UK Construction Price Indices: Importance, History, and Production, Study notes of Construction

Download UK Construction Price Indices: Importance, History, and Production and more Study notes Construction in PDF only on Docsity! The UK’s Construction Price Indices Experience and Perspectives. Martina Portanti Office for National Statistics, UK Business Prices Production team Outline • Background • History of the UK Construction Price indices • The new UK Construction Output Price Index: • Methods • Implementation • Future developments • Lessons learnt Why are construction price indices important? • Price indices fundamental to assess real change output • Use for deflation of components of national accounts (construction output and gross fixed capital formation) • Adjustment of constructions contracts • Indexation for insurance purposes Measuring construction prices is tricky! • Diverse sector and we need to measure prices at constant quality – for construction is virtually impossible, as very rare to have same projects • International and intranational comparisons hard because of different construction standards and requirements • Data sources may be limited • Require lot of technical knowledge 4 Office for aS National Statistics History of the UK Construction Price indices Bills of quantities & schedules of prices • Traditional construction procurement route for UK public sector projects • Project designed and detailed bills of quantities (BoQ) prepared. These are detailed list of all the materials, labour etc required for the building projects • Tenders invited based on BoQ. Bidders provide a schedule of prices PPP Bills of quantity - example Box 11.3: An example of a major component and its elementary components Dei Total Unit Price Price Item specification Unit Quantity (national (rotonel currency) currency) Masonry 3.1 Ground floor double-skin external wall: >» 20cm sand-lime brickwork + 11 cm facing brickwork, inclusive of m? 257 17 4369 pointing and acid cleaning > Plastering mm? 257 8 2056 3.2 Upper floors double skin external wall: >» 11 emsand lime brickwork + 10 em facing brickwork, inclusive of m2 413 18 7434 pointing and acid cleaning > Plastering m? 413 8 3304 3.3 Gable ends, 11 cm facing bricks, ; m2 625 18 11250 inclusive of pointing and acid cleaning 3.4 Fair-finish 7 cm plaster block work m? 585 7 4095 Total 32508 Tender Price Indices (TPIs) • Based on Tender prices receipted in a quarter • Tenderers provide a schedule of prices based on detailed Bills of Quantities produced by commissioning body • The schedule of prices are re-priced at base prices. This allows to construct a Paasche price index (quantities at time t) • Main use in estimating, cost-checking and fee negotiation on construction projects • Basis for the Output Price Indices (OPI) Price Adjustment Formulae Indices (PAFI) • Series of 42 input price indices including specific materials, labour and plant indices • Use of PPI, SPPI and Average weekly earnings • The indices represent the underlying movement in factory gate prices and nationally agreed wage awards. They are not intended to represent the effect that national or local market pressures have on prices from subcontractors, merchants and so forth • Main use for contract indexation Resource Cost Indices (RCI) • Weighted averages of PAFI indices • Separate indices available for housing; non-housing; infrastructure; and repair and maintenance (housing and non- housing) • Breakdowns by materials; labour; plant; electrical work; mechanical work and building work also available • Main use for contract indexation Issues • CPCI been subject of a number of reviews over the last 10 years • Langdon report in 2010 quote research by Yu and Ive: • Limited information on Mechanical and Electrical service items, often lumped together in BoQ • Use of base rates makes it difficult to capture new elements and proprietary items • BoQ procurement route diminishing in importance • Limited coverage of private sector housing and commercial New methodology and 2014 consultation • Consultation in 2014 on new methodology o Proposal to move to a basket-type approach to produce an input price index o Use the new input indicator as a basis for an output indicator • Publication of indices on new methodology due in December 2014 but issues with quality o Construction output lost National Statistics status due to deflators • Transfer of responsibility to ONS in March 2015 Methodology development • Interim solution while longer term methodology developed • Use of already existing ONS data sources • Interim methodology very close to final methodology • Interim methodology used for 2015-2017 • Since Q3 2017, final methodology applied 4 Office for aS National Statistics The new UK Construction Output Price Index New work - projects • Projects chosen from Purchasing Power Parities standard construction projects as representative of UK industry Type of work Bill of quantity Housing Detached house and apartment Infrastructure Roads and bridges Public Other New office building Private Industrial Factory building Private Commercial New office building New work - Materials • PPPs bills of quantities define the materials and weights to use to create the materials input costs • Low-level producer Price Indices linked to PPPs BoQ • PPIs for single materials are weighted together using PPPs BoQ • Weights not updated on a regular basis • Produce a materials index for each type of project Repair and maintenance - materials • Not covered specifically in PPPs manual, no BoQ available, no model projects available to price • Materials selected using information from the Annual Purchases survey • Collects data on business’ expenditure on energy, services, goods and materials • Materials breakdown required • Purchases returns linked to construction monthly survey to identify sector (housing vs non-housing) Index and weights structure Stage 1Stage 2Stage 3Stage 4 All Construction New Work Housing House Apartment Infrastructure Road Bridge Private Industrial Factory Private Commercial Office Public Other Office Repair and Maintenance Housing Repair and Maintenance Non-Housing Repair and Maintenance Stage 0 Materials Labour Plant Materials Labour Plant Stage 1 weights • Need to combine materials, labour and plant indices • Data used to weight the individual labour, materials and plant components for a construction business comes from the Annual Business Survey (ABS) using 2015 data. • Labour, material and plant ratios calculated for each business in each sector • Median ratios used Stage 1 weights • Housing weights used for both detached