Construction costs in Denmark

- a comparison with other countries

Danish Agency for Trade and Industry December 2000

Summary The comparison of construction costs by ordinary and modified prices per square metre has the fundamental weakness that the item we compare, a private single family house in two storeys, is not very well defined. Thus, there is a significant element of randomness in the comparison of construction costs between countries. In order to reduce this arbitrariness, we develop a new indicator of construction costs as follows: We select a typical Danish single family house. We ask an experienced surveyor to break down the house in well-defined work items. Obtaining prices for these work items from price books in a large number of countries, including Denmark and Sweden, we can now estimate the construction costs of an identical house in all these countries under review. We argue that this new index is the most reliable indicator for the comparison of construction costs between countries and conclude that Danish construction costs are among the highest in Europe, both using ordinary exchange rates and using PPP conversion rates. In an appendix we present alternative results from four other comparative studies of construction costs in European countries. Most of the results are difficult to evaluate due to lack of documentation. However, in those cases where the methods are comparable, the results are not incompatible with the results in this report. Construction costs in Denmark and in other countries We compare construction costs in Denmark with those in seventeen other primarily European countries. The construction costs are the costs that the client has to pay to build a house, except the purchase of land, finance and value-added tax. The construction costs are nearly equivalent to the contractors invoice prices and fees for professional services. First, we calculate the price per square metre of a private single-family house in one and a half or two storeys in each of the countries included in the survey, using Danish kroner as a reference currency. The construction costs in Denmark are the second highest, with fifty per cent above the average price per square metre for the Netherlands, Sweden, Finland and Germany (in the following referred to as the NSFG countries). If we compensate for differences in purchasing power using the Purchasing Power Parity (PPP) conversion factor, Denmark ranks sixth, but still at a 20 per cent higher cost level than in the NSFG countries. However, comparability is highly problematic. According to our analyses a number of factors, primarily living standards, but also inflation and climate have a statistically significant influence on the price per square metre. If we correct for differences in living standards, Denmark takes sixth place, but it is still twenty-five per cent more costly than the NSFG countries. Other factors also have the effect of changing the price per square metre. For example, we estimate that the price per square metre in Denmark is about DKK300 higher (5 per cent) than they would have been, because our

average climate is colder than the climate in the countries used for comparison. But none other factor has enough impact to change the rank significantly. In all other circumstances, Denmark stays second, with a price per square metre thirty to fifty per cent above the NSFG countries after currency conversion. Also, we have developed a price index for a typically Danish single family house. The costs of its construction would amount to about DKK1.2 million. If converted into Danish kroner as a reference currency, Denmark remains the most expensive country in Europe and the second most expensive country of the seventeen countries included in the survey. Only Japan is more costly. If a PPP conversion factor allowing for differences in purchasing power is used instead, Denmark turns into the third most expensive country in Europe and the fourth most expensive of all countries. In this case the construction costs are larger only in Belgium and Japan. Relative to the NSFG countries, the construction costs in Denmark are 20-30 per cent higher. The calculation of a price index for identical houses seems to suggest that the construction costs in Denmark are somewhat higher than in most other countries commonly used for comparison. The same is true whether we make corrections for purchasing power or not. The price index is a comparative method that most extensive makes allowance for the problems otherwise existing in comparative cross-country price studies. The estimated costs comprise exactly the same types and volumes of work items. Thus, we eliminate a major part of the criticism against comparative price studies. However, some weaknesses remain that we need to point out. Even though the materials are identical, quality differences may exist in different countries. And the quality of the workmanship may be different. In an appendix we examine four previous analyses of construction costs in European countries. The four analyses were undertaken by the Danish Building Development Council (1989), the German Ministry of Housing and Construction (1993), the Nordic Council of Ministers (1991-93) and the European Committee of Construction Economists (1992). The figures in parenthesis indicate the year when the construction costs were surveyed. These analyses are often hard to compare for lack of documentation or for differences in methodology. The results from comparable analyses essentially support the conclusions in this report. The analyses rely on three methods for their comparisons of construction costs: (i) systematic surveying of work items; (ii) systematic expert opinions; and (iii) ad hoc expert opinions. The first method is used by this report (Section C.3 in the full report), by the German Ministry of Housing and Construction (partly) and by the European Committee of Construction Economists. The conclusions of these analyses are fairly compatible, even if the comparative basis is limited. The second method is used by the Nordic Council of Ministers and by Copenhagen Economics. The conclusions are to a certain extent still compatible, but the comparison also reveals that systematic expert opinions may vary a great deal if conducted by different groups of experts at different points in time. The third method is used by the

Danish Building Development Council and by the German Ministry of Housing and Construction (partly). It seems to be hard to compare such estimates with each other and with the results of other analyses. C. Clients construction costs in Denmark and in other countries The analysis in this report differs from previous analyses in two respects. First, we consider the clients construction costs and not the contractors costs. The clients construction costs are costs that are relevant for the ultimate buyer of the output of construction, i.e. houses, and typically correspond to the contractors costs plus the contractors company overheads, profit and fees for professional services. We still exclude the purchase of land, finance and value-added tax. Secondly, we compare construction costs across countries. We will thus try to answer the following question: Does a Danish client pay more or less for building a house than clients in foreign countries? It is not an easy task to compare costs between countries. Useful comparisons of prices presuppose a comparison of the same product or service. If a house costs DKK1,000,000 in Denmark and DKK800,000 in Portugal, it is not possible to simply conclude that is it more expensive to build a house in Denmark than in Portugal. This is only possible if the two houses are identical. But differences in climate, practices, soil conditions, wealth and regulation of the construction sector often make houses very different. First, we consider the ordinary prices per square metre, i.e. the price in the local currency in 1999, of building one square metre of a certain type of house such as a one-storey, single-family house. A comparison of prices per square metre between countries therefore allows you to get some idea whether the costs of building a single-family house vary from country to country or not. We shall see that such a comparison is highly problematic, because the singlefamily houses used for comparison may be functional identical, but in reality they are very different. We further calculate the corrected prices per square metre based on a method developed by Wigren (1998). Corrected prices per square metre prices are prices that have been corrected for factors determining the differences in functionally identical houses between countries. We calculate the corrected prices per square metre based on a statistical analysis of the correlation between prices per square metre and variables that in our opinion explain why functionally identical houses are in reality different. For example, countries with cold winters will tend to have higher construction costs as a consequence of more insulation and more powerful heating systems. A statistical analysis will enable us to calculate how much higher the construction costs are in Denmark because of its colder winters. This allows us to calculate corrected prices per square metre for all countries on the assumption that these countries all have the same temperature in winter. In principle, the impact from differences in temperature between countries is thus eliminated in calculating the price per square metre.

