Have you been in a bid review where the comment is made that so and so bid item should be priced at no more than lets say for argument sake $110/cy?  Here is the question that should be asked. When did this price actually come into effect? If the answer is three or more years ago the retort should be that they are quoting a unit cost or below unit cost and not a market unit price. Inflation is currently running around 3% a year. Some inflation for commodities are higher and some are lower but no one is going to escape an average of 3% a year inflation rate.  So how long does it take for inflation to catch up and equal the proposed margin for an item?   This is the classic future value problem but in this case we will ignore the interest rate and i or becomes the inflation rate. So F or future value for our example is Cost + Margin. Lets say something costs $100/cy with all indirects included and 10% margin is desired. So Cost + Margin = $110.00. That is the F side of the equation. Now the right side of the equation is the cost times the inflation rate. What we want to know is when will the right side catch up to the left side or when will inflation costs catch up and equal the margin so there is no longer any margin!

F=P(1+i)n    where F = $110, P = $100, i = 0.03 and n is where we solve for.
110=100 x (1.03) n
n = log (110/100)/log(1.03)
n= 3.22 years

What can we conclude from this? If the historical pricing that determined $110/cy occurred 3.22 years ago with an inflation rate of 3% and a desire margin of 10% then the price of $110/cy will only cover the cost plus the inflation rate.  There will be no margin and worse the price could be below cost And I know that most readers of this post actually price jobs with less than 10% margin. 5% margin will cause the inflation to catch up in 1.65 years.

Why am covering this subject? There are many estimators and non-estimators in our industry that hold on to historical pricing to the extent that the price consider “market” could indeed be below cost due to the inflation rate. They hurt not only your company but the construction industry in general.  So next time someone says that an item should be a certain price ask then how long they have been using that price. A great source for inflation information is ENR (LINK). You will have to subscribe to the magazine but well worth the cost for this valuable information.