Estimating infrastructure costs

Estimating the cost of infrastructure is a key part of contributions planning. For section 7.11 plans the cost estimate informs the contribution rate and allows councils to calculate the amount of non-contribution funding needed to deliver the infrastructure.

This module provides guidance on how to estimate infrastructure costs for section 7.11 plans. This guidance can also be applicable for section 7.12 plans, though the nature of that mechanism means the level of detail in estimating costs is less critical.

Legislative requirements

There are no legislative or regulatory requirements for councils to estimate infrastructure costs in a particular way.

Policy positions

Councils can include benchmark costs, individual cost estimates or actual costs in their plans

Contributions plans must be based on the reasonable cost of providing the infrastructure needed by the incoming population. Accurately determining infrastructure costs helps demonstrate the reasonableness of the plan and can also reduce the risk of under collecting funds in a plan. However, it can be difficult to accurately estimate all the costs in a plan. Final designs are unlikely to be available when the plan is first developed, and design and cost considerations may change over the life of the plan.

The costs included in contributions plans can be:

estimates for infrastructure to be provided at a future date based on site specific concept plans
actual costs for infrastructure that has already been provided and is being recouped
benchmark costs and simple cost estimates based on recently completed infrastructure of the same type, with similar contexts, for infrastructure that is not yet fully scoped

A combination of benchmarks, estimates and actual costs can be included in each plan, depending on the progress of each infrastructure item in the schedule. Councils should clearly state in their plans how the cost for each infrastructure item was determined.

Individual cost estimates are the most accurate way to determine costs

Individual cost estimates are the most accurate way to determine costs for infrastructure that is yet to be provided. They provide an accurate representation of the cost to deliver the specific piece of infrastructure as identified in the contributions plan. Cost estimates and the plans on which they are based should accompany the contributions plan as supporting documentation.

Individual cost estimates should be based on concept plans and should be reflective of site-specific conditions. They should be prepared by appropriately qualified professionals, such as a quantity surveyor or valuer. Councils should consider having the costs prepared by an external source to ensure independence.

Although individual cost estimates are the most accurate, they should not be considered completely reliable, especially early in the life of a contributions plan. Infrastructure is unlikely to have reached the final design phase early on, so individual cost estimates on earlier designs may be less accurate. In these cases, councils should undertake concept planning and make a reasonable estimate of the cost.

Benchmark costs and simple estimates can be appropriate in some situations

Councils can also use benchmarked costs simple cost estimates based on recently completed infrastructure of the same type. These provide a transparent approach to determining contribution plan costs and can simplify the plan making process. However, benchmarks are generally a less accurate method for estimating infrastructure costs. Councils might consider using them when:

the infrastructure item is not yet fully scoped or designed, and the detailed work is likely to happen at a later point in the delivery timeframe, such as infrastructure that is prioritised towards the end of the works schedule.
the expense in getting a full cost estimate outweighs the benefits, such as when the cost of the item is small or the cost is generally easy to estimate and likely to be close to the benchmark, meaning the risk of final cost differences does not warrant the resourcing required to get a specific cost estimate.

Costs should be reviewed regularly and updated once actual costs are known

Councils should regularly review the cost estimates in their contributions plans to help mitigate the risks of under collecting. Inaccurate costs are one of the highest risk factors when collecting contributions, which can lead to funding shortfalls for councils and potential impacts on infrastructure delivery. Councils should review the costs in their plans as part of regular plan reviews.

Once a piece of infrastructure has been provided and contributions are being collected to finish paying for it, the cost has been established. Councils should update their plans to include the actual cost of construction in the next plan review and index this cost in accordance with the plan.

Councils can use either nominal cost or net present value

There are two basic techniques for including future costs of facilities within a works program, nominal costs and net present value. Generally nominal costs are simpler and easier to interpret, while net present value can be more accurate.

Nominal costs: This approach uses the total cost of infrastructure delivery in today’s money, to determine the total required contributions amount. The model estimates the value of infrastructure items in today’s dollars even though they may be constructed in 2, 5 or 10 years.