However, both ordinary and corrected prices per square metre share the common problem that the product we compare, a private single-family house of one and a half or two storeys, is not well defined. In every country there is in practice a wide differential for the price per square metre for this type of house, and we are not sure where to place the price per square metre for each individual country within this differential. The results are therefore subject to considerable uncertainty. Instead we develop our own methodology for comparison of the clients construction costs. We design a price index for identical houses. We estimate the costs by building the same Danish single-family house with exactly the same content of materials in several countries. This methodology has previously been used by construction economists affiliated to the CEEC, Comit Europen des Economists de la Construction, (the European Committee of Construction Economists). They have compared the construction costs of office buildings (for instance, CAT at Roskilde University), hospitals and schools in 1989 and 1996. The results derived from these analyses do not allow direct comparison with our analyses because their surveys are not immediately consistent enough for our purpose. This is how we do it: we select a typically Danish single-family house. An experienced construction economist is asked to survey the house and prepare a detailed list of the types of work and the work items involved in building the house. The next step is to obtain unit rates for work items from the countries we wish to compare, for calculation of the clients construction costs of exactly the same house with exactly the same content of materials in these countries. The established costs are eliminated of any differences in quality arising as a consequence of variance in materials and quantities of materials used in different countries. For example, the Portuguese client must build a house using 300mm of insulating material according to Danish standards. The methodology also makes allowance for differences between countries in terms of labour productivity and wages, because the clients costs are measured on the basis of work items that constitute a measure of output. In our opinion, therefore, the price index for identical houses is the most reliable method for comparison of construction costs across countries. No comparison of prices is perfect. We need to state that there are two weaknesses that the index design (still) does not eliminate. First, the Danish house uses materials commonly used for construction in Denmark and they are not necessarily the materials that would be used abroad. In that case the local markets for these materials are probably less developed than in Denmark. The market could be smaller, with no opportunity for economies of scale or less efficient competition. In both these cases we expect that the external prices for Danish materials will be higher than in a normally developed market. Thus, there will be a tendency to overestimate the costs abroad relative to Denmark. Differences in the choice of materials could, for instance, be due to differences in access to natural resources. In Scandinavia wood is an inexpensive and easily accessible construction material whereas

tiles provide an inexpensive and easily accessible construction material in plain-filled Central European countries. Secondly, we may have eliminated the external differences in quality. This means differences in quality due to the choice of materials. However, there may still exist internal differences in quality. This means differences in quality due to the same materials being of different qualities in the respective countries. If the quality of materials and in workmanship is higher in Denmark than in other countries, the Danish costs will tend to be overestimated compared with costs in foreign countries. 1. Prices per square metre in Denmark and in other countries Most countries publish surveys informing a client of the average price of building one square metre of a certain building type. For instance, a Danish client pays nearly DKK9,000 per square metre, exclusive of value-added tax, for a single-family house of a reasonable quality in Denmark. In some cases such prices per square metre are used in comparisons of construction costs between countries after conversion of local prices into a common currency. Figure 8 and Table 3 provide a survey of typical prices per square metre in the first quarter of 1999 for a private client wishing to build a one-and-a-half or two-storey single-family house in the capital of one of fourteen selected (primarily) European countries. In most cases the price per square metre was obtained from Spons European Construction Costs Handbook 2000 and stated for all countries in their local currencies by local construction economists according to identical guidelines. The price per square metre is converted into Danish kroner using the average exchange rate for the appropriate currency in the first quarter of 1999.

Figure 8: Prices per square metre for a single-family house in sixteen countries, 1999. Converted into Danish kroner by means of the average rate of exchange in the first quarter of 1999
D a n i sh k ro n e r p e r sq u a re m e tre 0 A u s tria S w itz e rla n d D e n m a rk S weden Ire la n d F ran c e It a ly G e rm a n y B e lg iu m US A N e t he rla n d s F in la nd U n it e d K in gd o m S p a in P o la n d P o rtu g a l 2000 4000 6000 8000 10000 12000

The Figure shows that a Danish client pays more to build a single-family house than clients in all other countries, except Austria and Switzerland where the price per square metre is nearly the same as in Denmark. On average, a Danish client must pay nearly fifty per cent more than a client from four countries very similar to us, the Netherlands, Sweden, Germany and Finland (in the following we will refer to these four countries as the NSGF countries). There are wide variations between countries. A single-family house of the same size is four times as costly in the most expensive country (Austria) than in the least expensive country (Portugal). The conversion of prices per square metre in different countries into Danish kroner using the rate of exchange is a problem as such. First of all, the exchange rate makes no allowance for the possibly higher real purchasing power of a currency than indicated by the exchange rate1. The Portuguese escudo, for instance, has a larger purchasing power, because many services are less expensive in Portugal than in other countries, even in the same currency. The difference arises because the exchange rate is very much determined by the physical trade between countries whereas services are seldom traded. Therefore, the exchange rate underestimates the real
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Besides, the exchange rates between some countries very often fluctuate so much so (and much more than prices ) that the time of comparison can determine whether one country is more or less costly than the other.

