cost and price indices
TRANSCRIPT
Engineering Costs and Production Economics, 8 (1984) 137-144
Elsev’ler Science Publishers B.V., Amsterdam - Printed in The Netherlands
137
COST AND PRICE INDICES
Norman Boyd
COMPILATION OF PLANT COSTS INDICES
The numerous series of indices, published in various countries and purporting to rep- resent process plant costs, are compiled in various ways, but each series falls into one of two broad groups. First, there are what may be termed “real” indices, examples of which are shown in Table 1. For this group, the total cost of the plant is divided into well-defined elements, to each of which is applied its related index in order to arrive at a weighted index for the whole plant. Each of these related indices is itself weighted in accordance with the various items of expenditure con- tained within the cost element. The second group may be described as “pseudo” indices, the simplest example of which is the two- component index. For this the plant cost is assumed to have two elements, materials and labour, e.g. in the proportion 30:70, to which are applied indices representing steel prices and wages.
The series of indices of erected costs of plants which have appeared in previous ar- ticles in this Journal, and which appear under ‘Encost’ in Tables 4 and 5, are of the ‘pseudo’ type, with six items of cost chosen to facil- itate cost comparisons between different locations and countries. These Encost indices are based on comparative erected plant costs, C, using the formula:
C=lOP,+P,+3P,+6P,+(3OOL, x2/(1+F))+
(23OL, x l/F)
where: P, = Basic price (ex works) per tonne of Portland cement; P, = Basic price (ex works) per tonne of reinforcing rod; P, = Basic price (ex works) per tonne of structural steel: P4 = Basic price (ex works) per tonne of heavy steel plate; L, = Hourly labour cost for mechanical engineering; _Lz = Hourly labour cost for construction: and F = Relative pro- ductivity per man-hour for construction.
The values assumed for F in international comparisons are: 0.5 for U.K.; 0.6 for France, Italy and Norway; 0.7 for Denmark and Sweden: 0.75 for W. Germany; 0.80 for Belgium and Netherlands; 0.85 for Australia; 0.90 for Canada; and 1.00 for Japan and U.S.A., but these can be altered to suit re- gional or local site variations. Using this formula gave weightings in January, 1975, for civil and building materials (represented by
lOPI + P, +0.25P,), in the range 8% to 10% for the various countries (except Japan at 13.6%) and for field construction (repre- sented by 230L2 X l/F) in the range 24% to 32% (except for Japan at 17.5%). Mechanical and electrical equipment (including engineer- ing and procurement) made up the balances and ranged from 59% to 69%.
The application to a complete cost element of an index which, in fact, applies only to a part of it has obvious dangers and this criti- cism can be directed at all “pseudo” indices. For instance, the assumption in the Encost
0167-188X/84/$03.00 0 1984 Elsevier Science Publishers B.V.
138
TABLE 1
Canadian plant costs indices
Purchases Chemical and mineral Chemical and petrochemical
process plant (A) plant (B)
Weights Indices (1982) Weights Indices (1982)
(1971= 100) (1971= 100)
Machinery and
equipment
Fabricated
equipment
Process
machinery
Pumps and
compressors
Piping, valves
and fittings
Instruments and
controls
Electrical
equipment
Other utilities
Structures, paint
and insulation
Construction labor
Construction indirects
Buildings
Engineering and
administration
Totals
(100.00) 54.2 303.1
(23.66) 341.6
(26.67) 294.4
(7.48) 279.1
(10.24) 310.6
(6.20) 275.4
(9.60) 262.3
(7.83) 292.0
(8.32) 313.4
16.6 284.4
13.5 279.1
15.7 276.2
100.0 292.6
(100.0) 47.0 316.2
(29.0) 380.4
(22.0) 285.4
(21.0) 298.8
(12.0) 215.4
(5.5) 261.2
- -
(10.5) 313.4
18.0 276.7
11.0 281.4
9.0 280.2
15.0 273.2
100.0 295.6
Plant (A) is representative of those used in the chemical, petroleum, paper, cement and mining industries. and includes some off-site facilities.
