A construction inflation allowance converts today's prices into the prices that will actually be paid. It sounds mechanical and it is the line most often carried forward unchanged while everything it depends on moves.
The reason is that an inflation figure looks like a percentage and behaves like a date. Once you see it as a date, it becomes obvious why it needs revisiting every time the programme changes.
Why the midpoint
The convention is to inflate from the base date of the rates to the midpoint of the construction period. The logic is that expenditure is spread across the build, so on average a pound is spent halfway through.
It is an approximation. On a scheme with a heavy substructure the spend is weighted early; on a fit out heavy scheme it is weighted late. Where the profile is strongly skewed, inflating against the actual cash flow rather than the midpoint is more accurate.
For most schemes the midpoint is close enough, provided the two dates behind it are stated. Without them the figure cannot be checked or updated by anybody.
Two dates and a base
The base date is when the rates were current. Rates from a previous project, or from a published index, carry a date, and inflating from the wrong base either double counts or under counts.
The start on site date and the construction duration give the midpoint. Both are assumptions at cost plan stage and both should appear on the document.
State all three and the allowance becomes maintainable. When the start slips by six months, anybody reading the cost plan can see immediately that the inflation line needs revisiting, and by roughly how much.
Tender inflation and construction inflation
These are separate and are often merged. Tender inflation covers the movement between the base date and the point contractors price the work. Construction inflation covers the movement from tender to the midpoint of the build.
Separating them is useful because they crystallise at different times. Tender inflation is fixed the moment a price is accepted; construction inflation continues to be a live risk unless the contract is fixed price.
That distinction determines who carries what. Under a fixed price contract the contractor carries construction inflation and will have priced for it. By contrast, under a fluctuating contract the client carries it and the allowance has to remain in the cost plan.
Fluctuations, and who is buying the risk
Where a contract includes fluctuations provisions, the client reimburses defined cost movements and the contractor does not need to price the risk. In cases where it excludes them, the contractor prices it, and that price is invisible in the total.
In a stable market excluding fluctuations is usually cheaper. By contrast, in a volatile one contractors either price the risk heavily or decline to bid, and a client insisting on full fixed price may be paying a large premium for certainty they could have bought more cheaply.
Neither approach is right in general. What matters is knowing which one the tender assumed, because two bids on different bases are not comparable, which is covered in normalising bids before you compare them.
Indices are evidence, not answers
Published construction cost indices are useful and they describe the market in aggregate. They do not describe your scheme, your location, your specification or your supply chain.
A scheme heavy in one material behaves like that material rather than like the index. A scheme in a location with limited contractor availability behaves like that market. Where a specific package dominates the cost, checking that package directly is worth more than any index.
The honest use of an index is as a starting point that is then tested against what the supply chain is actually saying. On mixed use schemes with several distinct packages the aggregate is particularly unrepresentative, as set out under mixed use and regeneration.
Long programmes change the arithmetic
On a scheme with a two or three year build, inflation stops being an adjustment and becomes a material component of the cost. It is also the component most sensitive to programme slippage.
Where a phased scheme has sections completing at different times, a single midpoint understates the position for later phases. Inflating each phase to its own midpoint is more work and materially more accurate.
That refinement is worth doing wherever the phases are separated by more than a few months, and it is one of the reasons phased schemes need their cost plans structured by phase from the first issue.
What this means for you
Look for three things on the inflation line: the base date, the assumed start, and the assumed duration. If any is missing, the allowance cannot be maintained and it will silently become wrong.
Then revisit it every time the programme moves. A slipped start is a cost increase whether or not anybody records it as one, and the cheapest moment to see that is when the programme changes rather than when the tenders arrive. The related failure is described in incomplete design information.
Programme slipped and unsure what it did to the budget?
Send the cost plan and the current programme. We will tell you what the inflation position now looks like and what has to be restated.