TYPES OF COST INDEX (INDICES)

TYPES OF COST INDEX (INDICES)

1. Factor cost Index: In this method, the cost of a typical building is analyzed into constituent (Labour, material and plant resources) monitored over time then a combined average index can be prepared which measure this changes in the total cost of the building over the same period.

Each resources need to be given due importance (weighted) in the index according to value in the total building instead of monitoring the absolute price of resources separate index or factors may be used.

2. Tender Cost Index: This method is principally based on tender document rate in the Bill of Quantities with the tender document as the source of cost information, thereby recoding what is usually happening in the market place.

In the approach either the total price related to the size of the building (e.g. cost/sq meter of gross floor area). Or the price of some selected representative of the Bill of Quantities items are collected from a large number of current successful tenders bill from which weighted average are obtained.

This is done at index time intervals and with the starting date as the base used in computation of the index at each time period.

APPLICATION OF COST INDEX (INDICES)

Which ever way an index is prepared, it will usually take the form of an indicator figure for a particular month, quarter or year related to a datum of 100 at a chosen point in time e.g. current index figure might be say 130 related to 100 in January a year ago.

This means that cost on a certain basis had increased by 30% during the period. If in a years of time the index rises to 140. it must be remembered – this would be a further rise of 10 points on the scale not 10%.
The actual percentage increase would be 140 – 130 /130 X 100 = 7.698%.

There are four basic requirement for the evaluation of cost index.
1- The datum point of the index should be far enough in time for a trends to be established but not so far away that it is likely to be based on an obsolete criteria.

2- The intervals at which index figure are shown should be reasonably close in relation to the total period of the index so that at least a dozen or so figure area available.

3- The index must be kept to date.

4- The basis of construction of the index must be known in order for it to be used wisely (Seeley H., 1996).