Cost Indices – Updating Capital and Operating Cost Estimates

7 September 2009
Topics: cost estimating, cost index, PPI, CCI, BCI, MCI, CEPCI

Introduction

Engineers and technical professionals often need to estimate costs. This includes capital and operating costs (opex).

Most people start with past data—both information from actual projects and past estimates. Engineers and analysts search the internet, consult literature, request accounting data, call friends, or contact vendors. Often this information represents snapshots of the past. And because the costs are historical, they must be adjusted to provide reasonable forecasts of the future. This is where cost indices come to play.

This article highlights some of the most frequently used and accessible cost indices.

Bureau of Labor Statistics

The United States Bureau of Labor Statistics (BLS) compiles the following statistics that pertains to cost estimating:

  • Inflation and prices – consumer and producer prices
  • Labor compensation – wages and benefits
  • Productivity

The Producer Price indices and the Labor Compensation rates are particularly useful for adjusting engineering and business estimates. You can find the data at http://www.bls.gov/data/

The BLS provides video tutorials and a handbook to help you access and understand the data. You can find the BLS Handbook of Methods at http://www.bls.gov/opub/hom/

You will find the video tutorials on the data page, http://www.bls.gov/data/, identified by purple icons, such as

Producer Prices Indices (PPI)

Producer Price indices measure changes in prices received by producers of most products and services generated by the US economy. It may take a bit of exploring to find the indices that best suit your purpose—being that the BLS has complied more than 8,000 Producer Price indices—but your patience will be rewarded by finding representative data. And the price is right—all important is available at no cost.

To obtain PPIs:

  •  Go to http://www.bls.gov/data/
  • Under the major heading “Inflation & Prices,” select either “Industry Data” or “Commodity Data” by clicking on the green icon.

  • With the popup data retrieval wizard, select an Industry and a Product.

Chapter 14 of the BLS Handbook of Methods, http://www.bls.gov/opub/hom/pdf/homch14.pdf, explains the Producer Price indices.

Labor Costs

You also can find labor costs on the BLS data page. To obtain labor compensation rates:

  • Go to http://www.bls.gov/data/
  • Under the major heading “Pay & Benefits,” select “Employer Cost for Employee Compensation Total Compensation” by clicking on the green icon.
  • With the popup data retrieval wizard, select the Compensation Component and the Employer/Employee Characteristic. The Compensation Component “01 Total compensation” may be particularly useful if you are seeking to estimate total labor costs for a project.

Chapter 8 of the BLS Handbook of Methods, http://www.bls.gov/opub/hom/pdf/homch8.pdf, provides much more information on the labor compensation statistics.

CPI

The BLS compiles the often reported Consumer Price Index (CPI). The CPI is a measure of what it costs for an average person to live in the United States. The CPI generally is not used for engineering estimates. The various PPIs, labor cost indices, and productivity indices better represent industrial costs.

Engineering and News Record

McGraw-Hill publishes the trade magazine Engineering News-Record (ENR) 40 times per year. Its audience is the engineering and construction field. A regular department is “Construction Economics.” The ENR reports cost data compiled by McGraw-Hill and maintains three widely-used cost indices. The indices include:

  • Construction Cost Index (CCI)
  • Building Cost Index (CCI)
  • Materials Cost Index (MCI)

The MCI consists of the price for 2,500 pounds of fabricated structural steel, 1.128 short tons of Portland cement, and 1,088 board feet of 2x4 lumber. The CCI and BCI include both labor and materials cost from the Material Cost Index. For labor the CCI uses 200 hours of common labor, while the BCI uses 68.38 hours of skilled labor averaged from three trades—bricklayers, carpenters, and ironworkers.

Current indices are free at http://enr.construction.com/economics/default.asp

You can access historical data by subscribing to the ENR. As of September 2009, the subscription rate was $9.95/month for web access or $82/year for web access plus the printed magazine.

Chemical Engineering Plant Cost Index

Chemical Engineering magazine publishes the Chemical Engineering Plant Cost Index (CEPCI), which is widely used to quickly evaluate equipment and plant costs. The index currently consists of the weighted average of 41 PPIs (both industry and commodity indices) and 12 labor cost indices, all reported by the BLS. Major categories of the CEPCI and their weighting include:

Equipment (including fabrication labor)

50.7%

 

Heat exchanger and tanks

17.1%

 

 

Process machinery

6.5%

 

 

Pipes, values, fittings

9.6%

 

 

Process instruments

5.3%

 

 

Pumps and compressors

3.2%

 

 

Electrical equipment

3.5%

 

 

Structural supports and misc.

5.3%

 

Construction labor

 

29.0%

Engineering and supervision

 

15.8%

Buildings (materials and contractors)

 

4.6%

    Total

 

100.0%

You can find a lengthy article by William M. Vatavuk, “Updating the CE Plant Cost Index,” which appeared in Chemical Engineering on January 2002 (page 62-70) at http://chemeng.nmsu.edu/ChE452/notes/CEPCI_1_01-2002.pdf

Web access to the CEPCI is a pricey $549 per year (as of September 2009). However, many professionals can qualify for a free subscription to Chemical Engineering magazine. The index is published monthly with indices 3 months behind the publishing date. See http://www.che.com/subscribe/

Marshall & Swift

Marshall & Swift (M&S) provides a wide range of commercial and residential real estate building cost data. See http://www.marshallswift.com/

Chemical Engineering magazine prints a high level summary of M&S indices each month along with its CEPCI.

Summary

Your best sources for quick and free cost indices include:

  • Bureau of Labor Statistics:
    • Producer Cost indices (PPIs)
    • Labor costs indices
  • Engineering News-Record:
    • Construction Cost Index (CCI)
    • Building Cost Index (CCI)
    • Materials Cost Index (MCI)
  • Chemical Engineering:
    • Plant Cost Index (CEPCI)