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INTERNATIONAL

COMPARISON OF COST FOR THE CONSTRUCTION

SECTOR

AN IMPLEMENTATION FRAMEWORK FOR THE BASKET OF CONSTRUCTION

COMPONENTS APPROACH

Report Submitted to:

The African Development Bank

&

The World Bank Group

June 2004

I N T E R N A T I O N A L C O M P A R I S O N P R O G R A M

......... Prepared by:Kenneth Walsh, Ph.D., P.E. & Anil

Sawhney, Ph.D.

.........

Opinions expressed in this report are those of the authors and not necessarily of the World Bank or the African Development

Bank Group.

INTERNATIONAL COMPARISON OF COST FOR THE CONSTRUCTION SECTOR

Table of ContentsIntroduction and Background.......................................................................................................................1

Construction Sector Background.............................................................................................................2

NEED ASSESSMENT....................................................................................................................................3

SYNOPSIS OF AUTHORS’ PAST WORK.................................................................................................5

GOAL AND OBJECTIVES OF THIS RESEARCH..................................................................................6

SCOPE OF WORK........................................................................................................................................7

REVIEW OF CONSTRUCTION SECTOR LITERATURE....................................................................8

The EuroStat Construction Price Survey: History, Current Methodology and New Ways for the Future” by Stapel S., (2002)....................................................................................................................................................8“Construction Industry Purchasing Power Parities Obtaining Comparable Price.” by Dubner, M., and McKenzie, R. (2002).............................................................................................................................................9“Comparison of the Aggregate ‘Construction’ in CIS Countries and Mongolia” by Kuznetsov, V (2002)........9Heston, Alan (1999) "ESCAP Comparisons of Real Gross Domestic Product and Purchasing Power Parities, 1993" United Nations, Bangkok, 1999...............................................................................................................10Ward, M. (2003), “Pricing Construction Projects Using Prototype Models,” paper presented to the 1st Regional Meeting on the International Comparison Program in Western Asia, 24-27 June 2003, Beirut, Lebanon, available at www.escwa.org.lb/icp/activities/regional/24-27june/papers.htm (last accessed 8 July 2004)...................................................................................................................................................................10

METHODOLOGIES FOR CONSTRUCTION SECTOR PRICE COMPARISON.............................11

Discussion of the Three Approaches.....................................................................................................12

APPLICATION OF THE BOCC METHOD............................................................................................18

Conceptual Basis...................................................................................................................................18

DESIGN OF THE BOCC-BASED IMPLEMENTATION FRAMEWORK..........................................23

Selection of Components........................................................................................................................23Conversion of Components Descriptions into SPD Format..................................................................25Pricing Strategy for Construction Components....................................................................................25Design of expenditure weights for BOCC Approach.............................................................................25Other Issues Raised...............................................................................................................................25

DEVELOPMENT OF TEST SPD FOR BOCC........................................................................................25

Brief summary of field work..................................................................................................................25Presentation and Discussion of Components and Their SPDs..............................................................25Preliminary Testing...............................................................................................................................25

ADVANTAGES OF BOCC.........................................................................................................................25

SUMMARY AND CONCLUSIONS...........................................................................................................25

RECOMMENDED PROCEDURE FOR IMPLEMENTATION............................................................25

ACKNOWLEDGMENTS............................................................................................................................25

REFERENCES.............................................................................................................................................25

APPENDIX A................................................................................................................................................25

Cement Plaster (SPD/PS for the Residential, Non-Residential, and Civil Works Sub-Sector).....................................................................................................................................................25


LIST OF FIGURES

Figure 1: Construction Sector Influence Diagram2

Figure 2: Different Methods of Mixing Concrete (from left: Yaoundé,, Tunis, Nairobi)..........................................................................16

Figure 3: Different Modes of Vertical Transportation (Left Tunis and Right Accra)..........................................................................16

Figure 4: 3-Dimensional Model of a North American Home 19

Figure 5: Spread Footing (CW from top left: Yaoundé, Tunis, Accra, Phoenix, and Kigali)................................................................20

Figure 6: Reinforced Concrete Columns (CW from top left: Johannesburg, Yaoundé, Accra, Tunis).....................................................21

Figure 7: Electrical Service Point (Accra, Tunis and Yaoundé) 21

Figure 8: Cement Plaster (Tunis and Yaoundé).22

Figure 9: Elevated Slab (Johannesburg and Yaoundé) 22

Figure 10: Proposed BOCC Framework............22

Figure 11: Project, System, and Component Hierarchy 25

Figure 12: Hierarchical Breakdown for Structural System 25

Figure 13: Cost Breakdown of a Construction Component 25

Figure 14: Component Comparison Assessments25

Figure 15: Component Identification by Process of Elimination based on Assessment of Comparison...................................................25

Figure 16: Description of Product Cluster Concept 25

Figure 17: Square Column and Round Column.25

Figure 18: Geographic Distribution of Visits on the African Continent (shaded countries were visited)......................................25

Figure 19: Relationship between Field Visits and Project25


LIST OF TABLES

Table 1: Key Differences in Construction Comparison Methods 17

Table 2: Schematic Project Cost Development from Component Price Estimates (in percentage).......................................................25

Table 3: Cost Contributions for Building Construction (Source RS Means Handbook for Estimating)..................................................25

Table 4: Cost Contributions for Light Building Construction in Southern California..........................................................................25

Table 5: Cost Contributions for U.S. Single-Family Residence (source: US Dept. of Energy)..............................................................25

Table 6: Cost Contributions for High-Rise Structure in Central London (after Davis Langdon 2002)..................................................25

Table 7: Cost Breakdown for Construction in Canada for Year 2000 (Source: Hanscomb 2000)...............................................25

Table 8: Cost Breakdown for Gravel Road Projects (source: Illi and Illi 1997) 25

Table 9: Preliminary System and Component Selections 25

Table 10: Sector, System, and Component Aggregation for BOCC 25

Table 11: System Weights.................................25

Table 12: Visit Schedule for this Project...........25

Table 13: List of Construction Components......25

INTERNATIONAL COMPARISON OF COST FOR THE CONSTRUCTION

SECTORINTRODUCTION AND BACKGROUND

Construction sector spending represents over half of the capital formation spending in most countries (Heston 1999). In overall GDP terms construction sector spending equals approximately 10.7% of the GDP—with a lower level of expenditures in developed countries and a higher level in developing nations (Walsh and Sawhney 2002). Statistics strongly support the fact that the construction sector is an important contributor to global economic growth. Therefore construction sector expenditures play a crucial role in the national GDP calculations and the attendant wealth and standard-of-living comparisons.

The United Nations System of National Accounts (SNA) utilized by the International Comparison Program (ICP) includes the construction sector under the category called Gross Fixed Capital Formation. The current SNA breakdown provides three basic headings for construction—namely residential, non-residential, and civil engineering. Data is collected for Purchasing Power Parity (PPP) calculations for the construction sector for these three basic headings (Sawhney et al. 2004). In addition to this type of data collection and statistics formulation most countries are also involved in the development and publication of temporal construction cost indices (Heston 1999).

The focus of this paper is the comparison of prices for the construction sector under the ICP program. Currently a “standard projects” based method (SPM) is adopted for such comparisons. This method was developed by the Statistical Office of the European Communities (EuroStat) and as such is also sometime known as the EuroStat method. The use of the SPM has been debated widely over the past two decades. Some have suggested a much simpler approach that essentially relies on a basket of goods and services (BGS or BOGS). Stapel (2002) concluded that methods other than the SPM should be evaluated and considered, due to the expense, difficulty, and perceived lack of accuracy of the SPM. In fact, Stapel (2002) stated, “The primary reason for seeking alternatives to the bill of quantities approach is that the latter is complicated, time consuming, and expensive, and gives no guarantee of reliable results.”

