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3 International construction cost comparisons

Rick Best and Jim Meikle

Introduction

Comparisons of the cost of construction across national boundaries have been routinely undertaken for many years for a variety of purposes. For clients, the reason may be as simple as wanting to know how much it will cost them in their own national currency to build a facility in another country; for governments and other agencies, it may be about how competitive their industry is in a global marketplace. For example, in 1949, a UK group, the Building Industry Productivity Team, visited the US (Anglo-American Council on Productivity 1950). A primary purpose of the visit was to compare the cost of construction in the two countries, which they did by comparing the cost of buildings of similar size used for similar purposes. The group concluded that US costs were in the order of 55 to 80% higher than comparable UK costs but noted that differences in design and specification of buildings varied considerably between the two countries. Costs were collected in the respective national currencies and then compared using the exchange rate current at the time of the group’s visit to the US, GBP1 = USD4. A year later, that rate had changed considerably to GBP1 = USD2.80 – had this rate been used, US costs would have appeared to be more like 120 to 160% higher than UK costs. That there would be so much change in relative construction costs in such a short time is extremely unlikely.

Methods have not necessarily changed much over the last 60 years; Best (2012) analysed the methodology underlying claims made by the Business Council of Australia (BCA 2012) regarding the high cost of building in Australia relative to the cost in the US and showed that, using the same methodology with different currency conversion rates and data from alternative sources, building in Australia was arguably much cheaper than it was in the US.

While the terms cost and price are largely used interchangeably here, cost may be interpreted as the cost to the contractor to build, that is the cost of inputs, while price is the amount actually paid by the client to the contractor for the completed work. In the latter case, of course, the price paid is the cost to the client.

What sort of costs or prices are collected and how that is done often depends on the purpose for which the data is required, and there are a number of ways that it can be done. Cost data can be collected for whole projects, parts of projects or for inputs to projects, with each method/approach having its advantages and disadvantages. Significantly, the most recent round of the International Comparison Program collected data that was not for projects or parts of projects but for basic inputs – this is described in the following chapter. The examples given highlight a further issue that arises when comparing costs between countries, which is how costs in different currencies can be ‘normalized’ – converted to a common currency unit – and thus be directly compared. Both aspects of cost comparisons are discussed in this chapter.

Collecting cost data

Whatever the purpose, a number of approaches are used, and have been used over the years, to collect cost data for international construction cost or price comparisons. These have been variously based on:

· output prices of construction (the prices of completed construction projects charged by contractors to their customers)

· input prices to construction (the prices paid by construction contractors for the inputs to construction work – primarily construction materials and labour)

· intermediate prices (prices used, for example, by contractors for parts of construction work, either in their own estimates or in tenders to customers)

· some combination of these.

Cost data may be based on complete projects or on some combination of elements that can be taken to represent whole industries or ‘all construction’. Where comparisons are made at a whole-of-industry level, they may involve some sort of weighting that reflects the share of total construction expenditure that each component represents, or they may be unweighted. The weighted versus unweighted approach is discussed in the following chapter in the context of the two most recent rounds of the International Comparison Program (ICP), where the 2005 round had a three-tier system of weights and the 2011 round features a combination of weighted (for industry sectors and resource groups) and unweighted (for individual resource inputs) approach.

Ideally, the prices collected should be output or purchaser prices, the actual final price paid by clients for completed work. Such prices include the cost of all inputs plus the other costs that make up the final project cost, including profit, taxes, contractors’ overheads and professional fees paid to designers and other consultants. They also reflect both productivity and labour/equipment use, which will vary between locations.

A number of international consultancies regularly collect and publish superficial (i.e. cost per m2) building costs, usually expressed as cost per m2 of floor space. Costs are given in the currency of each country, often converted to some single currency (typically USD, GBP or EUR). The use of cost/m2 data appears, prima facie, to offer a relatively simple method for comparing costs between locations. The basic notion is that if it costs USD1000/m2 to build a certain type of building in the US and AUD1500/m2 to build the same type of building in Australia, then the two amounts in the different currencies buy the same volume of construction. In reality it is not so simple. The key concerns are availability of data, the consistency of data between countries and whether the data represents national average prices for buildings that are actually similar enough to be compared.

