Construction tender price index : modelling and forecasting trends

The thesis considers the construction tender price index, an important area of construction economics, and models are developed to fit the trends in this index. Between 1980 and 1987, the UK Building Cost Index produced by the Building Cost Information Service increased at an annual rate of 6.3% compared with Tender Price Index 3.3% and Retail Price Index at 6.7% per annum. This significant disparity between Tender Price and Building Cost Index is unexpected in view of the attributed importance of input prices in the tender price formation. This suggests that other factors apart from input prices may be responsible for the trends in building prices generally. The thesis reviews the pricing strategies of construction contractors leading to the conclusion that macroeconomic factors are equally important. A univariate analysis of 24 potential indicators of tender price trends identified some variables of importance. An analysis is described of these variables using the OLS system of regression analysis. Single structural equation model of construction tender price level is developed which offer structural explanation of the movements in the index. Indicators of construction price (in real terms) produced by the structural equation were found to be unemployment level, real interest rate, manufacturing profitability, number of registered construction firms, oil crisis, building cost index, construction productivity and construction work stoppages. A Reduced-form model of construction price is developed that utilises simultaneous equation models comprising construction demand, supply and equilibrium models - the reduced-form models being generally regarded as having better predictive power than structural equations. The model is validated by comparing its accuracy with forecasts produced by two leading organisations in U.K. The out-of-sample forecast errors of the reduced-form model are 2.78, 3.58, 4.28 and 5.59 RMSE percent over 0, 1, 2 and 3 quarter forecast horizons respectively, which are better than the Building Cost Information Service (3.32, 5.29, 7.57 and 9.96 RMSE percent) and Davis, Langdon and Everest (3.21, 5.01, 7.16 and 10.41 RMSE percent).