering market, and are thus much more
useful in updating the prices in a design budget. While building costs may continue to rise, a
shortage of work in the industry may cause the tender price index to fall, as was experienced
122 Cost Studies of Buildings
during the period 1980–81 and repeated aggressively during the last great recession of
2008–10. Generally, there is some relationship in the trends of each index.
A tender price index can be obtained by pricing and re-pricing a bill of quantities at
various required intervals. This will then provide the user with tender sums which can be
quickly converted to index numbers. The bill items can be priced either on the basis of
price book data or by using rates from bills of quantities received. The latter point does
not infringe the form of contract, since the rates and the contractor are not disclosed to
third parties. The use of a standard price book may result in some distortion, since the data
contained are only an expert opinion and not necessarily a bona fide rate for a job. A more
accurate index is likely to be prepared where the given data can be priced repeatedly. The
larger the sample size, the greater will be the reliance that can be placed on the results.
The BCIS indices always indicate the sample size for statistical significance purposes.
The BCIS emphasises that in order to achieve statistical reliability it needs to analyse 80
projects per quarter. In times of recession in the construction industry this objective may be
difficult to achieve, and the users of the published indices must bear this in mind.
The majority of tender price indices do not use complete bills of quantities, but sample items
from each trade usually totalling about 25 per cent of the trade or section. A weighting which is
proportionate to the value of the trade or section in the bill of quantities is then applied.
Table 7.4 and Figure 7.3 provide a broad indication of the relationship and movement
of tender prices, building costs and retail prices. Building costs indicate a steady increase

Table 7.4 Building costs, tender prices and retail prices

Year TPI BCI CPI RPI

1990 129 133 72 134
1991 114 140 77 142
1992 108 145 80 147
1993 109 150 82 149
1994 121 155 84 153
1995 130 163 86 158
1996 130 168 88 162
1997 138 172 90 167
1998 146 178 91 173
1999 151 183 93 176
2000 161 191 93 181
2001 174 196 95 184
2002 187 205 95 187
2003 197 215 97 192
2004 213 227 98 198
2005 224 241 100 203
2006 230 255 103 210
2007 245 267 105 219
2008 246 282 109 228
2009 217 285 111 227
2010 217 295 115 237
2011 221 306 120 249
2012 223 310 123 258
2013 236 314 126 265
2014 forecast 251 318 272
2015 263 326 280
2016 275 336 289
2017 290 347 298
2018 306 361 308
Source: BCIS
 Indices and Trends 123
400

TPI BCI CPI RPI

350

300

250

200

150

100

50

0
1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018
Fig. 7.3 Comparison of indices (based on Table 7.4)

generally and are less susceptible than tender prices to changes in the market. Building costs
therefore align themselves with the index of retail prices, but tender price trends tend to be
more erratic.
At the beginning of 2008, tender prices continued to rise in Greater London but the rate
of increase eased. This tended to indicate that changes in market conditions were beginning
to take place. A year later tender prices had all but collapsed since the workload was drying
up due to the onset of the impending recession. Some regions of the UK would fare rather
better as workloads would not diminish to the same extent. Tender prices throughout the
UK suffered a dramatic fall in the fourth quarter of 2008. These fell by as much as 7.5 per
cent as contractors saw a gaping hole in workload ahead of them. As private sector building
projects grind to a halt, two years of falling prices are forecast.
Most leading cost consultancies regularly maintain and make their own TPI and BCI
indices and forecasts. AECOM (formerly Davis Langdon), the construction cost consultancy,
has suggested that tender prices will maintain steady growth to recover to the levels that
were there prior to the 2008 fall due to the great recession. It suggested that price levels will
achieve 2008 price levels only in mid-2017 at a rate of 5–6 per cent. The year-on-year TPI
drop in 2009 was 12 per cent and was matched by a previous similar drop in 1991.
The building cost index rose by 6 per cent year on year in 2008 but dropped to a 1 per cent
increase by 2009. This was the lowest recorded figure for two decades. It recovered slightly in
124 Cost Studies of Buildings
2010 and 2011 but dropped again to 1 per cent in 2012–13 and is expected to continue in 2014.
However, it was expected that BCI would increase beyond 1 per cent by 2015.
The rate of increase in the retail prices index (RPI) slipped to 0 per cent in 2009 but
recovered in 2010 up to 4 per cent. It is expected that it will maintain a growth of 3 per
cent throughout 2014 and beyond. The government’s inflation measure, the consumer prices
index (CPI), is at 1.5 per cent in August 2014. Independent forecasters believed that the CPI
would drop due to falling fuel prices in the short term. The RPI is expected to follow this
short-term dip.

