Dynamics of New Building Construction Costs: Implications for Forecasting Escalation Allowances
Journal of Cost Analysis and Parametrics
Construction projects often require multiple years to complete and the costs of supplies, materials, and labor may increase substantially during a project’s time span. As a result, construction contracts often include an escalation clause to account for cost increases. This article examines the time-series properties of new building construction costs using several producer price indexes. Using a battery of unit root tests, we ﬁnd substantial evidence that construction cost indexes are generally nonstationary. This ﬁnding has implications for the proper speciﬁcation and use of these series in contract escalation clauses and their respective use in forecasting construction cost increases.
Michael T. Dugan is the Knox Chair of Accounting at Augusta University. He has published extensively in the accounting area, especially in using accounting data to assess bankruptcy potential. Professor Dugan received his bachelors degree from the University of New Orleans and his masters and doctoral degrees from The University of Tennessee, Knoxville.
Bradley T. Ewing is the C.T. McLaughlin Chair of Free Enterprise in the Rawls College of Business at Texas Tech University. Professor Ewing received his Ph.D. from Purdue Universitys Krannert School of Management. He has published over 100 articles and is the recipient of several research grants.
Mark A. Thompson is the Maxwell Chair of Business Administration at Augusta Universitys Hull College of Business. He earned his Ph.D. in economics from Texas Tech and has published extensively in the areas of engineering economics, risk analysis, energy economics, and healthcare management.