Comparing construction costs - methodology

Previous Preliminaries and margin trends in construction

1Introduction

It is important to compare construction costs between countries to inform expansion decisions. It can also enable productivity comparisons, highlight 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.

2Calculating the effect of exchange rates

Fluctuating exchange rates also affect the cost of imported materials and equipment used in construction projects. Where the exchange rate falls against the currency of the supplier country, the cost of imports in the local currency is higher and pushes up construction costs.

The US dollar appreciated significantly against many currencies, while the currencies of some commodity exporters rose off the back of the improving prices of commodities during 2016. When the dollar is compared against a weighted average of foreign exchange values, it appreciated by 5.6 percent since June 2016.

In contrast, the euro and Japanese yen both weakened against the US dollar. In emerging markets, the Turkish lira and Mexican peso were some of the worst performing currencies, so comparative costs in all of these depreciating regions fell when converted to US dollars for comparison.

We continue to use three construction cost comparison methodologies to ensure our findings deliver accuracy and insight. This is increasingly important given the volatility in exchange rates and its impact on construction cost. 

Download the full table of exchange rate fluctuation in all 43 markets

3Method one: convert to a single currency

This is the most common means of comparison, useful for a multinational organisation paying for projects in its home currency.

Advantages

Disadvantages

Is not a reliable indicator of relative costs and efficiency of construction between countries.

4Method 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.

Advantages

Disadvantages

The cost of the basket of goods ignores contractors’ margins, labour productivity and preliminaries.

5Method 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 USD103m in Toronto (location factor 103) at the exchange rate as of the first quarter of 2016.

Advantages

Disadvantages

In practice, local building codes, methods and specifications are different between regions.

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