7.7 OTHER PUBLISHED INDICES

7.7.1 Retail prices index (RPI)

The RPI is the index with which most people are familiar and is used by a wide range of
organisations in the UK. It is compiled by the Central Statistical Office and published in its
Monthly Digest of Statistics. It is quoted frequently in the news and its publication, usually
on a Tuesday in the middle of each month, is eagerly awaited by political and economic
commentators. The general index seeks to measure the percentage changes month by month
in the average level of prices of the commodities and services purchased by the average
household in the UK. The commodities and services included in the index are weighted in
accordance with their supposed importance. Details of the method used for computing the
index are given in the Method of Construction and Calculation of the Index of Retail Prices,
published for the Department of Employment by HMSO.

7.7.2 BCIS building cost indices

BCIS building cost indices monitor the movement of labour, materials and plant costs of the
building contractor. They are compiled using the NEDO formula indices applied to the work
category weighting systems derived from an analysis of accepted tenders. The available
indices are as follows.
Index No. 4 General building cost index (excluding mechanical and external work). This
represents all construction types and covers all work except mechanical, electrical and lift
installations.
Index No. 5 General building cost index; based on a weighting of indices 6–8. Steel frame
(6) 25 per cent; concrete frame (7) 25 per cent; brickwork (8) 50 per cent.
Index No. 6 Steel-framed construction cost index; represents mainly low-rise structures
with both heavy and light steel frames.
Index No. 7 Concrete-framed construction cost index; represents in situ and precast
concrete framed structures.
Index No. 8 Brick construction cost index; represents low- and medium-rise buildings
with structural brick external walls.
Index No. 9 Mechanical and engineering cost index; covers mechanical and electrical
work including lifts.

7.7.3 BCIS tender price indices

This is a similar type of index to the DoE tender index. It is not, however, restricted
to government projects, and must therefore be presumed to cover a wider range of
building types.
 Indices and Trends 125
7.7.4 Building indicators

Building magazine provides from time to time an attempt at indicating the economic
performance of the construction industry. It does this by examining certain key areas or
indicators. These key areas are varied and diverse and include, for example, architects’
workload, total new orders and starts and completions of dwellings, both public and private.
In addition, Building magazine has constructed its own housing cost index based on its
own assessed weightings of a typical house. Although this is included as an indicator, it is
sometimes shown separately in far greater detail.

7.7.5 Housing and Construction Statistics (DoE)

This publication is provided quarterly and is prepared by the Directorate of Statistics in the
DoE. It includes indices as varied as housing finance, slum clearance and house-building
performance.

7.7.6 Davis Langdon cost forecasts

The above firm of chartered quantity surveyors frequently publishes cost forecasts in both
graphical and index format in The Architects’ Journal. The indices are based on schemes
in the London area and are likely to be of a smaller sample size than either government or
BCIS indices. This information also appears in Spon’s Architect’s and Builder’s Price Book.

7.7.7 Nationwide Building Society index

This is an index of house prices which measures the change in cost to purchasers of different
house types. The data are recorded on a regional basis. The RICS collects and publishes
similar data.

7.7.8 The formula method

The formula method has been devised and researched by the NEDO for the measurement of
construction cost increases. It is used extensively in the UK for calculating increased costs
in preference to the traditional method of using actual cost increases from time and wage
sheets. The system in use is the Series 2 indices where the building work is subdivided into
48 categories, based broadly on the work sections from the SMM.

