An Inflation Allowance is a provision included in a cost plan or estimate to account for anticipated increases in construction costs between the estimate date and the anticipated construction period. It protects against cost escalation due to market price movements.
Why Inflation Allowance Is Needed
Construction projects often span several years from initial estimate to completion. During this time, costs for labour, materials, and plant typically increase. The inflation allowance ensures the budget remains realistic.
Calculation Methods
Inflation allowances are typically calculated using:
- BCIS Tender Price Index (TPI) – Measures changes in tender prices
- BCIS All-in TPI – Includes both tender prices and construction costs
- Published forecasts – From BCIS, industry bodies, or economic forecasters
Components
A comprehensive inflation allowance considers:
- Base date to tender – Inflation from estimate date to tender return
- Tender to construction midpoint – Inflation during the construction period
- Sectional considerations – Different inflation rates for different work packages
Treatment in Contracts
Some contracts include fluctuation clauses that adjust the contract sum for actual inflation, while fixed-price contracts require the contractor to price inflation risk into their tender.
Related Terms
See also: Cost Index, Risk Allowance, Cost Plan
