Definition
A building price index is a measure of the change in cost to the owner of non-residential building works, from one point in time to another.

An index of this type, which provides monthly indices, (referring to the 1st. of the month) from a base 100.0, records both historical price movements and provides a forecast of up to twelve months ahead. (Long-range price movements are listed separately as annual movements.) The index is reviewed quarterly. Typically, indices are applied to an established construction budget to update it to a design development stage or tender date. The current design estimate or tender is then expected to be within this updated budget. The index is also used to update historical cost analyses to assist in the cost planning of current projects.

Note that two indexes of this type have been prepared – one simply called the Building Price Index (BPI) and the other called the Building Price Index (Enterprise Bargaining Agreement) ((BPI(EBA)). Refer to the commentary associated with the current Bulletin for an understanding of when these indexes could be used.

Composition
The two building price indexes are factor cost indexes, in which the constituent resources of "typical" building construction works are determined, the cost of each resource monitored over time and then converted to an index. Each resource index (which has been set with the base month equalling 100.0) is then combined into a final composite index. This is done by weighting each resource index by its cost relevance to the total building cost.

The main constituent resources are labour, materials and market conditions. For the Department’s normal non-residential construction, Building Plant is considered of less significance and not considered separately.

The resource index of labour is represented by movement in the weighted, average loaded hourly rates of the more common trades. The hourly rates associated with the BPIs are based on award rates, and those associated with the BPI(EBA)s are based on the CFMEU Enterprise or Collective Bargaining Agreements.

The resource index of Materials is represented by movement in the Australian Bureau of Statistics “Materials Used in building Other Than House Building - Sydney” included in their Producer Price Indexes.

Market conditions measure variations in price due to the level of activity in the industry. Within Public Works the effect of this factor is assessed on a range of -17% to +12%, representing the extremes of the "boom to bust" cyclical nature of the industry. The basis of assessment is a mathematical model reflecting market conditions' effects on builders' costs and on-costs via overtime and over-award payments and special materials discounts. Other considerations include incentive payments, profit levels and short-term changes in labour productivity. Although the model has a mathematical basis, determining the position on the range is a subjective assessment based on industry intelligence. This intelligence is gathered from builders, consultants, estimators, industry statisticians and forecasters and the Department’s own tendering results.

Application
The BPI is a means whereby construction budgets may reasonably be adjusted for time. In the first instance, such budgets may not relate to a specific design but could be based on a notional cost unit e.g. pupil, bed, seat or car space. Following development of the brief and/or an accommodation schedule the budget is refined by costing each individual functional space,e.g. a classroom, ward, courtroom or cell. As such, the budget represents a realistic allowance within which a project will be designed. As design development takes place the initial budget is updated to correspond with the timing of the various project stages up to receipt of tenders. Once a tender which is subject to "rise and fall" is let, however, the BPI becomes inappropriate since the element of competition is absent and market forces no longer have any impact. Subsequent adjustments for cost movements may be based on combinded labour and materials components.

Normally, a building price index is not used for updating estimates or cost plans. These estimates should be prepared at current market rates and be a true reflection of the specific current design and characteristics of each project.

Summary
The building price index is a statistical based method of measuring building price movements over time for the purpose of updating non-residential building construction budgets. It is a composite index with weighted factors on an industry wide basis. As such it does not relate to specific building type whether by function (school, hospital etc.) or by construction (reinforced concrete frame, steel frame brickwork etc.)

Generally speaking this is not a significant limitation, since the individual and overall weightings applied lessen the effects of significant specific movements. However, if necessary auxiliary indices could be created for projects with special circumstances e.g. a project with a high engineering services content, or even a high building plant content.