The contribution rates per person calculated by dividing the total apportioned infrastructure cost by the future population. This approach does not account for when the infrastructure item will be built or the projected growth profile.

It requires careful use of indexation, such as construction cost or land value indexes, to account for escalating infrastructure delivery costs. A contributions plan based on nominal values requires regular review to ensure it reflects the actual cost of infrastructure delivery.

Net present value: The net present value approach discounts future cash flows to account for the fact that funds received or expended today are worth more than future funds, owing to the effect of inflation. Compared to the traditional nominal approach, the net present value model needs more information to ensure that costs and revenues can be calculated correctly. The net present value model requires:

a works schedule which details when each piece of infrastructure will be delivered
the growth profile (either population or other demand units) by year
several indexes to escalate and discount both costs and revenues.

If accurate indexes are used, the net present value method will better align the contributions revenue and real cost over time and has the potential to reduce contributions revenue shortfalls.

Councils should update their net present value model when their contributions plans are reviewed. On review, actual delivery timing and costs can be used to update the model. The model should also be adjusted to ensure that accurate apportionment is maintained. For example, where infrastructure costs have escalated faster than originally modelled and anticipated, future developments should continue to only contribute their portion of the escalated costs and not the entire escalated costs.

IPART provides more detailed guidance on using a net present value model in their Technical Paper - Modelling local infrastructure contributions. This includes advice on escalation rates that are appropriate for different type of infrastructure.

Comparison of nominal costs and net present value

Considerations	Nominal costs	Net present value
Infrastructure items	The cost of all infrastructure is added up to get the total value of the work schedule and hence the total required revenue. This total value is used to calculate the contribution rates. The contribution rate is then indexed.	The cost of every infrastructure item is separately escalated and then discounted to account for delivery time and its effect on the present value. It is necessary to know when each infrastructure item will be delivered by year which can be detailed in the capital works plan.
Indexation	Minimum of one index needed: indexation of current contributions rates going forward	Minimum of three different indexes are used: escalation rate to estimate future infrastructure costs (this may be different for different infrastructure items) discount rate to discount future cashflows (revenue or cost) to present value indexation of current contributions rates going forward Choice of escalation rate is based on historical data and may not reflect the future market.
Works schedule detail	Does not consider when infrastructure items will be delivered.	Works schedule must detail when each piece of infrastructure will be delivered.
Population estimates	Only requires an estimate of the total population that creates the demand for the infrastructure.	Requires a year-by-year breakdown of the predicted population to understand the profile of population growth over time (for example, how much of the total population growth is predicted to occur in each year).
Revenue risks	Revenue shortfalls are common without regular review.	Potential to reduce future contributions revenue shortfalls.
Complexity	Easier to apply and understand. Requires fewer inputs and less detail needed in early stages of the contribution plan.	More complex model. May be challenging to understand if all the inputs are not defined clearly. Encourages councils to consider infrastructure delivery prioritisation and phasing, as well as population growth.

Land costs are often a large proportion of the costs in a contributions plan

In addition to estimating the cost of infrastructure construction, councils must estimate the cost of land for the infrastructure. Land acquisition costs are often one of the largest components of a contributions plan in areas where land values are high. 

Councils should engage an accredited, independent valuer to determine the value of the land needed for infrastructure. The valuation methodology should be clearly documented in the valuation advice including any assumptions and justifications.

Land costs may also be informed by any recent council land transactions including, by agreement, compulsory acquisition, or dedication.

Examples

Worked example of infrastructure costs using nominal cost or net present value

Council has proposed that a road is to be built in 7 years (Year 7). In year 1 when the plan is prepared, the cost of the road is valued at $1 million. This example assumes a discount rate of 2.5% per year, a projected Sydney CPI of 2.5% per year and a projected road construction cost escalation of 7% per year.

Download worked example of infrastructure costing using nominal cost or net present value

Practice notes home page

Updates