Plant (B) is representative of those used in the chemical and petrochemical industries for
processing gases and liquids, wlthm battery limits.
formula that field construction costs, which Since a “real” index provides a more ac- include the costs of site supervision, construc- curate indication of price and cost changes
tion equipment, transport, and temporary than does a “pseudo” index, one might ask
facilities in addition to erection labour, why the latter type should be used. The
change at the same rate as do hourly construc- answer lies in the availability of indices. In
tion labour costs, is obviously open to ques- most of the developed countries, data on
tion although, as Table 1, Plant B indicates wages in various industries and on prices for
the difference in the indices for construction basic materials are published regularly but,
labour and construction indirects is less than except in a few of the larger countries, data
2% in this particular case. on earnings and labour costs in specific in-
139
dustries and on prices of items of equipment are either not available or limited in scope. When compiling a weighted index for a com- plete plant, one is therefore forced to select from the available price and cost indices those which appear best fitted to represent changes in the various cost components which com- prise the total cost.
CONSUMER PRICE INDICES
It can be argued that, in general, prices within a country merely reflect changes in the value of that country’s currency, even though prices of individual items will be affected by many different factors and will not all change at a uniform rate. On this basis a weighted index of all prices could be calculated using normal sampling techniques which require that the list of selected items included in the sample be representative and reasonably large. The most readily available index of this nature is the Consumer Price Index (CPI), and monthly or quarterly indices are published in the International Labour Office quarterly bulletins [ 1 ] for some 140 countries. From its name it is obvious that it is not necessarily applicable to prices of capital goods, but in many countries wages, which are a major element in manufacturing and other costs, are tied to the CPI by government decree and are generally a factor in all wage settlements.
In the U.K. these indices, based on about 350 items, are published monthly as Retail Price Indices [2], and Table 2 compares the 1978 and 1982 indices. In addition to the weighted total index, indices are given for each of 11 constituent groups and the in- creases in these over the five years range from 23.1% for clothing and footwear to 106.6% for housing. In 1982, the indices (with Jan. 1974 = 100) ranged from 210.5 for clothing and footwear to 433.3 for fuel and light, a ratio of 1:2.06. The ranges of these indices and increases are considerably greater than
those for the two Canadian plants listed in
Table 1. The Retail Price Index (RPI) is based on a
family expenditure survey [3] which cur- rently is made in just over 7000 households in the U.K. throughout the year, and the results are published quarterly. They are analysed in various ways, one of which is by gross normal weekly income split into 16 groups ranging, in 1982, from under &40 per week to over &400 per week. The weightings for four of these groups and for the total average are given in Table 3, and these weightings have been used, together with the 1982 constituent group price indices, to calculate composite price indices for each income group. The indices for the sixteen groups range from 339.7 to 32 1.7, i.e. +4.2% to -1.3% relative to the overall average of 326.0 or a total variation of 5.5%. The figure of 326.0 differs from 320.4 in Table 2 partly because the RPI excludes certain families in its assessment, and partly because the price indices for one year are applied to weights for the previous year.
Two points can be drawn from Table 3. The first is that the composite index remains fairly constant for the different income groups although the patterns of expenditure vary widely. In other words, both the weight- ings given to the various constituents and their respective indices can be altered quite radically without seriously affecting the weighted over-all index. The second point is that individual families, because of different spending patterns, could have indices outside the range of +4.2% to -1.3% in the previous paragraph. With a family on the average income living rent-free in a company house, provided with free fuel and light and a com- pany car, but spending the average amount on the remaining eight constituent groups, the over-all index would drop from 326.0 to 302.5, a drop of 7.2%. However there is an important difference in these two cases in that the families under review are typical in the first and nontypical in the second.
140
TABLE 2
U.K. retail price index
Purchases Weights Indices (15th Jan. 1974 = 100)
1978 1982 Variation 1978 1982 Variation
(%) (70)
Food
Alcoholic drink
Tobacco
Housing
Fuel and Light
Durable household
goods
Clothing and
footwear
Transport and
vehicles
Miscellaneous
Services Meals bought out
233 206 -11.6 203.8 299.3 46.9
85 17 -9.4 196.0 341.4 74.2
48 41 -14.6 226.2 413.3 82.7
113 144 27.4 173.4 358.3 106.6
60 62 3.3 227.5 433.3 90.5
64 64 182.1 243.8 33.9
80 77 -3.8 171.0 210.5 23.1
140 154 10.0 207.2 343.5 65.8
70 72 2.9 206.7 325.8 57.6
56 65 16.0 192.0 331.6 72.7
51 38 -25.5 207.8 341.7 64.4
Total 1000 1000 197.1 320.4 62.6
TABLE 3
U.K. family expenditures - Selected income groups (1982)
Purchases Gross normal weekly
income (EStg.)
