The difference between Tender Price Indices and Output Price Indices

Understanding construction price* trends is key to successful construction management. Two important price metrics are Tender Price Indices (TPI) and Output Price Indices (OPI). Both offer valuable insights into construction prices, but they measure different things and serve different purposes.

Tender Price Indices (TPI)

Tender price indices track the prices agreed between the client and the contractor at the point of ‘commit to construct’, which may come from a tender process or direct negotiation.

Essentially, TPIs capture the price levels agreed for a construction project, reflecting the movement in market conditions and competitiveness over time. These prices set the basis for payments under the contract, which can span several years and may be adjusted based on fluctuation agreements in the contract.

Uses of TPI:

Benchmarking: TPIs standardise project prices to a common date, allowing for comparisons across different projects.

Programme Planning: TPIs help forecast and schedule future projects by providing a baseline for expected costs.

Project Cost Planning: They assist in estimating budgets for new projects using historical data of agreed prices.

Financial Management: TPIs help manage financial resources by projecting future cash flows based on agreed tender prices.

Risk Assessment: Analysing TPI trends allows stakeholders to assess potential financial risks from cost escalations over time.

Output Price Indices (OPI)

Output price indices measure the prices paid by clients to contractors in valuations for work carried out in the preceding period. OPIs are lagged price indicators since they are based on prices agreed in previous periods adjusted in some cases for cost inflation.

Uses of OPI:

Deflating Construction Output Statistics: OPIs adjust construction output statistics for inflation, providing a real-term measure of construction activity.

Economic Analysis: Economists and policymakers use OPIs to understand inflationary trends within the construction sector and their broader economic impact.

Contract Administration: OPIs help evaluate contractor claims and variations by providing a benchmark for industry prices.

Key Differences:

Timing: TPIs capture agreed prices at the start of a project, while OPIs reflect prices paid during construction.

Usage: TPIs are used for planning, benchmarking and financial management of projects. OPIs are primarily for economic analysis and deflating output statistics.

Scope: TPIs set the initial budget and price levels for a project, while OPIs measure prices paid during a contract.

Additional Considerations:

Regional Variations: Both TPIs and OPIs can vary significantly by region due to local market conditions, labour costs, and material availability. It’s important to consider regional indices when planning and managing projects in different locations.

Sector-Specific Indices: Different sectors within construction, such as residential, commercial, and infrastructure, may have specific TPIs and OPIs. Understanding these can provide more accurate cost assessments and forecasts.

Historical Data Analysis: Analysing historical TPI and OPI data can reveal long-term trends and cycles in construction costs, helping stakeholders anticipate future changes and plan accordingly.

Integration with Other Indices: TPIs and OPIs can be integrated with other economic indicators, like Consumer Price Indices (CPI) and Producer Price Indices (PPI), to provide a comprehensive view of the economic environment affecting the construction industry.

Understanding the distinctions and applications of TPI and OPI is vital for effective project-management, cost control, and economic analysis in the construction industry. Each index provides valuable insights, serving different purposes to inform better decision-making.

*While in any transaction the seller’s price and the buyer’s cost is the same number, BCIS has adopted the convention to use ‘Price’ to mean what a contractor charges to a client and ‘Cost’ to mean what a contractor pays for the resources required to carry out the work.

Indices available to BCIS subscribers:

• BCIS All-in TPI
• PUBSEC Tender Price Index of Public Sector Building Non-Housing
• BCIS All-in OPI