Data is available for many countries but is often not readily available for countries other than those included in the data published by the major consultancies. Where data can be obtained, it is often unclear how reliable the data is in terms of consistency of approach to factors such as the measurement of gross floor area (e.g. does it include unenclosed covered areas or not), and the specifics of the building projects, such as what is included or excluded (e.g. fitout to office space), are not always provided, and thus the comparability of the projects is unknown. Equally, it is seldom clear whether the projects for which costs are given represent ‘typical’ construction in each location.

Statisticians tend to use terms like ‘goods’, ‘products’ and ‘services’ for items such as televisions, cars and haircuts for which costs can be collected. Construction projects vary considerably in size, type and complexity and typically have no typology by which they can be separated into anything other than broad functional groups such as hospitals or offices; as a result, they seldom fit well into the statisticians’ categories and are thus harder to price.

Comparability and representativeness

Finding construction that is both similar enough to be readily compared between countries and that represents typical construction in each location is not a simple task, and the problem is not limited to the construction sector. Even within a country, something as simple as a haircut varies considerably in cost and quality between, say, a small shopfront in a rural town and an up-market salon in a major city. Construction projects vary even more markedly, particularly when international comparisons are the aim, due to design for different climatic and seismic conditions, differences in regulations and client expectations. It is a main reason construction has been described as ‘comparison-resistant’ by the World Bank (Walsh and Sawhney 2004). While they may exhibit many similarities, most building projects are unique, even within a single country, when considered at a detailed level. Differences between countries mean the nearest we can get to identical projects are generally functionally similar projects such as basic warehouses, while more complex projects such as hospitals, bridges and schools vary considerably and pose larger problems.

Attempts have been made to look at smaller parts of projects and basic inputs such as materials and labour in order to achieve greater comparability and representativeness; these are discussed in this chapter.

Collecting output prices

With methods based on output prices, the preference is to collect actual or out-turn prices, that is final prices paid by clients for building work. In practice, it is difficult to obtain such data. It is most unusual for identical projects to be constructed in different countries at the same time in exactly the same circumstances. The output prices that are typically used are therefore either consultants’ or contractors’ estimates, and thus they are not ‘real’ prices; while they are based on experience and represent an expert view on a range of projects, they must contain an element of subjectivity. Even though it is usually possible to obtain average real prices (e.g. cost per m2 of floor area) for broadly similar project types (e.g. mass-market housing, industrial buildings, office buildings or sections of highway), these are not identical and are likely to vary in quality and functional performance. This is not necessarily a problem, as clients planning to build outside their own country will build to meet local standards, and thus it is local costs that are relevant to them. If, however, the aim is some sort of more general comparison of industry performance or international competitiveness, then differences in project design, building codes and typical materials can distort the outcomes.

Standard projects

As it is virtually impossible to find identical buildings in each location that can be compared, this method is generally based on the pricing of one or more hypothetical building projects; if more than one project is included, usually a range of different building types are priced. Project costs are determined by the pricing of detailed bills of quantities (BQs), in which each project is broken down into a number of detailed work items that are individually priced by construction cost experts in each location. If comparisons are being made at the whole-of-industry level, then project costs are aggregated, perhaps with the various projects weighted according to the volume of each type of building constructed in each location. The standard projects method is the method currently used by the OECD-Eurostat program to produce construction-specific purchasing power parities (CPPPs) as part of a broader exercise that produces GDP–level PPPs.

This approach:

· is designed to collect prices that are best estimates of actual prices paid; however, it is typically tender prices that are collected, and these are in reality forecasts of the cost to build and are thus not ‘current prices’ as is the case with other PPP price data.

· should reflect capital/labour mix and relative productivity differences.

· requires projects that are both representative and comparable across all locations, which is seldom possible.

· is designed to collect data for different construction types (residential, nonresidential and civil engineering) and ‘all construction’ by using a range of project/building types.

· is difficult to adapt to cover work other than the construction of new projects.

· can be costly in implementation, particularly if more than one price observation is collected for each project from each location, although if a construction cost expert is employed, then their experience should allow them to provide a more considered and balanced set of prices than might be the case with an observation from a single-industry participant such as an estimator in a contracting firm.

