ConstructionCost Indices

Department Editor: Scott Jenkins

ost estimation is a critical dimension

of project planning in asset-heavy industries such as the chemical process
industries (CPI). Construction cost indices
are useful tools in cost estimation and
are used to compare plant construction
costs from one time period to another.
Understanding them can improve the
accuracy of the cost estimates, as well
as the effectiveness with which they are
applied. This column discusses the use of
cost indices and historical trends.

Indices for the CPI

CEPCI Historical Trends

800
CE INDEX

700

Equipment

Buildings

Construction
labor

Engineering
supervision

600
500
400
300

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Cost indices are dimensionless numbers

200
that compare prices of a class of goods
or services to the corresponding prices
at a base period. They are widely used
100
in the construction industry and can be
customized to various industry segments.
0
Predesign estimates are usually made
for equipment and assets that will be built
in the future, but must be assembled from
FIGURE 1. The CEPCI, along with the four sub-indices that contribute to it, has risen unevenly
prices of the past.
over the past three decades
The mathematical relationship between
costs and indices is the following:
the composite CEPCI index. Annual values
sector. Location factors also typically do
for the overall CEPCI and for each of the
not consider cost effects that are associated
(Cost at Time 1) (Cost at Time 2) =
sub-indices are calculated from the arithmewith site-specific conditions, such as local
(Index at Time 2) (Index at Time 1)
tic mean of the monthly values for that year,
climate, earthquake risk and other geologiA number of cost indices are relevant to the
for each subindex.
cal differences. Countries may not have the
CPI, including the Chemical Engineering
The overall CEPCI for 1959 was assigned
capability to manufacture certain specialPlant Cost Index (CEPCI) and the Marshall
a value of 100 as a benchmark. Figure 1
ized equipment and need to import it, so
& Swift index (www.marshallswift.com) for
illustrates the historical escalation of the
the degree of importing required needs to
the chemical industry and the Nelson-Farrar
CEPCI and its sub-components for the past
be part of the calculation.
index (www.ogj.com), which is designed
37 years. The CEPCI value, along with those
When used, location factors should be
for petroleum refineries.
for the sub-indices, has risen unevenly, but
reserved for preliminary project evaluations
steadily for the past three decades.
they are not intended to be used when
CEPCI
preparing appropriation-quality estimates.
The CEPCI is a composite index, and is
Location factors
Resources for more information on location
built from four sub-indices: 1) Equipment;
Cost indices are traditionally tied to a parfactors include AACE International and
2) Construction Labor; 3) Buildings; and 4)
ticular geographic region. As industries and
the International Cost Engineering Council
Engineering & Supervision. The Equipment
markets globalize, the ability to translate
(Sydney, Australia; www.icoste.org).
subindex is further broken down into seven
costs has become increasingly important.
component indices, as follows:
The cost engineering professional organizaReferences
Heat exchangers and tanks
tion AACE International (formerly Assoc.
1. Ulrich, G.D. and Vasudevan, P.T., Capital
Process machinery
for Advancement of Cost Engineering; MorCosts Quickly Calculated, Chem. Eng., April 1,
Pipe, valves and fittings
gantown, W.Va.; www.aacei.org) defines
2009, pp. 4652.
Process instruments
a location factor as an estimating factor
2. Humphreys, Kenneth K., and Hamilton, Allen
C. Worldwide Sources of Cost and Project In Pumps and compressors
used to convert the cost of an identical
formation. Conference Proceedings, Joint Cost
Electrical equipment
plant from one location to another. Location
Management Societies, Morgantown,
Structural supports and miscellaneous
factors recognize differences in labor costs,
W. Va., 2000.
The component indices are compiled with
engineered equipment and material freight,
3. Vatavuk, William M., Updating the CE Plant Cost
weighting factors and combined to make
duty, taxes, engineering, design and project
Index, Chem. Eng., January 2002, pp. 6270.
up the equipment index. The three other
administration costs. The cost of land is not
4. Pietlock, Bernard A., Developing Foreign Locasub-indices are compiled independently and
included in location factors.
tion Factors, Cost Engineering 34(1), January
also weighted and normalized.
Accurately and effectively applying
1992, pp. 711.
The CEPCI includes the costs to design,
location factors can be challenging and
5. Pietlock, Bernard A., Developing Location Facpurchase and install chemical plant equipdoing so requires an understanding of
tors by Factoring, AACE International Recomment, and is weighted as follows:
how each factor was derived and exactly
mended Practice No. 28R-03, October 2006.
61% equipment, machinery, and supports
what it represents. In most cases, location
22% construction labor
factors are not industry-specific, but rather
Editors note: The editor would like to acknowledge
AACE International for allowing access to its virtual
7% buildings
are designed for a broader mix of facility
library, and EC Harris LLP (London, U.K.; www.
10% engineering and supervision
types, so they may not reflect the unique
echarris.com; an Arcadis company), for insight
Combining the four sub-indices gives rise to
characteristics of buildings in a particular
related to this column.