COST INDICES

Dr. Ali Shash

Cost Indices
 Fact
 Inflationescalates costs as a function of time.
 Over a relatively short period of time the price of a
certain material may be increased from X to (X + E)
 Cost Adjustment
 Because of inflation, contractor’s historical cost records
should be adjusted.
 One means for such adjustment is through the use of
indices.
Cost Indices
 A cost index provides a comparison of cost or price
change from year to year for fixed quantity of
work or services.
 Forecast the cost of similar type of work from the
past to the present or future period without going
through detailed costing.
 Indices convert costs applicable at a past date to
equivalent costs now or in the future.
 Indices for upgrading an estimate
Cost Indices
 How to obtain indexes?
 Published indices
 Contractor’s self constructed index.

 Example :Fruit Index



 What kind of fruits to be included in the Basket in

order to determine the index?
Cost Indices
 In similar sense, concrete
 Steel, concrete, Aggregates, Formwork, Labors
 Index:
 isa dimensionless number for a given year showing the
cost at the time relative to a certain base year.
Cost Indices
 If a construction cost at a previous period is known,
present cost can be determined by multiplying the
original cost by the ratio of the present index value to
the index value applicable when the original cost was
obtained.
Cc = Cr (Ic/Ir)
 Where:
 Cc=Present Cost
 Cr=Original Cost
 Ic=Present Index Value
 Ir=Index value at time of reference cost.
Cost Indices
 Garli was the first to use index numbers in 1750 to
investigate the effects of the discovery of America
on the purchasing power of money in Europe.
Cost Indices
Construction of Index Numbers
 Notation Used
 p0, p1, pn = The prices for different items at different
occasions.
 q0, q1, qn = Quantities of different items at different
occasions.
 pi01 = The price index for a particular item, i, from time
0 to time 1
 n = The number of items in the index.
Cost Indices
Construction of Index Numbers
 Unweighted Index
 Index = (ΣPn/P0) * 100
 Weighted Index
 Laspeyer’s Index Formula (Base Year)
 Index = (ΣPn*Q0/ P0*Q0) * 100
 However, since the combination of various items
change over time, these calculations will be
inaccurate, especially if the index is used over many
years.
Cost Indices
Construction of Index Numbers
 Paasche’s Index Formula (Present time)

 Index = (ΣPn*Qn/ P0*Qn) * 100

 Edgeworth’s Index Formula:

 Uses an average of quantities from the base year and
present time.
Cost Indices
Construction of Index Numbers
 Fisher’s Index Formula:

 Index = Laspeyer’s X Paache’s

 Chain Index:
 Each year a new index series is begun with the previous
year as a base.
P0t = P01 x P12 x P20 x Pt-1, t