purchasing power in Portugal, and for this reason the Portuguese price per square metre of about DKK3,000 in reality underestimates the cost of building a house in Portugal. Instead it is possible to convert prices per square metre by means of PPP factors (PPP = Purchasing Power Parity). The PPP factors convert values in different currencies into a common currency, eliminating any differences in purchasing power at the same time. At the beginning of 1999, for instance, the price of PTE100 was about DKK27. As the PPP conversion factor between Portugal and Denmark is 185 at the same time, this means that the PTE100 in reality will buy goods and services in Portugal that would be worth 27 x 185/100, or DKK50, in Denmark. If the PPP conversion factor is applied to the Portuguese price per square metre, you thus get a higher PPP corrected price per square metre of about DKK5,500. Table 3: Prices per square metre in Danish kroner converted by means of exchange rates and PPP conversion factors, 1999 Exchange rate 11,902 8,603 8,600 8,416 7,602 7,002 6,336 5,665 5,520 5,235 4,854 4,691 4,183 4,050 3,030 2,960 PPP factor 14,282 9,655 9,511 8,617 8,600 8,258 8,122 7,606 7,224 7,010 6,515 6,165 6,075 5,476 5,348 5,103

Austria Switzerland Denmark Sweden Ireland France Italy Germany Belgium USA Netherlands Finland United Kingdom Spain Poland Portugal

Austria Ireland Sweden Italy Denmark Switzerland France Poland USA Belgium Germany Netherlands Spain Portugal Finland United Kingdom

Source: Spons European Construction Costs Handbook 2000, Mngda AB and own estimates

Figure 9 and Table 3 show the same survey of prices per square metre as in Figure 8. Only the prices per square metre are converted into Danish kroner by means of PPP factors. Denmark is still an expensive country, but considering the real purchasing power, housing construction is apparently more expensive in Ireland, Sweden and Italy than in Denmark. Denmark is now fifth among these countries. Moreover, the differential between the most expensive and least expensive countries has considerably narrowed. So a single-family house of the same size is now only three times as expensive in the most expensive country (Austria) as in the least expensive country (United Kingdom).

Figure 9: Price per square metre of a single-family house in sixteen countries 1999. Converted into Danish kroner by means of PPP conversion factors
D a n i sh k ro n e r p e r sq u a r e m e tre 0 A u s tria Ire la n d S weden It a ly D e n m a rk S w itz e rla n d F ra n c e P o la n d US A B e lg iu m G e rm a n y N e t h e rla n d s S p a in P o rtu g a l F in la n d U n it e d K in g d o m 2000 4000 6000 8000 10000 12000 14000 16000

It is important to keep in mind that the conversion of currencies by means of PPP conversion factors is not necessarily a more correct way than conversion by means of the exchange rates. The PPP conversion assumes, in fact, that the basket of goods you purchase, in this case one square metre of a singlefamily house, has the same composition of goods (traded across borders) and services (non-traded items) as the GDP. The reason is that the PPP conversion factor is calculated on the basis of composition of goods in the GDP. Therefore, you should consider calculations based on exchange rates and PPP factors as calculations that will complement, rather than replace each other. However, there is a reason why comparisons of prices per square metre between countries at best can be misleading and at worst can be downright erratic. This is true whether the conversion into a common currency is based on ordinary exchange rates or PPP conversion factors. The prices per square metre reproduced in Figures 8 and 9 and in Table 3 are for functionally identical houses, i.e. houses that fulfil the same function in the respective countries. In this case it is a private home of one and a half or two storeys for a single family. But functionally identical houses may show immense variety in design between countries. In one country winter temperatures may drop below zero, and all houses are carefully insulated and provided with a powerful heating system. In another country the power supply

installations are subject to specific safety regulations. And in a third country all single-family houses traditionally have at least two bathrooms. These differences imply that even if houses are functionally identical, the comparison in reality consider houses of a widely different content of materials and widely differences in quality. Figures 8 and 9 thus do not vouch for a conclusion that Danish construction costs are higher than in many other countries. The price per square metre may be high in Denmark, because Danish houses have a higher quality than in most other countries. The quality may be superior if the house is built from better materials and the house contains more functions and installations. In the next two sections we will apply methods that will allow for the possibility that functionally identical houses are not physically identical and are therefore only comparable with difficulty. First, applying statistical methodology, we correct the prices per square metre for some of the factors that may lead to higher construction costs, see Section 2. In the next step we develop a new price index for identical houses, cf. Section 3. 2. Corrected prices per square metre in Denmark and in other countries The purpose of this section is to correct the prices per square metre for the factors allowing functionally identical houses to contain different materials and thus leading to variations in costs. We expect that the corrected prices per square metre will present a more fair view of Danish construction costs relative to the construction costs in other countries. The climate is an example of a factor which have impact on the variety in the designs of functionally identical houses. For instance, we expect that the construction costs of houses in countries with cold winters will prove to be higher, due to the increase in insulation and the more powerful heating systems. We thus want to correct the price per square metre price for instance for the part of the construction costs that is owed to the cold winters in Denmark. The correction takes place by regression of the prices per square metre of several variables that are considered ex ante to be closely correlated with the causal factors of variety in functionally identical houses. For instance, we expect that the average minimum temperature in January will be indicative of a cold winter. For each of these variables we estimate a coefficient in the regression indicating the change, statistically, in the price per square metre price with changes in the variable. In a specific case, the average minimum temperature in January may be given the coefficient 1.2. This means that for each time the minimum temperature in January increases by 1C the construction costs will fall by 1.2 per cent. The result is (fortunately) as expected. With rising temperatures, the costs will fall. And now we are able to calculate a corrected price per square metre for each country in the hypothetical situation of the minimum temperature being the same in all countries. The resulting price per square metre is thus eliminated of differences in winter temperatures.

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Methodology This methodology was originally developed by and described in Wigren (1998). He carried out the analysis using data from a previous edition of Spons European Construction Costs Handbook. In principle, we carry out the same analysis, only we use the most recent data available. We go through the following regression: ln y = 0 + 1 ln x + 2 z +

where ln y is the logarithm to the uncorrected prices per square metre for each country and for four different house types2, x and z are explanatory variables included in a logarithmic or linear form, are coefficients and is a term of error. As explanatory variable we use as a basis the same variables that were used in Wigren (1998). The explanatory variables, except for a series of dummies, are specified in Table 43. The Table states the effect that we expect the variable in question to have on construction costs. In some cases we are unable to determine the total effect in advance, because there are opposite forces at work. We include sixteen countries in the regression: Denmark, Sweden, Finland, Belgium, the Netherlands, France, the United Kingdom, Ireland, Germany, Austria, Switzerland, Spain, Italy, Portugal, Japan and the United States.

