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AACE Region 08 General Discussion Digest


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AACE本部の ”Region-8 Discussion” の報告です。

 

Theme: Capital Estimate - Real vs Nominal dollars   

Date: July2 - July3, 2021

 

 


AACE International

Region 08 General Discussion

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Jul 3, 2021

 

Discussions

started 2 days ago, Jose L Noe (3 replies)

Capital Estimate - Real vs Nominal dollars   external link to thread view

1. 

My take on this is that Real money is at a... Nolan L. Bear

 

 

1.

Re:Capital  Estimate - Real vs Nominal dollars

Nolan L. Bear

Jul 3, 2021 7:13 PM

Nolan L. Bear

My take on this is that Real money is at a specific date, whereas Nominal money is at whatever date it is charged or paid for.

For example interest rates that are charged or forecast to apply at a specific date, are Nominal rates. When we forecast future rates and discount them for forecast inflation (ie future reduction in buying power) we are using Real returns. An example from personal investment, If my investments earn 10% but inflation (reduction in my future buying power) is 2%, then my Real forecast return is (10% - 2% =) 8%. 

 A consequence of this is that where an estimate is defined as being the cost at a specific date, then it is assumed that all nominal or past rates used in the estimate are escalated to the estimate base date using escalation and foreign exchange indices. We can then reliably forecast future costs using the cost at a defined base date.

 

In practice companies maintain cost data in a format that allows for them to include a Nominal base rate that allows escalation to a current day. In the current low inflation environment, the practice of effectively ignoring escalation by defaulting to a consumer price index is risky for construction projects. We only have to look at the correlation between the price of iron ore and fabricated steel, the oil price, or the variances in FX rates to see how construction costs can be severely impacted.

 

Regard's

 

Nolan Bear,

B Eng, MBA(tech), DipEd, FIEAust, EngExec, CPEng (Cost, L&M), NER

Past National Chair, Australian Cost Engineering Society; Past President, Australian Section AACE International;

Industry Fellow, Swinburne University of Technology

Email: nolanbear@gmail.com; Website: www.costengineer.org.au

Mob: +61 (0)425 801 813  Skype: noel.bear; Swinburne 03 9214 5319




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-------------------------------------------
Original Message:
Sent: 7/2/2021 9:03:00 AM
From: Patrick Loke
Subject: RE: Capital Estimate - Real vs Nominal dollars

The estimated dollars BEFORE being escalated, are NOMINAL dollars.
AFTER the escalation (inflation) is incorporated into the estimate, the dollars are REAL dollars.

You can also relate REAL as in today's reality, you need to use this REAL amount in the current economy for the purchase.

------------------------------
Patrick Loke
Asst. Vice President (Group Project Development)
Sembcorp Industries Limited
Singapore
(659) 878-7894
------------------------------



 

 

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AACE International

Region 08 General Discussion

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Jul 2, 2021

 

Discussions

started yesterday, Jose L Noe (2 replies)

Capital Estimate - Real vs Nominal dollars   external link to thread view

1. 

The estimated dollars BEFORE being escalated,... Patrick Loke

2. 

"So, I believe that the estimate dollars BEFORE... Rolando Charcos Canseco

 



 

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1.

Re: Capital Estimate - Real vs Nominal dollars

Patrick Loke

Jul 2, 2021 9:03 AM

Patrick Loke

The estimated dollars BEFORE being escalated, are NOMINAL dollars.
AFTER the escalation (inflation) is incorporated into the estimate, the dollars are REAL dollars.

You can also relate REAL as in today's reality, you need to use this REAL amount in the current economy for the purchase.

------------------------------
Patrick Loke
Asst. Vice President (Group Project Development)
Sembcorp Industries Limited
Singapore
(659) 878-7894
------------------------------

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-------------------------------------------
Original Message:
Sent: 07-01-2021 23:34
From: Jose Noe
Subject: Capital Estimate - Real vs Nominal dollars

Hello there!

Would like to seek general wisdom from the members on the understanding of real vs nominal dollars in the estimate.

As part of the preparation of an estimate to obtain the total capital cost for a project, in our organisation, we include, amongst other things, escalation.

My basic understanding on the matter is (and more than happy to be told otherwise) is that to consider the impact of price changes of materials used during the execution of a typical large project. For that, we affect the estimate (only the relevant line items) with a percentage that takes into account those annual price increases (assuming they go up). Now, I am clear that the percentage is escalation and not inflation.

So, I believe that the estimate dollars BEFORE being escalated, are REAL dollars. AFTER the escalation is incorporated to the estimate, the dollars are NOMINAL.

Any guidance you may be able to provide, will be greatly appreciated.

Thank you.

Jose

------------------------------
Jose Noe
Principal PMO
South32
Perth
+61412445566
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2.

Re: Capital Estimate - Real vs Nominal dollars

Rolando Charcos Canseco

Jul 2, 2021 10:13 PM

Rolando Charcos Canseco

"So, I believe that the estimate dollars BEFORE being escalated, are REAL dollars." > Yes.
AFTER the escalation is incorporated to the estimate, the dollars are NOMINAL." > No. The nominal value applies to an estimated present value of an item in relation to the impact of approximated future inflation. In your case, when the escalation took effect, the escalated price is a real value.

BR
Rolando Charcos Canseco
Prof. Civil Engr, Project Mgt & Project Services Specialist
Singapore
+6591708367



------------------------------
Rolando Canseco
Project Controls & Contracts Manager
WEC Engineers & Constructors Pte. Ltd.
91708367
------------------------------

  Reply to Group Online   View Thread   Recommend   Forward  

-------------------------------------------
Original Message:
Sent: 07-01-2021 23:34
From: Jose Noe
Subject: Capital Estimate - Real vs Nominal dollars

Hello there!

Would like to seek general wisdom from the members on the understanding of real vs nominal dollars in the estimate.

As part of the preparation of an estimate to obtain the total capital cost for a project, in our organisation, we include, amongst other things, escalation.

My basic understanding on the matter is (and more than happy to be told otherwise) is that to consider the impact of price changes of materials used during the execution of a typical large project. For that, we affect the estimate (only the relevant line items) with a percentage that takes into account those annual price increases (assuming they go up). Now, I am clear that the percentage is escalation and not inflation.

So, I believe that the estimate dollars BEFORE being escalated, are REAL dollars. AFTER the escalation is incorporated to the estimate, the dollars are NOMINAL.

Any guidance you may be able to provide, will be greatly appreciated.

Thank you.

Jose

------------------------------
Jose Noe
Principal PMO
South32
Perth
+61412445566
------------------------------