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Estimating Inflation and Forecasting Construction Costs for Watermain and Sanitary Sewer Projects

The client is a Canadian municipality which manages both a watermain and sanitary sewer network.
The municipality has maintained tender/bid summaries and contractor progress payments for watermain, sanitary sewer, storm sewer and road construction projects from 1981 to 2014.
The municipality wanted to determine if costs presented on current tender/bid submissions are in line with historical costs and representative of a competitive market bid for watermain and sanitary sewer projects. They also wanted to improve the accuracy and reliability of construction cost forecasts.

Watermain and sanitary sewer unit costs are first calculated from historical tender/bid records. These unit costs were then scaled to a reference project.
The watermain reference project was composed of 1m length of 150mm PVC pipe, one 150mm valve per 100m of pipe and one hydrant per 100m of pipe.
The sanitary sewer reference project was comprised of 1m length of 375mm PVC pipe and one 1200mm maintenance hole of 5m depth per 75m of pipe.
The time-sequence of unit costs for each reference project were fit with a financial model to estimate the inflation rate over a specified time interval.
The utility used the estimated inflation rates, in conjunction with historical construction cost data, to examine current tender/bid submissions and to forecast construction costs at future design dates.
Construction cost inflation rates were intermediate between the Consumer Price Index (CPI) and the S&P/TSX composite index. The interest rate premium above CPI reflects the markup that the contractors require to cover their construction risk.

We use your tender/bid data to provide a defensible estimate in the inflation rate of watermain and sanitary sewer CapEx for your network. This allows you to budget accordingly.
Our inflation index provides you with a construction-sector specific tender/bid appraisal, without the bias induced by proxy indices such as CPI.
Deviation of submitted bid unit costs from your expected inflation rate can be indicative of imbalances in the supply/demand of construction projects in your local market. They can also provide insight into the bidding strategies of your local contractors.

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