Last edited 08 Jan 2021

Discount rate in the construction industry

The New Rules of Measurement (NRM) are published by the Royal Institute of Chartered Surveyors (RICS). They provide a standard set of measurement rules for estimating, cost planning, procurement and whole-life costing for construction projects.

NRM3: Order of cost estimating and cost planning for building maintenance works, defines a ‘discount rate’ as:

The percentage rate required to calculate the present value of a future cash flow (i.e. used for bringing future costs to a comparable time base).

For example, if investing at 3 per cent interest, then the present value is discounted by 3 per cent as it is worth less than future earnings due to interest.

The discount rate is a factor or rate reflecting the time value of money that is used to convert cash flows occurring at different times to a common time base.

Where the present value is:

'...the cost or benefit in the future discounted back to some base date, usually the present day, at a given compound interest rate'.

NRM3 defines the ‘treasury discount rate’ as:

'…the rate specified as the discount rate by the UK Government Treasury to be used as the discount rate for public sector whole life costing calculations.'

NB Guide to developing the project business case, Better business cases: for better outcomes, published by HM Treasury in 2018, defines the discount rate as: ‘The annual percentage rate at which the present value of a £, or other unit of account, is reduced over time. This is applied to values that are at constant prices and has nothing to do with currency inflation.'

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