In a study conducted by the authors in 2002 a construction-component-based approach was proposed, and termed a basket of construction components (BOCC). This report describes in detail an implementation framework for the BOCC-based approach in an African context. The BOCC methodology can be utilized in the price collection for and formulation of

International Comparison of Cost for the Construction Sector by Walsh & Sawhney (Page 1 of 51)

construction sector PPP. As an additional benefit BOCC can also be used for country-specific temporal construction cost indices. The work described in this report is based on a critical analysis of unique challenges peculiar to the construction sector. A detailed comparison of BOCC methodology and other construction-sector-specific methodologies (SPM and BGS) is also provided in the report. With the help of field work in Africa, critical implementation questions are addressed, leading to the development of preliminary price collection instruments. These instruments are in the Standard Product Description (SPD) and Product Specification (PS) format that has been adopted for ICP 2004. SPDs are defined by the ICP 2004 Handbook as generic product descriptions that list the various price determining characteristics that a particular narrow cluster of products may possess. PSs are defined as descriptions that specify the precise characteristics of the individual products for which prices are to be collected.

CONSTRUCTION SECTOR BACKGROUND

The complex and variable nature of the construction sector makes it a difficult sector to integrate into standardized econometric systems (Walsh and Sawhney 2002) and in many ways can be termed as a “comparison resistant” sector. The construction industry consists of a fragmented array of contractors, subcontractors, and suppliers. The construction industry supply chain is extremely complex. There are no formalized industry structures that represent all of its stakeholders. Its primary output is a series of projects, each resulting in a unique constructed facility. The industry is typified by temporary, contract-driven relationships between the participants of a given project, and this condition makes characterization and collection of national statistics very difficult to satisfactorily achieve. The lifecycle and timeline of construction projects further complicates collection of prices and their relationship to expenditures in national accounts. It is common to find construction projects with duration ranging from a few months to several years. Furthermore, the industry does not really exist within a given nation; all projects at some point in their supply chains for materials, equipment, or labor, reach out into the interconnected global industry (Tommelein, et al. 2003).

Construction products are highly customized to the needs and wishes of the construction consumer. In fact, there is no “production line” for constructed facilities; each and every project is specific to the eventual owner, at the foundation level at a minimum. The net result of this customization from the perspective of international comparison is that it becomes very difficult to compare one project to another. The external influences that are at work on the constructed product are correspondingly unique, and exist primarily at the project level (Figure 1). Economic activity in the construction sector consists of the conversion of materials, labor, and equipment into the unique constructed facility. Variations in these inputs and in the common means and methods used to orchestrate and install them, exist between regions of the world, between nations, and even internally within nations (Thomas 2002).


Figure 1 depicts the conversion of inputs to a constructed facility output, and the influencing factors at the project and industry levels.

Figure 1: Construction Sector Influence Diagram

Because these factors never combine in quite the same way twice, each constructed facility is unique. The cost of a construction project is directly influenced by the selection of means and methods of putting materials in place, the materials themselves, and the labor and equipment rates in use at that time and place. However, there are a number of indirect influences that affect these choices. A number of these indirect factors are represented in Figure 1, termed “indirect” here because they will modify the selection of materials, equipment, labor, or methods, but will not appear on a bill of quantities themselves. Because construction outputs are inherently difficult to compare, this study was conceived and conducted to further develop concepts for the necessary price comparison in the construction sector.

NEED ASSESSMENT

Given the relative importance of the construction sector, the World Bank in 2002 proposed research and analysis on the program methodology used for construction sector price comparisons. The World Bank convened an Expert Group (EG) to evaluate, amongst other things, the status of the methodological and calculation framework used by the construction sector for the derivation of PPP. This was initiated primarily for providing better answers to users’ concerns on the data collection aspects of member countries. As part of this initiative the authors prepared a report entitled “International Comparison of Cost for the Construction Sector: Toward a Conceptual Model for Purchasing Power Parity” (Walsh and Sawhney 2002). This report was presented to EG on July 11, 2002. Members of EG recommended further investigation of the proposals made by the authors in their report submitted in 2002 (the EG has now been formulated into the ICP Technical Advisory Group (TAG)). The recommendation was primarily driven by the following broad challenges specific to the construction sector:


1. Traditionally the calculations for the construction sector are handled by developing estimated costs for 20 standard construction projects (Vachris and Thomas 1999, Stapel 2002), for which bills of quantities and specifications have been developed. According to the EuroStat procedures, each bill of quantities requires price estimation for 10 to 20 chapters, each consisting of 100 to 1000 individual construction items (Stapel 2002). The 1993 round was conducted using the 10-20 chapters. Significant concerns arose about the resource intensity of providing these prices, so subsequently the standard projects method (SPM) has been modified to the so-called “reduced bill of quantities” approach, in which many of the individual items have been eliminated This represents some reduction in effort, although still a substantial number of prices must be selected. There is growing concern that the level of effort and resources required for this process is prohibitive for expansion and continued application of construction sector comparison (Dubner and McKenzie 2002, Stapel 2002, Ward 2003).

2. Construction pricing is resource intensive compared to many other sectors because pricing of elements involved in a construction project requires expertise that is not normally available within National Statistics Organizations (NSO) (Ward 2003, Heston 1999). Such expertise includes familiarity with construction means and methods and experience with recent construction costs. This kind of expertise is usually not available at NSO’s but instead must be acquired (typically on a consulting basis) from construction, engineering, or architectural companies. This makes it mandatory for NSOs to acquire the expensive services of construction industry experts. A study conducted for Economic and Social Commission for Asia and Pacific (ESCAP) concluded that the construction project based comparison currently used is very burdensome for ESCAP countries (Heston 1999).

3. Temporal construction price indices are often developed using a basket of construction material and labor prices. This approach causes three problems: a) temporal productivity fluctuations are not accounted for in the resulting index (Heston 1999), b) such methods obscure means and methods differences such as different approaches to the labor/equipment tradeoff when applied to separate countries, and c) using current methods there is no overlap between the temporal basket of goods and labor approach and the spatial approach (such as for ICP) (Heston 1999). Due to this disconnect between the temporal indices produced on a frequent basis and ICP comparisons conducted on a five-year cycle, NSOs find it difficult to garner support and resources for either activity. There is therefore a need for a method that could possibly eradicate both these problems.


4. Three different broad methodologies for derivation of PPP values exist under the ICP program (Walsh and Sawhney 2002). The first methodology is used for a majority of the basic headings. Under this methodology prices for commodities form the core of the data collection and calculation. The second methodology is used for non-market services and is based on the cost of commodities and services as indicators of the relevant service (Dean 2002). The third methodology is unique for the construction sector and currently uses a standard project method. This leaves the construction sector price comparisons disconnected from the main stream of ICP price comparisons (Sawhney and Walsh 2004). This problem has become more pronounced during the 2004 ICP round due to the global adoption of SPD and PS format. Conversion of standard projects in to SPD and PS format seems unattainable, further exaggerating the stark differences between construction sector price comparisons and other sectors. This causes many problems for NSOs as it is not easy for countries to readily see a use for the ICP construction prices in other areas of statistics (Heston 1999).

5. A study conducted by EuroStat in 2002 concluded that “There are significant methodological problems with the current ‘bill of quantities’ approach, in particular, that it takes a lot of time and effort but the results may still be relatively unreliable”. Some partners of the ICP program have also cast their doubts on the accuracy of the data collected and credibility of the construction estimation process. In a study conducted for ESCAP it was determined that for the 1999 ICP round only 56% of the items that needed to be priced for the standard projects were priced by the ESCAP countries. Further the report documents that out of the 56% prices reported 33.33% were reported partially (where partial coverage means that 10 percent or more of the individual construction units were left blank by the country) (Heston 1999). In addition to this issue of partial coverage the price estimation at the construction project level has many pitfalls. Many authors have pointed out that there can be a very wide range in project cost estimates, and that these estimates can compare very poorly to the actual cost of the construction projects (Walsh and Sawhney 2002). The Construction Industry Institute reported that a range of as much as –50% to +100% compared to the actual project cost can exist on early estimates of industrial projects, and even well done detailed estimates can range through 25% (CII 1996, 1998). The primary predictor of estimate accuracy is the effort expended to produce the estimate (CII 1998), which raises obvious concerns about the ICP given the disparate resources among NSO’s.

