FORECASTING CONSTRUCTION COST ESCALATION

Escalation can account for a substantial part of construction costs. T herefore forecasts of the amount of escalation are required for budget ary and bidding purposes. This paper examines methods for forecasting construction escalation using statistical time series methods. Time se ries of construction cost indices are used as a proxy of construction cost escalation. The application of time series methods, their limitat ions, and their effect on the risk of cost escalation are demonstrated and evaluated. The analytical methods available are only useful in fo recasting for short construction projects in stable conditions. This i s because none of the methods can forecast escalation caused by unpred ictable occurrences such as outbreak of war or certain government acti on. Construction cost escalation remains a risk to be borne by either the contractor or the owner, or both, depending on the terms of the co ntract; any logical approach to minimize the risk is worthwhile.