Recent market commentary has highlighted the continued increase in tender prices in the Irish market through Q2 and Q3 - these increases have a knock-on cost impact on projects because of delays. With increases noted of 13% - 16% from early 2017 to early 2019 the tender price increase has potentially raised the forecast out turn cost of projects such as the National Maternity Hospital by €50m to €350m. The quantum of potential increase in tender prices emphasises the importance of providing for future tender inflation in feasibility studies and development cost planning – calculation of an appropriate allowance needs to be a key part of financial risk planning for a project. This allowance should be based on four things:
Amounts provided for tender inflation should be identified separately in a budget and should be incorporated into the individual cost components at various project review stages. This post lays out a prediction for future tender inflation illustrating a clear estimation methodology (see link) .
Our estimate of tender inflation through the period to 2020 has been calculated with the following assumptions:
A forecast of cost and tender price indices has been calculated using the following formulas:
Cost Index Forecast = 60% x Equipment and Materials Inflation + 40% x Labour Cost Inflation
Tender Index Forecast = Cost Index Forecast x Expected Change in Tender Margin
These calculations indicate that after peaking in 2018 at a rate of 7.8% our forecast is for tender inflation to moderate from 2019 on to c. 4.6%. We have examined the sensitivity of tender prices to changes in labour costs and margin recovery - this indicates that increases above 6.4% in tender prices would require a mark-up on costs increase of 10% (from current estimated levels) and a wage increase of 5% in 2019. Given the increases experienced to date in 2018 we estimate that it is likely that price increases will moderate in 2019 given competition.
In summary, amounts provided for tender inflation should be identified separately in a budget and should be incorporated into the individual cost components at various project review stages. The linked article looks at the current trends in material and labour costs and, based on an assessment of the level of competition in the market, lays out a prediction for future tender inflation. After peaking in 2018 at a rate of 7.8% our forecast is for tender inflation to moderate from 2019 on to c. 4.6% based on the assumptions made.
Our iOS App to estimate a construction cost range for your project and appropriate inflation allowances based on your programme can be downloaded from the APP STORE here.
 Source: Irish Independent 7th August. Irish Times 7th August. Sunday Times 19th August, 2018, p3.
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