We use prices per square metre for four different building types: a mass market one-storey detached house, a one and a half storey single-family house, an appartment building (with lifts) and an appartment building (no lifts). All prices per square metre are from Spons European Construction Costs Handbook 2000. 3 We refer to Byggeomkostningerne i Danmark Erhvervsfremme Styrelsen 2000, for the precise definition of each variable.

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Table 4 Explanatory variables in the correction regression and their expected effect on construction costs Variable Housing pattern Degree of urbanisation increases construction reduces construction costs, because costs, because a higher concentration of city dwellers increases the local demand for building projects a higher concentration of city dwellers increases the local demand for building projects a higher concentration makes it possible to achieve economies of scale a higher concentration makes it possible to achieve economies of scale

Capital city dwellers

Economic development Economic growth increased economic increased economic growth generates an growth may be due to increased demand technological development, which increases construction efficiency Inflation inflation increases the (current) prices of materials and labour Standard of living a higher standard of living increases the demand for quality of the home The construction market Construction level of increased building activity activity creates bottlenecks, which drives up costs Size of the construction a large market may be a large market may be market due to high prices as a due to a high level of result of inefficiency activity as a result of efficiency and economies of scale Climate Temperature high temperatures reduce the need for insulation and heating systems

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Regression results We then carry out the regression and obtain results as reproduced in Table 5. The regression has reasonable statistical properties and most variables are significant if we use a standard significance limit of ten per cent. If a variable is significant, it means that there is statistical evidence to suggest that the variable in question is different from zero. In turn, this means that there is a statistical correlation between the variable and the construction costs. Most variables have the expected signs, however except for the activity in the construction market, where increased activity in the market apparently reduces costs. These results are further discussed in Appendix 2. Table 5: Survey of estimation results Variable Expected coefficient Housing pattern Degree of urbanisation Capital city dwellers Economic development Economic growth Inflation Standard of living Construction market Construction activity Size market Climate Temperature Minus -0.02 (highly significant) Adjusted R2=0.71; F value=14.37 (0.00); number of observations=57 of construction Plus/minus 0.89 (significant) level of Plus -0.43 (significant) Plus/minus Plus Plus -0.83 (almost significant) 1.48 (highly significant) 0.92 (highly significant) Plus/minus Plus/minus -0.59 (not significant) -0.01 (significant) sign of Estimated coefficient

(10% significance limit)

Corrected prices per square metre We can now use the estimation results to consider which variables have the largest impact on Danish construction costs. A variable has a major impact on Danish construction costs if (i) the estimated coefficient is large and significant and if (ii) the value of the variable for Denmark is widely different from the average value for all countries. Based on this we now calculate for each significant variable the hypothetical price per square metre payable by a Danish client if the variable in question had a value corresponding to the average of the countries included in the survey, see Table 6. The table also

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shows how much the price per square metre would hypothetically fall or increase in each case. If corrected for individual variables, this mostly implies that the Danish price per square metre will fall. Table 6: Corrected price per square metre in Denmark if the value of a significant variable is set to equal the country average, 1999 Variable Market size Economic growth Capital city dwellers Climate Inflation Standard of living
Source: Own estimates

Corrected price per price per square metre 8789 8610 8592 8359 8356 6859

Difference to actual price per square metre 139 -40 -58 -291 -294 -1791

The standard of living is by far the most important variable. If Denmark had had a standard of living equivalent to the average of the sixteen countries in our survey, the clients costs would be nearly DKK1,800, or twenty per cent lower per square metre, which makes a total of about DKK6,900 per square metre. The result can be interpreted so that one of the reasons for Danish clients paying a high price per square metre is that they demand a higher quality as they have a higher standard of living than clients have in most other countries. A high rate of inflation signifies all other things being equal that it is a high price per square metre. This is hardly surprising. We measure the price per square metre in current prices, and inflation is exactly a measure of the increase in current prices. As Denmark in the period up to 1999 experienced a higher rate of inflation than the average of the sixteen countries, this means that the price per square metre in Denmark gets lower if inflation is reduced to the same level as in other countries. In such case the price per square metre will be about DKK300 lower. This corresponds to about five per cent. The Danish winter also means that Denmark has higher construction costs than most other countries. If they were just as warm as the average in the other countries, the price per square metre would fall by about DKK300 or five per cent. For a house of 150 square metres this would lead to savings of about DKK45,000 in 1999. The price per square metre is then corrected for differences in the standards of living. We calculate the hypothetical costs for each country if the standard of living was exactly the average for all countries, see Table 7. The correction implies that the price per square metre will increase for countries such as Portugal, Spain, the United Kingdom, Italy and Ireland. Conversely, the prices per square metre will drop for countries such as Japan, Denmark, Switzerland and Germany.

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Table 7: Price per square metre for a one-and-a-half to two storey singlefamily house, corrected for differences in the standard of living, 1999 Country Austria Ireland Italy Sweden France Denmark Spain Portugal United Kingdom Switzerland Belgium Germany USA Netherlands Finland Actual price 11902 7602 6336 8416 7002 8600 4050 2960 4183 8603 5520 5665 5235 4854 4691 Price correction -557 1043 2089 -191 202 -1791 2054 2822 1548 -2929 -105 -400 -312 -144 -185 Corrected price 11345 8645 8425 8225 7202 6809 6104 5782 5731 5674 5415 5265 4923 4710 4506

Source: Spons European Construction Costs Handbook 2000 and own estimates

Our calculations show that if we correct the prices per square metre for differences in the standards of living, the Danish construction costs would move from second in the top range to rank sixth in the upper half of the group of countries with average construction costs. The price per square metre price would still be higher than in the NSGF countries, but now it is only twenty per cent higher against, previously, fifty per cent. The result therefore suggests that part of the reason for the higher constructions in Denmark is due to the affluence of this society where a client demands a higher quality than in other countries. We can undertake similar calculations for each of the other variables. But none other variable has enough impact to change the ranks of countries according to price per square metre. For this reason we have left out the specific results in this context. All relevant tables can be verified in Appendix 2, sub-appendix 1. However, there is one problem in comparing prices per square metre that has not been solved by estimating corrected prices per square metre. The prices per square metre that we compare are for building a typical one-and-a-half to two-storey single-family house. The problem is that this typical single-family house is not very well defined. If you asked several architects or construction economists to estimate a price per square metre, you would be certain to receive different quotes. This means that there are in fact a price differential between typical prices per square metre of a single-family house, and we do not know where in this differential the prices per square metre were taken in the individual countries. In one country it may be a single-family house of medium quality with an average price per square metre. In another country it may be a house of high quality with a relatively high price per square metre. 15

