International Research Journal of Engineering and Technology (IRJET) e-ISSN: 2395 -0056

Volume: 04 Issue: 03 | Mar -2017 www.irjet.net p-ISSN: 2395-0072

FORECASTING AND RATE ANALYSIS OF COST ESCALATION FOR

CONSTRUCTION INDUSTRY

Nilesh D Patil1 , B.A.Konnur2

1 M.Tech scholar, Department of Civil Engineering, Government College of Engineering, Karad.
2Associate Professor, Government College of Engineering, Karad.

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Abstract The constructon industry s a vtal sector n any
economy and sgnfcantly contrbutes to the soco-economc
growth of a country. Cost escalaton s one of the
consequental dentfed rsks faced by constructon ndustry.
So the objective of the study s to ntend new and modfed
theores so that the subject area nclnes towards precson
and perfecton under the case study of buldng constructon
project. The study proposes new approaches and method such
as Market Rate Method (MRM) that can be mplemented n the
feld of cost escalaton, so that dfferent errors, complextes n
the stll used technques could be removed. The results of
study denotes that ths new approach yelds better results than
the tradtonal method whch are more wdely utlzed.
Key words : Constructon ndustry, Cost Escalaton, Whole
Sale Price Index (WPI), Market Rate Method (MRM).
1.INTRODUCTION
In general construction projects ranges from several months
to several years. Therefore there s probablty that the cost
of labour and materal ncreases, hence ncreases the cost of
project. Escalaton s a rsk that can account for a substantal
part of constructon cost, especally n long term projects
where the varablty and uncertanty s greater. n mult-
project programs, the effect of escalaton can be the prme
concern. Cost escalaton n constructon project refers to
antcpated ncrease n cost of constructng a project over a
perod. Cost ncrease usually occur as a result of fluctuaton
of market forces and reflect ncreases n the cost of materal/
labour and hgher levels of constructon actvty. n
developng country such as nda cost escalaton s one of the
major phenomenon faced by the constructon ndustry whch
has led to delay of several other projects assocated wth t.
Thus there s need for more realstc approach towards the
management of cost assocated wth the projects.
1.1 Literature Revew
Escalaton reflects change n productvty, technology,
proft margns and market condtons such as hgh demand
and so on. And complcatng the stuaton Price escalaton
vares by regon and procurement strategy [1]. Cost
escalaton s drectly proportonal to ncrease n Price of all
the constructon element of the orgnal contract. Escalaton
n constructon market has been extremely volatle and s
expected to contnue n the near future due to demand for
resources, sklled workers and contnuous strong growth [2].
Nne out of every ten constructon projects experences cost
escalaton and most occurs before constructon begns.
Escalaton manly attrbutes because of poor ste
management and supervson, low speed of decson makng
and clent-ntated varatons at the constructon phase of the
project [3]. Delay n projects are the unversal phenomenon
and constructon projects are no excepton. cost escalaton
can be categorzed nto two broad groups: uncontrollable and
controllable factors [4]. Tll now, many researchers have
presented varous rsk management models and technques
to mnmze rsk of escalaton. But the correlaton among
varous rsks assocated wth escalaton and ther
nterdependency s not yet reported. Therefore, the man
objectve of ths study reflects methods by whch partcpants
n constructon projects can both track the extent of
escalaton and work together to mnmze the mpact of cost
escalaton on the success of a project.
2. Case Study
Ruparel Arana at Parel, Mumba s taken as case study. A
tender document, bll of quanttes and abstract sheets
provdes necessary data for project cost and schedulng
actvtes.
3. TRADITIONAL METHOD (WPI)
WPI s the Index that s used to measure the change n the
average Pricelevel of goods traded n wholesale market. n
nda, a total of 676 commodtes data on Price level s
tracked through WPI whch s an ndcator of movement n
prces of commodtes n all trade and transactons. t s also
the Price Index whch s avalable on a weekly bass wth the
shortest possble tme lag only two weeks. The ndan
government has taken WPI as an ndcator of the rate of
nflaton n the economy. WPI s a measure to montor the
movement of general level of prces n the economy. t s

