Discount rate in the construction industry
[edit] What is the discount rate?
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.'
[edit] Other definitions
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.'
Life Cycle Costing (BG 67/2016), written by David Churcher and Peter Tse and published by BSRIA in March 2016, defines the discount rate as: ‘The percentage by which costs or benefits occurring one year in the future are deemed to be less valuable than costs or benefits today. In life cycle costing, the discount rate is the difference between the cost of capital and the inflation rate. For public sector projects, the discount rate is 3.5% per annum. Discount rates can be expressed using different time periods (such as months) provided the study period is expressed in a consistent manner.’
ICMS: Global Consistency in Presenting Construction Life Cycle Costs and Carbon Emissions, 3rd edition, November 2021, published by the ICMS (International Cost Management Standard) Coalition, defines discount rate as a: ‘Factor or rate reflecting the time value of money that is used to convert cash flows occurring at different times (ISO 15686-5).’
[edit] Related articles on Designing Buildings
Featured articles and news
Buildings that changed the future of architecture. Book review.
The Sustainability Pathfinder© Handbook
Built environment agency launches free Pathfinder© tool to help businesses progress sustainability strategies.
Government outcome to the late payment consultation, ECA reacts.
IHBC 2025 Gus Astley Student Award winners
Work on the role of hewing in UK historic conservation a win for Jack Parker of Oxford Brookes University.
Future Homes Building Standards and plug-in solar
Parts F and L amendments, the availability of solar panels and industry responses.
How later living housing can help solve the housing crisis
Unlocking homes, unlocking lives.
Preparing safety case reports for HRBs under the BSA
A new practical guide to preparing structural inputs for safety cases and safety case reports published by IStructE.
Male construction workers and prostate cancer
CIOB and Prostate Cancer UK encourage awareness of prostate cancer risks, and what to do about it.
The changed R&D tax landscape for Architects
Specialist gives a recap on tax changes for Research and Development, via the ACA newsletter.
Structured product data as a competitive advantage
NBS explain why accessible product data that works across digital systems is key.
Welsh retrofit workforce assessment
Welsh Government report confirms Wales faces major electrical skills shortage, warns ECA.
A now architectural practice looks back at its concept project for a sustainable oceanic settlement 25 years on.
Copyright and Artificial Intelligence
Government report and back track on copyright opt out for AI training but no clear preferred alternative as yet.
Embedding AI tools into architectural education
Beyond the render: LMU share how student led research is shaping the future of visualisation workflows.
Why document control still fails UK construction projects
A Chartered Quantity Surveyor explains what needs to change and how.
Inspiration for a new 2026 wave of Irish construction professionals.
New planning reforms and Warm Homes Bill
Take centre stage at UK Construction Week London.
Comments
[edit] To make a comment about this article, or to suggest changes, click 'Add a comment' above. Separate your comments from any existing comments by inserting a horizontal line.