Heston (1999) strongly suggests that there is a need to improve the construction sector price comparison process so as to make it less burdensome and more relevant to participating countries. A methodological study is needed to deal with the following broad questions: Given the nature


of the construction sector and the inherent difficulties in construction price comparisons what improvements can be made? What is the basis and level of comparison that is appropriate for the sector? Further, how can quality and level-of-service differences among countries be incorporated in these comparisons? The ICP needs to allow for pricing experts in each country to do the pricing in light of the materials and construction methods that are actually available, and in use, in their own country. This may mean that a standard design should be used for all countries, so as to achieve uniform quality of the final product between countries, while allowing for variation between countries in the specific materials and construction methods used in the pricing exercise to achieve this uniform quality. It may also be effective to use a construction cost indexing methodology for important construction materials and labor, similar to that employed for evaluating changes in construction cost over time for a given country. Hybrid systems could be considered as well. While this study will not be able to address all of these concerns, it will focus primarily on the identification of a less resource-intensive approach to construction price comparisons. Given that the level of effort required, and the attendant cost of that effort, is directly related to the number and complexity of components to be priced, this report will focus on the identification of a relatively short list of components which might be representative and comparable in regards to means and methods, and which can be broadly illustrative of the major capital-intensive systems in the constructed facility.

SYNOPSIS OF AUTHORS’ PAST WORK

Preliminary answers to the above-mentioned questions were provided in a study conducted by the authors in 2002 for the World Bank. The key question answered in the 2002 study was the question pertaining to the level at which construction prices should be compared. Should the comparison occur at the construction project level as is the case of the standard project method; or should the comparison of prices occur at the input level as is the case for most temporal construction cost indices? Through a detailed analysis of construction sector characteristics, ICP program requirements, the structure of temporal construction cost indices, and efforts by other agencies (notably the World Bank, EuroStat, Organization for Economic Cooperation and Development (OECD), and the Australian Bureau of Statistics), it was determined that the level of estimation should occur at a level that lies between the construction project level and the input level. This estimation level was neatly encapsulated in a construction component. A construction component is a production unit or good measured at the level of its cost installed in a construction project (Walsh and Sawhney 2002). Whereas the idea of performing construction pricing comparison at a level below the construction project level has been explored by others (Heston 1999, Ward 2003); the concept of a construction component and resulting formal methodology was defined by the authors in 2002. The methodology proposed by the authors in 2002 was called the Basket of Construction Components (BOCC). This report builds on this past work and contributes towards the creation of an implementation framework for the BOCC


approach using the SPD and PS methodology (more information about SPD and PS approach can be obtained from the 2004 ICP Handbook).

The authors’ research between 2002 and 2004 and deliberations of the TAG point towards a number of potentially beneficial features of BOCC. Some of these features are used in the creation of the implementation framework and are described in detail in the body of this report. Other features of BOCC promise impact that is broader than the implementation framework itself. At a general level these key features of BOCC are listed below:

1. The BOCC will provide a much simpler and better defined price comparison tool that most likely will drastically reduce the resource and expertise requirements in the price collection process. Due to the nature of the proposed basket it is plausible that the basket can be adapted for use as a national inter-temporal price comparison tool. These two features in conjunction will advance the World Bank’s program of statistical capacity building and will also further the goal of making ICP sustainable.

2. As is the case with a basket of goods and services, because it is less resource intensive to price the proposed basket can easily be used to generate multiple observations. Using the BOCC approach NSOs can collect prices for the construction sector at a number of locations within their country including both urban and rural locations, and at several times over the course of a year. This will be a marked improvement over current practice.

3. Due to the design features of BOCC it can also potentially impact the national accounting procedures used for the construction sector in a country. The accounting procedures used by national accounts in ICP countries for the construction sector show large variations. Probably most countries base their estimates on building permits, public works budgets, and some ad hoc valuation of non-permit buildings and private non-building projects (Heston 2004). It is likely that the BOCC approach could improve on existing valuation methods and thereby improve the accounting procedures for the construction sector within the national accounts.

4. The BOCC approach can provide some guidance in comparing other comparison resistant sectors, such as the rental housing sector. The comparison in the rental housing sector often is complicated due to the influence of government programs (such as subsidies) and limited availability of rental housing in some areas. Extensive discussion on the problems faced in housing comparisons is documented in Sergueev (2001). One suggested improvement is to use the “quantity” approach in which the volume of housing is derived by multiplying the quantity indicator and the quality indicator (Sergueev 2001). The BOCC approach for


residential sector may have enough flexibility that it could also be applied with some modifications to obtain user cost for housing (Heston 2004).

GOAL AND OBJECTIVES OF THIS RESEARCH

The goal of this research is to develop an implementation framework for the Basket of Construction Components-based comparison methodology for the construction sector. The work described herein builds upon the previous analysis that was performed in an earlier study for the World Bank. The objectives of the research project are to:

1) Revisit and refresh the critical analysis of current methods used for comparison of construction costs with a point of view of comparing these methods to the BOCC approach;

2) Identify key issues and characteristics of the international construction comparison;

3) Describe in detail the BOCC methodology;

4) Develop an implementation framework for the BOCC methodology for the construction sector;

5) Identify and develop test components for the three construction basic headings;

6) Convert the construction component descriptions into SPD and PS;

7) Conduct testing of the BOCC concept using the SPDs and PSs in the selected African countries; and

8) Provide recommendations for global deployment of the BOCC methodology.

SCOPE OF WORK

The scope of the work conducted was to develop a framework for construction sector comparisons for the African context, including the development of specific test cases for data collection. BOCC methodology was defined as the centerpiece of the work which includes streamlining the development and identification of construction components through the use of the SPD framework. In addition to answering broad question pertaining to a proposed BOCC-based implementation framework, the scope of work includes:

Task 1: Review the SPD concept and develop five construction components for testing and initial evaluation in the African context. The description of the five test-case construction components will be


developed using the SPD concept. Testing would be attempted in each of the three construction sectors: residential; non-residential; and civil engineering works. At a preliminary level the focus areas for selection might include broader subdivisions (systems) within these sectors such as subsurface, structural, length dependent, area dependent, and/or volume dependent.

Task 2: Outline a data collection method for the component concept using the designed SPD-based component description.

Task 3: Visit two to three African nations and meet with regional/country ICP coordinators, AfDB ICP experts, local construction industry experts, and regional construction companies. During these visits, the investigators would attempt to:

a. Seek input on the five test-case construction components and their descriptions;

b. Seek input on other components which would be valuable in regional comparison;

c. Seek information on typical construction methods and standards in each country, including tours of construction sites;

d. Obtain or observe typical building plans and specifications for several construction projects;

e. Identify or confirm the existence of data collection sources for the five test-case components; and

f. Obtain or confirm the existence of sources of cost information for five test-case components in the construction sector.

Task 4: Using the data collected develop the final SPD-based description of the five test construction components that are identified in task 1.

Task 5: Send developed construction components to 5 to 6 African nations selected with the help of the regional coordinator for data collection, or otherwise distribute them for consideration.

Task 6: Prepare a final report to outline the SPD-based construction component approach for the African continent and a vision for deployment of this approach to other continents for an ICP-wide construction sector PPP calculation.

REVIEW OF CONSTRUCTION SECTOR LITERATURE

This section presents a brief review of some important recent works in this general area. This section is not intended to be exhaustive, but merely to highlight some important issues in PPP calculation for construction.


The EuroStat Construction Price Survey: History, Current Methodology and New Ways for the Future” by Stapel S., (2002)

Stapel (2002), as the title of the paper suggests, provides extensive discussion on the history, current state and possible future direction of the comparison of construction sector prices. The context of the discussion is the European Union (EU) countries (including 15 member states, 13 candidate countries, and 3 European Free Trade Association (EFTA) countries). As originators of the SPM method EuroStat have been carefully analyzing past performance of the SPM method. The paper primarily focuses upon highlighting the advantages and disadvantages of the SPM method, description of some experimentation to improve the construction sector price comparison, and a commentary on the findings of these experimentations.