This introduces an element of randomness in the comparison of both square metre prices and corrected prices per square metre. And, what is worse, we do not know the direction or the magnitude of the uncertainty. Therefore, in the next section, we will develop a new price index for identical houses, with a much better definition and taking the above mentioned problem much more into account. 3. Comparable price index for Denmark and other countries We intend to design a price index for housing construction that provides a more fair view of the construction costs in various countries. We design the index so as to measure the costs of building precisely the same Danish single-family house in the countries in question. In each country there will thus be precisely the same content of materials in the house we build and price. Thus, we avoid many of the problems (but not all) of comparing construction costs for functionally identical houses. The price index is developed in four steps. First, after consulting an architect, we select a typical Danish single-family house. Secondly, we arrange with an experienced construction economist to survey the house and to prepare a complete list of components. We focus on components constituting welldefined work items that are priced in national schedules of unit rates. Thirdly, we collect list prices of these items from the schedules of unit rates in the select countries for comparison. Fourthly, we submit the Danish single-family house to approximate estimating of costs for each country in their national currencies and convert these costs into a common currency for comparison between the countries. The index is designed so as to measure the clients costs. The index thus indicates the costs that the client has to pay to the contractor for building the house in question, except the purchase of land, finance and value-added tax. The index calculations are based on the type and volume of the work items for the house in question. Table 8 shows examples of some of the 63 work items involved in building the house. The price of a work item includes all necessary materials delivered to the site, the necessary labour for mounting and handing over the works after completion and the contractors company overheads and profit. The price of each work item is published in the national schedules of unit rates of labour and costs.

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Table 8: Examples of work items included in the Danish single-family house Description Hard core filling in making up levels, 150mm capillary breaking hard brick or crushed or broken stone Lathing with roof battens 38x56mm Facing bricks type BS red or yellow, gauged mortar flush pointed as work proceeds Single-glazed casement window, size 650x900mm in hardwood (Meranti) with 38x100mm frame and 75x125mm sill, with single-glazed window pane, U=1.5 Low pressure polypropylene, polythene or UPVC pipes for cold water supply. Fixed to lightweight concrete walls at 1,00m centres.15mm diameter, complete with fittings
Source: Spons European Construction Costs Handbook 2000

Unit m3 m m2 unit

The house We develop the index based on a typically Danish single-family house. After consulting with an architect, we chose a one-and-a-half storey single-family house of about 150m2 with a half basement and an outhouse supplied by a medium size Danish prefabricated housing contractor in the Copenhagen area. The design is shown in Figure 10, however, it should be borne in mind that the house actually surveyed is purpose designed and is therefore not truly identical with the depicted house. Figure 10: The typical Danish single-family house

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Accommodation includes a master bedroom and three childrens bedrooms. The position of one of the childrens bedroom makes it suitable as proxy for an office or a hobby room. The two childrens bedrooms are placed towards one end of the house, sharing a separate bathroom and a toilet. Two bays at either end of the front provide extensions of the crosswise kitchen/family room provided with a rich light entrance. A carport complete with outhouse is attached. Finally, the house contains a large bathroom and a cloakroom. Lightweight concrete panels veneered with brown facing bricks are used for construction. Lightweight concrete panels are also used for all internal walls. A w- truss is used at the top of the roof, which is covered by standard concrete roofing tiles. Insulation complies with Danish standards and requirements. The carport and outhouse are wooden structures with one-ontwo board cladding. Although normally delivered as part of the outfit of a Danish prefabricated housing unit, white goods and kitchen are excluded. The plan, elevation and section drawings are contained in Appendix 4A to the full report. The particular house was subsequently surveyed by an experienced construction economist, who prepared a detailed list of the type and number of work items. In a few cases we made adjustments to materials compared with the original plans to be certain to find comparable prices in as many countries as possible. A complete list of the work items and a description of the individual items are reproduced in Appendix 4B (to the full report). The prices We have collected prices of the individual work items in nineteen (primarily European) countries: Denmark, Sweden, Austria, Belgium, Finland, France, Germany, Ireland, Italy, Japan, the Netherlands, Poland, Portugal, Slovakia, Spain, Switzerland, Turkey, the United Kingdom and the United States. A complete survey of the prices of individual work items in the nineteen countries is reproduced in Appendix 4C to the full report. All prices, except the prices from Denmark and Sweden, were taken from Spons European Construction Costs Handbook 2000. This book is published by E & FN Spoon (see www.efnspon.com), a respectable British publisher specialising in national and international price data for the construction sector (see also www.pricebooks.co.uk). Professional investors use it for cost comparisons of international projects. Unit rates are collected in all countries according to a common methodology developed with the assistance of the CEEC, Comit Europen des Economistes de Construction, (the European Committee of Construction Economists). The CEEC holds experience in applying the same methodology in connection with country-to-country comparisons of the construction costs of schools, hospitals and office buildings4 .

See for example the CEEC, Economie de la Construction en Europe Comparaison des Mthodes dEstimation Cots, Ecole Polytechnique Fdrale de Lausanne 1998 and B. Drake (ed.), Construction Economics in the Single European Market, E&FN Spon 1995.

