Inflation indices and lump sum fees

[Robert Holden]

Inflation and Fees

Having worked through the 1970s (when inflation rose to 27% per annum in 1976) I offer these thoughts and would welcome comments please. 

It is a time of inflation (forecast by many including the Bank of England to rise to 10% p.a. by the end of the year) and anyone putting fee bids should be aware of what is happening. go to the Office of National Statistics (ONS) for the national picture, for CPIH, CPI,  and RPI, The figures are published monthly so in mid April the March 2022 figures were published as follows:

• CPIH Consumer Price Index including owner occupier’s housing costs: 6.2% per annum
• CPI Consumer Price Index: 7.0% per annum
• RPI Retail Price Index: 9.0% per annum

Each of these indices is a basket of prices of consumer goods. Clearly of these indices currently the RPI is the most favourable, but because  RPI does not meet international statistical standards, since 2013 the Office for National Statistics no longer classifies it as a "national statistic", and instead emphasizes the Consumer Price Index. 

However, the LI Landscape Consultant’s Conditions of Appointment (2018) refers to the Average Earnings Index for both time fees (clause 4.4) and lump sum fees (clause 4.7) and states they shall be revised at 12 month intervals. It does not give  source for the Average Earnings Index, however, one assumes this may refer to the Office of National Statistics  figures for Average Weekly Earnings. This is published with a two month delay so in early May 2022 the latest figure was that for February 2022 with an inflation figure of 5.2% for the whole economy. Better than nothing but not as high as the CPI or RPI figures. Close to construction is the information in the RICS Building and Construction Information Service (BCIS) at a hefty subscription rate, larger practices may subscribe or one might be able to obtain figures from a QS. 

The other thing one can do is not to sign for long term fees agreements, i.e. just sign up for each stage of work using the LI 2018 Scope of Services, however, this has its downside in that your commissions will each be for a shorter term, and so such as option offers less long term security. Arguably it is better to sign up for longer term in term of financial security, but to inflation index any fixed fees.

Sources:

Office of National Statistics ref. https://www.ons.gov.uk/economy/inflationandpriceindices

Office of National Statistics Average Weekly Earnings: ref. https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/earningsandworkinghours

RICS Building and Construction Information Service: https://www.rics.org/uk/products/data-products/bcis-construction/bcis-online/

Inflation forecasts: 

Bank of England https://www.bankofengland.co.uk/knowledgebank/will-inflation-in-the-uk-keep-rising  (5 May 2022)  

Office for Budget Responsibility  https://obr.uk/forecasts-in-depth/the-economy-forecast/inflation/ (March 2022 figures)

Edited May 10, 2022 by Robert Holden

[Penny Bennett]

Hi Robert,  I have been looking at this issue for a modest project, and I note that you suggest not signing up for long term agreements, as a possible option.  With landscape maintenance contracts and work related to setting up and running those, a five year span is a common minimum and certainly for that type of work I suppose we have to try and sort out which is the best way of accommodating  the  price increases, I have told my client I am going to use the consumer prices index to review my fees on an annual basis.

Penny Bennett

[Graham Pockett]

I think that's all you can do realistically.  I don't think many clients would accept a regular fee review on a shorter period than a year.

[Robert Holden]

Dear Graham and Penny,  

ONS annual inflation figures of 17 August  for the year upto July 2022 were CPI of 10.1% and RPI of 12.3% ref. https://www.ons.gov.uk/economy/inflationandpriceindices The Bank of England Monetary Policy Report of 3 August advises  "CPI inflation is expected to rise more than forecast in the May Report, from 9.4% in June to just over 13% in 2022 Q4, and to remain at very elevated levels throughout much of 2023, before falling to the 2% target two years ahead." ref. https://www.bankofengland.co.uk/-/media/boe/files/monetary-policy-report/2022/august/monetary-policy-report-august-2022.pdf

Graham: If your profit margin is 10% then you will be operating at a loss in one year’s time, given the present level of inflation. Maybe this is an argument for 20% profit ab initio? See my related piece on profit in landscape architecture consultancy work ref. https://connect.landscapeinstitute.org/index.php?/topic/261-profit-in-landscape-architecture/&tab=comments#comment-566