A warehouse cost $210,000 to build when the cost index stood at 105. The index is now 210. Its indicated current cost is:
Correct Answer
A) $420,000, doubling with the index
Why this is correct: The index method formula is: Current Cost = Historic Cost × (Current Index / Historic Index). Calculation: $210,000 × (210 / 105) = $210,000 × 2 = $420,000. The index doubled, so the cost estimate doubles. Why the other choices are wrong: "$220,500, adding five percent" is incorrect; it misapplies a percentage increase instead of using the index ratio. "$105,000, halving with inflation" is incorrect; it reverses the direction of change. "$441,000, compounding the index twice" is incorrect; it erroneously applies the index change twice. Exam tip: For index trending, use the ratio (Current Index / Historic Index) as a multiplier.
Why This Is the Correct Answer
The index doubled from 105 to 210, so the trended cost doubles from $210,000 to $420,000. The ratio form of the calculation is what makes it work, since the absolute index values are meaningless on their own and only their relationship matters. Verifying the direction helps: the index rose, so the cost must rise. The result is an indication of reproduction cost that should be cross-checked against a current cost service estimate where the assignment warrants it.
Why the Other Options Are Wrong
Option B: $220,500, adding five percent
$220,500 adds five percent, apparently reading the index values as though the movement from 105 to 210 represented a small percentage change or confusing the index level 105 with a five percent increase. The actual movement is a doubling. Index numbers are relative markers, not percentages, and comparing them requires a ratio.
Option C: $105,000, halving with inflation
$105,000 halves the cost, applying the ratio upside down as 105 divided by 210. Beyond the arithmetic, the direction fails a common sense check, since construction costs do not fall as an index rises. Confirming the direction before computing catches this instantly.
Option D: $441,000, compounding the index twice
$441,000 applies the doubling and then adds another five percent, or equivalently squares part of the adjustment. Nothing in the method compounds the index twice; it is a single ratio applied once. The figure exists to catch candidates who apply an extra step out of caution.
Now Over Then
Write the ratio as current index over historic index, always in that order, and multiply the old cost by it. If the index went up, the cost goes up. Flipping the fraction is the only way to get the direction wrong.
How to use: Set up the fraction before computing and sanity-check its direction against whether costs rose or fell. Then multiply once, never twice.
Exam Tip
Index trending is the least reliable cost method and its reliability decays with time. If a question asks which method is most defensible for a current estimate, trending is rarely the answer.
Common Mistakes to Avoid
- -Inverting the index ratio and moving the cost the wrong direction
- -Treating index levels as percentages rather than relative markers
- -Relying on trending alone for a cost incurred many years ago
Concept Deep Dive
Analysis
Cost index trending updates a known historical construction cost to current dollars using a published index of construction costs over time. The method is a ratio: current cost equals historical cost multiplied by the current index divided by the index at the time of construction. Here the index moved from 105 to 210, a ratio of exactly 2.0, so the $210,000 historical cost trends to $420,000. Index trending is one of several cost estimation methods, alongside the comparative unit method that applies a cost per square foot, the unit-in-place method that prices assemblies, and the quantity survey method that details every material and labor item. Trending is the least precise of them and carries real limitations: a published index reflects average national or regional cost movement rather than the subject's specific market, it says nothing about design changes or code requirements adopted since construction, and it becomes progressively less reliable the further back the historical cost lies. It also produces reproduction cost of the original design, not replacement cost of a modern equivalent.
Background Knowledge
You need the four cost estimation methods, comparative unit, unit in place, quantity survey, and index trending, and their relative reliability. You should also know the difference between reproduction and replacement cost, and understand that a published index reflects average cost movement rather than a specific market's experience.
Real-World Application
An appraiser holding a contractor's records for a warehouse built years earlier trends the historical cost with a published index to get a rough current figure, then develops an independent estimate from a cost service, finds the two within a few percent, and reports the cost service figure as her primary indication with the trended number as support.
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