Project-Specific Cost Escalation Modeling: Crafting a Stochastic Tool for Predicting escalation

Abstract

Gaining insights into anticipated future expenses is essential for both the planning and construction phases of a project. A significant factor in future costs, particularly over extended periods, is the variability of material and labor prices. the change in costs over time, known as ’cost escalation,’ has been the focus of numerous research efforts. These studies primarily aim to forecast the Construction Cost Index (CCI), a composite index representing a standardized array of materials and labor typical in construction projects. This research presents a novel approach to forecast cost escalations, tailored to individual construction projects, addressing the shortcomings of predictions of a generic Construction Cost Index (CCI). Traditional CCI predictions, while providing some foresight, are limited by their generic nature and often overlook the specific material and labor variations within different projects. Additionally, current research generally fails to account for the uncertainty in the forecasts of the change in the material price and the estimate of the construction cost. In response to these challenges, this research pivots around the following research question: How can cost escalation for various types of construction projects be predicted, accounting for uncertainties in final construction costs and the forecast? Addressing this question involves selecting distinct indices for various project resources, such as steel, concrete, and labor, and combining these predicted indices in line with each resource’s cost. To achieve this, the study evaluates several time-series forecasting models, namely the vector error correction model (VECM), the vector autoregression (VAR) model, and the Holt-Winters model. For each model an automatic forecasting process is created, which automatically checks the suitability of the model, select the appropriate variables (in case of a multivariate model) and selects parameters. These models are evaluated for their accuracy across different time-frames and forecasting horizons. The Holt-Winters model, in particular, showed promise in providing reliable confidence intervals and point forecasts. The study’s testing phase revealed varying degrees of success, as volatile indices like copper and steel proved to be challenging, whereas forecasts for less volatile indices achieved higher accuracy. This outcome suggests room for improvement in refining these forecasting methods. The project-specific forecasts, including cost uncertainties, are developed by inputting cost estimates associated to the material price at current day value. The cost estimates input includes material and labor costs and their uncertainties. The uncertainties are represented through a three v point estimate (optimistic, pessimistic, and most likely values). This input is then transformed into a PERT distribution which is a transformation of the Beta distribution. The final stage involves combining the PDFs of each project activities cost (considering the cost of each specific resource) with the monthly forecast PDFs in a Monte Carlo simulation, providing a detailed cost distribution histogram of total cost and the individual resources cost. The tool’s functionality was demonstrated through a case study on a highway construction project. In this demonstration, specific project data, including material and labor cost estimates, were inputted into a hybrid web and Excel interface. This setup facilitates visualization and manipulation of project information. The tool processes these inputs via the AFP and Monte Carlo simulation, yielding comprehensive outputs such as histograms and statistical properties of the output. This is visible for total project costs and resource-specific escalations. This demonstration effectively showcased the tool’s capability to offer detailed insights into cost escalation, addressing the variability and uncertainty in construction projects. It underscored the tool’s alignment with the study’s objective of providing nuanced, project-specific cost escalation forecasts, moving beyond traditional CCI predictions. In conclusion, this study introduces a tool that caters to specific project resources, timelines, and uncertainties in cost escalations. While current limitations prevent its immediate practical application, this proof-of-concept lays the groundwork for future improvements. Focus of future research should be on refining accuracy and comparing the tool’s forecasts with escalation of historic projects to establish more robust insight into the actual escalation of projects.