An advantage of the SPM method described in the paper is that it results in pricing of a product (a construction project) that is tangible; providing some satisfaction in the end result to those involved in the comparison exercise. However, the paper also points out the difficulty involved in identification of a project which is appropriate in size, means and methods, and features to be capable of representing the complexity of a construction project in a range of countries. Using actual results from the 31 countries, the study could not conclude that the SPM was effective. The statement from the paper “There are significant methodological problems with the current ‘bill of quantities’ approach, in particular, that it takes a lot of time and effort but the results may still be relatively unreliable” sums up the findings of this analysis. The author does conclude that the “reduced set” SPM gave results acceptably close to the full SPM, but admits that there is no sure way to tell whether the full set results are correct.

Numerous difficulties have been documented in the paper for the 31 countries which participate in the price comparison using the SPM method. Stapel points out that the SPM method including the full BOQ was resource- and time-intensive. Entire projects were used in order to gain comparability, which the SPM emphasizes over representativity. In order to capture a range of projects deemed similar to that in the construction economy, the SPM requires that 15 projects be priced by individual countries. Stapel explains that due to the resource-intensive nature of the pricing exercise and relative difficulty in estimating prices, even a ± 10% tolerance is difficult to achieve. Walsh and Sawhney (2002), based on work by the Construction Industry Institute, suggested that a larger range is more likely.

Stapel points out that, because actual projects that are similar to standard projects are not available each year in each country, it is not possible to collect ‘real contractors’ prices for the set of standard projects. This finding is particularly alarming since the EU is significantly more homogeneous than the entire set of countries participating in the ICP. The author further points out that, due to resource constraints, only single price estimates for each country can be prepared. These single estimates are checked centrally by construction experts. Such a pricing scheme clearly


will not be able to consider variation in prices within the individual countries. A method which would allow multiple observations in each country would seem to have a significant advantage in terms of statistical significance and identification of outliers. This problem will be especially noticeable when an effort is made to include both rural and urban construction markets, especially in residential construction.

After describing in detail several deficiencies in the SPM method, Stapel goes on to describe some possible improvements. One such suggested improvement is the idea of a reduced bill of quantities. A simulation exercise was presented that showed that the number of line items in the BOQ can be halved, without negatively affecting the overall quality of the PPP calculations. The reduced items still number between 500 and 600, which remains a significantly large list to price. The reduced bill of quantities approach was implemented by EuroStat for 14 EU countries. This test showed that the results “are probably as reliable as those of the full list”. The reduction was conducted by rank ordering the value-contribution of the individual items, and observing based on cumulative cost plots that about 50% of the items seem to contribute about 90% of the value (although there is significant scatter in this relationship). The use of 50% and 90% values is not described, and seems to have been arbitrary. No testing is presented that indicates that smaller (or larger) sets of items might also give results tolerably close to the full SPM results.

Stapel also evaluated a test basket of goods for the construction industry consisting of six materials and a fixed quantity of three types of construction labor. The preliminary findings give some reason for optimism but are ultimately inconclusive. The structures of the basket of goods that the author proposes result in input prices and inherently exclude productivity implications from the calculations. Stapel suggested that another option would be to adopt a relatively “small or standard building”, which is recognizable by all countries. This could be an agricultural or industrial structure that could be described clearly and succinctly and illustrated with drawings. It is not clear from the paper whether this approach was further developed or not, but no numerical testing was included.

The author concludes the paper by stating that “it is clear that EuroStat has not yet decided which will be the new way in the future of construction price surveys” and that exploration of alternatives to the SPM was warranted.

“Construction Industry Purchasing Power Parities Obtaining Comparable Price.” by Dubner, M., and McKenzie, R. (2002)

Dubner and McKenzie (2002) reviewed a number of possible methods of performing construction comparisons. Specifically, they reviewed comparison of factor inputs (a set of materials and perhaps labor, which has been called BOGS in the present work), components (similar in concept to the BOCC), quoted prices (including both the SPM and the “reduced” SPM), elemental costs (costs are developed based on some kind of international


compromise construction specification index similar to the CSI system presented later in Table 3), and a matched model (such as a comparison on a construction per square meter basis). Dubner and McKenzie summarize the advantages and disadvantages of these various methods, without explicitly recommending any one of them as their recommended approach, and seem to have been striving to be objective and diplomatic in their analysis of the methods.

“Comparison of the Aggregate ‘Construction’ in CIS Countries and Mongolia” by Kuznetsov, V (2002)

This author modified and applied the EuroStat methodology for the PPP calculations for the construction industry in Commonwealth of Independent States (CIS) and Mongolia. Kuznetsov (2002) has developed a modified standard project-based method through a series of regional expert group meetings. The key modification is that the price collection at the country level primarily focuses on prices for materials and labor rather than pricing of work items. Once this pricing information is collected, a central office then computes pricing of work item from the submitted input prices. Wherever price information is missing statistical methods are used to fill in the gaps. In the calculations proposed by Kuznetsov an explicit contribution of indirect construction costs including social contribution, depreciation, profit, VAT, design fee and other overhead costs is included. An example standard project partially showing the proposed calculations is provided in the paper. No indication is provided, however, relating to the estimation of the labor productivity values specific to individual countries, labor/equipment tradeoff and contextual reference of a specific project type. The paper indirectly points out the advantages of a region-specific framework for improving representativity and comparability.

Heston, Alan (1999) "ESCAP Comparisons of Real Gross Domestic Product and Purchasing Power Parities, 1993" United Nations, Bangkok, 1999.

Heston (1999) presents a report that studies the 1993 round of ICP construction comparisons performed by countries belonging to the ESCAP region. The report begins by highlighting the importance of the construction sector to capital formation, the overall economy of countries and the ICP comparison. It also highlights the difficulties faced in collecting construction prices from countries based on the EuroStat method. Numerous problems in the process are highlighted, including requirements for extensive resources, the need for external (mostly expensive) experts, and disconnect with the regularly-produced temporal price comparisons. Due to these difficulties the ESCAP countries in 1993 could only collect partial prices for the standard projects. The report raises particular concern over the fact that partial prices for construction projects were submitted by countries. Partial completion of the pricing survey results in an underestimation of the costs of a project and biases estimates of the parity downward and the quantity of construction upward. With the 1993 data Heston performed country product dummy (CPD) calculations. The result of these calculations showed that the


problem of partial pricing for projects can be overcome to some extent for the residential and non-residential sectors but not for the civil engineering sector.

In light of these difficulties, the report then suggests exploration of the idea of comparing prices at a level that is below the entire project. In particular Heston (1999) suggest using work items in a construction project as a level of comparison. So a possible approach will be to identify common work items from a project and price those for comparison purposes. The report suggests further study of this issue due to the fact that such an approach can result in significant improvements in the construction sector comparisons, both temporal and spatial.

Ward, M. (2003), “Pricing Construction Projects Using Prototype Models,” paper presented to the 1st Regional Meeting on the International Comparison Program in Western Asia, 24-27 June 2003, Beirut, Lebanon, available at www.escwa.org.lb/icp/activities/regional/24-27june/papers.htm (last accessed 8 July 2004).

Ward (2003) described general models available for the comparison of pricing in construction, and in particular described the collection of prices for the “reduced bill of quantities” approach. The article describes that the reduction was based on the observation that about 50% of the bill of quantities for the standard projects accounted for about 90% of total cost. Accordingly, while the original bills of quantities for the standard projects method relied upon pricing of the full bills, in the “reduced bill of quantities” approach, according to Ward, “…only those elementary components that make a significant contribution to total price…” (p. 2) are priced. The method provides for countries to price some alternative systems to maintain flexibility, and thus to enhance representativity. However, in such cases multiple approaches to these systems must be priced, and the most representative approach indicated. This implies that the total effort to provide prices is larger than the reduced bill of quantities itself, as in some cases multiple alternates must be priced.