Project prices

This method is based on what are sometimes referred to as area cost models or matched models. Historical cost data in the form of rates per m2 of floor area ($/m2) are collected for various building types, and these are used as an indicator of relative costs across countries by a number of firms of construction cost consultants. It is a relatively crude method, however, as costs are generally expressed as ranges that reflect the great variety of designs and construction methods that may occur in any category of building – for example, an ‘industrial building’ may take many different forms even within a single country.

Main features:

· based on actual output prices

· relies on databases of historical data, which may or may not exist in all locations

· relies on consistent data collection and analysis

· based on average prices that may or may not be truly indicative of actual prices (i.e. depends heavily on the availability of representative data for various typical building types, and those buildings need to be comparable and representative)

· assumes use of common concepts for measurement and content.

Table 3.1 shows a sample of such data published by an international consultancy. Costs of this nature are generally given by city rather than as national averages, particularly for countries such as the US where there are significant regional variations. In some cases, even in a single location, costs can vary considerably, as illustrated by the London rates shown in the table, where the higher rate for three-star budget hotels is around 25% higher than the lower rate, while for five-star luxury hotels, the difference is nearly 40%.

Table 3.1  Cost/m2 data for three styles of hotel published by an international consultancy (Source: Davis Langdon 2011)

Using input prices

In this method, a selected set or ‘basket’ of inputs or resources is priced. Inputs include typical construction materials (possibly including some components, such as windows, that are typically manufactured off site), various types or classes of labour and possibly some items of construction plant and equipment. Basket costs are adjusted to include estimates of site-specific and general overheads and builders’ profit. Other adjustments may include local taxes and consultants’ fees.

Comparable input prices are relatively straightforward to collect. They are for standard measured units (e.g. tonnes, m2, m3, days) of readily available items (e.g. concrete, timber, steel, skilled labour). A particular issue with this approach is that input prices are not purchaser prices, they are the prices paid by contractors to their suppliers, not the prices charged to their customers. Furthermore, input prices (and, indeed, all construction prices) are context dependent, that is they are, at least to some extent, dependent on the quantity used, the scale of the project, how and where it is used, who is doing the work, and who is the customer for the work; prices collected thus have to be some sort of average that accounts for these variations.

Main features:

· generally reasonably easy to implement

· in line with many other price index and price comparison methodologies

· provides current price levels rather than forecasts (which is, as noted earlier, what tender prices are – out-turn costs would be preferable, but they are seldom available, so current ‘real’ prices for inputs may be the next best option)

· reduced effort offers the possibility of multiple observations and/or more frequent surveys and makes validation of data by reference to data providers feasible

· designed to provide price levels for different construction types (residential, nonresidential and civil engineering) and ‘all construction’ by using different baskets of resources

· does not implicitly account for contractors’ margins (provides contractors’ input prices rather than output prices) or other general cost inputs, so these must be estimated or collected and added separately or possibly ignored.

Using intermediate prices

Intermediate prices are composite rates or prices for items of work and, as such, combine the cost of all required inputs (materials, labour and so on). Such prices are available – from price books and successful tenders, for example – but the way they are used depends on the pricing approach of particular contractors and the circumstances of particular projects. They need to be used consistently; for example, if prices from successful tenders are used, all prices need to come from the same tender, and even then there is no guarantee that margins have been evenly distributed across the items in the tender, as tenderers may weight some items to enhance their cash flow. Price book prices cannot reflect the specific context of projects or the methods used by different contractors. Due to these factors, it is likely to require expert input to price the items in any basket. Another challenge is to find items of output that are sufficiently similar in all locations that are both representative and comparable.

The premise for this method is that by pricing composite yet discrete items of construction output, not only does the data represent purchaser prices, but these prices inherently reflect differences in productivity and labour/equipment ratios between locations. This component cost method is similar to the BQ approach; however, rather than pricing every part of a project, a standardized set of components is taken to represent whole projects or even a whole sector; this greatly reduces and potentially simplifies the price collection process. Typical components include concrete footings, an area of finish (e.g. cement render) to a surface, a concrete pier, or an area of pavement. The items are typically tightly specified with precise details of size, materials and construction method.

Main features:

· designed to reflect productivity and labour/capital differences between locations

· includes contractors’ margins (if correctly priced)

· designed to provide price levels for different construction types (residential, nonresidential and civil engineering) and ‘all construction’

· difficult to specify components that are sufficiently similar in all locations and reasonably representative of every location.