house and apartment block • Infrastructure weight used for both road and bridge indices • Other work weights used to price the factory and office project models Stage 4 weights • Used to produced an overall Construction OPI • Not directly used by National Accounts • Weights obtained by ONS’s Output in the Construction Industry release Mark-up for profit margin/1 • Mark up represents difference between price charged by company and its marginal cost • Based on gross profit as focus on direct costs of goods and not indirect fixed costs • Data from 715 firms obtained from FAME dataset from Bureau Van Dijk Mark up for profit margin/2 • Annual mark up figures from FAME database • Cubic spline applied to derive quarterly series • Linear interpolation applied to obtain monthly series Production systems • Interim and final solution developed via a set of spreadsheets • These use PPI, SPPI, AWE and CPI data • They cover almost the whole OPI production, including: AWE forecasting SPPI monthly interpolation Index weighting Re-referencing Markup monthly interpolation Mark-up application • They exclude: SPPI forecast for latest quarter (in CSDB) Annual mark-up calculation and quarterly interpolation Weights calculations Production system developments • Between December 2017 and March 2018, spreadsheets for NA deliveries redeveloped in Python system • Local system that will require migration to new Data Access Platform • Cut down production process to a few minutes • System currently being expanded to cover OPI publication requirements Future development • Construction OPI methodology considered now “final” • Working alongside construction output team to re-gain “National Statistics” status after de- designation in 2014 • Some work around refinements in the mark up calculation and data source • Lot on development though on data sources, particularly PPI and SPPI Put users and experts at centre of development • Absolutely key to involve users and technical experts • Understand requirements and use of the indices • Technical knowledge absolutely critical to develop an index o Range of construction activities o Construction techniques o Types of organisations involved in construction activities (e.g. public vs private) o Administrative arrangements for government authorisation of construction projects (e.g. BOQ required?) What ONS did… • Decision to focus on deflator use of the index Development work carried out very closely with the Construction output team– new methodology completely aligned with NA requirements • Wider engagement outside ONS to get input into the project o Construction Statistics Steering Group o Other government departments o Industry experts o Academics o Consultative Committee for Construction Industry Statistics o Eurostat Communicate change clearly and timely • Substantial methodological change • Wider users need to be informed • Widespread use in contract indexation – users do not like to see change! What ONS did… • New methodology completely reliant on existing and long established ONS data sources • Complemented by a small number of privately owned datasets • No increase in any compliance cost! …but treat existing sources with caution • Different definitions • Data originally collected for different purposes and methods optimised accordingly Sample designs are optimised for the primary use of the data sources Timeliness dictated by primary requirements A couple of real examples/1… • AWE data changed methodology to better capture small businesses. This had a large impact on the construction earning index used for new work Contacts Business Prices Production - ppi@ons.gov.uk Martina Portanti – Martina.Portanti@ons.gov.uk Joshua Lloyd – Joshua.Lloyd@ons.gov.uk Construction Statistics – construction.statistics@ons.gov.uk John Allcoat– john.allcoat@ons.gov.uk Ceri Lewis – ceri.lewis@ons.gov.uk Thank you Obrigada Gracias Grazie References • Construction OPI publication https://www.ons.gov.uk/businessindustryandtrade/constructionindustry/bulletins/constructionoutputpriceindicesopis/apriltoj une2018 • Construction OPI QMI https://www.ons.gov.uk/businessindustryandtrade/constructionindustry/methodologies/constructionoutputpriceindicesopisq mi • Construction development: Impact of improvements to construction statistics: September 2017 https://www.ons.gov.uk/businessindustryandtrade/constructionindustry/articles/constructiondevelopment/impactofimprove mentstoconstructionstatistics • Eurostat-OECD Methodological Manual on Purchasing Power Parities https://www.oecd.org/sdd/prices-ppp/12-3012041ec014.pdf • Construction OPI – BEIS new methodology https://www.gov.uk/government/publications/construction-price-and-cost-indices-new-methodology • Construction OPI – interim methodology https://www.ons.gov.uk/businessindustryandtrade/constructionindustry/articles/interimsolutionforconstructionoutputpriceindi ces/2015-06-12 • Uk Standard industrial classification https://www.gov.uk/government/publications/standard-industrial-classification-of-economic-activities-sic • EUROSTAT classfication of economic activity NACE https://ec.europa.eu/eurostat/documents/3859598/5902521/KS-RA-07-015-EN.PDF • Output in the construction industry – monthly publication https://www.ons.gov.uk/businessindustryandtrade/constructionindustry/bulletins/constructionoutputingreatbritain/august201 8 • Construction new orders https://www.ons.gov.uk/businessindustryandtrade/constructionindustry/datasets/newordersintheconstructionindustry • Construction statistics, annual edition https://www.ons.gov.uk/businessindustryandtrade/constructionindustry/articles/constructionstatistics/number192018edition Construction Breakdown Public Housing Private Housing Infrastructure Other Work •Local authority housing schemes •Married quarters for services and police •Old people’s homes •Orphanages •Provision of roads and services within housing sites •Privately owned buildings for residential use oHouses oFlats oBungalows oCottages oVicarages • Provision of services to new developments •Water •Sewerage •Electricity •Gas •Communications •Air Transport •Railways •Harbours •Roads Industrial •Factories •Warehouses •Oil •Steelworks •Coal Public Other / Private Commercial •Schools and colleges •Universities •Health •Offices •Entertainment •Garages •Shops •Agriculture •Everything else! Monthly mark-up figure Figure 2: Monthly mark-up figures, construction industry Great Britain, January 2012 to June 2017 Figure 2: Monthly mark-up figures, construction industry Great Britain, January 2012 to June 2017 Feb 2012 Oct 2012 June 2013 Feb 2014 Oct 2014 June 2015 Feb 2016 Oct 2016 June 2017