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 International Research Journal of Engineering and Technology (IRJET) e-ISSN: 2395 -0056
Volume: 04 Issue: 03 | Mar -2017 www.irjet.net p-ISSN: 2395-0072

wdely used by Government, banks, ndustry and busness

crcles.
3.1 Drawback of WPI
) The man problem wth WPI calculaton s that more than
100 out of the 676 commodtes ncluded n the Index have
ceased to be mportant from consumpton pont of vew.
) Inda consttuted the last WPI seres of commodtes n
2004-05, but has not updated and cannot be used as
barometer to calculate escalaton.
) Many developed countres have already mgrated to the
other polcy to decde the key rate and we are stll stuck up
wth usng WPI.
v) The WPI s based on collectng of almost 676 odd
commodtes and the latest collecton of these tems was done
by 2003.t s ndeed true that the Index stll contan and
weghs the tems that are near obsolete and ths doesn't
make sense.
If an owner ntends to utlze an actual cost based escalaton
provson, t s suggested that the arrangement nclude at
least the followng essental peces:
) Adequate documentaton (e.g., suppler quotes and detaled
bd breakdowns) establshng the base Pricefor the
applcaton of the escalaton provson.
) Documentaton (e.g., addtonal suppler quotes)
establshng that the base prce s, n fact, a reasonable
prce.
) A contractual oblgaton that the contractor and
subcontractors mmedately (wthn a specfed tmeframe
after contract award) place orders for any materal tems
subject to escalaton.
v) Sworn certfcaton by the contractor of the accuracy of,
and actual relance on, the materal Pricen the bd, and of the
accuracy of contractors representatons regardng the actual
materal cost.
v) Prompt notce requrements.

4. PROPOSED METHOD MARKET RATE METHOD
(MRM)
There are many parameters nvolved n the calculaton of any
Price Index and due to so many drawbacks n calculaton of
ndces, t s very dffcult to develop ndces whch reflect the
true pcture of the varaton n prces of dfferent materal.
Due to varous complcatons, t s not possble to obtan
completely flawless values of the cost ndces. Hence the
objectve of the study s to use a practcal approach for
calculaton of cost escalaton whch elmnates the use of cost
ndces and stll gves realstc results.
4.1 Values To Be Consdered
) The base Price of cement (.e.) Market rate of cement s
taken 28 days pror to date of release of tender.
) The current Price should be taken as the Price of the
materal n the month under consderaton.
v) Excluson of overhead and proft mark-up on the
Priceescalaton.
v) Adequate assurance that the contractors Pricedoes not
nclude a hdden escalaton contngency.
v) A system for dentfyng, and trackng through the
fabrcaton or delvery phases, the specfc materals subject
to escalaton terms.
5. Data Analyss for Case Study
The Data analyss s done consderng two major components
used n the constructon (.e.) Steel And Cement. Both the
components are calculated by usng the tradtonal method
Wholesale Price Index (WPI) and Market Rate Method (MRM)
and the result obtaned by both these methods are
nterpreted
Table 5.1 Shows the calculaton of escalaton usng
Wholesale Price Index (WPI) method usually practced
CEMENT
STEEL

QUA MONT CERTI VS= Vc=

4.2 Advantages Of Market Rate Method
H& FIED

) Adoptng ths methodology, all the area of ndstnctness RTER YEAR RATE (0.85*Pc*R*(Si- (0.85*Pc*R*(Ci-
are elmnated. The MRM for computng the cost escalaton
So))/(100*So) Co))/(100*Co)
can result nto realstc result, f properly and thought fully
adopted. So
) t purges all the uncertanty related to varous cost ndces.
=147.4
) By usng the proposed Market Rate Method, more and PS 0 PC Co
more materals can be removed from ths other materals
category, snce there s no want of ndces n ths method, =134.70
whch are otherwse unavalable for most of the materals.
4.3 Requirements of Market Rate Method

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 International Research Journal of Engineering and Technology (IRJET) e-ISSN: 2395 -0056
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R (Rs in Amoun Amount Dec-

Cr) t in Lac
2010
in Lac
Sixth Jan-2011 1.63 132.60 16 -2.69 148. 10 1.62
Si Y (VS) Ci Y (VC)
10
Sep- Feb-

2009 2011

Oct - 1.43 149. March-

First 2009 144.50 16 -0.45 30 10 1.55 2011

Nov- Sevent
h April - 2.25 132.80 16 -3.71 148. 10 2.24
2009
2011 10
Dec-
May-
Secon 2009 3.16 148. 2011
d Jan-2010 140.03 16 -2.53 27 10 3.18 June-
Feb- 2011
2010 July- 0.36 148.
March- Eighth 2011 132.80 16 -0.60 10 10 0.36
2010 Aug-
April- 2.45 151. 2011
Third 2010 134.63 16 -3.39 67 10 3.08 Sep-
May- 2011
2010 Oct- 1.00 148.
June- Ninth 2011 132.80 16 -1.65 10 10 0.99
2010 Nov-
July- 2.53 151. 2011
Fourth 2010 133.70 16 -3.76 67 10 3.19 Dec-
Aug- 2012
2010 0.61 148.
Sep- Tenth Jan-2012 132.20 16 -1.00 10 10 0.60
2010 Feb-