Pricing of the reduced bill of quantities is completed using a unit price approach, with unit prices to include labor, equipment, and materials, as well as any applicable taxes and allowances for profit. A wide range of other costs are also to be included in these unit costs, including insurance and bonds, permits and inspections, layout, temporary utility connections and site facilities, signage, supervisory costs, some kinds of temporary construction, trash collection and disposal, cleaning, and home office overhead. Ward indicates that this approach leads to estimates of final purchaser prices to the consumer of the capital project, rather than producer costs.

However, it must be pointed out that adjustment from producer costs to purchaser prices in the construction sector is perhaps the most difficult challenge facing the ICP. Ward recommends sampling of real bills of


quantities from accepted bids to assist with this adjustment. Such processes might be workable if quantities and projects are similar to those priced for the standard projects, but given the concerns raised about representativity such similarity is not likely. Ward acknowledges that some expertise will be required to price these bills, and that in all likelihood outside consultants will be employed. Further, he makes some indication that for certain approaches to the national accounts, baskets of goods or services might be workable as an alternative approach. Bear in mind that both price and quantity estimates are ultimately needed for comparisons. Obtaining both requires that the pricing and the national accounts must be consistent in terms of treatment of margin and other add-on costs listed above.

Ward points out that informal construction, such as that conducted by households on their own account perhaps relying on found materials, can distort the deflation process if left unaccounted. This is particularly a problem for the residential sector in low income countries where such construction is extremely common.

METHODOLOGIES FOR CONSTRUCTION SECTOR PRICE COMPARISON

Spatial comparison of construction sector pricing can be performed using a number of approaches. The key question that needs to be answered for spatial price comparison is: what is the price, in local currency units of each country, of the construction sector output that is included in the national account of the country? A number of general approaches can be used to derive the answer to this question. In a broad sense these approaches can fall under one of the following three categories:

1. Pricing a basket of standard (hypothetical) construction projects: This approach has been used for the past rounds of ICP comparisons. The crux of this approach is to ask countries to price using the unit price approach a number of standard construction projects. The instrument used in the pricing effort is called the bill of quantities (BOQ). BOQs for standard residential, non-residential and civil engineering projects are used for price collection. A more detailed description of this method is provided in the Handbook of International Comparison Program (United Nations 1992).

2. Pricing a basket of construction inputs—material, labor, and equipment: This approach is primarily used for temporal construction indices developed by countries or regions. Such use makes the method appealing, at least at first blush, as it carries the suggestion that temporal comparisons already available might be fit within the framework of spatial comparison and augment the utility of both types of comparison (Walsh and Sawhney 2002). This approach requires only that one monitor the prices for goods and/or services included in the basket, and compare them to prices at some other time (or, in


the case of PPP, at some other place). A more complete description of this class of methods can be obtained from a document entitled “Source and Methods: Construction Price Indices” (OECD 2001).

3. Pricing a basket of construction components : This approach resembles the basket of construction inputs approach in that it revolves around the concept of pricing a fixed set of items. As the name suggests the basket that is used for price comparison consists of construction components (Walsh and Sawhney 2002, Sawhney et al. 2004, Walsh et al. 2004). Construction components are tangible units of a construction project that consume inputs such as material, labor, and equipment. In hierarchical terms construction components lie somewhere between the construction inputs and construction projects (Walsh and Sawhney 2002). A more formative discussion of the BOCC approach can be seen in the report entitled “International Comparison of Cost for the Construction Sector: Toward a Conceptual Model for Purchasing Power Parity” (Walsh and Sawhney 2002).

DISCUSSION OF THE THREE APPROACHES

The reader will recall that the SPM requires cost estimates for portions of the bills of quantities for a set of construction projects. Simply stated, the idea is to retain national and regional experts to develop a detailed item-by-item cost estimate for portions of these projects. The experts are provided with bills of quantities, drawings, and specifications for the various projects. The measurement of the prices under this approach is completed at the output level, as the final cost is more representative of the price that the construction users/buyers actually pay to purchase a constructed facility. This approach inherently introduces some advantages and disadvantages.

The most important advantages include the direct inclusion of productivity differences and the implications of the labor/equipment trade-off into the calculation. Because the project cost reflects the labor to actually install a number of different materials or systems, labor productivity differences are accounted for. In addition, if equipment is commonly used to replace labor in a given country, or if the methods to accomplish a given task differ in some other way, the cost implications of these differences are also automatically captured. Because of the detailed documentation and the bills of quantities provided, this approach is intrinsically comparable but not necessarily representative. For certain types of projects (for example semiconductor manufacturing plants) since the construction technology is controlled by the final quality standards to a large degree this method is extremely applicable.

This method suffers, however, from a number of disadvantages. Speaking for the moment primarily about the full method, perhaps the most important disadvantage is the effort required to complete the data collection process (Dubner and McKenzie 2002, Stapel 2002, Ward 2003, Heston 1999).


Literally thousands of highly specialized, construction-specific items have to be priced. To develop installed costs for these items further requires detailed knowledge of the means and methods to put those items in place, the labor, equipment and other resources needed, and the typical order of events in a construction project. This specialized knowledge is not widely distributed but resides only with highly experienced construction professionals. As a consequence tapping these skills is expensive and difficult. From this outcome results a tendency to leave portions of the instrument blank, which results in a host of calculation difficulties (Heston, 1999).

Another important challenge arises from the wide variety in construction tolerances and acceptable quality that exists between nations. The current standard projects approach relies on highly detailed information about the materials and quality requirements in order to ensure comparability at the expense of representativity (Stapel 2002). It is hard to imagine a project which would contain only materials and products that are relevant or appropriate for every country. One way to circumvent this deficiency is to produce the standard project documents in such a way as to define materials and products flexibly, to allow for variations in usage without disturbing the mathematical basis for comparison. But no scientific or mathematical research has been done to enable such flexible specification. Another approach is to account for differences using a hedonic approach as practiced by some countries for their domestic statistics. The authors are aware of no research to support the necessary regression analyses in the archival literature.

Perhaps because of these difficulties, the so-called “reduced bill of quantities” method has been developed from the standard projects method (Stapel 2002, Ward 2003). In effect, the pricing effort has been reduced by eliminating the need to complete the pricing for the entire bill of quantities for the projects, and some flexibility has been inserted into the pricing effort by allowing the inclusion of some alternates, so long as the as-specified versions are priced as well. This reduction seems to have been based on identifying a set of items that contribute a significant portion of project cost and not on construction sequencing or the realities of the construction process.

Furthermore, though this reduced pricing effort ostensibly does not require one to estimate all of the costs for the entire project; it does require that unit prices for the remaining quantities be reflective of output pricing. In other words, the estimated prices are to include a host of other costs (such as bonds, insurance, site office facilities) and an appropriate markup for profit. There would seem to be two methods for providing unit costs adjusted in this way. First, one might perform a complete estimate for all quantities at cost, and all of these other cost categories, and then apportion the other costs to the quantities still included, and then estimate profit margin. This approach utterly defeats the purpose of the reduced set, as one must price the entire project anyway, but at least the apportioning of other costs would be rationally performed. Second, and probably the more


common approach NSO’s might take, would be to complete estimates for the required quantities only at cost, and then to mark them up with some percentage estimated to account for all the other costs. This approach would be faster, but it seems utterly unlikely that two practitioners (even inside a given country, let alone in different national contexts) would estimate the other costs the same. It is important to recall that in some regions of the world, unit price bidding is not nearly as common as lump-sum bidding, meaning that there will be varying levels of experience with this process, and varying levels of sophistication in making the necessary markup estimates. The errors in the estimates of the markups would be layered atop errors in the underlying cost estimates, which are demonstrably related to the effort required to produce the estimate (Oberlender and Trost 2001; Curran 1989; Remer and Buchanan 2000). As a consequence, one should expect significant variation to be introduced from this estimating process, having nothing to do with real cost variation (see also Dubner and McKenzie, 2002). Finding a means to deal with markup, should it be necessary, is a challenging problem which will arise regardless of the comparison method chosen.

