We have discussions on RYPN about projects that are funded incrementally over five year, ten year, fifteen year time periods. Would anyone care to comment about how they account for escalating costs for such projects? For example is anyone using a calculation that starts with the estimated cost of the project (as an immediate build) and then allows the entry of a time period and an annual rate of cost escalation to solve for the amount of funding you would have to bring in and spend each year in order to complete that project while contending with the rising cost?

PC

When our Museum has done incremental projects we have budgeted each step in real time, i.e. we did not plan a total budget with allowance for inflation, etc.

Wesley

Agreed. Incremental budgeting seems to be a default made by the nature of the process as a whole, not as a preferred option. Until a project is about half done it is difficult to even know its scope, much less its cost.....and its execution is usually based on the rate of funding rather than the ability to spend productively.

I'd like to read about any that have been done as you suggest is possible.

dave

Dave and Wesley, thanks for your thoughts on this.

I think it would be helpful to preservation planning to have a workable predictive process that allows you to plug in an estimated "build now" cost (what it would take to do the job immediately), an annual rate of cost increase, and a term of years that you expect the project to take to complete, and allow you to solve for an "X" number which would be the amount of donations you have to take in (and spend) to accomplish the yearly work and simultaneously deal with the inflating remaining balance.

As far as annual rate of cost increase is concerned, in the railroad industry it has very little in common with the rate of inflation. The current CPI is heavily weighted by electronic goods that tend to decrease in price as they get more common, and is also held down by hedonics and other adjustments. The 1990s CPI calculation method is quoted on some websites as around 8% to 9% which is a closer estimate, and railroad equipment builders usually estimate 12% to 15% per year to be safe.

Of course projects don't get done in exactly equal yearly increments, so the solution would be approximate, but it would at least provide a guideline to see if your organization's level of donations can deal with the long term effect of increasing cost on the work remaining to be done in a project.

I would suspect something of this type might be used in the construction industry.

PC

It would be very useful; just not sure how one would be able to do all that prediction unless.......we separate the project into two phases: one a systematic progressive survey and exploration including development of a scope of work and specifications, and then the information from this phase could be used to do what you suggest. Alternatively, if the starting point was a known quantity such as a chicken coop variety of trolley car body, there's pretty much nothing you can't see or left to disassemble that would require a lot of time or effort, so it might be workable.

dave

Yes Dave, you would need a "built now" cost estimate as a starting point, the calculation would take that and apply the effects of cost inflation over the term of years you want to examine.

I wonder if any restorations that stalled partway through (a certain marine project comes to mind) did this kind of calculation up front to see what kind of cash flow they had to maintain in order to make progress against escalating costs.

PC

With a little research, here are some results. The type of calculation that comes very close to meeting the requirements is one for retiring debt against a fixed interest rate specifying a particular period of time and solving for the payment amount that will achieve zero balance in that time period. For our purposes we are substituting cost escalation for the interest rate.

For sample calculations I am using an initial cost estimate of $1 Million "built right now". It is within the range of some locomotive rebuilding projects, and it makes the numbers easy to view.

A project with an initial estimate of $1,000,000, funded in equal installments once per year for five years, against a 15% annual cost escalation of the remaining balance, requires a cash flow of about $259,400 a year and the total cost of the project is about $1,297,000.

A project with an initial estimate of $1,000,000, funded in equal installments once per year for ten years, against a 15% annual cost escalation of the remaining balance, requires a cash flow of about $173,260 a year and the total cost of the project is about $1,732,600.

A project with an initial estimate of $1,000,000, funded in equal installments once per year for fifteen years, against a 15% annual cost escalation of the remaining balance, requires a cash flow of about $148,710 a year and the total cost of the project is about $2,230,650.

I haven't heard of anyone in preservation proposing a project over a longer time frame so I stopped there. These calculations are very approximate because they are based on one project payment event a year and groups do projects in smaller and more frequent purchase/payment increments than that.

But you can see why project costs go right through the roof when donations and work stall, time is definitely not your friend, loosing ground through lack of cash flow and stretching a project out is extremely expensive.

I was looking this over and comparing with a local commuter rail project proposed 20 years ago and not built yet. The original estimate in 1995 was $138 million. Today the estimate for exactly the same project scope is $2.4 billion. Yes that is 17.39 times the original cost for having waited twenty years to build. Last thing I heard the cost of the studies alone was approaching the original estimate for the entire project.

PC