Capital cost forecasting

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Improve your accuracy when planning a budget

A simple tool for analyzing your data

One of the most crucial needs for a facility professional is obtaining reliable data on which to base capital budgeting decisions. Your best cost data may be readily available to you in your past project data. This article will give you suggestions for organizing your project data to extract useful information that will make your future cost projections more reliable.

You likely already have all the tools you need. Using your own files and a simple spreadsheet program like Excel, you can manipulate past project costs to accurately forecast future projects, even if they're in multiple locations. This article will show you how, step-by-step.

Gathering base data

Start by going into your files and contracts for past projects. For our purposes, we went back to 2001. Using your spreadsheet program, set up columns for the data you believe to be most relevant. Consider how you want to reference this information in the future. Which comparisons are going to be of the most value to you? Include columns to categorize your information for any way you think you might want to group, sort, or filter the information.

Our example below includes these categories:

      a.  Project name

      b.  Project number

      c.  Year built

      d.  Campus location – Which metropolitan area is it in or near.

      e.  Specific building

      f.   Type of structure – Such as modular steel, block and plank, or renovation.

      g.  Style of building – Such as dormitory, townhouse, hotel, suite, or apartment.

      h.  Delivery method – Such as open bid, design/bid/build, or bid by invitation.

      i.   Construction cost – In dollars for that specific year, these will be adjusted later.

      j.   Project cost – Same as above

      k.  Gross square feet

      l.   Number of beds

Next enter in the data. Be clear, specific, and most of all, consistent with your definitions. 

You’ll see in the example above, we used the term “Block and Plank” to describe one structure. This term must have the same meaning for every project. Be as complete as possible with each description.

Follow these important tips in your spreadsheet when setting up your information:

1. Have only one top row for headings.  Don't use subheadings anywhere in your table.
2. You should (almost) never merge cells.
3. Never mix numbers that will be used in formulas with text in the same cell.  For example, while it’s fine to list something like “Building 17” in a cell to designate the name of the building, you would not put “100 SF” in one cell. Put the “100” in one cell and “SF” in another.
4. Never skip rows or columns.  This will complicate filtering and sorting data.

Adjusting for location

If your organization operates campuses in different geographic areas, you’ll have to take regional construction cost differences into account, such as materials, transportation, and labor. You can do this by using a location factor. 
For our purpose, we used information from RS Means Building Construction Cost Data. This provides a construction cost index for municipalities throughout the nation, based on national averages for materials and installation.The map at right lists some of the location cost factors in Reed’s 2014 edition. To adjust costs by location, multiply the base cost by the Reed factor and divide by 100. Your spreadsheet can be programmed to do this. If your project is located at the fringe of any of the listed metropolitan areas, you may need to adjust the factor by a percentage point or two to account for transporting materials from a nearby city or distribution center.

Adjusting for time

Next, factor in historical data. This is best done as a two-step process, first adjusting for known escalation using historic cost indexes to bring past costs to the present and then projecting the future cost with an escalation factor. 

Start by accounting for inflation. Again, the source we used for this was Reeds. Their index can be used to convert national average building costs from one year to another. For example, indices for costs every 10 years since 1970 include:

        1970 - 14.9

        1980 - 32.6

        1990 - 48.9

        2000 - 62.7

        2010 - 95.2   

To determine a cost in 1980 of a $200,000 building constructed in 1990, one would divide the index from 1980 (32.6) by the index from 2000 (62.7), then multiply the result (0.51993) by the 1990 cost ($200,000) to find the answer ($103,987.24).

   

     32.6 ÷ 62.7 = 0.51993 x 200,000 = 103,987.24

This too, can be programmed into your spreadsheet, enabling you to make estimates based on actual historical data. 

The table at left pulls all of this information together, listing the campus, the location factor, and the historical cost index. To project costs, you can derive a figure for escalation from the local region’s past performance then multiply it by the rate of inflation, which for the past decade has averaged about 2.4%. This figure tends to stay steady barring an unexpected occurrence.



Developing a forecast

Now, with your data and indices entered into your spread sheet and the formulas configured, you can use your old project data to forecast the costs of building the same structure in a different location in a different time period.

           

So, for example, if you’re budgeting for a new building in Atlanta to be completed in 2020, that will be similar to a structure you built in Chicago in 2010, you can estimate the cost of the new building by taking the data from your Chicago building and adjusting it for time and location.

By forecasting with this method, your department will provide more dependable data to all parties down the line who review and approve your budget requests. You have a more accurate picture of what costs will likely be based on what you know in the present and the trends of the past.

If you would like more information about organizing your facility data please contact us at capital.planning@truarchs.com  or call Mark Genovese in Marketing at (518) 785-5851, ext. 106.

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