Road construction cost trends: the role of inflation in Ethiopian federal road projects

Abstract

Due to its significant contribution to GDP and other sectors, the construction industry plays an important role in economic growth. The construction of roads as part of this industry plays a major role in fulfilling the demand for transport infrastructure. The influence of inflation on economic growth cannot be overlooked. The cost of construction is influenced by global social, economic, and political circumstances. Therefore, the trend of construction costs is one issue that must be examined - whether it is regular or not. The aim of this study is to investigate the construction cost trends in the case of federal roads of Ethiopia. The study uses federal road project contract data obtained from Ethiopian Roads Administration (ERA) together with other supplementary sources. The outcome of the study showed that road construction costs in the country are increasing rapidly. The inflation rate is a leading factor in the increasing road construction cost trend. It was observed that high inflation in the overall economy causes excessive cost inflation in the road construction sector, which is a “key factor” for road construction cost trend escalation. The average annual inflation for cement, fuel, bitumen, and steel was 15.6, 13.5, 12.6, and 6.2% respectively. To depict this mathematically, a framework has been proposed that highlights the strong relationship between the inflation rate and costs to the construction industry. The proposed framework supports improved budget forecasting and enables clients to anticipate inflation-related cost changes, allowing more effective budget allocation and contract price adjustment mechanisms.