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The Danish and Swedish cost data were obtained applying the same methodology as in Spons handbook. Most Danish prices were supplied by V&S Byggedata, a Danish publisher of local prices (see www.vsbyggedata.dk). The Swedish prices were supplied by Mngda AB, a Swedish publisher of local prices (see www.mangda.se). The prices were collected as if the house was to be built in the capital city of each appropriate country in the spring of 1999. They reflect the contractors charge invoiced to the client for the particular work item and are based on the current schedule of unit rates, with the addition of the standard cost payable in each particular country to cover the contractors company overheads, profit and fees for the professional services of architects and engineers. The price thus includes all materials according to the particular country standard and labour wages (including taxes, health insurance and other indirect payroll costs) normally attached to the performance of the appropriate work item in the particular country. The prices collected are list price rates. This means that they do not include wage drift or specific company or cyclical discounts. In addition, there may be variations in the additional standard costs to the contractor for reasons of local practices or cyclical conditions. It was impossible to find comparable costs for all work items included in the house of our choice. It was possible to find comparable costs for about 63 different work items. However, these work items cover a significant part of total construction costs of this particular house. In our view the construction costs of the selected work items account for eighty-five per cent of the clients total costs in Denmark. Non-included work items were, first of all, kitchen outfit and bathroom and utility room equipment as well as installation of a heating system. There are gaps in data because the cost data of a particular work item in a country was sometimes missing. In these cases we put a price on such work items, by assuming that they represented the same proportion of total costs as in Denmark. In most of the cases by far the corrections affected less than ten per cent of the total construction costs, see Table 13 in Appendix 4C to the full report. The price index We are now able to determine a price index for an identical house by adding up the clients construction costs of the Danish single-family house in each of the countries in the survey. The price index indicates the approximate estimating costs (not the actual price), which a contractor will invoice to the client for the construction of the Danish single-family house, if it were to be built in the particular country. We convert the prices from national currencies into Danish kroner by means of the ordinary rate of exchange as well as a PPP conversion factor. But it should be pointed out that in this case the PPP conversion is not as relevant, because we compare products that are in principle identical for all the countries under review.

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Our calculations show that a client has to pay about DKK1.2 million towards construction costs for the single-family house in Denmark. Among the eighteen countries used for comparison Denmark is the most expensive country in Europe and the second most expensive country of all countries in the survey if we convert into a common currency at the ordinary rate of exchange, see Figure 11 and Table 10. Using PPP conversion factors instead, Denmark becomes the third most expensive country in Europe and the fourth most expensive of all countries in the survey, see Figure 12 and Table 10. Figure 11: Clients construction costs of the Danish single-family house in 18 countries in Danish currency converted at the ordinary exchange rates, 1999
Danish kroner per square metre
0 200.000 400.000 600.000 800.000 1.000.000 1.200.000 1.400.000

Japan Denmark Belgium Austria Germany Netherlands France Ireland Switzerland USA Sweden United Kingdom Italy Finland Spain Poland Portugal Turkey

The PPP factor conversion does not upset ranks anyway significantly, because Denmark, Belgium and Japan show much higher costs than all other countries by ordinary conversion. However, the conversion carries some importance if we compare the Danish clients construction costs with the level of the NSGF countries. In the first instance the clients costs are 44 per cent higher in Denmark than in the NSGF countries. In the second instance the clients construction costs are 23 per cent higher.

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The calculation of a price index for identical houses suggests that construction costs are somewhat higher in Denmark as compared with most other countries normally used for comparison. This is true whether or not we correct for purchasing power. The price index is a method of comparison that extensively allow for problems that may otherwise exist in price comparisons between countries. The approximate estimating costs comprise exactly the same types and quantities of materials. This removes most of the criticism against comparisons of prices. Figure 12: Clients construction costs of the Danish single-family house in 18 countries in Danish kroner using PPP conversion factors, 1999
D anish kroner per square metre
0 200.000 400.000 600.000 800.000 1.000.000 1.200.000 1.400.000 1.600.000

Japan B elgium P oland D enmark Netherlands USA A ustria Ireland Germany France Italy United K ingdom S weden S pain P ortugal Finland S witzerland Turkey

The result of the analysis is relatively robust to any systematic errors in computing Danish construction costs. No price comparison is perfect, however. There are two weaknesses that have proved impossible to overcome in developing this index and that require specific mentioning. First of all, construction of the Danish house employs materials normally used in Denmark and these materials may not be the appropriate choice abroad. In this event, the local market for these materials will probably not be as well developed as in Denmark. The market may be smaller, with no opportunity for economies of scale or competition may be less efficient. In both respects the prices of Danish materials in foreign countries will be higher than in an

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ordinarily developed market. Thus, there will be a tendency to overestimating foreign costs compared with the costs in Denmark. Table 9: Clients construction costs of a Danish single-family house in 18 countries converted into Danish kroner by means of exchange rates and PPP factors, 1999 Country Japan Denmark Belgium Austria Germany Netherlands France Ireland Switzerland USA Sweden United Kingdom Italy Finland Spain Poland Portugal Turkey Exchange rate 1.331.890 1.145.531 1.076.406 903.444 877.781 874.939 868.720 838.763 808.749 796.837 740.826 722.321 697.066 689.745 554.706 456.927 437.763 224.265 Country Japan Belgium Poland Denmark Netherlands USA Austria Ireland Germany France Italy United Kingdom Sweden Spain Portugal Finland Switzerland Turkey PPP factor 1.371.846 1.367.036 1.146.886 1.145.531 1.111.173 1.099.635 1.084.133 1.065.229 1.009.448 1.007.715 948.010 881.232 837.134 832.058 809.861 786.309 776.399 479.928

Source: Spons European Construction Costs Handbook 2000 and own estimates

Secondly, we may have eliminated the external differences in quality. These are differences in quality due to a different choice of materials. However, there may still exist internal differences in quality. These are differences in quality due to fact that the same materials are of different qualities in different countries. If the qualities of materials and workmanship are higher in Denmark than in other countries, the Danish costs will tend to be overestimated compared with those in other countries.

