Stop Using Location Factors or Economic Indexes (CCIs) for Construction Cost Estimating, IDIQs, Job Order Contracting, or Budgeting
Peter Cholakis
Improve facilities repair, renovation, maintenance, and new build outcomes and reduce costs
Everyone should stop using location and economic factors for Construction Cost Estimating, IDIQs, Job Order Contracting, and CAPEX Budgeting. Here are the reasons why...
Multi-year IDIQ contracts, like JOC, as well as real property / CAPEX planning and budgeting call for financial visibility and transparency and risk mitigation. These can't be achieved with location or economic factors.
All professional construction cost estimators know that applying an single location factor or economic index to a cost estimate or to a detailed construction cost database in an attempt to update them from year to year, or quarter to quarter, or to account for local cost variances is a fools errand. The individual trades, materials, and associated tasks vary significantly over time, making the application of a single economic index is a abstract concept at best.
The use of construction cost indexes (CCI) for economic updating and/or localization is inappropriate for JOC and not a best management practice. This fact is supported by both research and professional practice. Fundamental proportionality principles are severely violated when attempting to use a one-size-fits-all index to adjust all unit prices for either economic annual/quarterly updating, or localization for specific sites/regions/countries.
"In the case of CCIs, there is not a true number to indicate cost changes in the construction industry for a particular region or a given commodity over time. This is evident when considering that a variety of widely accepted index formulas yield different values using the same input data and the fact that different contractors bid different price proposals for the same contract in accordance with their pricing systems.
References: Allen 1975, Hansen 1984, Skolnik 2011, West et al. 2012, Lee 2013, Olson 2013, Rueda and Gransberg 2014
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