The inclusion of profit into this process is probably even more difficult and intellectually unsatisfying. The standard projects method, in both its original and reduced instantiations, assumes that by merely asking contractors to include profit, some meaningful estimate of output pricing will ensue. Given that the dominant form of award in the construction industry remains the low-bid, profit margins are extremely situational. In a relatively slow construction economy, a project will attract many bidders, some of whom will be willing to adopt extremely low (or even negative) profit margins in order to get work and maintain resource utilization. In a very busy construction economy, many contractors will use higher margins because they need the work less, and fewer bidders will be attracted to a given project. Resulting profit margins are harder to predict in such cases, because the workload of the particular, small set of bidders will be the critical factor. Construction experts, who complete the pricing in the various nations, secure in the understanding that the projects are hypothetical and facing no competition real or imagined, are unlikely to include profit margins anything like their “real” profit margins for the year. The process is most similar to the development of the engineer’s estimate in civil works – which are infamously inaccurate for the same reason. A large body of literature under the subject area of “bidding models” exists to document such nuances within the construction sector (Friedman 1956, Gates 1967, Farid and Boyer 1985, Dozzi et al. 1996, Ahmad and Minkarah 1988, Ioannou 1988, Harris and McCaffer 1989, Neufville and King 1991, AbouRizk et al. 1992, Griffis 1992, AbouRizk et al. 1993, and Smith 1995)

The inaccuracies of the profit margin estimate will be layered on top of inaccuracies in the estimation of other costs. The consequence to the ICP is that a wider range of prices than exist in reality will be introduced into construction sector price comparisons that have nothing whatever to do with real variations in cost between the economies, and everything to do with peculiarities of the price collection strategy; surely an unsatisfying result.


The authors have seen some suggestions that collection of actual bid prices within a country might help to alleviate these problems by providing a check on the values reported on the instrument (e.g. Ward 2003). This argument seems wholly unlikely to the authors. Firstly, even the reduced set of quantities is quite long, but the observations of the authors in the field indicate that a fairly small number of components are actually representative in multiple countries. As a result, a great many of the prices to be collected and reported on the SPM instrument will not be readily available for comparison on a typical bid. Secondly, unless the estimates are produced in the same way inside the country (that is, with unit rates weighted with other costs and profit) the unit prices in bids will not be directly comparable, but will instead require experts from the industry to perform the adjustments. These needs will add resource requirements to an already burdensome system. Thirdly, unless projects in the country are broadly similar to those in the SPM, which seems impossible given the field observations of the authors, one cannot expect sub-item bid prices to have any relation whatsoever to those needed for the SPM.

Additionally unit price contracting, which forms the basis of the SPM, is marred by such construction industry complications as abnormally high rates (AHR), abnormally low rates (ALR), and front-end loading. Again given the nature of the construction market, construction companies are in the “habit” of utilizing trade practices of ALR, AHR and front-end loading that if used in the SPM parlance can severely impact the outcome. And, such practices make it even less likely that comparison of SPM unit rates to winning bid unit rates will be fruitful.

The problem is best separated into two parts: 1) the cost estimate itself; and 2) the adjustment of cost estimates to purchaser prices to account for other costs and/or profit margins. As documented in Stapel (2002), the SPM method performs poorly in producing cost estimates, or the first part. The authors, after a rigorous review of literature, generally conclude that the second step can be disassociated from the method used for the underlying cost estimate, and therefore represents a challenge that must be addressed at a broader level by the ICP Global Office, the ICP Regional Coordinators, TAG, and construction industry experts. Note that the second step, the adjustment for other costs and margin, is deeply entangled with the methods used in the national accounts for capturing construction expenditure.

The basket of goods and services approach is widely used as a means for temporal comparison of prices in many countries. Such use makes the method appealing, at least at first blush, as it carries the suggestion that temporal comparisons already available might be fit within the framework of spatial comparison and augment the utility of both types of comparison. The BGS approach requires only that one monitor the prices for goods and/or services included in the basket, and compare them to prices at some other time (or, in the case of PPP, at some other place). The authors observed that several of the countries visited for this project already collect such data for purposes of temporal price comparison in construction, within the country. Because of this simplicity of concept, the required data are relatively simpler


to obtain, perhaps even potentially possible without the aid of construction experts. The items included may be unambiguous if commonly-used international or regional specifications are used to identify the items, although the authors observed that different countries visited collect prices on very different items at present.

However, this method has its own challenges as well. First (and probably most important), the BGS method usually does not capture productivity and its fluctuation over time and space very well. Even in cases where the basket includes labor items, in most instances the cost of a fixed number of hours of labor is reported. So, for example, a basket might call for the cost of 600 hours of skilled labor, without concern for the amount of construction work likely to be put in place during those 600 hours. This problem degrades the comparability of the basket when more productive labor is compared to less productive labor. In a similar vein, this approach removes the labor/equipment tradeoff from the result, because the degree to which some of the tasks the requested labor might conduct would be simplified by equipment is not considered in the basket. This deficiency can significantly impact any spatial and temporal comparison (Heston 1999, Heston 2004).

An even larger challenge may arise from representativity concerns. A fixed basket of goods would have to consist of very ubiquitous items and labor classifications, in just the right mix, in order for an index based on the BGS to be representative. Existing baskets in common use seem to concentrate on structural elements (concrete and steel principally), which may be appropriate. The selection of a basket of goods and services within a single country is not that difficult, as it is relatively easy to identify a basket that suits the material and service requirements of a given set of means and methods. However, given the stark differences in means and methods which the authors observed among the African nations visited, the BGS approach seems unlikely to be effective. Very great differences were observed in many common tasks, particularly in the level and extent of equipment use. For example, Figure 2 shows a range of concrete mixing methods observed by the authors, and covers a range from hand mixing of all concrete in small batches in wheel barrows (Rwanda), to use of field equipment to mix small batches (Tunisia and Kenya), to use of ready-mix trucks for concrete batched at a central location. The labor implications of these differences are profound, and use of a fixed number of labor hours cannot possibly capture such implications. Similarly, vertical transportation of goods was found to range through a wide range of possibilities, from tower and truck mounted cranes to hand transport using ladders (Figure 3). The labor productivity which will result from these different situations will be significantly different. Nonetheless, some materials are so ubiquitous (cement and reinforcing steel, for example) that some testing of this hypothesis would seem warranted.

The CIS method and the BOCC method are in the spectrum between the BGS and SPM approaches. The CIS method is close to the BGS end of the spectrum, and relies on a lengthy list of materials and a basket of labor hours. Some indices are included to try and capture productivity differences.


The method seems to be appropriate to a region with relatively similar construction means and methods, but the lack of direct inclusion of labor and equipment tradeoffs and productivity fluctuations is a critical shortcoming when applying this approach in an international context.

The BOCC method relies upon pricing of components in their installed state, thus including material, labor, and equipment intrinsically. Labor productivity and variations in means and methods are also intrinsically incorporated. Two major differences exist between the BOCC and the SPM. The most critical difference is in the length of the list of components to be priced. In the reduced-set formulation of the SPM, the result is in effect a basket of components, but it is a very long list. Because the authors observed only a small number of components that were actually similar from country to country, many of the components in a long list will be unrepresentative of a given country, and flexible specification of such items detracts from comparability. In order to avoid these problems, the BOCC seeks to identify a short list of components which are commonly performed in virtually all countries, and to price just those components. Volume flexibility demands that estimators get some sense of the total scope of the project, of course, but it is not necessary to provide complete project details to convey project scope. Such context can very readily be conveyed via appropriate selection of components, efficient description of these components using SPD and PS formulation, and creation of effective pricing strategies. Information on volume flexibility could also be captured in the aggregation process; treatment of this issue is procedural rather than conceptual and probably will require careful consideration by TAG.