Examples of implementation of various methods

Each of the generic methods described has been implemented at least once. Several methods provide data for the ICP, and its component parts are discussed further in the following chapter. Other examples of the use of methods and some variations to the basic methods are discussed here. The following sections give overviews of a number of construction cost studies carried out over the past 25 years. Some are stand-alone studies, while others have been, and in some cases still are, conducted regularly by commercial organizations. They illustrate similarities and differences in approach and often demonstrate the generic problems that are faced by those carrying out such studies.

UK Building Employers Confederation – 1986

Construction costs were a key part of an investigation carried out in 1986 that compared many aspects of the construction industries in the UK and US (Flanagan et al. 1986). Part of the exercise involved direct comparisons of construction cost between pairs of completed projects that covered a range of building types, including residential, office and industrial. A set of nine suitable projects was identified in the US and an extensive search was then conducted to find similar UK projects that matched each of the US projects as closely as possible. Although every effort was made to match the pairs, basic differences in a number of factors including quality, regulatory requirements and client expectations meant that the cost data had to be adjusted by the researchers in order to improve the comparability of the projects. This is a fundamental issue and one that is not easily resolved, as any such adjustment is likely to require some degree of judgement and subjectivity, yet it is likely to be necessary if valid comparisons are to be drawn. Identifying suitable projects in this way is a lengthy process even for a small sample of nine pairs, and the smallness of the sample raises questions about how representative of all construction the selected projects could be, particularly in the US context given the substantial differences in construction costs that exist between different parts of the US. As the researchers acknowledged, regional differences in cost are also apparent in the UK, but they are of much greater significance in the US.

The method used for comparing costs employed a sort of construction- specific purchasing power parity (CPPP), as the project costs were expressed in national currency units per m2 of floor area and the cost ratio for each of the pairs calculated (e.g. for one pair, the rates were GBP288.00/m2 and USD502.90/m2, respectively, with a ratio of 1.75). Five of those ratios (range: 0.86–1.02) were below the then-current exchange rate and four were near or above (range: 1.22–2.55), thus suggesting that the exchange rate was a reasonable proxy for a purchasing power parity at that time. In fact, if the geometric means of the nine GBP and USD rates are computed and compared, a CPPP (GBP:USD) of 1.21 results, and that is reasonably close to the average exchange rate for 1985 of GBP1 = USD1.30 (fxtop, 2013). The original results were a little clouded, however, as costs for each pair were adjusted to bring costs for each pair to a common base date, but all the pairs were not brought to the same base date; thus the pair-wise comparisons appear valid, but it is hard to judge the robustness of the overall comparison.

Davis Langdon – standard projects

Davis Langdon Consultancy (DLC 1999) used a set of three standard building projects, comprising a single-storey factory/office (GFA 2,900m2); a multistorey office block (GFA 4,500m2) and a single-family dwelling priced in the UK, Ireland and the Netherlands to compare construction costs among three locations.

The Davis Langdon study produced bilateral comparisons that separated cost differences due to differences in specification as well as those due to differing price levels. The basic methodology is shown diagrammatically in Fig. 3.1 . A typical bilateral comparison is shown in Fig. 3.2 . The buildings were priced by experts in each country in national currencies. Total costs were then converted to European Currency Units (ECUs were an informal predecessor to the euro) to allow direct comparisons of cost.

Figure 3.1  Basic comparison methodology (DLC 1999:4)

Figure 3.2  Office building price comparison – project prices in ECUs (base date September 1997) (DLC 1999:18)

The method was expanded to include differences in building geometry for residential buildings that were typical of the different locations. This allowed analysis of overall cost differences between locations to show the relative effects of the three variables, viz. price-level differences, specification differences and differences in building geometry (form).

Figure 3.2 shows that the ‘standard’ UK building is 12.5% higher in price level than the ‘standard’ Irish building and that that is largely (10.2–11.1%) made up of differences in price levels and only a little (1.5–2.5%) by differences in specification.

Davis Langdon – basket of materials and labour

In 2003, Davis Langdon undertook a test exercise of a basket-of-goods approach to international construction cost comparisons. The basket consisted of 35 materials or products and four items of labour. Prices were sought for large, medium and small quantities/projects (indicative quantities were provided for each); in practice, only one set of quantities, that for small projects, was consistently priced, and the test exercise was eventually based only on that data. Weightings for the basket were derived from the 1999 UK Input-Output (I/O) tables, with one or more items being taken as proxies for either industries (materials or products) or compensation of employees (labour). Value weightings were converted to unit quantities using the UK prices.

