Developing Project Cost Estimates in Volatile Markets - RETC2023

For public organizations, preparing accurate project cost estimates is a critical component in capital project planning. Project delivery methods provide a structured approach to moving projects through the design and construction lifecycle, and typically use cost estimates as key inputs at each stage to determine if the project will advance. As design stages can occur years or even decades before construction contracts are awarded, estimates need to make reasonable assumptions about how the work may be executed (means and methods) as well as potential future market trends so that appropriate values for material pricing, labour costs, escalation, and owner’s costs can be included. This process is challenging enough during stable markets, as historic trends can often be misleading and require a suitable understanding of economic factors to use appropriately. When you mix in the market volatility that has been observed since 2020, developing accurate project cost estimates becomes even more challenging. In cases such as this, having a structured approach to cost estimating that includes an adequate risk-based reserves cannot be overstated as it provides the basis for ongoing project decisions. This paper explores some of the historic and more recent market trends that have impacted key aspects of project cost estimates for capital project planning. It also provides recommendations on how to develop cost estimates for infrastructure projects, with examples from Metro Vancouver, which plans for and delivers regional-scale services to 2.6 million residents. A brief commentary on the use of escalation clauses in contracts is also presented.