Figure 2: Different Methods of Mixing Concrete (from left: Yaoundé,, Tunis, Nairobi)


Figure 3: Different Modes of Vertical Transportation (Left Tunis and Right Accra)

The second difference is an outgrowth of the first. For the BOCC approach prices are collected at the producer cost level rather than the final price to the purchaser. The reason for such pricing scheme is that without pricing the entire project, it is difficult to incorporate other costs, and profit margins. Note that, using the same probably inaccurate markups required to complete the SPM method pricing, component prices could be adjusted to reflect purchaser prices. The authors suggest caution in the use of these adjustments only because it may lead to inaccuracies and unrealistic variations. It was previously indicated that this adjustment is a difficult problem owing to unique nature of the construction projects combined with the traditional system for awarding work. The difficulty in translating from producer prices to purchaser prices is to some degree a peculiarity of the construction sector. These characteristics of the construction sector represent a challenge for the ICP regardless of the underlying cost estimating method, and will require a consensus solution. However, it should be pointed out that the BOCC approach may provide a framework for the national accountants to use in producing their estimates, which could then harmonize these processes (Heston 2004).

Table 1 summarizes the most important differences in the various methods.

Table 1: Key Differences in Construction Comparison Methods

Method SPM CIS BOCC

What is priced

Standard projects have been developed for the construction

A list of 100 construction-related materials,

A set of key components common to many projects are priced. The


Method SPM CIS BOCC

sectors. A bill of quantities has been developed for these projects. Countries price some of the items in the context of this project, with appropriate labor and equipment costs, and estimate the additional impact of profit and other costs.

plus 3 kinds of labor and some indices are collected by the individual National Statistical Offices.

price includes the materials, labor, equipment, and any consumables required to put the work in place. Distinct set of components are developed for the three sectors of construction—residential, non-residential and civil.

Advantages

Very complete depiction of the context for the materials is provided within the standard construction projects. Comprehensive coverage of relevant materials is provided. Includes labor productivity and labor/equipment tradeoff. Weighting of materials to projects is clear.

Shorter list of items to price. Representativity and comparability are maximized by the uniformity of the list. Applicability of hedonic methods and bridging strategies is high.

Directly includes labor productivity differences and labor/equipment tradeoff. Relatively short list of prices to compile. Lends itself nicely to the SPD concept. Representativity and comparability are provided by selection of components that are common in maximum number of contexts. May allow overlap with temporal indices that use a similar component approach. This overlap will facilitate efficient resource usage and may contribute towards making ICP sustainable.

Disadvantages

Representativity and comparability are a compromise layered onto the projects. The list of items to be priced is very long, representing a significant allocation of resources for the National Statistical Offices. Projects must be weighted to the sectors. Estimates of impact of other costs and profit unlikely to

Context for the construction project is not provided, so conceptually the map of these prices to construction project prices is limited. Labor/equipment tradeoff and labor productivity differences are not captured. Weighting the

Components must be weighted to sectors and to projects, which is potentially complex.


Method SPM CIS BOCC

be accurate. results to the project and/or sectors is complex. Only applicable when some uniformity of means and methods, such as a relatively homogenous region.

DESCRIPTION OF THE BOCC METHOD

CONCEPTUAL BASIS

The fundamental conceptual basis of the cost comparison system proposed in this study is to measure relative prices at the level of the construction component. A construction component is a production unit which can be fully defined as a portion of a complete construction project. The construction component thus falls between a construction project (e.g., a complete structure) and a construction work item (e.g. a piece of reinforcing steel). The construction component can be thought of as an aggregation of several construction work items, including the material actually put in place, the labor and equipment required to accomplish that task, and any consumables that might be required (e.g. formwork, blades, or waste lumber). Because the labor, equipment, and consumables are directly included in the price, the construction component also inherently accommodates differences in productivity, the labor equipment tradeoff, and differences in means and methods of construction.

Figure 4 depicts an exploded view of a typical North American single-family residential structure. The entirety of this structure (i.e., the project) differs materially from any structures for a similar purpose observed in the field visits to Africa. The differences extend to a great many of the systems in the structure. North American homes are almost always built using lumber; this material was never observed in use as a primary structural material in Africa. Finishes, mechanical ventilation systems, insulation, and so on were also significantly different. Thus, the project level would clearly be a very difficult level at which to make effective comparisons. However, some portions of this structure, or construction components, were quite similar to the components observed in Africa. For example, spread footings depicted in Figure 5 can be observed to be similar to corresponding components in Africa. Even at the component level there are differences, of course. These include the level of quality control testing that may be conducted, the applicable building codes and the level at which they are


enforced, the specific material sizes and strengths, and the degree to which safety precautions are observed by the construction workers. These various influences may be observable in price differences, but should be much easier to correct for than the major differences that exist at the level of the entire project.

Figure 5 depicts foundation components of obvious similarity among many countries (CW: Cameroon, Tunisia, Ghana, USA, and Rwanda). Reinforced concrete column details also exhibited substantial similarity (Figure 6). Electrical work was conducted with similar methods and materials in all countries visited (Figure 7), even if the actual service point fixture exhibited some different configurations. Cement-based plaster was a common finish for interior vertical and ceiling surfaces and exterior vertical services (Figure 8). Painting work was similar in all locations. Because concrete was a dominant structural material observed in all sectors of construction, cement and reinforcing steel are of interest for testing goods-based comparisons. Other components were also observed to be similar in methods or materials (e.g. elevated concrete slabs shown in Figure 9), and can be considered for additional SPD development.

Figure 4: 3-Dimensional Model of a North American Home


Figure 5: Spread Footing (CW from top left: Yaoundé, Tunis, Accra, Phoenix, and Kigali)


Figure 6: Reinforced Concrete Columns (CW from top left: Johannesburg, Yaoundé, Accra, Tunis)

Figure 7: Electrical Service Point (Accra, Tunis and Yaoundé)

Pricing of the construction components here is intended to include the price of the good itself, any consumables required in the construction process, and the cost of the labor or equipment required to install it. The price could be further adjusted to include appropriate markups (taxes, fees, profit, etc.). The advisability of and methods for inclusion of markups will depend to some extent on the methods used in the national accounts, of course, and based on the likely inaccuracy of these markups the authors are


not necessarily recommending such a process, but it could be attempted. Volume flexibility in construction pricing can be incorporated by providing via the SPD a context in which this component will be placed, so that an idea of the total volume of like work can be uniformly incorporated by all pricing sources.

Figure 8: Cement Plaster (Tunis and Yaoundé)

Figure 9: Elevated Slab (Johannesburg and Yaoundé)

Based on the current ICP framework it seems three distinct BOCC might be needed for the proposed methodology (Figure 10).

Figure 10: Proposed BOCC Framework


Some components could be appropriate to more than one sector. The Civil Engineering Works sector will likely be a problem for any proposed method, because it includes such a wide array of possible projects. This sector would equally incorporate a small drainage enhancement project, with a value equivalent to a few thousand dollars, and an enormous dam or airport with a value of several billion euros. Finding common building blocks for both of these and any other such project one can imagine will prove vexing. Of course, this problem will arise for any system of measurement, but for this sector some common elements may still be identifiable. Earthwork is nearly always a part of civil engineering works, as is concrete placement, so these may represent promising areas for testing. Additional civil engineering related components such as site preparation, haulage, mass concrete, asphalt concrete, and utility/drainage works can also be studied, and represent systems of civil engineering works that are almost included in such projects.

DESIGN OF THE BOCC-BASED IMPLEMENTATION FRAMEWORK

In order to successfully deploy a BOCC-based construction price comparison system for the ICP program it is critical to develop an implementation framework. The implementation framework needs to address several important issues that include:

1. Selection of construction components to be included in the BOCC;

2. Conversion of identified components into SPD and PS format;

3. Pricing strategy for construction components;

4. Design of expenditure weights for the BOCC approach;

5. Aggregation for the BOCC approach; and

6. Address other issues critical to the BOCC approach.

The success of the BOCC approach primarily rests on the correct identification of the construction components for the basket(s). This report places great emphasis on the selection of construction components and addresses the other implementation issues at a conceptual level. The hope is that subsequent to the correct identification of construction components subject-area expert help can be obtained to answer the questions pertaining to econometric issues such as expenditure weights and aggregation.

