Approaches to Understanding the Levels and Trends of Construction Cost in Japan.

Construction Market Trends Series: Price (5)

In the previous article, the fourth in our Construction Market Trends series, we introduced the factors that affect construction costs. In the fifth and final installment of this series, we will introduce an approach to understanding the levels and trends of construction costs.

What is the purpose of ascertaining the level and trend of construction costs?

In general, development projects require a period of time for design, etc., from the time the project budget is planned to the time the order is placed, so there is a time lag between the time the project budget is planned and the time the construction contract is signed. Due to this time lag, in situations where construction costs are on the rise, there may be a large discrepancy between the level of construction costs at the time of planning the project budget and the actual construction costs at the time of bidding and construction contracts, resulting in over-budgeting, which may force the project to be reviewed, changed, postponed or suspended. Therefore, in the development business, it is important to have a clear understanding of the project.

For this reason, when formulating a budget for a development project, the client is always required to provide a convincing explanation of how much the risk of construction cost increase is expected and why it is set as it is.

In addition, the client is always required to confirm whether or not the estimated construction cost is appropriate. By grasping construction cost levels in the market, one can check from an objective point of view whether the contract amount of the project for which a construction contract is about to be signed is at an appropriate level without deviating from the market price, and whether the company itself is ordering at an excessive level.

By understanding the level and trend of construction costs in the market, more appropriate budget plans can be formulated, the risk of construction cost increases can be examined, and the validity of the construction contracts can be checked.

Three approaches to understanding the level and trend of construction costs.

There are three approaches to understanding the level and trend of construction costs: using statistical data, analyzing actual data, and using the results of interviews.

1. Using statistical data
2. Analyzing actual data
3. Using results of interviews

Each of the major approaches listed above has different characteristics, so it is important to use them according to the purpose and situation. Let’s take a look at some of the specific approaches below.

1. Using statistical data

This approach is characterized by the fact that it allows you to grasp the level and trend of construction costs for free by utilizing data published on the Internet and other media by public organizations such as the Ministry of Land, Infrastructure, Transport and Tourism. Another advantage of using these statistics is that since the survey method is basically the same, the time-series data is always collected from the same perspective, and the data characteristics are consistent.

On the other hand, since this method only provides data within the published range, it is suitable as a means of understanding trends and trends in the level of construction costs in a large market such as the entire country or by city, but it is not so suitable for projects with strong individual characteristics or when high accuracy is required.

In this section, we will introduce a specific approach using the statistical data published by the Ministry of Land, Infrastructure, Transport and Tourism. Figure 1 below is a time series (annual) graph of RC (reinforced concrete) housing in Tokyo using estimated construction cost (yen) and floor area of construction starts (m2) and considering the estimated construction cost per floor area as construction cost level (thousand yen /m2) .

From the graph, it can be said that the cost has risen by about 50% from 217 (thousand yen/m2) in 2011 to 325 (thousand yen/m2) in 2020. In addition, we can see that in recent years, the level has been above the level of 306 (thousand yen/m2) in 1991, the bubble period.

It is possible to grasp the trend of construction cost levels in the construction market by using statistical data published by the Ministry of Land, Infrastructure, Transport and Tourism. In this article, we introduced cases where the estimated construction cost per floor area is considered to be the construction cost level (thousand yen/m2) by using the estimated construction cost (yen) and the floor area of construction starts (m2) as the basis for considering the construction cost level. However, by replacing the floor area (m2) with the number of new housing units and the number of new buildings started, it is possible to understand the trend in the level of construction costs per new housing unit and per new building started.

However, as mentioned above, this method is suitable as a means to grasp the trend of the level of construction costs from a large perspective, but as the Ministry of Land, Infrastructure, Transport and Tourism (MLIT) notes, for example, the estimated amount of construction costs is only an estimated amount, not the actual construction costs required from the start of construction to completion. In general, this type of statistics tends to appear low. In general, this type of statistic tends to appear low. It is important to understand this point before using the data, and to consider adopting other approaches depending on the purpose.

