Construction-Cost Indices

Cost estimation is a critical dimension of project planning in asset-heavy industries such as the chemical process industries (CPI). Construction cost indices are useful tools in cost estimation and are used to compare plant construction costs from one time period to another. Understanding them can improve the accuracy of the cost estimates, as well as the effectiveness with which they are applied. This column discusses the use of cost indices and historical trends. Indices for the CPI Cost indices are dimensionless numbers that compare prices of a class of goods or services to the corresponding prices at a base period. They are widely used in the construction industry and can be customized to various industry segments. Predesign estimates are usually made for equipment and assets that will be built in the future, but must be assembled from prices of the past. The mathematical relationship between costs and indices is the following: (Cost at Time 1) ÷ (Cost at Time 2) = (Index at Time 2) ÷ (Index at Time 1) A number of cost indices are relevant to the CPI, including the Chemical Engineering Plant Cost Index (CEPCI) and the Marshall & Swift index (www.marshallswift.com) for the chemical industry and the Nelson-Farrar…