Construction Indices

What are construction indices?

Construction indices, also known as construction cost indices or construction price indices, are tools used to measure and track changes in the cost of construction, labour, materials and other expenses over time. These indices provide valuable information to various stakeholders in the construction industry, such as contractors, project owners, and government agencies, to understand and manage the economic dynamics of the construction sector. 

What is an ‘index’?

Indices are published for two main purposes:

• Present the movement in something in an easy-to-understand format. For example: ONS present construction output in volume terms both as £ and as an index This makes it easier to understand the magnitude of any change, e,g. the change between 2Q2022 and 2Q2023 is £45,299million to £46,625million at 2019 constant prices, which ONS represent as an index (base 2019 = 100) as 102.5 to 105.5 (note this is a volume index not a cost or price index).

• Estimate the movement in something that cannot be directly measured because it is too complex or too big. For example, we cannot measure all prices and costs that go to make up household or construction spending. Indices such as the Consumer Price Index (CPI) and all BCIS indices are examples of the latter.

BCIS Indices

BCIS indices are all examples of the latter as they attempt to measure the movement of construction costs and prices, generally assuming constant quality and specification. We do this in a variety of ways.

Prices

• Analysis of project – by measuring the pricing levels in individual projects, we can average those levels quarterly to provide an estimate of the movement in prices generally. For example:
  • Tender Price Index – samples the cost of measured items of work in a tender and compares these to a base schedule to produce a project index.
  • Scottish Social Housing TPI – compares the total cost of the superstructures of the houses and flats on a project, with a modelled estimate for the same mix at a base price.

• Surveys of price movement – for example:
  • Tender price assessment panels (UK and Scotland) – BCIS carries out quarterly ‘Delphic’ surveys to establish a consensus of the price movement in a given quarter. We ask a panel of experts with access to multiple projects in a quarter to complete a survey and discuss the results to produce a consensus estimate.
  • Private Housebuilders Construction Price Index – we survey housebuilders who provide the percentage change, in the cost of building a chosen house type, on a quarterly basis. We average the price movement to provide a quarterly index.

Costs

• Modelling resources – by producing weighted averages, in the resources required to complete construction work, we can estimate the movement in costs. For example:
  • General Building Cost Index (GBCI) and General Civil Engineering Cost Index (GCECI) – based on models of the resources required to construct types of buildings and civil engineering assets. These models are based on BCIS compiled indices for generic work categories and resources.
  • Price Adjustment Formulae Price Indices (PAFI) – the most detailed indices (there are over 200) based on modelling the resources required for generic work categories (sub trades) and resources (groups of separate materials, labour and plant). Originally produced and still widely used in construction inflation adjustment clauses, they are also used for tracking cost movement for a wide variety of client and contracting organisations. Material costs are based on Office for National Statistics (ONS) Producer Price Indices (PPI), pricing data from manufacturers and special resource cost indices, which are produced by BCIS. Labour costs are based on nationally agreed wage agreements and statutory employment costs.
  • Maintenance indices – based on models of expenditure on maintenance or buildings and services, redecorations and cleaning.

• Modelling resources and changes in specification required by regulations – extending the coverage of a cost index to cover changes in specification. For example:
  • House Rebuilding Cost Index – based on models of houses and flats, built to current building regulations, the index includes the effect of changes in those regulations as they occur.

Special indices

• Community Infrastructure Levy (CIL) Index – produced in response to a request from Ministry of Communities, Housing ang Local government (MCHLG), now the Department for Levelling Up, Housing & Communities (DLUHC) for use in conjunction with the CIL legislation, it’s based on an average of four quarters movement in the TPI. It is a price index.
• Plant and equipment indices – indices for plant and equipment. Indices of the cost of plant and equipment – these are used in manufacturing and are based on ONS PPIs and Import Price Indices (IPIs). It is a cost index. Originally introduced at the request of specialist valuers, they are can also be used for other purposes, such as insurance.

Things to remember

An index number does not ‘mean’ anything, it is purely a measure of the changes in something.

Indices are usually published relative to 100. This is referred to as the ‘base’, so you should see a statement of the base of an index wherever an index is referred to. BCIS indices generally have a base of 1985 mean = 100. There are exceptions to this where the index wants to show a greater gradation of movement – for example, the FTSE 100 index has a base of 1000 in January 1984.

When an index gets too far away from its base it is less easy to interpret, so indices are often ‘rebased’ to a more recent date, i.e. they are recalibrated to 100. However, there are indices that are never rebased for contractual or continuity purposes, so our PAFI series are always based on the period when they were introduced.

If indices have moved a long way from their base, or other series are difficult to interpret, you may see movement described as ‘Basis’ points. These are a unit of measure, used particularly in finance, to describe the rate change in an index or other benchmark –  one basis point is equivalent to 0.01% (1/100th of a percent) or 0.0001 in decimal form.

Terminology

Prices and Costs

In any transaction, price and cost are the same thing – ie, the seller’s price is the buyer’s cost. The convention at BCIS is to use ‘Price’ to mean what the client pays to a contractor and ‘Cost’ to mean what a contractor pays for the resources required to complete the work.

Indices and Indexes

At BCIS we use ‘Indices’ as the plural of ‘Index’.