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Appendix 1: Four analyses of construction costs in European countries Copenhagen Economics have reviewed four previous studies of construction costs in a number of European countries and compared their results with those presented in this report. We reproduce the review results in this appendix. The four analyses were undertaken by the Danish Building Development Council (1989), the German Ministry of Housing and Construction (1993), the Nordic Council of Ministers (1991-93) and the European Committee of Construction Economists (1992). The figures in parenthesis indicate the year when the construction costs were surveyed. These analyses are often difficult to compare for lack of documentation or for differences in methodology. The results from comparable analyses essentially support the conclusion in this report. The analyses rely on three methods for their comparisons of construction costs: i) systematic surveying of work items; ii) systematic expert opinions; and iii) ad hoc expert opinions. The first method is used by this report, by the German Ministry of Housing and Construction (partly) and by the European Committee of Construction Economists. The conclusions of these analyses are fairly compatible, even if the comparative basis is limited. The second method is used by the Nordic Council of Ministers. The conclusions are to a certain extent still compatible, but the comparison also reveals that systematic expert opinions may vary a great deal if made by different groups of experts at different points in time. The third method is used by the Danish Building Development Council and by the German Ministry of Housing and Construction (partly). It seems to be hard to compare such estimates with each other and with the results of other analyses. In the following we present each analysis individually. Analysis 1: The Danish Building Development Council, 1998 The Danish Building Development Council prepared a note on productivity in construction in 1998. It contains a comparative study of the construction costs in Denmark, the United Kingdom and Germany. The method applied was an ad hoc expert opinion. The construction costs were measured as prices per square metre in an unspecified building in 1989, with a breakdown of prices into seven main components. The note fails to specify the exact country area for collection of data or whether prices include value-added tax or not. No information is offered as to how the figures were generated, for example by expert opinion or by specific surveying of the individual work items. The construction costs were converted into a common currency (Danish kroner) by means of both ordinary and purchasing power corrected exchange rates. The analysis shows that Danish construction costs per square metre in 1989 was about thirty per cent higher than the corresponding German costs and five per cent higher than the corresponding costs in the United Kingdom by ordinary exchange rate conversion. Instead, if purchasing power corrected exchange rates are used, the Danish construction costs would be twelve per cent higher than the German ones, but twenty-two per cent lower than the UK costs.

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The note concludes that an in-depth study of the prices of the individual building services shows, however, that the cost level is largely the same in the individual countries in comparable areas . The note does not disclose the logic of arriving at this conclusion based on the above figures. All analyses in this report confirm that the Danish construction costs for single-family houses are higher than those in Germany whether converted by ordinary or purchasing power corrected exchange rates, see Tables 3, 7 and 9. The same analyses also conclude that Danish construction costs are higher than in the UK whether converted by ordinary or purchasing power corrected exchange rates. However, it should be pointed out that it is difficult to compare the results of these two reports. The data are ten years apart, and it is far from certain that the prices are for comparable constructions or in other ways are comparable. Analysis 2: Kommission zur Kostensenkung und Verringerung von vorschriften im Wohnungsbau, Germany, 1994 The German Ministry of Housing and Construction (at the federal level) set up a commission in the early 1990s to study the possibilities of lowering the German construction costs. In 1994, the commission issued a report that also compared construction costs in Germany with similar costs in Denmark, Norway and the Netherlands. Germany-Netherlands The commission carried out a detailed survey of construction costs by erecting the same Dutch house in both the Netherlands and in Germany (Meurer, 1994). The method applied is a (i) systematic surveying of work items and in principle similar to the method applied in this report, section C.3 in the full report. The Dutch house was a two-storey terrace house with an floorage of about 125 square metres built as the central house of a group of sixty houses in the autumn of 1993 in the Netherlands and in the spring of 1994 in NordrheinWestphalen in Germany. The prices originated from a detailed surveying of forty work items and comprised the costs of materials and labour, the contractors company overheads and profit including value-added tax. The house in the Netherlands was built according to Dutch customs and standards, and the house in Germany was built according to Dutch customs and German standards. The prices of the individual work items were obtained from Dutch suppliers, price-lists and from a regular tender from a Dutch contractor to build the houses in question in Germany. The total costs were converted into a common currency using normal exchange rates. The computations showed that the Dutch construction costs were about DKK3,2505 per square metre exclusive of 18.5 per cent Dutch value-added tax whereas the German construction costs were about DKK4,040 per square
5

All prices are converted from Deutschemark into Danish kroner at the ordinary average exchange rate for the year 1993.

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metre exclusive of 15 per cent German value-added tax. The German construction costs were thus about twenty-four per cent higher than the Dutch costs. The German house was considered to have a higher quality in particular areas, which could explain about three percentage points of the difference and also the higher German standards necessitated additional costs of five to ten percentage points. The report subsequently argued that the Dutch construction methods might be forty to fifty per cent more efficient than the German method and considered that the same house built according to German methods would have showed considerable higher costs in the interval from DKK5,600 to DKK6,800 exclusive of value-added tax. The report does not explain how to arrive at these figures. For comparative purposes, all the analyses of this report, except one, confirm that the German construction costs are higher than or similar to the Dutch construction costs. Germany-Denmark-Norway The comparison of the construction costs in Germany, Denmark and Norway relies on expert opinion, and computations were not nearly as thorough as with the Netherlands (Aring and Tornow, 1994). The applied method was an (iii) ad hoc expert opinion. The commission stated that a typical price per square metre of single-family houses in Denmark was about DKK5,900 in 1993, whereas in Norway it varied between DKK3,900 and DKK6,700 and in Germany between DKK7,100 and DKK11,4006. The prices per square metre were pure construction costs and did not include costs in connection with the acquisition of land. It does not specify which construction costs were otherwise included in the individual prices. Neither does it specify whether the prices were inclusive or exclusive of value-added tax. The report quotes several examples to illustrate the difficulty in comparing construction costs across countries. For example, the square area stated against the price per square metre can be different. Sweden uses an overall gross measure where the area includes both internal and external walls. Denmark and Norway use a gross measure in which the area includes the internal walls but not the external walls. Germany uses a net measure where neither the external nor the internal walls are included. However, the report does not specify whether the authors have attempted to correct for these differences or not. Our analyses in the present report are unable to confirm that the Danish construction costs are lower than in Germany. All results suggest that the Danish construction costs exceed the German ones. However, it should be emphasised that it may be difficult to assess to which extent the results of the two analyses are comparable.
6

The Norwegian differential is mainly due to variations in quality, whereas the German differential is mainly due to regional variations. No reason is given for not indicating a Danish differential.

