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FEATURE ARTICLE: PRODUCER PRICE INDEX FOR ANZSIC 3109 OTHER HEAVY AND CIVIL ENGINEERING CONSTRUCTION
In developing the model projects, the following points were taken into account:
Where possible, a cost component was split into cost inputs (e.g. labour, materials, plant, etc.) plus relevant margin. Such a split is necessary for the calculation of price escalation of a cost component when price for the component is not directly available.
Representative projects are restricted to new construction or upgrade work. Activity related to repair and maintenance is also in scope of Class 3109 (and included in PPI index structures). However, due to their overall small weights, no projects are selected for this type of activity.
In principle, construction projects should be priced by region as the cost structure for a similar type of project varies from region to region. This means that selection of representative projects should be region specific and where possible a representative project should be selected from a region where the type of construction activity is considered as the most significant. In developing the model projects, the location of the project was chosen by the consultant based on recent construction activity.
Although the model projects developed are region specific, indexes for the models are compiled at the national level as prices are sourced from ABS's existing indexes (mostly PPIs) which are available mostly at the national level. Nonetheless, the model structure developed for the chosen region can be used in the future for compiling region specific indexes. The model can be used as the base model which can be adapted to a different region by adjusting for regional differences in the cost structure.
The consultant also provided a basket of items that are representative for key cost components of the models and these basket items will be used in the future for pricing some of the cost components from the market.
Construction Category Weights
The ABS's Quarterly Engineering Construction Survey (ECS) captures values of work done in engineering construction (Engineering Construction Activity, Australia, cat. no. 8762.0). The survey is the main data source for estimating weighting patterns for construction categories.
As the ECS is not an industry based survey, it includes secondary production by units outside 3109. In estimating the category weights, some adjustment was made to exclude work done by units classified outside ANZSIC 2006 Subdivision 31 and 32.
The category weights were calculated as a 2-year moving average and are updated with a 2-year frequency. This was based on the consideration that due to construction related to the mining boom, over the past few years it is unlikely that the ECS data for any one particular year represents normal activity and is representative for future activity. Also, due to the large and variable nature of the projects, there is likely to be considerable change in the relative share of work done in the construction categories over short periods of time as current projects wind up and new projects commence.
For these reasons it is desirable to use as recent data as possible and update frequently. Thus the annual weights were derived using 2-year average and can be updated biennially. In this approach, the weights take into account activity for each year.
COMPILATION OF THE 3109 INDEX
The price index for a model project is calculated by quarterly price update using the ABS's existing price indexes.
Specifically, a project model can be price updated from the cost component level or the inputs to cost components, depending on availability of suitable price indexes. Where possible, a work-in-place component is price updated using a relevant output price index. If such an index is not available, the component is price updated from its inputs using relevant input price indexes.
Due to the limited coverage of available input price indexes, it is not feasible in practice to use input price indexes for price updating the input costs. Therefore, a variety of price indexes (e.g. output PPIs, Wage Price Indexes, etc) are used as input indexes. For example, output price indexes for manufacturing were used for a material part of a cost component.
As in most cases PPIs at the regional level are not available, price update is done at the national level. This means an index calculated for a model project represents a national average.
A prime contractor's margin is price updated using movements in the project cost, incorporating movements in percentage mark-up. The latter is imputed from the Quarterly Business Indicator Survey (QBIS) gross operating profit data.
The Class 3109 Index
Category level indexes are compiled at the national level using the model projects and aggregated using the ECS weights to the national 3109 index.
USE OF THE INDEX
The primary purpose of ABS PPIs is to support the compilation of the National Accounts, i.e. they are used for deflation in compiling chain volume measures. The new index is mainly used for compiling chain volume measures of outputs from engineering construction activity and estimate of real capital formation.
In the application of a construction price index, it should be noted that the index by design prices entire projects at a point in time. As construction work, especially engineering construction projects, usually takes months or years to complete, it is usually the case where the value of part of work completed, not the whole project, is measured in the National Accounts.
The Other Heavy and Civil Engineering Construction index is incorporated in the Stage of Production (SOP) framework which provides economy-wide price measures. For the SOP concept and method, see ABS Information Paper: Producer and International Trade Price Indexes; Concepts, Sources and Methods, 2014 (cat. no. 6429.0).
Additional information relating to Producer Price Indexes is available from the ABS website or by emailing the Producer Price Index Director on email@example.com.
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