CAF- COST INDEXES
This Tool tracks the costs of equipment, facilities, materials and personnel (both qualified and non-qualified) used in the construction of a geographically diversified portfolio of twenty-eight projects onshore, offshore, pipelines and LNG. It is similar to the Consumer Price Index (CPI), as it provides a transparent and transparent reference tool for monitoring and forecasting a complex and dynamic environment. The CAFCAPEX Cost Index is a useful work product for estimators when it comes to updating material costs and reference equipment with information based on past times.
The Inflation phenomenon:
In economics, inflation (or less frequently, price inflation) is a general rise in the price level in an economy over a period of time, resulting in a sustained drop in the purchasing power of money. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy.
Economists generally believe that very high rates of inflation and hyperinflation are harmful, and are caused by an excessive growth of the money supply. Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities. However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth.
The Deflation phenomenon:
In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). Inflation reduces the value of currency over time, but sudden deflation increases it. This allows more goods and services to be bought than before with the same amount of currency. Deflation is distinct from disinflation, a slow-down in the inflation rate, i.e. when inflation declines to a lower rate but is still positive.
Economists generally believe that a sudden deflationary shock is a problem in a modern economy because it increases the real value of debt, especially if the deflation is unexpected. Deflation may also aggravate recessions and lead to a deflationary spiral. Deflation usually happens when supply is high (when excess production occurs), when demand is low (when consumption decreases), or when the money supply decreases (sometimes in response to a contraction created from careless investment or a credit crunch) or because of a net capital outflow from the economy. It can also occur due to too much competition and too little market concentration.
The Escalation as trivial term:
It can be defined as changes in the cost or price of specific goods or services in a given economy over a period. This is similar to the concepts of inflation and deflation except that escalation is specific to an item or class of items (not as general in nature), it is often not primarily driven by changes in the money supply, and it tends to be less sustained. While escalation includes general inflation related to the money supply, it is also driven by changes in technology, practices, and particularly supply-demand imbalances that are specific to a good or service in a given economy. For example, while general inflation (e.g., consumer price index) in the US was less than 5% in the 2003-2007 time period, steel prices increased (escalated) by over 50% because of supply-demand imbalance. Cost escalation may contribute to a project cost overrun but it is not synonymous with it. Over long periods of time, as market supply and demand imbalances are corrected, escalation will tend to more-or-less equal inflation unless there are sustained technology or efficiency changes in a market.
Project Cost Estimation update due to datasource time frame from base up to "current estimation date":
For Project Cost Estimation is mandatory that all cost reference data is homologated in term of time up to the official date of Estimation, this task implies that the estimator should bring to the estimating date, all prices and references cost obtained from historical sources making calculations based on the Cost Indexation Update Methodology.
Project Cost Escalation:
Also called "Future Escalation", it can be forecast using econometrics. Unfortunately, because escalation (unlike inflation) may occur in a micro-market, and it may be hard to measure with surveys, indices can be difficult to find. For example, the Bureau of Labor Statistics has a price index for construction wages and compensation (what the construction contractor’s labor cost), but has none for the prices that owners must pay the construction contractor for their services. Escalation is usually calculated by examining the changes in price index measures for a good or service. [*]