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Analysis 3: The Nordic Council of Ministers, Construction costs in the Nordic Countries and Western Europe, 1997 The Nordic ministers for housing and construction in the Nordic Council of Ministers have ordered an analysis of the construction costs in the Nordic countries compared with other countries (Engebeck and Wigren, 1997). In the analysis the method applied is a (ii) systematic expert opinion and is largely identical with the method of analysis applied in this report, see Section C.2 in the full report. However, the data are from a previous period since the construction costs were collected in 1991. The construction costs are the (gross) price which a client must pay in the particular country to build one square metre of a multi-family house in the normal standard of the particular country (i.e. functionally identical houses), excluding the purchase of land and finance. The prices are estimated by local experts in national currencies and are collected from twenty primarily European countries. The prices are converted into a common currency using the ordinary exchange rates in force in 1991. The report also computes costs in a common currency, using the 1993 exchange rates. The aim is to study the sensitivity to fluctuations in the exchange rate. The data source is Spons European Construction Costs Handbook (1992). The prices per square metre have then been corrected for the factors contributing to functionally identical houses containing different materials and thus showing different costs. It is the same methodology as described in Appendix 3 to the full report, but in this case the correction is based on a somewhat different group of explanatory variables and on a slightly larger group of countries. The results of the two analyses do not allow immediate comparison, but a simple conversion is able to constitute a comparable basis. Table 1 contains a comparable survey of prices per square metre and corrected prices per square metre from the two analyses complete with ranking of the countries. A comparison of the actual ranking of the countries shows some coincidence in country position. Denmark is in the top range in both analyses, and countries with double-digit rank appear largely the same in the two analyses. However, there are some marked exceptions. Finland was clearly the most expensive country in 1991, but plummeted to twelfth place in 1999. Austria is clearly the most expensive country in 1999, and takes first place in 1999. Austria was by far the most expensive country in 1999 compared with being only fifth in 1991. Part of the explanation for these significant differences, especially in the case of Finland, may however be attributable to considerable fluctuations in the exchange rates taking place in the early 1990s. Instead, by converting the prices into a common exchange rate at the 1993 average, the Finnish construction costs are up to twenty-five per cent lower7.

There can be at least four explanations for these deviations. First, the countries could be in different phases of the trade cycle when the surveys
7

Alternatively, PPP conversion factors could be used as they are more stable vis--vis fluctuations in exchange rates.

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were made. In 1991 the Finnish economy had not yet collapsed after the debacle in Eastern Europe. Secondly, the expert opinions could be based on different conditions in the two years. There is thus no precise definition as to how the prices per square metre should be made up, and the expert opinions may be subject to some degree of randomness. Thirdly, the 1991 figures are for a multi-family house with several flats, whereas the 1999 figures are for a single-family house. There is no rejecting that there could be differences in ranks due to the building type. Fourthly, the data on which the results are based are almost a decade apart. Table 10: Actual and corrected prices per square metre for a number of countries and their ranking, 1991 and 1999 Danish kroner Actual 1999 11902 7602 6336 8416 7002 8600 4050 2960 4183 8603 5530 5665 5235 4691 4854 1991 6963 4731 5923 6561 4382 9651 3827 3546 5164 7950 5756 7039 3417 9917 6644 Corrected 1999 1991 11345 5770 8645 8425 8225 7202 6809 6104 5782 5731 5674 5415 5265 4923 4506 4710 5892 5462 4920 3893 7107 4756 7749 4980 4832 5018 5298 2852 7240 4876 Ranking Actual 1999 1991 1 5 5 7 4 6 3 14 15 13 2 9 8 10 12 11 11 8 7 12 2 13 14 10 3 9 4 15 1 6 Corrected 1999 1991 1 5 2 3 4 5 6 7 8 9 10 11 12 13 15 14 4 6 10 14 3 13 1 9 12 8 7 15 2 11

Austria Ireland Italy Sweden France Denmark Spain Portugal U.K. Switzerland Belgium Germany USA Finland Netherlands Norway

Analysis 4: The European Committee of Construction Economists (CEEC), 1992 The European Committee of Construction Economists (CEEC) has also conducted comparative analyses of construction costs in Europe (the European Committee of Construction Economists, 1992). The applied method is a (i) systematic surveying of work items and somewhat similar to the method applied in Section C.3 in the full report, but the computations are for another building type and are not carried out at the same detailed level. The fictitious buildings for costing included a school and an office building constructed in 1992. Either building was split into 66 major work items and eight consulting services. The school is a basic state school for 500 pupils for construction in a major provincial town in the appropriate country. It is a two-storey building with a

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basement and a gross floorage of 3,440 square metres. The project was prepared by the French delegation to the CEEC. The school was priced in four countries: Germany, Denmark, Spain and the United Kingdom8 . The price per square metre in Danish kroner was converted by means of the ordinary rate of exchange exclusive of value-added tax, producing an estimated DKK8,350 in Germany, DKK7,500 in Denmark, DKK4,300 in the United Kingdom and DKK2,870 in Spain. Corrected by purchasing power these German, UK and Spanish prices would increase compared with the Danish prices, but not so much so that the United Kingdom and Spain would have larger purchasing power corrected costs than Denmark. The Danish construction costs are comparatively high, but the comparison only includes very few countries. The office building is a private six-storey building for rental, with a total floorage of nearly 10,000 square metres and an underground parking space of 800 square metres. The office building was aimed for construction in the capital city of the appropriate country in 1992. This project was also prepared by the French delegation to the CEEC. The building was priced in five countries: Germany, Denmark, Spain, Ireland and the Netherlands9 . The price per square metre in Danish kroner was converted by means of an ordinary rate of exchange exclusive of value-added tax, producing an estimated DKK7,800 in Denmark, DKK6,050 in Germany, DKK5,100 in both Ireland and the Netherlands and DKK2,300 in Spain. Corrected by purchasing power, all other prices would increase compared with the Danish prices, but not to so much so that other countries would have larger purchasing power corrected costs than Denmark. The Danish construction costs are high, but the comparison only includes very few countries.

In principle, prices also exist from Finland, but they are considered of poor quality. The UK construction costs are adjusted upwards by twenty per cent to compensate for the lack of prices of consulting services. 9 In principle, prices also exist from Finland, but they are considered of poor quality. The Irish construction costs are adjusted upwards by twenty per cent to compensate for the lack of prices of consulting services.

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