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Inflation indices and lump sum fees


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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 by Robert Holden
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