The weighting approach used was unusual and probably unique; rather than producing a standard weighted basket and then seeking price data for that basket, unit rates were gathered, and these were used to assemble a basket of goods and labour that contained the same list of materials, products and labour categories but different quantities for each item. Quantities for each country were derived from national I/O tables. National accounts generally include figures that represent purchases of materials by the construction industry from other sectors, and these provide a value weighting of inputs to the construction industry. Priced items in the basket were assigned to various product groups in the I/O tables and the average contribution to the basket determined. The labour:materials ratio was assumed to be 40:60 with no separation of plant costs or profit and overheads.

This exercise was not taken any further at the time, but it was revised and reviewed in the methodology development stage for the 2011 ICP. Its main general shortcoming is that it can usually only be used for ‘all construction’; the other problem for the ICP is that I/O tables are not available for many countries.

A standard projects example
In 1999, a two-stage comparison study was carried out for the Australian government that compared Australian construction costs against costs from six other countries. In the first stage, seven hypothetical projects of various types were priced in local currencies in the seven target countries. Project costs were converted to AUD using current exchange rates. Based on those figures, the authors of the first-stage report suggested that “it would appear that Australia with its currency exchange advantage is more than competitive with the other Western countries and on a par with Singapore” (Page Kirkland 1999:2 – emphasis added).

In Stage Two of the study, Langston and de Valence (1999) acknowledged the problems of using exchange rates to convert costs. They noted, for example, the effects of fluctuations in exchange rates between Australia and some of the other countries around the time of the study, which produced very different results if varying exchange rates were used over the course of just one year.

In an effort to eliminate the problem, they utilized the Big Mac Index (for an explanation, see The Economist 2004) and expressed costs in local currencies as the number of hamburgers that (at local prices) equated to building cost. On that basis, Australia appeared to be more expensive than all but one of the other six countries (China) included in the study and the most expensive of the four Western countries, that is, the cost to build equalled the cost of a greater number of hamburgers in Australia than it did in the other countries. Subsequent work by Langston and Best (2005) did not provide strong evidence to support the hamburger exchange rate in the construction context, but the concept of purchasing power as a method for bringing costs to a common base has been explored further (e.g. Best 2008).

The BLOC method
In early 2008, a comparative construction cost study using a basket of goods and labour was carried out across six locations: three cities in Australia plus Auckland, Singapore and Phoenix. The basket was dubbed a BLOC, a Basket of Locally Obtained Commodities (Best 2008).

A bill of quantities for a completed hotel, priced by the successful tenderer, was analysed to identify the most cost significant materials in the most cost significant trade or work sections. These materials were then taken to be representative of all the materials in each trade. Total values for the various trades were used as the basis for deriving weights (quantities) of the various materials. Composite unit rates for the significant items were broken down into materials, labour and plant or equipment costs, and published labour rates were used to determine the quantity (hours) of various classes of site labour required to install the derived quantities of each material.

A survey instrument comprising the fixed-weight basket of materials and labour supplemented by several general questions regarding site-specific overheads, general overheads and profit margins was priced by estimators and quantity surveyors in the six target locations. Average unit rates were calculated for each item for each location, and these were used to calculate the average cost of the BLOC in each location. At this stage, BLOC costs represented input costs only. Margins were added for site-specific overheads (referred to as Preliminaries in the UK and Australia) based on estimates from the survey respondents, and similar adjustments were made for general overheads and profit. Finally, the appropriate local taxes were added to produce BLOC costs that represented purchaser or output prices rather than input costs. Using Phoenix as a base, city-based construction-specific purchasing power parities (CPPPs) were calculated by dividing the cost of the BLOC in each location by the cost of the BLOC in Phoenix.

While the basic method appears sound, the exercise only provided price levels for a single building type (a hotel), which may or may not be an appropriate proxy for all nonresidential construction, let alone for all construction. Further application of the method using a range of building types may show whether the single building type is a suitable proxy. Another difficulty is that the data necessary to convert input prices to output prices (e.g. overheads and profit) is only an estimate and is hard to validate.

