Dynamics of New Building Construction Costs: Implications for Forecasting Escalation Allowances

Abstract

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.

Notes

1. See Elliott et al. (1996) for further discussion of the detrending procedure.

Additional information

Notes on contributors

Michael T. Dugan

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 bachelor’s degree from the University of New Orleans and his master’s and doctoral degrees from The University of Tennessee, Knoxville.

Bradley T. Ewing

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 University’s Krannert School of Management. He has published over 100 articles and is the recipient of several research grants.

Mark A. Thompson

Mark A. Thompson is the Maxwell Chair of Business Administration at Augusta University’s 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.