As a contractor, you have probably settled into a niche during your tenure in the construction industry. Perhaps you specialize in building commercial retail space or have developed a knack for constructing high-rise apartments; in any case, you want to be certain that your construction costs aren’t overinflated or underestimated when you enter the planning stage for your next project. Examining relevant construction cost indices is one way you can protect yourself from overpaying for labor and materials.
In part one, our Hillsborough County contractor lawyers introduced price indices and the information stored in them. Now, we will develop a stronger understanding of the appropriate applications for using cost indices in an estimate.
Compiling and Applying Cost Indices
When you identify a cost function to find a value for an item in a cost index, a single parameter is used to describe its cost. In a report on cost estimation published by Carnegie Mellon University, the author describes how a single parameter can be used to measure the cost of a power plant and a sewage treatment plan.
In this example, “the cost of a power plant is a function of electricity generating capacity expressed in megawatts,” and “the cost of a sewage treatment plant [is represented] as a function of waste flow expressed in million gallons per day.”
Clearly, there are limitations to these cost indices, which is why multiple cost indices can be utilized to uncover the cost of a construction project. By condensing each index into a single parameter, you can account for a multitude of variances in your project versus the project(s) the information in the index was sourced from.
Conditions for Single Parameter Cost Functions
When applying a single parameter cost function to your cost estimate, it’s imperative that you understand the conditions that permit the use of such a function including:
- You should exclude historical data founded on the basis of “special local conditions”
- Attribute specific size and capacity metrics to help evaluate your construction cost
- Adjust for inflation index, local index of construction costs, different regulatory constraints, and local factors
You can use compiled indices or traditional field investigation to assess these adjustments. Always use professional judgment when considering the preliminary cost of your project, and past projects of a similar magnitude.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.