Last edited 12 Feb 2019

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.'