The term 'base year' refers to the year that is the starting point for a series of years in an economic or financial index. It can be used for comparing business activities, economic growth, measuring inflation and so on across a number of years.
It is usual for the base year to be set to an arbitrary level of 100. For example, if the base year is set as 2014:
- 2014: 100
- 2015: 102.5
- 2016: 107
This simple index series shows a growth rate in the first year of 2.5%, and of 7% between the first year and the third year.
The base year is a key element of financial analysis used to calculate how much a particular measure changes from one time period to the next. The equation for calculating the growth rate is:
(Current year - Base year) / Base year
Using the figures above:
(107 - 100) / 100 = 7%
This might be used for example to measure company performance over a period of time. Contractors can also use a base year to demonstrate percentage change in work won over a set period.
For a more precise index, a 'base month' can be set instead.
Within construction contracts, the 'base date' is a reference date from which changes in conditions can be assessed. It sets the reference date from which the conditions under which the tender was prepared are considered to have been known by the contractor and so are properly reflected in their price. If specified conditions change before the contract is implemented, then the contract may be adjusted to reflect this.
For more information see: Base date.
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