7.8 REGIONAL VARIATION

Indices of different kinds are often produced for the country as a whole, and since they
measure only a typical ‘basket of goods’, they can at best represent a typical trend. It is
possible, however, to analyse costs on a regional basis or even within a sub-region. The
locality of a project produces a cost which is dependent on the market conditions such as the
availability of labour and materials, workload and availability of grants. Similar buildings
constructed in different localities will produce different tender sums. The BCIS produces a
quarterly review of building prices which outlines the variation measured in tender sums.
Over a period of time the regional variation statistics will change, depending on the amount
of competition for work within a region. They produce Regional TPI to facilitate comparison
of prices between regions. London and south-east regions account for a significantly
high proportion of construction activity which continues over several decades. Table 7.5
126 Cost Studies of Buildings
Table 7.5 Percentage construction output by regions

Region 1980 1985 1990 1995 2000 2005 2010 2013

North-east    4%    4%    3%    4%    3%    3%    3%    3%
Yorkshire and the Humber    8%    7%    8%    8%    8%    9%    8%    7%
East Midlands    6%    6%    6%    7%    6%    8%    6%    6%
East of England    9% 10% 10% 10%    9% 10%    9% 11%
London 16% 15% 17% 14% 16% 14% 18% 20%
South-east 16% 18% 18% 14% 16% 15% 16% 14%
South-west    7%    9%    8%    9%    8%    9%    8%    8%
Wales    5%    4%    4%    5%    4%    4%    4%    4%
West Midlands    8%    8%    8%    8% 10%    8%    8%    8%
North-west 11% 10% 10% 11% 10% 11% 10% 10%
Scotland 10%    9%    8% 10% 10%    9% 10%    9%
Total 100% 100% 100% 100% 100% 100% 100% 100%
Source: Derived from ONS (2014)

compares the regional variation in construction output. It should be emphasised that, even
within the sub-regions, variations in tender levels must be expected, depending on where the
projects are being constructed (see site considerations, Chapter 5).
The regional variation in building activity has, of course, some relationship to the
population distribution. Wales, for example, accounts for 4.8 per cent and Scotland 8.3 per
cent of the population of Great Britain. The population is forecast to increase by 0.6 per cent
in England, 0.3 per cent in Wales and 0.3 per cent in Scotland over the next 25 years. This
clearly has implications for the infrastructure and building development requirements.

7.9 MEASURING TRENDS

Time series analysis is the statistical technique used to measure the relationship between a
series of data and a period of time. The name given to the graph on which such a series is
plotted is a histogram, i.e. a history or record over time. The series may be plotted daily,
weekly, monthly, yearly or at any interval of time. The horizontal axis is always chosen as
the time axis.
Future projected trends can be assessed on the basis of the previous performance of
similar recorded data. It should be emphasised, however, that past trends may not always be
maintained in the pattern they suggest.
It is therefore necessary to couple with these past trends an assessment of any likely
changes to the conditions of the market in general. Time series analysis actually represents a
mixture of various influences; the principal ones are described below.

The long-term trend Data are said to show a trend where the values generally increase
or decrease over the whole period that they span. It is unlikely that the examination of any
data, particularly from the construction industry, will indicate a smooth upturn or decline;
any trend is likely to be punctuated with troughs and peaks.

The cyclical movement This is the wave-like formation generally due to the influence
of booms and slumps on business activity. These trade cycles in the construction industry
vary in relationship to the demand for buildings, and this in turn is influenced by economic
prosperity and government policy.

The seasonal variations These describe the fact that the quarterly figures follow a
seasonal pattern. This pattern will vary from industry to industry and may vary within the
 Indices and Trends 127
various sectors of a single industry. For example, in the building industry productivity is at a
higher level during the summer season than in the winter season.

The non-recurring influences These are random variations in a time series analysis, and
since they do not occur with any statistical regularity they cannot be measured or predicted.
The majority of contractors from time to time experience irregular increases or decreases in
workload that cannot be attributed to any particular factor.
It is essential that we should be able to distinguish between these various influences, and
to measure each one separately. This procedure is known as the analysis of a time series.
Two techniques are now considered in connection with this analysis.

