Beyond Traditional Methods: Enhancing Cost Escalation Forecasting in Commercial Construction amid Economic Turbulence

Abstract

The application of cost escalation rates to commercial construction projects has historically been a straightforward task for estimators. However, the onset of the post-COVID-19 recovery period has introduced unprecedented challenges. The surge in inflation, followed by sharp disinflation triggered by one of the most aggressive interest rate hike cycles in Federal Reserve history, has created significant obstacles in forecasting future costs, a situation unfamiliar to many contemporary construction cost estimators. Unlike previous research that predominantly focused on cost indices tracking labor rates and building materials, our study integrates the Turner Building Cost Index, which also accounts for the competitive condition of the marketplace. Although traditional academic forecasting tools may perform well during periods of gradual economic expansion, they often falter amidst recessions or sudden economic shocks. Recognizing the crucial role of the overall economy in future cost projections, our paper rigorously examines current economic conditions and emphasizes concerns stemming from recent monetary policy actions by the Federal Reserve. We introduce an integrated forecasting approach, combing quantitative analysis with qualitative insights from industry experts—a process referred to as decision science analysis. This method allows estimators to incorporate a comprehensive view of the current economic landscape, transcending conventional academic models. Our methodology projects costs across three scenarios: best-case, average, and worst-case. In the best-case scenario, assuming the US economy avoids a recession or sudden economic shock, the annual escalation rate is forecasted at 2.8% over the next 7 years. In contrast, a worst-case scenario characterized by a severe recession could cause a decrease in cost by 13% within 2 years of the index peak. This study underscores the importance of considering macroeconomic conditions during periods of heightened economic uncertainty. Furthermore, it showcases how effective collaboration between industry and academia can yield a robust and comprehensive forecasting approach, adaptable to any economic climate. The leading US authority and educator in cost estimating has emphasized the necessity for practitioners to incorporate unexpected downturn in forecasts, as outlined in its guidelines. This study directly aligns with such industry calls for the inclusion of economic impacts on cost forecasting, contributing valuable perspectives to the existing body of knowledge. By introducing economic indicators, the study provides a deeper understanding of the current economy, employing a data-driven approach of forecasting commercial construction indices amid economic uncertainty. Diverging from conventional academic approaches, the research integrates a qualitative dimension through decision science and scenario analysis, fostering a closer connection between industry practitioners and academia. The deliberate use of simplified language and a straightforward technical structure enhances accessibility and adaptability, ensuring that the findings are readily embraced by industry professionals. This research is particularly relevant for construction cost estimators and project stakeholders aiming to enhance their understanding of imminent risks and opportunities in cost management. Regardless of the economic trajectory, readers will gain the capability to forecast future costs with heightened confidence and precision, offering invaluable insights for strategic decision-making in construction projects. We encourage continual dialogue between academia and industry, fostering a dynamic exchange of insights and knowledge.