The Construction Costs Index and the state’s decision to provide additional funding for Public works Contracts

The Albanian Government has approved the Normative Act, with the force of Law, act no. 10, dated May 18, 2022, for the Financial Compensation due to the increase in the price for some construction materials, based on the stipulations in the public contracts, as a result of the special situation created in the market during the year 2022, referring to market prices and construction cost indices.

The following article aims to clarify and visualize some market indicators related to this government act.

The Normative Act applies and aims to compensate with additional funding, public works contracts (civil works), supported by the State Budget, central and local government funds, as well as contracts implemented by companies that are majority owned by the state. Compensation is justified with the increase in the price of construction raw materials such as iron, cement, bitumen, plastic pipes, aluminum, copper and zinc. These prices have increased in the international markets as a result of the crisis caused by the aggression in Ukraine. Public Contracts, subject to said Normative Act, must have been concluded before the entry into force of the act and be in the process of implementation no earlier than January 1, 2020.

Compensation will be carried out through Additional Contracts (contract extension), subject to approval from the procuring authority, in the amount of an extra 5 to 30% of the original value. The new regulation and successive assessment of the compensation margin, raises many problems regarding the procedure, its integrity and avoiding undue influence from companies to obtain the extra-financing regardless if they incurred higher costs.

The foresees additional financial costs that will be covered by the budgets of the State Institution or the Publicly Owned Company.

The Normative Act supports economic operators that implement public works contracts, in the time frame provided, through two options: by increasing the value of the contract through the approval of the request for financial compensation and by not applying or forsaking penalties for contractual delays in the implementation. Even procedures for the Reconstruction Program are subject to it.

In this article we will examine two indices that are the basis for estimating increased costs in the implementation of public works contract. Specifically, the Construction Cost Index and the Import Price Index with a focus on construction material items.

The Construction Cost Index (CCI) measures the price performance of construction materials, labor and other capital expenditures used in the construction of a typical building (8-10 floors). The annual difference in CCI in the first quarter of 2022 is 5%, which means that in the first quarter of 2022 the cost of construction is 5% higher than in the first quarter of 2021. While in the first quarter of 2021 it was only 0.6% more compared to the same period of the previous year. 2022 marks the biggest increase in costs recorded during the reviewed period, from 2018 onwards, where the upward trend of the index dominates.

Source: INSTAT(2022)
Comments and Analysis: Open Data Albania

Based on to the cost increase on a quarterly basis, in 2022 an increase of the index by 2.9% compared to the fourth quarter of 2021 is observed.

Source: INSTAT(2022)
Comments and Analysis: Open Data Albania

Based on the data provided by EUROSTAT for the measuring of the Construction Cost Index, six main groups of expenses are considered: Material costs; Salary costs; Machinery costs; Transport costs; Energy costs and other costs. Because the Normative Act takes into consideration only the compensation in the price increase for some construction materials, in addition to the changes in the overall price index, the focus will be on the subgroup of construction materials, as part of the “Material costs” group.

Source: INSTAT(2022)
Comments and Analysis: Open Data Albania

The index of the subgroup “Construction materials” in the first quarter of 2022 is 6.5% higher than the first quarter of 2021, the largest increase in the last 5 years. The biggest difference, again, is observed in the last quarter examined (Quarter 1 of 2022) in comparison to the last quarter of 2021, where an increase by 3.2% in the index is noted.

Source: INSTAT(2022)
Comments and Analysis: Open Data Albania

Another index that provides information on price differences is the Import Price Index, which measures changes in import prices for any product that is not produced in Albania, but that is imported from a third country.

Source: IndexMundi , Statista
Comments and Analysis: Open Data Albania

The Import Price Index, in the first quarter of 2022, reached 111.7 level, marking an annual increase of 10.7%, compared to the same quarter in 2021. The largest increase was registered in the last quarter under examination, compared to the previous quarter. The index recorded an increase of 6.1%, meaning that import prices in the first quarter of 2022, resulted on average 6.1% higher than in the last quarter of 2021.

Metallurgy (such as iron, aluminum, copper, etc.) is considered among the sectors with the highest inflation rate, in which import prices rose 18% in the first quarter of 2022 compared to the last quarter of 2021 and on annual basis, compared in the first quarter of 2021, 21% higher.

With reference to international markets, the price of iron shows a generally upward trend since 2019, long before the recent crisis. Within 5 years (April 2022 vs April 2017) there is a 142% price hike, specifically, going from 62 to 151 dollars per metric ton of iron.

Source: IndexMundi , Statista
Comments and Analysis: Open Data Albania

Likewise, Aluminum shows a price increase in the same five-year period (April 2017-April 2022) of 32%, going from 1885 to 2490 dollars per metric ton of aluminum. Unlike iron, aluminum shows a higher price increase in the last two years with an increase of 122% in April 2022 compared to April 2020 (rising from 1460 to 3244 dollars).

Source: IndexMundi , Statista
Comments and Analysis: Open Data Albania

Another metal considered for compensation under the Normative Act is Copper, whose price stood at 5,600 dollars in 2017, while in 2022 it exceeds the price of 10,000 dollars per metric ton, resulting in a 56% increase in the last five years. The fastest hike is observed after 2020, where the price doubles from 5,000 to 10,000 dollars per metric ton.

Source: IndexMundi , Statista
Comments and Analysis: Open Data Albania

The Financial Effects of the abovementioned Normative Act, have not yet been calculated, leaving room for the imminent revision of the Budget Plan for 2022 at the central and local level, as well as lending, in order to fulfil contractual repayment needs, in the case of public companies. This legal directive, issued by the Government, also opens the door for all private companies to request a review of construction costs for Public Infrastructure Contracts, in order to potentially take advantage of the opportunity.

Download excel:The Construction Costs Index and the state’s decision to provide additional funding for Public works Contracts
Comments and Analysis: Open Data Albania
Translated by: Rezarta Cushaj
Contributed by: Blerina Gjaci