7.9.1 Moving average

Table 7.6 shows the data relating to expenditure on contracts for each of the four quarters
between 1993 and 1997. The data have been adjusted to a common base date to remove any
influences due to inflation
Column 3 shows the actual expenditure for each quarter of each of the five years. Column
4 shows the moving average based on each of the five periods and column 5 the variation
between the actual quarterly expenditure and the moving average. The question of whether
to base the moving average on three years, five years or any other period is largely a matter
of judgement. The purpose is to remove all the troughs and peaks in order to produce a trend
line.
One disadvantage of the moving averages method is that the respective values for the end
periods cannot be calculated but can only be inserted by interpolation.
The trend line, based on the data from column 4, has been plotted onto the histogram
(Figure 7.4). In order to work out the second part of the problem we examine column 5 from
Table 7.6. This information is first transferred to Table 7.7. These seasonal variations should
add up to zero; any difference is due to rounding errors. These figures would indicate that

Table 7.6 Expenditure on contracts, 1993–97 (inflation-adjusted)

1 2 3 4 5
Year Quarter Expenditure (£’000) Moving average (£’000) Variation from trend (£’000)
1993 1 200    –    –
2 215    –    –
3 240 225 +15
4 245 231 +14
1994 1 225 237 −12
2 230 241 −11
3 245 242    3
4 260 252    8
1995 1 250 264 −14
2 275 274    1
3 290 279 11
4 295 292    3
1996 1 285 307 −22
2 315 322 −7
3 350 330 20
4 365 344 21
1997 1 335 356 −21
2 355 362 −7
3 375    –    –
4 380    –    –
128 Cost Studies of Buildings
Table 7.7 Variation from trend

Quarter
1 2 3 4
1993    –    – +15 +14
1994 −12 −11 +3 +8
1995 −14 +1 +11 +3
1996 −22 −7 +20 +21
1997 −21 −7    –    –
−69 −24 +49 +46
Seasonal variation −17.25 −6 +12.25 +11.5

£
400 000

350 000

300 000

250 000 Trend line using ‘5-point,

moving average
200 000

1993 1994 1995 1996 1997 1998

Fig. 7.4 Contractor’s expenditure, 1993–97

the contractor’s expenditure is considerably greater in the last two quarters of the year than
at the beginning. The cyclical variation would be calculated on a similar basis over a known
trade cycle, taking the year’s values as a whole. The difference between seasonal variation
and cyclic effect is largely a matter of knowledge and experience.

7.9.2 Seasonal adjustment

A popular way of presenting construction statistics is to produce seasonally adjusted data. In

order to adjust a set of original figures we calculate the seasonal variations and deduct these
from the original figures. For example, the seasonally adjusted expenditure for 1995 would
be as given in Table 7.8.

7.9.3 Linear regression analysis

An alternative to using the above method for smoothing out data points and inserting a trend
line is to use linear regression analysis. This is a statistical technique to find the formula of
the best-fit line through the data.
Consider the data given in Table 7.9, which show the number of enquiries received by a
construction firm for new projects over a period of 18 months. These data are also plotted in
Figure 7.5. It can be observed that in general the trend for this particular firm is to receive
more enquiries. (The type and size of enquiries in this example have been ignored.) The
trend line fitted supports this viewpoint.
 Indices and Trends 129
Table 7.8 Seasonally adjusted data

Quarter Expenditure Seasonal variation figure Seasonally adjusted

1 250 −17.25 267.25
2 275 −6.00 281.00
3 290 +12.25 277.75
4 295 +11.50 283.50

Table 7.9 Number of enquiries received for new work

Month Enquiries
x x2 xy y2
1    3     9     3     1
2    4    16     8     4
3    6    36    18     9
4    7    49    28    16
5    4    16    20    25
6    5    25    30    36
7    5    25    35    49
8    8    64    64    64
9    7    49    63    81
10    9    81    90   100
11    8    64    88   121
12    7    49    84   144
13    8    64   104   169
14 10   100   140   196
15 11   121   165   225
16 10   100   160   256
17    9    81   153   289
18 10   100   180   324
131 1 049 1 433 2 009
171 = 18a + 131b (i)
1433 = 131a + 1.049b (ii)
= y = −4.83 + 1.97x
When x = 6, y = −4.83 + 6 × 1.97 = 6.99
Note: See p. 338 for a fuller explanation of the method.

