Comparing construction costs; Terms and references

1Comparing construction costs

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

 

Method one: convert to a single currency such as USD

This is the most common means of comparison, useful for a multinational organisation paying for projects in its home currency.
Advantages Disadvantages
Easy to understand and visualise. 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.
Gives the cost of typical building in each country. 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 104 for more detail).

Advantages Disadvantages
Leaves exchange rate out of the equation. For a global firm looking to build overseas, it can be
more convenient to look at cost in its home currency.

Useful for governments, policy-makers and researchers to compare costs and efficiency with other countries. 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 USD108m in Toronto (location factor 108) at the exchange rate as of the first quarter of 2018.

Advantages Disadvantages
Useful for a company considering a complex investment in several locations and wanting to know the cost in a single currency. As this method uses a common currency, it is subject
to the same disadvantages as method one.
Will show the difference in cost between countries of buildings built with similar specifications and inclusions. In practice, local building codes, methods and
specifications are different between regions.

 

2Terms and references

Building costs per square meter

In this survey, building costs per m², sometimes referred to as direct costs (as opposed to indirect costs), are for construction of the building, including preliminaries (or general conditions) costs and substructure, columns, upper floors, staircases, roof, external walls, external doors, internal walls, internal doors, wall finishes, floor finishes, ceiling finishes, fitments, plumbing, HVAC, fire protection, electrical and communication systems and transportation systems.

It is assumed that building costs are based on the typical building standards and building methods for the region.

Exclusions from building costs per square meter

External works, landscaping, professional fees, demolition, loose furniture, fittings and equipment, developer’s internal costs and finance, local authority fees and headworks charges, land, legal, finance and holding costs, GST or sales taxes, site investigation and test bores, removal of significant obstructions in the ground, abnormal footings. Allowance for underground or onsite car parking is also excluded from the building cost unless stated otherwise.

Labour costs

Labour costs are the all-inclusive cost to the employer, which includes the basic hourly wage, allowances, taxes, annual leave cost, and where paid by the employer, workers’ compensation and health insurance, pensions, and travel costs and fares. It excludes overheads, margins and overtime bonuses.

Composite trade rates

Composite trade rates are the fully installed rates charged by the subcontractor to cover labour, materials, delivery, plant, overheads and margins, and sales tax.

Construction costs and exchange rates


This survey’s construction cost data comes from programmes underway at the beginning of 2016, and excludes applicable taxes. All exchange rates are from January 2018.

Purchasing Power Parity (PPP)


PPP is a technique that compares construction costs with the cost of living (purchasing power) in each country. In short, it’s a better way to compare construction costs between countries.

The PPP methodology removes the impact of exchange rates, which are notoriously volatile. Often costs are converted to USD (or any other currency) in order to compare costs between countries. Because exchange rates have fluctuated so much in recent times, this can give a false impression of how a country’s construction costs compare with others. A high exchange rate will make local costs look high against the comparison country. A low exchange rate will do the opposite.

To gain a better indication of whether a country’s construction is expensive we use PPP. A standard basket of goods is priced in each country in the local currency. This basket includes quantities of labour, plant and materials common to all forms of construction. Then we compare the cost of the basket goods with the cost of construction in the country to obtain a purchasing power parity cost.

The higher the PPP cost, the higher the cost of construction in local cost-of-living terms. PPP costs can, therefore, be used to better compare the relative costs of building from country to country.

Though such indexes are used in some branches of economics, it has not often been used to compare construction costs. We have developed this methodology with the Centre for Comparative Construction Research (CCCR) at Bond University, Australia, using their CitiBloc method for the calculation of basket item costs.

To compare PPP costs, divide the $/m² rate in local currency by the PPP coefficient for that country.

 


This content is part of the International construction market survey 2018

Go back to the main ICMS 2018 page