Forecasting construction cost escalation

Abstract

Escalation can account for a substantial part of construction costs. Therefore forecasts of the amount of escalation are required for budgetary and bidding purposes. This paper examines methods for forecasting construction escalation using statistical time series methods. Time series of construction cost indices are used as a proxy of construction cost escalation. The application of time series methods, their limitations, and their effect on the risk of cost escalation are demonstrated and evaluated. The analytical methods available are only useful in forecasting for short construction projects in stable conditions. This is because none of the methods can forecast escalation caused by unpredictable occurrences such as outbreak of war or certain government action. Construction cost escalation remains a risk to be borne by either the contractor or the owner, or both, depending on the terms of the contract; any logical approach to minimize the risk is worthwhile. Key words: construction cost escalation, cost indices, time series forecasting, exponential smoothing. Box–Jenkins methods, dynamic regression, Statistics Canada.