Fifth Oct- 3.80 132.43 16 -6.20 148. 10 3.22 2012

2010 10 Total 19.26 -26.03 20.08
Nov-
(Rs)
2010

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March-
Table 5.2 Shows the calculation of escalation using Market
Rate Method (MRM). In this Approach, the escalation of the 2010
construction material has be obtained by applying market
April- -0.09
rates (i.e. market price) of purchase instead of the WPI and
generalized Indexes. In case study, this new concept has been Third 2010 2.45 31180 16 244 10 3.37
applied on the two major construction material (i.e. steel and
cement) May-
Table 5.2 Shows the calculaton of escalaton usng MRM 2010
(Market Rate Method) Proposed Method
STEEL CEMENT June-
QUART MON CERTIF Vs= Vc= 2010
TH & IED
Fourth July- 2.53 32340 16 1.17 247 10 3.79
ER (0.85*Pc*R*(Si - (0.85*Pc*R*(Ci-
YEAR RATE 2010

So))/(100*So) Co))/(100*Co) Aug-

Market 2010
Market
Rate/To Sep-
n Co
2010
R (Rs in Rate/B
Cr.) in Ps So ag Pc =210
Fifth Oct- 3.80 34700 16 5.68 240 10 4.62
=31270 in
2010
Rs.
Rs. Nov-

2010
Amou Amou Dec-
Si Y nt Ci Y nt

in Lac in Lac 2010

(Vs) (Vc) Jan- 1.90 2.31

Sep- Sixth 2011 1.63 33950 16 245 10

2009 Feb-

First Oct - 1.43 32180 16 0.56 240 210 1.74 2011

2009 March-

Nov- 2011

2009 April- 3.16 5.01

Dec- Seventh 2011 2.25 34500 16 265 10

2009 May-

Jan- -0.37 2011

Second 2010 3.16 31000 16 237 10 3.45 June-

2011
Feb-
Eighth July- 0.36 35220 16 0.63 298 10 1.31
2010

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2011 Table 5.3 Interpretation of Wholesale Price Index (WPI) and

Market Rate Method (MRM) Results
Aug-

2011 STEEL CEMENT

Sep- (Rs in Lac) (Rs in Lac)

2011 Escalation obtained by MRM

15.83 30.68
Ninth Oct- 1.00 34700 16 1.49 282 10 2.91
(Market Rate Method)
2011
Escalation claimed by WPI
Nov-
-26.03 20.08
2011 (Wholesale price index)

Dec- Difference 41.87 10.59

2012 Percentage Difference 160.84% 52.77%

Tenth Jan- 0.61 37600 16 1.68 296 10 2.12

2012
Feb-
2012
Total 19.26 15.83 30.68
(Rs)
5.1 Interpretation of Results
Table 5.3 shows the interpretation of results obtained by using
the traditional Wholesale Price Index (WPI) and the proposed
Market Rate Method (MRM). Based on the interpretation of
results obtained it is observed that the traditional method do not
yield a realistic value of escalation amount. The value obtained
from traditional method is found to be much lower then the
value incurred during the project. Hence, loss for the contractor,
this action leads to unrealistic bid as the contractors add an extra
lump sum amount of their own wish and apprehension, to their
bid proposals during the bidding process for any construction
project, in spite of the existence of escalations clauses in the
tender documents. Hence, ambiguity for the client/bid evaluator
as well as enhancement of the risk of loosing the bid for the
bidding contractor is created, due to improbable and non-
competent bid proposals
6. Conclusion
i) From the case study, it can be inferred that the Market Rate
Method (MRM) used yielded better results than the results
obtained from Traditional Wholesale Price Index (WPI)
Method
ii) If the escalation working were done using the Market Rate
Method, the project would have probably quoted 52.46 lakh and
the percentage difference of cement is found to be 52.77% and
whereas for steel it is found to be 160.84%. This is an enormous
amount, which is entirely lost in the game of construction
contractorship, just due to the existing impractical and vague
techniques and traditional procedures
iii) The study, as a contribution to the development of the Indian
construction industry, urges that it is high time for India to
abscond the traditional hypothetical theories and adopt the
pragmatic and pioneering new approaches of construction cost
escalation working.
iv) As a part of the research work the study has evolved ground-
breaking and new revolutionary methodology related to this
subject that would purge the snags and hitches associated with
cost escalation in construction industry.
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Large Infrastructure Projects" journal of construction
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"What Causes Cost Overrun in Transport Infrastructure

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BIOGRAPHIES
Nilesh D Patil received his BE
degree in civil engineering from
shivaji University (Maharashtra) in
2015, pursuing the M.Tech degree
in Construction Management from
Government College of
Engineering, Karad, Maharashtra.

Basavaraj A. Konnur received his

M.E. degree in Construction
Management, BE degree in civil
engineering.

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