The Index Prediction Tool: Improving how we forecast construction costs during COVID-19 Uncertainty

Tina Le
COVID-19 continues to impact the global economy, and no one knows for sure how long it will last. The widespread disruption and uncertainty make accurately forecasting construction costs more challenging than ever before.

We often rely on past performance as an indicator of future results, and this method has been effective when gradual changes to the economic climate have occurred. The pandemic, however, has caused unprecedented changes to global markets, and economic variables have moved in ways we’ve never seen.

Traditional forecasting techniques typically fail to adequately account for the impacts of major changes in the economy. Previous methods assumed future construction cost indices will move similar to how they moved in the past, but we have no historical data to show what is happening right now. We can’t just take a typical three-year rolling average approach for predicting futures values.

The good news is we developed a tool to better forecast project escalation. Our Construction Data Intelligence team reviewed data back to 1960 to conduct an extensive study of construction cost escalation rates against changes in several major economic variables. The Index Prediction Tool allows you to confidently predict escalation rates using experienced economists’ forecast values.

The multiple linear regression model quantifies the historical relationship between a building cost index[1] and a range of economic variables. When combined with forecasted economic variables, the model makes it is possible to better predict the impact on future building cost indices as the economic forecasts rapidly change.

Understanding how the economy moves in the future can be beneficial in predicting the building cost index. Using forecasted economic factors from trusted sources[2] [3] [4] makes the forecasted building cost index more reliable. By using data from well-established organizations that specialize in economic projections, we can build greater trust with clients leery of certain numbers because of current economic conditions.

Anyone can use the Index Prediction Tool to update escalation forecasts as the publicly available forecasts for major economic variables change. Contact us for access and start improving how you forecast construction costs during this time of uncertainty.

Read ENR’s article to learn about how the tool works, how it was created and more about the benefits.

Faithful+Gould provides location factors, escalation forecasts, benchmarks, cost models and market analysis through our Construction Data IntelligenceSM service.

[1] Engineering News-Record

[2] Congressional Budget Office

[3] International Monetary Fund

[4] Organization for Economic Co-operation and Development

 

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