Question 14.5: In January 2005, bids were opened for a new building in Los ...
In January 2005, bids were opened for a new building in Los Angeles. The low bid and the final construction cost were $5.25 million. Another building of the same size, quality, and purpose is planned with a bid opening in January 2020. Estimate the new building’s low bid and cost.
According to the website just cited, in January 2016 the California Construction Cost Index (CCCI) had a value of 6,106 and in January 2005 the value was 4,339. If we wanted a cost estimate for January 2016, we could simply use the former value. But we want a value for January 2020, which is outside our data set. (That is true for all future estimates.)
The solution is to estimate the average annual rate of increase, and then to apply that for the longer period.
F = 6,106, P = 4,339, n = 11, find f
F = P(1 + f) ^{n}
f = (6,106/4,339)^{1/11} – 1 = 3.15% per year
Now we can apply the inflation rate for n = 15 years to the cost of the building in 2005.
F = $5.25 million × (1.0315)^{15} = $8.36 million