BCIS: Asia Building Construction Survey
In August 2006, the Building Cost Information Service (BCIS) published the first issue of the Asia Building Construction Survey. The report was survey based, and amongst the data gathered was average costs per m2 of gross internal floor area for 10 building types as assessed by respondents in the various countries. These were reported in local currencies, with costs converted from local currencies into USD, EUR and GBP using current exchange rates.

The aim of the study was to produce a commercial document that would provide companies wishing to build facilities outside their home country with indicative costs for such facilities compared to the cost of building in their home country. It included costs for a range of materials and labour inputs, but no attempt was made to aggregate these in any way.

Cost models for engineering construction

The International Cost Engineering Council (ICEC) launched a project in 2008 with the aim of producing location factors to assist in early estimates for projects located in different places. Two cost models based on a handful of composite items were to be priced by ICEC members in different countries, but as participation was purely voluntary, little or no data was ever collected. The cost models were for a building and a process plant with most of the composite items that were priced being common to both models/projects. Respondents were asked to provide composite unit rates including labour, materials and plant costs for around 10 components (e.g. an in situ reinforced concrete column, a plasterboard and metal stud partition wall). Additional data including hourly rates for various categories of labour was to be provided by respondents. The survey form and the accompanying pricing notes appear to be quite US centric, and although the survey was brief (in terms of the number of items to be priced), actually completing the survey would have been quite challenging. Weights (i.e. quantities of each item) in the models reflect the cost engineering basis of the survey: the building model, for example, includes just 50m2 each of external wall and internal wall but 500m of 12.5mm-diameter copper pipe and 5 tonnes of structural steel.

International cost data published by consultants

Indicative costs are routinely collected and published by a number of international firms, with some data freely available on websites and other data only provided to paying clients. Firms that are active in this area include:

· Rider Levitt Bucknall

· Gardiner & Theobald

· EC Harris

· Turner & Townsend

· Davis Langdon/AECOM

· Faithful+Gould

· Rawlinsons

· Reed Construction Data.

Several exercises are outlined later in this chapter. It is important to note that these datasets are often collected and published more for publicity than for application. They normally carry disclaimers that point out that the published data should only be used to give a general indication of relative costs.

EC Harris: International Building Costs

EC Harris is an international ‘built asset consultancy’. They publish an annual survey of building costs across around 50 countries with cost/m2 rates for a broad range of building types (EC Harris 2012). Costs are collected in national currencies and converted to USD, GBP and EUR as necessary. They acknowledge that relative price differences can be substantially affected by fluctuations in exchange rates as well as factors such as location, accessibility and design intent. As a result, the cost data has limited application apart from providing a snapshot of comparative costs at a given time and in circumstances where exchange rate conversions are appropriate.

Gardiner & Theobald: International Construction Cost Survey

This international firm of construction cost consultants regularly publishes the results of an International Construction Cost Survey that includes cost/m2 rates for eight building types and rates for 11 materials and three classes of labour across a range of countries around the world (Gardiner & Theobald 2011). The published data gives no indication of any quantities/weights for the input items; however, it can be assumed that the aim of the exercise is not to produce a cost for a basket but to indicate the comparative cost of individual materials and various categories of labour between countries. Costs are published in USD, EUR and GBP, with costs in national currencies converted to each of the base currencies using current exchange rates.

Turner & Townsend

Another global firm, Turner & Townsend, is a ‘program management and construction consultancy’ with offices in more than 30 countries. They produce an annual International Construction Cost Survey (Turner & Townsend 2012) that covers not only cost/m2 rates for a range of building types but also detailed information on labour and materials costs as well as rates for a number of complete work items such as an area of soffit formwork and an area of wall tiling. Costs are published in national currencies with an exchange rate based conversion to USD.

Commentary

The examples described in the preceding sections do not represent an exhaustive review of every attempt made to collect and compare international construction costs, but they illustrate an ongoing interest in such exercises covering more than 60 years. In later chapters, some more recent exercises are considered, including the 2011 round of the ICP, which is, at the time of writing, the most recent pricing round for that program.

A number of common threads can be identified across the various studies even though the purpose of the various types may vary. The costs collected generally fall into three categories: most commonly whole-project costs expressed as cost/m2 of floor space and/or costs for basic inputs that usually comprise labour and materials/components, with some instances of intermediate prices for items of construction work.