Each April we publish some background information about the model building used for the Hanscomb/Means parity/index. The building is a single story owner-built, owner-occupied manufacturing facility with a large office component. Model parameters are shown in the table. We selected 26 items from all trades to represent all building construction items. Hanscomb and associated companies at each location price each item. The prices are trade contractors' in-place prices, including labor, material, equipment, overhead and profit. To produce a composite index, each item was weighted according to its contribution to total cost.

This approach, measuring in-place rates rather than basic inputs into construction (material, labor and equipment), inherently measures differences in productivity and to some extent differences in market and bidding conditions. While the same basket of goods is priced in every country, each correspondent may substitute local materials as appropriate. However, substitutions may not reflect the most typical construction materials used in the country.

Any index based on a model building has limitations. It does not measure certain other factors that contribute to price differences between locations. The effects of regulatory and code requirements, seismic design requirements, design styles, and climate on design are difficult to measure using a building model approach.

We exclude many capital cost items from the Index, such as:

• Site work
• Furnishings and equipment
• Process related requirements
• Land and associated costs
• Design and management fees
• Financing
• Value added or use taxes or any other recoverable tax

International price indexes often attempt to measure two moving targets: the value of construction at locations and fluctuating exchange rates. Purchasing parity comparisons remove the exchange rate variable. This helps avoid thinking in terms of a fixed percentage difference between countries, which inevitably happens with indexes. It also allows users to apply exchange rates appropriate for their project time frame and corporate policies. Hanscomb/Means publish cost comparisons using purchasing parity. Information in the Tables reflects conditions at March 1999.

Table 1 shows a purchasing parity range for each location to the United States (Chicago). As there is nothing definitive about any index, we provide a parity range. The table also shows the March1999 exchange rates used to calculate the index from average parity value. The Index values, like the parity values, compare to the US (100.0). The table shows projections of likely construction price inflation (April to April). We are pleased to add Sao Paulo, Brazil to our list of parity locations. The data is contributed by Hanscomb-Herzog.

Table 2 shows price changes for each location. The first quarter of 1995 is 100.0.

Table 3 lists taxes in effect for each country. These are mostly Value Added Taxes (VAT) or Goods and Services Taxes (GST). They are not included in the parity and index values. For some countries (e.g., USA and Australia) the rate is applied only to materials.

Purchasing parity measures the rate of currency conversion that equalizes (parity) the purchasing power between currencies. Knowing the cost of a project in the US we can use the parity rates to convert it into different currencies. For example, if a manufacturing facility costs $625 per square meter in the US, we can calculate the approximate cost in Italy.

• Using the average parity value of 1916 Lira per US$, (1827 + 2005) / 2.
• Facility cost would be 1916 x $625 or Lira 1,197,500 per m².

There are always demands for a simple relative index to calculate costs in the base location currency, US$. So we publish a relative index using current exchange rates, that are clearly stated in the table.

• Cost for the facility in Italy in US$ will be 108.3% x $625 or $677 per m².
• Cost in Lira will be $677 x 1769 or Lira 1,197,613 per m². (The difference from L 1,197,500 is due to rounding.)

Many organizations fix exchange rates that may be different from the public market. If corporate finance dictates we use a rate of 1850 Lira = US$1, instead current 1769 then:

• Equivalent cost in US dollars is Lira 1,197,500 / 1850 or $647 per m².
• Compared to the US cost of $625, Italy is now 1.04 x US costs.

Possibly, you may be wondering why we continue to use national currencies for the member countries of the European Economic Monetary Union (EMU). After years of planning they launched the Euro on 1, January 1999. It will only be used in non-cash transactions until January 2002 when the currency is introduced and national currencies phased out. The eleven participating Euro countries are often referred to as "Euroland".

The Euro will impact many aspects of doing business in Europe. However, national currencies may be used during the transition. Many companies will have existing contracts in national currencies, as a result we will continue to show parities in national currencies (Table 1) and in Euros (Table 4) during this transitional period.

The Euro's influence will be significant both for member and non-member countries. For member countries three important benefits are suggested:

• Transparent price differences. Price differences among the member countries are more obvious. The question remains as to how this will really impact manufacturer/supplier pricing. Will there be a convergence of pricing?
• Minimizes exchange rate risk. Firms operating in "Euroland" no longer face currency exchange rate risks when doing business there. Companies outside "Euroland" will continue to face these risks. The expectations are that "Euroland" firms will have a competitive advantage inside "Euroland".
• Lower transaction costs. With a common currency the costs for inter-country commerce should be reduced.

Only in time will we know the true impact of the Euro on construction prices. It has the possibility of having a wider impact on the industry if it becomes a currency of choice for international contracts in developing countries where stable costs are desired, like US dollar and UK£.

The index, which relates price to the US, may change because of three factors:

• Price change in the US as this changes then so do all other relationships)
• Price change at every other location.
• Changes in the currency exchange rate.

Chicago's year-to-year price change was about 3%. Inflation in most countries (15) was within one percent of inflation in the US. So, relative price inflation was not significant except for:

• Turkey, Finland, Poland and Mexico, which had significant relative inflation.
• Russia (in US$ terms) and Japan, which had significant relative deflation.

The US Dollar continued to strengthen during the past quarter. The exceptions were Norway, Canada, Mexico, Australia and New Zealand. As would be expected with the strengthening dollar and little significant inflation, Index values are mostly lower 22) over last quarter's Index.

The Hanscomb/Means Report is a unique newsletter dedicated to international construction intelligence. The Report includes:

• 8 Issues Annually
• Special Supplement In-Country Profiles

Sharing over fifty years of Hanscomb's international construction experience, the Hanscomb/Means Report provides:

• Quarterly International Construction Cost Index
• Building Type Cost Comparisons
• Procedural/Contractual Issues Report
• Country and Regional Overviews

Subscriptions are free to qualified individuals.