intended time frame of execution. Such a recast is not a construction cost growth over the original estimate, but merely an adjustment for anticipated inflation.
Construction cost-estimates are normally adjusted for the effects of inflation, by applying the estimated inflation rate at the mid-point of construction. Construction estimating manuals, such as Means 51, contain graphs or numerical data for estimators to adjust project costs accordingly.
Means Estimating Manual cautions that comparisons of one project to another must be made in the same dollar base 51. Comparisons of project A to project B must be made in the same dollar base. For example, suppose project A occurred in 1990 at a cost of $19901 million, and project B occurred in 1991 at the cost of $19911.05 million. If the rate of inflation from 1990 to 1991 was 5% then project A and project B both cost $1 million in 1990 dollars. The effect of deflated dollars on project B is not a construction cost growth over project A.
Inflation is neither good nor bad for society as a whole, but classes of currency users do feel its effects. Capital owners suffer loss of wealth, while borrowers enjoy a corresponding gain in wealth. Individuals on fixed incomes suffer a reduction in buying power, while tax authorities enjoy a rise in tax revenues as a result of rising prices on the goods taxed.
Inflation gets its name by the price increase of goods and services, but the real mechanism is the decrease in value of the monetary unit, which is reflected as an increase in price of goods and services. The classical cause of inflation is a significant increase in the supply of money without any corresponding increase in demand. Since money obeys the law of supply and demand, the effect of the increase in supply is to decrease the value of the monetary unit, other factors held constant.
Inflation can be controlled by limiting the infusion of new money into the economy consistent with the rise in demand, and removing currency from circulation when demand falls. Governments which increase the money supply to create wealth will find that inflation will automatically follow to negate their attempts.
Central banks, including the US Federal Reserve Bank, attempt to control inflation by increasing the rate at which they loan money to their member banks. This is only partly successful in the US because the US dollar is the de facto international currency, and US dollar reserves held by other countries can significantly affect supply and demand.