11
10
9
8

Trend fitted by
6
regression line
5 y = - 4 . 8 3 + 1.97x
4
3
2
1
0
1 2 4 6 8 10 12 14 16 18
Months
Fig. 7.5 Number of enquiries received regarding new work
130 Cost Studies of Buildings
In order to avoid individual judgement in constructing the line through these points, it is
necessary to calculate a best-fitti g line. This is derived from the method of least squares
analysis, i.e. the line is drawn in such a way that the sum of the squares of the vertical
distances of the plotted points to the line is a minimum. The formula is written as follows (x
= number of enquiries; y = month):

∑y =an +b∑x
∑xy =a∑x +b∑x2
These variables can now be replaced with the values from Table 7.9 so that on the basis of
these data alone it could be predicted, for instance, that in month 24 the number of enquiries
for new projects could be calculated as follows:

y (24 months) = −4.83 + 1.97x = 15

Of course this previous trend would need to be coupled with any known prevailing
conditions in the construction industry.

7.9.4 Use of time series analysis

By analysing the data and separating the seasonal variation, the cyclical variation and the
trend, we hope to learn something of the behaviour of the data we are examining. This
knowledge can then be used as a basis for future planning. A time series can be separated
into each of these movements, and to each of these we can attribute a probable cause and a
possible future course of action.
Time series analysis is widely used in business for planning on the basis that the previous
performance and rhythm will to some extent be repeated.

7.10 KEY PERFORMANCE INDICATORS AND BENCHMARKING

The use of performance indicators to measure the different attributes of firms is now
commonplace in different industries and companies around the world. The Egan Report
(Rethinking Construction, 1998) concerned itself directly with improving both the
effectiveness and the efficien y of the UK construction industry. It challenged the industry to
meet some ambitious targets and to measure its performance over a range of activities. The
creation of Construction Key Performance Indicators (KPIs) and the release of the first KPI
pack in early 1999 were the firs steps in the process of answering these challenges.
The KPIs are produced by a partnership of the Department for Business, Enterprise and
Regulatory Reform (BERR), the Construction Industry Board and the Construction Best
Practice Programme using data from BERR, the Building Cost Information service, the
Construction Clients Forum, the Health and Safety Executive, Dun & Bradstreet and other
third-party financial analysts.
The fourth annual Construction Industry KPIs, relating to performance in 2001, were
published in May 2002. These adopted the format of an overall industry wall chart and a
KPI pack containing:
■■ A handbook;
■■ A number of sector-specific wall charts;
■■ A book of additional performance indicators, containing charts for a number of industry
sub-sectors;
■■ An industry progress report;
■■ A ‘Respect for People’ KPI wall chart;
■■ An interactive CD ROM.
 Indices and Trends 131
The Construction Industry KPIs are intended for use by individual firms wishing to measure
or compare their own performance. In order to collect and use the Construction Industry KPI
graphs, three key project stages have been identified
1. Commit to invest. The point at which the client decides in principle to invest in a
project, sets out the requirements in business terms and authorises the project team to
proceed with the conceptual design.
2. Commit to consult. The point at which the client authorises the project team to start the
construction of the project.
3. Available for use. The point at which the project is available for substantial occupancy
or use. This may be in advance of the completion date.

7.10.1 Definitions of project and company KPIs

Table 7.10 shows the ten KPIs that have been developed as part of the benchmarking exercise.

Table 7.10

Client satisfaction – product How satisfied the client was with the finished product, using a
1–10 scale where 10 = totally satisfied, 5–6 = neither satisfied
nor dissatisfied, 1 = totally dissatisfied.
Client satisfaction – service How satisfied the client was with the service of the consultants
and the main contractor, using a 1–10 scale where 10 = totally
satisfied, 5–6 = neither satisfied nor dissatisfied, 1 = totally
dissatisfied.
Defects The condition of the product with respect to defects at the time
of handover, using a scale of 1–10 where 10 = defect free, 8
= defects with no significant impact, 5–6 = defects with some
impact, 3 = defects with a major impact, 1 = totally defective.
Predictability – cost There are three indicators. One is for design cost, one for
construction cost and one for project cost.
■■ Design cost. Actual cost at available for use less estimated
cost at commit to invest. This is expressed as a percentage
of the estimated cost at commit to invest.
■■ Construction cost. Actual cost at available for use less
estimated cost at commit to construct. This is expressed as a
percentage of the estimated cost at commit to construct.
■■ Project cost. Actual cost of the combined design and
construction process at available for use less the anticipated
cost of the combined design and construction process at
commit to invest, expressed as a percentage.
Predictability – time There are three indicators, one for the design phase, one for the
construction phase and one for the whole project.

