Comparing construction costs - methodology
It is important to compare construction costs between countries to inform expansion decisions. It can also enable productivity comparisons, highlighting how different practices and tools such as BIM can improve design and delivery. Opportunities to improve the efficiency of the construction sector and reduce costs are also opportunities to grow the global economy faster.
Here we look at the advantages and disadvantages of three methods of comparing construction costs using an example building type: Central Business District (CBD) offices – high-rise prestige.
Method one: convert to a single currency such as USD or euros
This is the most common means of comparison, useful for a multinational organisation paying for projects in its home currency.
- Easy to understand and visualise.
- Gives the cost of a typical building in each country.
- A change in the exchange rate makes a huge difference: if a particular currency is strong compared to the base currency, the cost of construction looks expensive.
- Is not a reliable indicator of relative costs and efficiency of construction between countries.
Method two: Purchasing Power Parity (PPP)
The PPP measure shows costs in relation to cost of living in the country. It indicates the construction cost per square metre in the local currency, relative to the costs of a basket of construction materials and labour. The PPP cost of a particular building type is calculated by dividing the cost in m2 in local currency by the PPP coefficient. A lower PPP cost generally indicates more efficient construction (see page 82 for more detail).
- Leaves exchange rate out of the equation.
- Useful for governments, policy-makers and researchers to compare costs and efficiency with other countries.
- For a global firm looking to build overseas, it can be more convenient to look at cost in its home currency.
- The cost of the basket of goods ignores contractors’ margins, labour productivity and preliminaries.
Method three: location factors
Location factors extend the basket of goods approach used in method two (PPP) by adding labour, productivity, market conditions, contractors’ preliminaries and margins.
A similarly specified building constructed for USD100m in London (location factor 100) should cost USD84m in Toronto (location factor 84) at the exchange rate as of the first quarter of 2016.
- Useful for a company considering a complex investment in several locations and wanting to know the cost in a single currency.
- Will show the difference in cost between countries of buildings built with similar specifications and inclusions.
- As this method uses a common currency, it is subject to the same disadvantages as method one.
- In practice, local building codes, methods and specifications are different between regions.