Compilation Methods of Construction Cost Indices in the UK

BCIS, BIS and DL publish general construction cost indices to reflect the inflation of the input prices paid by contractors in various sub-sectors of the construction industry.

These cost indices develop from the Price Adjustment Formulae indices, also known as NEDO indices (originally compiled for the Construction Committee of the National Economic Development Office).

Price Adjustment Formulae for Construction Contracts

Construction contracts with fluctuation provisions allowed contractors to pass on to their clients the increase in input cost, such as wages and material prices, in the period between the date of tender and the work being carried out. The Steering Group on Price Fluctuations Formulae of the National Economic Development Office (NEDO) published a report in 1969, which proposed a formula based method to calculate input price (i.e. cost) fluctuations in building contracts. It suggested dividing the contract sum into trade based work categories (such as brickwork and concrete) and to adjust by the published indices of each work category. By analysing 60 completed questionnaires, the report concluded that the administrative cost of agreeing the fluctuations by the recommended formula method would be 0.16% of the contract sum compared with 0.75% by the conventional method of auditing suppliers’ invoices and the wages set by the appropriate wage-fixing bodies.

The formulae methods of adjusting fluctuations in civil engineering contracts began in 1973 and in building and specialist engineering commenced in 1974. Each work category index is a weighted index of various labour wages, material prices and plant cost to reflect the cost structure of that particular work category. No productivity growth is assumed in the work category indices.

The sources of the labour wages are largely based on national labour agreements. At the time quite a large proportion of the construction workforce had wages based at least in part on rates set by the national agreements. This it seems is no longer the case. The current wage agreement bodies for different trades are summarised in table 3.2.

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Wage Agreement Body Trade

Construction Industry Joint Council Building and civil engineering Building and Allied Trade Joint Industrial Council Building and civil engineering The Joint Industry Board for the Electrical Contracting

Industry; Scottish Joint Industry Board for the Electrical Contracting Industry

Electrical installation

The Joint Industry Board for Plumbing Mechanical Engineering Services in England and Wales; Scottish and Northern Ireland Joint Industry Board for the Plumbing Industry

Plumbing

Joint Conciliation Committee of the Heating, Ventilating and Domestic Engineering Industry

Heating and Ventilation

Table 3.2: Wage Agreement Bodies

These wage agreement bodies have representatives from employers and unions. For example, the Construction Industry Joint Council consists of 9 employers’

organisations and 3 trade unions.

The construction material price indices are compiled by the Office for National Statistics (ONS) as part of the whole-economy producer price indices. BIS publishes the material price indices in its Monthly Statistics of Building Materials and Components.

The plant cost, including the cost of the operator, is a weighted average of depreciation, building labour cost, and consumables such as tyres and fuel cost.

The weighting of labour wages, material prices and plant cost for the work categories have been revised infrequently since the first series was published in 1974. The second version, Series 2, was published in 1977 and the latest version, 1990 Series (also known as Series 3), was published in 1995.

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The double digit inflation that plagued the UK for the majority of the 1970s and 1980s made the fluctuation construction contracts very popular and the Price Adjustment Formulae indices then had an important role to play. Inflation in the UK has come down under 5% since the mid-1990s and consequently fluctuation contracts have become exceptions rather than the norm.

BCIS Building Cost Indices

BCIS publish nine building cost indices on a monthly basis:

 General building cost index

 General building cost, excluding Mechanical and Electrical (M&E), index

 Steel framed construction cost index

 Concrete framed construction cost index

 Brick construction cost index

 Mechanical and electrical engineering cost index

 Basic labour cost index

 Basic materials cost index

 Basic plant cost index

These BCIS indices are based on the work category indices as compiled for Price Adjustment Formulae for Building Contracts published in 1977 (Series 2). BCIS (1997) explains that it has analysed 54 bills of quantities to work out different weightings of the various work category indices for each of the above building cost indices.

Since the weightings are fixed in the base year (1977), the BCIS Building Cost Indices are fix-based match-item Laspeyres indices. Figure 3.2 uses the BCIS Brick Construction Cost Index as an example to illustrate the relationship with the work categories indices and the underlying input indices.

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Figure 3.2: Relationships among construction cost indices, work categories indices and underlying input indices

BIS Construction Resource Cost Indices

BIS publish 35 resource cost indices for construction in the UK on a quarterly basis covering repair and maintenance as well as new work. Table 3.3 summarises the availabilities of the cost indices in the different sectors and for the different inputs of the construction industry.

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Infrastructure Available Not Applicable

Maintenance

Table 3.3: Construction Resource Cost Indices published by BIS

These construction resource cost indices are weighted averages of the relevant work category indices compiled by the most recently Price Adjustment Formulae for Construction Contracts (1990 Series of Indices, also known as Series 3).

BIS (2012a) reported that the weightings of the new building non housing index had been assessed in the 1970s and the weightings of the rest were assessed by a panel of Chartered Quantity Surveyors in 1998.

3.5 Evaluation of the British Tender Price Indices and