NZ Report / Proposal Template - State Services Commission

Department has in place processes for reviewing the cost estimates prepared for each of
the projects. This has involved use of external professional/expert advisers.
Uncertainties With the Earlier Cost Estimates
4.8 The information presented to Cabinet in December 2005 was intended to provide a
link back to earlier cost estimates provided in the context of Budget 05 (and before that,
Budget 04). It is important to appreciate that the earlier estimates were indicative only.
4.9 The Budget 05 (and Budget 04) estimates were based on high-level assessments
of construction cost. At the time of the earlier estimates, detailed designs had yet to be
completed. Accordingly, the earlier estimates had high degrees of risk and uncertainty
attaching to them. The initial estimates were also based on a traditional quantity surveyor
approach to cost estimation which involves assessing the scope of work (e.g. m 2 of floor
space) and attaching a generic rate ($/m 2 ). In contrast, the latest cost estimates reflect
the outcome of applying the CWA methodology. This involves a detailed line by line
assessment of all inputs and processes involved in constructing the facilities. This is a
fundamentally different approach to estimating cost and, accordingly, there is an element
of attempting to compare apples with oranges when comparing latest with earlier
estimates.
Market Influences
4.10 Under the heading of market influences, the Department has apportioned the cost
increases under four headings; escalation, labour rates and location, margins and
overhead and on-site construction costs.
Escalation
4.11 The construction market has been heated over the time period during which Spring
Hill and Otago have been being constructed. Estimated construction costs have been
escalated with reference to the Capital Goods Price Index for Non-Residential Building
(CGPI-NRB). Forecasts of the CGPI-NRB are prepared by the New Zealand Institute of
Economic Research (NZIER) and, as far as we are aware, the NZIER forecasts are the
only ones that are widely available and published quarterly. The CGPI-NRB is produced
by Statistics New Zealand (SNZ) and is based on a basket of “model buildings”
determined by SNZ. The prices associated with each model building are updated by SNZ
from the New Zealand Building Economist (NZBE) publication.
4.12 There are several limitations and caveats around the CGPI-NRB index that need
to be taken into account.
• There is considerable uncertainty regarding the degree to which margins and
discounts are incorporated into the NZBE prices.
• SNZ seeks to adjust its index numbers to strip out the effect of quality changes.
For example, if the quality of a new building is enhanced and costs are increased
accordingly, the SNZ approach will attempt to strip out the quality dimension and
lower the prices accordingly.
• The models being used by SNZ were last revised in 2000 and are viewed as being
out-of-date.
Key Drivers and Causes of Cost Escalation 16