■■ Design time. Actual duration at commit to construct less the

estimated duration at commit to invest. This is expressed as
a percentage of the estimated duration at commit to invest.
■■ Construction time. The actual duration at available for
use less estimated duration at commit to construct. This
is expressed as a percentage of the estimated duration of
commit to construct.
■■ Project time. Actual duration of the combined design and
construction process at available for use less the anticipated
duration of the combined design and construction process at
commit to invest.
132 Cost Studies of Buildings

Construction cost The normalised1 construction cost of a project in the current

year less the construction cost of a similar project one year
earlier. This is expressed as a percentage of the construction
cost of a similar project one year earlier.
Construction time The normalised time to construct a project in the current year
less the time to construct a similar project one year earlier. This
is expressed as a percentage of the time to construct a similar
project one year earlier.
Company KPIs
Profitabilit Company profit before tax and interest as a percentage of sales.
Productivity Company value added2 per employee (#)
Safety Reportable accidents3 per 100 000 employed per year.4
Source: BERR (2007)
Notes
# indicates that no measured data were available
1. Normalisation is a statistical method for removing the effects of location, function, size and
inflation.
2. Value added is turnover less all costs subcontracted to or supplied by other parties.
3. Reportable accidents are defined in the Health and Safety Statistics published by the Health
and Safety Commission as: fatalities, major injuries, and over-three-day injuries to employees,
self-employed people and members of the public.
4. The figures need to be compared pro rata if they cover a shorter period than a year. Such short
period rates should be compared only with rates of similar periods and not the annual rates.

The statistics presented in Table 7.11 give a variable picture of the performance of the
UK construction industry during 1998–2001. While there is some evidence that practices
are changing, there remains much scope for further improvement. In addition to the range of
performance indicators shown in the table, BERR also records the Respect for People KPIs.

Table 7.11 Summary of UK industry performance

Performance
Headline KPI Measure 2003 2005 2007
Client satisfaction – product Scoring 8/10 or better 78% 83% 82%
Client satisfaction – services Scoring 8/10 or better 71% 77% 75%
Defects Scoring 8/10 or better 68% 72% 73%
Safety – industry Accident incidence rate 1 097 1 023 946
Safety – all contractors % achieving zero rate 30% 50% 62%
Safety – contractors over £10m % achieving zero rate 1% 1% 1%
Predictability cost – design % on target or better 65% 63% 64%
Predictability cost – construction % on target or better 52% 48% 49%
Predictability cost – project % on target or better 52% 48% 46%
Predictability time – design % on target or better 53% 52% 58%
Predictability time – construction % on target or better 59% 62% 65%
Predictability time – project % on target or better 44% 46% 58%
Profitability Median profit before 5.4% 8.1% 8.2%
interest or tax
Productivity – current values Median added value £000 31.1 34.2 42.0
Productivity – 2000 values Median added value £000 27.9 27.5 31.2
Construction cost Change over previous year 5.0% −0.8% −3.8%
Construction time Change over previous year 1.0% 1.3% −0.3%
Source: ONS (2008)
 Indices and Trends 133
SELF-ASSESSMENT QUESTIONS

1. Describe the important characteristics to be taken into account when constructing a set of
indices.
2. Describe the differences between building cost indices and tender price indices,
explaining where and how each would be used in practice.
3. If past performance is no guarantee of future projections, then what is the point of using
indices? Discuss this question.

BIBLIOGRAPHY

BCIS. Tender Price Indices. RICS (quarterly).

Building. Building Intelligence (weekly).
Davis Langdon. Market Intelligence, Building (various).
Department for Business, Enterprise and Regulatory Reform (BERR). Construction Statistics
Annual. The Stationery Office 2007.
Fleming, M.C. and Tysoe, B.A. Construction Cost and Price Indices Handbook. Spon 1991.
Office for National Statistics. Construction Statistics Annual No. 9. Palgrave Macmillan 2008.