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

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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

What is construction?

• Includes a wide variety of activities: o Construction of dwellings (houses, apartments, etc) o Construction of non-residential buildings o Civil engineering works (roads, bridges, dams etc) o Repair, maintenance and renovations
• In the UK, it accounts for around 6% of GDP
• Key short-term indicator feeding into GDP calculations, alongside Index of Production and Index of Services

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

History of the UK Construction Price

indices

Construction Statistics in the UK

• ONS in charge of Construction statistics (output/volume) since 2010
• The Department for Business, Energy and Industrial Strategy (BEIS) has historically been responsible for producing Construction price indices - Adjustment of constructions contracts - Indexation for insurance purposes - Use for deflation of components of national accounts (construction output and gross fixed capital formation)

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

• Example?

Output Price Indices (OPIs)

• Required as deflator in National Accounts
• Construction output in each quarter rarely related to contracts awarded/receipted in that quarter
• Use set of weights to combine previous quarters’ TPIs by sector
• Sector OPIs combined to create higher level aggregates
• Breakdowns published for new work, Repair and Maintenance and all work

Sector OPI

Sector OPIs derived as an harmonic mean of TPIs NO(n)=value of new orders at time n TPI(n)=TPI at time n W(n)= weigths

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

Comparison of CPCI – all work

• Include some comparison of the 3 indices?

Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 OPI TPI RCIS

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