1. Three components
On Statistics Estonia methodology, direct costs fall into three main groups. They are labour, materials and machinery.
| Component | What drives its movement |
|---|---|
| Labour | wage levels |
| Construction machinery | equipment and fuel prices |
| Materials | raw materials and supply chain factors |
These three do not move together, and that is precisely what makes the index a useful tool. The sub-indices show where the pressure comes from.
| Quarter | Main driver |
|---|---|
| 2026 Q1 | wage growth |
| 2026 Q2 | rising material prices |
The same index, two different causes, two consecutive quarters. The example explains why the headline figure is not enough.
2. Why distinguishing them is useful
Three practical consequences. A rise in labour affects labour intensive solutions most, for instance structures built on site.
A rise in materials affects material intensive solutions most.
A project already ordered from a factory is partly protected against material movement, whereas a project built on site is not. The extent of protection follows from the contract terms.
This ties the index directly to the choice of technology. For the client it means the same general price rise does not affect every project equally, and that looking at the component is more useful than looking at the headline figure.
3. What is left out of direct costs
Four cost layers the index does not cover. They lie outside direct costs.
| Cost layer | Why it is left out |
|---|---|
| The contractor's overheads | management, office, general organisation |
| Profit | part of every quotation |
| Costs off site | design, permits, connections |
| VAT and the plot | not construction costs |
The movement of these layers can differ from that of direct costs. Competitive conditions affect the profit margin independently of input costs, so the level of quotations may move faster or slower than the index.
4. Why that gap matters
One sentence sums up the whole article: the index measures what it costs to build, not what is charged for building. A quotation additionally carries a margin.
The gap between the two is the contractor's margin and overheads, and that gap is not constant. The margin moves with market conditions.
In strong demand the level of quotations can rise faster than direct costs. In weak demand it can rise more slowly or fall, even while direct costs rise.
Applying the index mechanically to a quotation assumes the margin is unchanged, which is not true. That assumption rarely holds.
5. How to explain it to a client
Three sentences are usually enough. The index shows the change in inputs, not the change in quotations.
Inputs are around three quarters of a quotation, the rest is overheads and profit. A change in the index therefore does not pass through in full.
The index is therefore a good indicator of direction and a poor predictor of amount.
These three explain why a 3 % rise in the index does not mean a 3 % dearer quotation, without anyone having to go into the methodology. The pass-through is partial and delayed.
In summary, and four practical rules
Direct costs are split between labour, construction machinery and materials, and these three do not move together: in the first quarter of 2026 the index was driven by wage growth, in the second by material prices. Four cost layers are left out, including overheads and profit, which are around a quarter of a quotation and move independently of inputs.
Four rules: always say which cost layer the index measures. Look at the components, not only the headline figure. Do not apply the index mechanically to a quotation, because the margin is not constant. Tie the movement of the components to the choice of technology, which gives the client usable information.
This article serves professional orientation at the date of checking. It is not a quotation.