For more information on unit price per square area by purpose of use, structure, and prefecture, please click below.

• Construction cost for Apartment Complexes
• Construction cost for Detached Residences
• Construction cost for Rental Apartments
• Construction cost for Shared Residences
• Construction cost for Residences
• Construction cost for Office Buildings
• Construction cost for Factories
• Construction cost for Warehouses
• Construction cost for Commercial Stores
• Construction cost for Hotels
• Construction cost for Hospitals
• Construction cost for Welfare and Nursing Care Facilities
• Construction cost for Schools

2. Analyzing actual data

This approach involves collecting data on construction costs of similar projects in the past or in the recent past, and then to analyze them in chronological order to understand the trend of construction cost levels. In general, this method can be expected to be more accurate than the statistical data approach, so it is an effective method for examining the level of budget for a specific project or checking the level of estimates submitted by construction companies. On the other hand, this method requires a lot of effort from data collection to analysis, such as collecting similar data and organizing them into a time series.

As a concrete method, data on past construction costs that are as similar as possible to the target project in terms of construction conditions and characteristics such as region, use, scale, structure, shape, number of floors, and building grade is collected as actual data based on contract amounts. In this case, if data similar to all conditions is collected, the amount of data that can be collected will be reduced, so it is common to collect data that is similar to some extent to the items of region, use, scale, and building grade. For example, if you want to understand the trend of the past five years, you should collect data for the past five years, and if you want to understand the current level, you should collect data for the past several months to one year.

For the collected data, divide the construction cost (yen) by the floor area (m2) or number of units (units) and calculate the construction cost per m2 (thousand yen/m2) or construction cost per unit (thousand yen/unit), and plot the data collected at each point in time to grasp the level and trend of construction cost. This method can be used for various purposes. Using this method, depending on the purpose, the level at each point in time can be considered as a range based on the lowest and highest levels, or as a point based on the average value of the data at each point in time. In either case, if there is data that falls outside the range of outliers, it is necessary to adopt the results obtained by excluding those data.

Specific methods of data collection include guerrilla-style collection of past performance data from the Internet and books, accumulation of project data developed in-house, and collection from design offices, construction companies, and construction consulting firms. Collecting a wide range of data from as many different clients, designers, and construction companies as possible will lead to a more unbiased and realistic understanding of construction cost levels and trends.

In particular, construction consulting companies not only have a large amount of data on the performance of various clients, designers, and construction companies, but also constantly accumulate and organize data from the perspective of region, use, and scale. This is an approach that allows one to reach the results they want more efficiently than a guerrilla approach.

3. Using results of interviews

The last approach we will introduce is to assume a model case and regularly update the unit price of the construction cost of that model in order to grasp the level and trend of the construction cost. Therefore, if the characteristics such as development area, building use, scale, and structure are similar for most of the projects developed by the company, this method has the merit of being used continuously, but it may not be effective if the conditions and characteristics of the development projects differ greatly each time.

This method is characterized by the fact that it does not require the collection of a large number of similar actual data, unlike the approach of collecting and analyzing similar actual data, since the construction cost is always observed at a fixed point under the same construction conditions. On the other hand, only the unit price is updated, and the risk of rising labor and material costs when the construction company actually estimates the cost cannot be reflected in the price, so the results obtained may be lower than the actual situation.

Specifically, first, assuming a model case, the construction cost is calculated from the quantity and unit price of each construction based on a detailed breakdown sheet. Then, the unit price in the breakdown sheet is updated every quarter or year, and the result obtained is used as the level of the construction cost at that time. This is a very simple and straightforward method that can be utilized by simply updating the unit price.

In some cases, unit price is updated in-house, and in other cases, they are obtained through cooperation with clients such as design offices and construction companies. However, recently, there are more and more cases where unit prices are automatically updated by using estimation systems or costing systems.

Over the past five articles, we have introduced a wide range of construction costs as prices in the construction market, starting with the basic concept and definition, and ending with how to grasp the level and trend of construction costs actually used in projects in this final article.