40 to 100 to 225 to 400 and over All
under 50 under 125 under 250
Food 225 215 166 116 179
Alcoholic drink 25 43 43 50 46
Tobacco 28 41 26 15 29
Housing 260 182 144 140 166
Fuel and Light 127 74 52 43 62
Durable household
goods 26 70 88 84 72
Clothing and
footwear 44 72 86 84 72
Transport and
vehicles 38 114 175 183 148
Miscellaneous 64 75 78 77 79
Services 151 88 108 168 115
Meals bought out 12 26 34 40 32
Totals 1000 1000 1000 1000 1000
Price index 339.7 327.2 321.7 322.4 326.0
141
COMPARISON OF CONSUMER PRICES
AND PLANT COSTS INDICES
Table 4 compares the Consumer Price Indices and Encost Plant Cost Indices for the thirteen countries dealt with in this series of articles, all based on January, 1975 = 100. The degree of correlation in the two series varies with each country but in general is not unreasonable. Of the 130 comparisons, 68 (52%) are within 5% of each other and 102 (78%) are within 10%. For the individual countries, the entire EEC group is within the 10% range except France, with 11% in 1984, and Italy, where the differences are generally between 7% and 16%. Norway has 6% dif- ference in 1979 with all other years within a 5% range. Sweden has a 10% maximum dif- ference, Denmark has 17%, and the USA has 8% maximum difference. For Australia, the differences range from 5% in 1976 to 8% in 1981, and then rise to ll%, 18% and 19% in successive years. The differences for Canada range from 10% to 2 1% and for Japan from 2% to 19%. For cost comparisons at dif- ferent times the base year is not necessarily 1975 thus, if 1978 and 1984 costs are com- pared, the Canadian CPI increase is 70% against Encost’s figure of 66%, and for Japan the increases are 27% and 32% respectively.
Table 5 lists indices of erected costs of plants published in five countries together with Encost and CPI figures. The bases for the Encost indices have been discussed previously. The other indices, except the Nelson Refinery (Inflation) Index, are essentially “real”, with typical plant costs divided into elements in the manner shown in Table 1, although the weightings in the different series vary. For the labour element, the Canadian and Nelson series use wage rates, Chemical Engineering (CE) uses earnings, and both DACE (Dutch Association of Cost Engineers) and A.C.E. (Association of Cost Engineers) use labour costs, i.e. earnings + fringe benefits. DACE, A.C.E. (1958 series) and CE incorporate a
factor for changing productivity in con- struction costs, CE assuming an improvement of 2.5% p.a. The Nelson index is basically a “pseudo” type, although 12% of the 1946 total cost is based on equipment costs, 20% is based on various iron and steel prices and 8% is based on non-metallic building materials. The labour component of 60% (39% skilled, 2 1% unskilled) is based on figures in Engineer- ing News Record for wages in the construc- tion industry. It is of interest to note the difference in some of the indices from using hourly labour costs instead of wage rates or hourly earnings. For 1984 the Nelson index would rise to something around 199 and the CE index would rise to 182. This would rise further to 192 if the provision for a 2.5% p.a. rise in productivity were removed.
Before examining the correlations of the various indices in Table 5, one should con- sider how the costs of individual plants might differ from those of a so-called ‘typical’ plant. In the case of the two Canadian plants, the indices in Table 5 differ by no more than 1 point over 10 years even though the weightings and indices vary quite consider- ably, as shown in Table 1. A different picture emerges for the U.K. The A.C.E. indices given in Table 5 are averages for four plants with different weightings but with the same indices for each of the various cost elements. Against the 1984 average of 288, the individual plant averages range from 282 (-2.08%) to 298 (+3.47%), or just over 5.5% in total. This total variation agrees closely with that in the RPI for the various income groups discussed earlier.
FACTORS AFFECTING PLANT COSTS
There are many factors affecting the erected cost of a plant and its distribution to various cost elements. Consider first the effect of size. A commonly accepted formula for relating prices and capacities of two units of similar design is:
142
TA
BL
E
5
Com
pari
son
of
plan
t co
sts
and
cons
umer
pr
ices
in
dice
s
As
at
Janu
ary
Can
ada
W.
Ger
man
y N
ethe
rlan
ds
U.K
. U
.S.A
.
