Forecasting construction costs in hyper-inflated economies

Comprehensive construction project management must include several aspects; namely: cost, productivity, materials and equipment, and schedule. Project management is a complex process by nature. The complexity of cost control is increased when the phantom of inflation is present. Inflation is not an isolated problem and is found throughout the world. At this moment, several countries are experiencing high to hyper-inflated environments. Under these conditions, to maintain a project on budget will depend on the knowledge and ability of project managers to forecast construction costs.

Since inflationary processes are specific for each country, Mexico has been chosen as the economic model. This economy is analyzed covering general and construction-oriented aspects. Mexican economic indicators are compared with indicators from the United States. As a result, the link between both economies, pointed out by several authors, has been confirmed. The chronic lack of Mexican construction-oriented information motivates the author to propose and to develop a new construction cost index. This index is called Low Cost Housing (LOCH) index and targets this type of construction. This newly developed index is compared with the other two indexes which exist in Mexico. Also, the LOCH index is used to forecast construction costs using Box and Jenkins models. During the model validation stage, it is proved that model accuracy lies between $\pm$2% of the real LOCH index values.

The main purpose of this research is to forecast construction costs in high to hyper-inflated environments. As far as the author knows, this is the first time in which Box and Jenkins models have been used for this purpose. The reliability of the developed model depends on the economy chosen as the model, on the construction type, and on the prices and costs matrix developed. For conditions different from those established in this research the model needs to be calculated again. In the problem analyzed, considering the results obtained, the author proves that the Box and Jenkins techniques are a useful tool for forecasting construction costs in economies experiencing high to hyper-inflated conditions.