Author: J. Korevaar
For CCE qualification
Abstract
Over the time span of major capital projects, from the first conceptual studies to the
completion of the projects, there are many factors that influence the project costs. This paper
focuses on the effects of ever-increasing inflation on the project costs, comparing the
variance in rates seen on a sample project to the publicised accepted norm of the local
published escalation rates. Possible reasons for the problematic differences between market
related prices and normally accepted escalation indices are presented. The information in
this paper can be used to provide awareness for future project estimating in an effort to
reduce the risk to the estimated total project costs with particular reference to escalation.
Cost increases can be due to various reasons, including but not limited to scope growth,
schedule slippage, changes in productivity or cost escalation. When an estimate is
developed, an allowance is made for future escalation by using published escalation indices
and forecasting the escalation based on the trends in these indices. However, the actual
circumstances that a project is performed in, provide price increases that are influenced more
by unique market related conditions, rather than by empirical indices. One such contract is
presented in this paper, where the pricing obtained at the Class 3 estimate stage differs
considerably to the bid pricing obtained a year later by the same contractor. Interviews were
held with cost engineers on various projects to obtain further opinion on their experience on
their projects.
The results of these interviews conclude that the issues of market related influences on
project costs continues to be a factor that needs to be understood in a better way.
Economists who provide market trends in commodities and labour costs and who can provide
forecasts based on these trends, will be of added benefit to organisations working with Major
Capital Projects. This will assist the project management in seizing opportunity costs in order
to mitigate the risk of being at the mercy of the market.