Con
stru
ctio
n E
ncos
t C
hem
isch
e E
ncos
t D
AC
E
Enc
ost
A.C
.E.
[7]
Enc
ost
Nel
son
Enc
ost
Che
mic
al
Pric
e St
atis
tics
[4]
(CP
I)
Indu
stri
e &
PI)
[6
1 (C
PI)
19
58
1975
(C
PI)
[8
1 K
W
Eng
inee
ring
Plan
t A
Pl
ant
B
151
seri
es
seri
es
191
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
100
100
109
110
118
119
126
127
139
139
153
154
171
170
191
189
202
202
208
208
100
100
100
100
100
(100
) (1
00)
(100
)
120
105
103
109
109
(109
) (1
05)
(108
)
133
111
107
115
114
(115
) (1
09)
(117
)
146
115
111
120
122
(126
) (1
12)
(123
)
156
120
114
124
118
(137
) (1
15)
(128
)
176
130
121
129
124
(150
) (1
21)
(135
)
195
138
129
133
131
(168
) (1
28)
(144
)
224
149
138
138~
. 14
2
(187
) (1
36)
(154
)
246
153
153
143p
. 15
4
(203
) (1
41)
(160
)
242
156
152
151
(214
) (1
45)
(165
)
100
100
119
121
139
137
155
172
201
230
252
270
288
100
100
100
(100
) (1
00)
130
106
111
(121
) (1
06)
145
113
118
(141
) (1
11)
161
121
127
(155
) (1
19)
176
130
139
(170
) (1
30)
204
141
153
(201
) (1
48)
235
154
168
(227
) (1
66)
256
170
185
(255
) (1
80)
278
179
196
(267
) (1
86)
292
188
209
(281
) (1
94)
100
104
111
117
128
138
154
174
176
179
144
P, 0’2 = (8, IQ, 1”
where PI and P, are the erected costs, Q, and Qz are the respective capacities, and n ranges from about 0.4 to about 1.0, depending on the type of unit. The same sort of relationship exists for many types of equipment and n varies widely for these too. Thus, as plant capacity alters so do the weightings for the various cost elements. An analogy can be drawn here with the various income groups where the “spread” in the composite indices was about 5.5%. However, there is one cost element included in most plant cost indices which would be better excluded and dealt with separately. Engineering design, drafting and procurement costs are largely indepen- dent of the erected cost and more closely allied to the number of equipment items in the plant. The cost of these services on a single unit, including a contractor’s profit, can range from 50% of the cost of materials and equipment on small units to 15% on large units. Based on erected costs those figures would fall to about 25% and S%, respectively. If duplicate units are ordered at, or about, the same time, these charges on the second unit may be very small in relation to those on the first. In the light of these possible variations in erected costs, including contractor’s charges, it would be unreasonable to expect much better than a + 10% confidence limit in the plant costs indices.
CONCLUSIONS
An examination of the comparative figures in Table 5 shows that the Consumer Price Indices are in closer agreement with the various published indices than are the Encost
figures, except for Germany and the Netherlands from 1981 onwards and the U.K. for 1984, but all the indices fall within the
limit of ? 10%. This would suggest that Con- sumer Price Indices could be taken as a fairly reliable indicator of erected costs of plants in the absence of other data.
The Encost indices are generally higher than the other plant indices, but some of the differences arise from the use of hourly labour costs instead of wage rates or hourly earnings in assessing the cost of erection labour. This different treatment explains about a third of the difference in the later years in the Canadian comparison and almost half the difference in the Nelson comparison. The DACE and the A.C.E. series, both of which use hourly labour costs, are in good agreement with Encost. The differences
between Encost and the other plant indices vary in extent from year to year, but in any one year are reasonably consistent for all five countries. This means that the annual com- parison of erected plant costs in the various countries, and which was the primary aim of the Encost series, is not adversely affected by such differences.
REFERENCES
Bulletin of Labour Statistics, International Labour Office,
Geneva.
Retail Price Index, Dept. of Employment, London. 1982 Family Expenditure Survey, Dept. of Employment,
London.
Construction Price Statistics, Statistics Canada, Ottawa.
Chemische Industrie, I+ankfurt.
1982 WEBCI Prijzenboekje, NAP, The Hague.
The Cost Engineer, The Association of Cost Engineers,
Boulton House, Chorlton St., Manchester.
Oil and Gas Journal, Tulsa, Oklahoma.
Chemical Engineering, McGraw-Hill, New York.