SELECTION OF COMPONENTS

The authors envision that the selection of construction components can be broadly guided by the following principles:

1. Identify components with high value contribution for a given type of construction project;


2. Identify components that are comparable and representative; and

3. Identify components that are relatively easy to price.

The process for identifying construction-specific components, in broad steps, can be described as follows:

1. Identify major cost-contributing systems in typical construction projects belonging to residential, non-residential or civil engineering headings;

2. Observe (in conjunction with interviews with construction experts) construction projects in several African countries in order to identify similarities and differences in construction means and methods, focusing on the major cost-contributing systems;

3. Based on these observations, identify potential components which could be both comparable and representative;

4. Study plans and specifications for these components, and collect copies if possible and practical; and

5. Synthesize the component plans and specifications for the selected component into a format that can be readily converted into a set of standard product descriptions and product specifications which could be priced in each of the countries visited.

The concept of the construction component was based on the concept of identifying a “level” at which an estimate can be prepared, incorporating labor and equipment tradeoffs and productivity variations, with some confidence that the component will be both representative and comparable. Walsh and Sawhney (2002) expanded upon the levels of estimation concept, and demonstrated that the breakdown of a project is a fractal (a system having similar detail at all scales, leading to intricate patterns and unexpected features) problem, in that at every level of evaluation there are equal degrees of complexity. Hence, a specific taxonomy is required in order to carry out this discussion. While the rigorous development of such taxonomy is beyond the scope of this work, it is useful to introduce terminology used by the authors in considering possible components for development of comparative frameworks. Following is a list of generic terms with concept-level definitions to be followed in this report:

Project : the entirety of a construction enterprise, resulting in a relatively well defined facility for essentially a single purpose. Examples include the construction of a building, the construction of a campus of buildings more-or-less simultaneously, or the construction of a section of roadway including interchanges, bridges, and drainage appurtenances.

System : a set of related components within a project that satisfy a given function. For example, the structural system within a


building is intended to denote that set of components that serve the purpose of supporting the building, and would include foundations, columns, beams, girders, purlins, headers, and so on. It would not include the heating and ventilation equipment or non-structural exterior cladding.

Component : a combination of materials in their final intended location which can be clearly identified to a simple purpose within the project; the building blocks of a system. For example, a column. A component will in general consist of some materials manipulated in some way, transported to a final location at the project site, and connected to other components with labor and equipment as appropriate to means and methods employed in a given country.

The relationship between projects, systems, and components is depicted in Figure 11. In this figure a hypothetical project is shown to consist of three systems. Each system is further broken down into its constituent components; with each component made up of material, labor and equipment. In essence, this taxonomy supports a hierarchical discretization of the project into smaller “chunks”. The cost contribution of each component to the total system and project costs can then be developed, using standard construction cost estimating and accounting principles, by rolling up along the branches of the tree (Table 2). Costs for any given component can be developed from the unit costs of materials (including any necessary consumables) and the expected quantity of materials to create that component, labor rates and labor factors, and equipment rates and factors. Construction cost estimators are very skilled and experienced in making these calculations. A detailed example of a single system, in this case the structural system and its constituent components, is presented in Figure 12. Figure 12 demonstrates the logic one might use in identifying the components of a system. A similar breakdown could be conducted for any of the systems in a project, of course.

Figure 11: Project, System, and Component Hierarchy


Table 2: Schematic Project Cost Development from Component Price Estimates (in percentage)

Project 100.00System1 26.00

Component-1 5.00Component-2 13.00Component-3 8.00

System2 34.50Component-4 14.50Component-5 2.00Component-6 5.00Component-7 13.00

System3 39.50Component-8 13.00Component-9 13.00Component-10 13.50

The system cost estimate (such as Table 2) can be developed by identifying all of the cost categories for each of the components in a system (Figure 13), and summing for all of the components. By way of further example of the costing process, Figure 13 provides a sample cost breakdown of the concrete footing component. Once a quantity (generally in cubic meters) is noted for the component, fairly detailed construction drawings and specifications for the component can be developed. The authors, based on their construction experience, believe that variation in construction specification will be minimal, for example the concrete footing component is universally recognized and entails very few regional and local modifications. Similarity of this component in the African context was depicted in Figure 5.


Figure 12: Hierarchical Breakdown for Structural System

Figure 13: Cost Breakdown of a Construction Component

Another important point brought forward by Figure 13 is that cost of labor is directly related to the quantity of materials required for the component. This inherently allows the inclusion of labor productivity in the cost calculations. A country where labor productivity is relatively high will use less labor in the cost calculations. Also included in the scheme is the equipment cost. This allows the calculation to directly capture the labor/equipment tradeoff. In a country where construction is equipment intensive, the construction equipment factor will be higher as compared to a country where labor is more often used.

The method for identifying test SPD’s described in this report is easily visualized using the schematic hierarchy of Figure 11. Field observation allowed determination of the means and methods of construction employed in the seven countries visited. It was then possible to consider the components represented by the various cells in the hierarchy and to label each one in a given country by its level of representativity and comparability (Figure 14). All components not identified as representative or comparable were then eliminated from consideration for SPD development (Figure 15). Figure 15 provides a simplified explanation of the process used for


derivation of the basket of components. In essence, the authors have eliminated those components that exist in at least one system, but not necessarily in all. In reality the basket will consist of some components that are not fully representative of the local construction sector. This situation will be handled through appropriate SPD and PS formulation and use of appropriate calculation procedures.

Figure 14: Component Comparison Assessments

Figure 15: Component Identification by Process of Elimination based on Assessment of Comparison

It is clear from the observations of the authors in the field that dramatic differences exist in too many components to ever hope to achieve comparability and representativity even at a system level. This simple explanation becomes the crux of the BOCC approach and also acts as a


bedrock principle for guiding the selection of components for the BOCC approach. Given this observation, it seems that an understanding of the relative cost contribution of various systems from any construction project could be a useful guide to the establishment of priorities for components within those systems.

The relative cost of various systems within a project will vary based on the nature of the project, the economic conditions, and the geographic setting, among other influences. Perhaps as a consequence, the technical literature in construction includes relatively little of this kind of information. The authors are aware of no systematic collection of such cost breakdowns. A number of cost distributions for different systems within a project were identified for particular contexts, as outlined in the following tables. These cannot be translated directly into any regional context, of course, but are instructive in establishing the approximate cost contribution at the system level.

The R.S. Means Company catalogs construction cost data for approximate estimating purposes, and produce construction cost handbooks that are widely used throughout North America. These handbooks rely heavily on one approach to system identification of the project, particularly for building construction, which is also heavily used in North America. This is the Construction Specification Institute (CSI) divisions (a widely used system for categorizing and presenting cost data, construction product information, drawings identification, market data, project manuals and the specifications they contain and other construction documents) according to the materials of construction and/or the common skills of trades grouped by subcontractors on a typical project. Table 3 shows a typical system and component contribution for building construction projects in North America. The table is based on historical information available to R.S. Means, and includes primarily commercial buildings.

Table 3: Cost Contributions for Building Construction (Source RS Means Handbook for Estimating)

No. CSI Division

Cost %

Functional System Identificati

on

Combined

Percentage

2 Sitework 5.1Sitewor

k 5.1%

3 Concrete18.

4 Structural System

44.8%4 Masonry

10.1

5 Metals 6.36 Woods &

Plastics1.7 Not

easily attributed


7Moisture Protection 4.9 Envelop

e8

Doors, Windows, Glass 5.8

10.7%

9 Finishing10.

4Finishin

g 10.4%

15 Mechanical19.

3Mechan

ical 19.3%

16 Electrical 9.5Electric

al 9.5%

10 to 14 All others 8.5

Not easily attributed

TOTAL10

0

The R.S. Means cost distributions (Table 3) are U.S. averages. A number of cost estimates for various light construction projects in Southern California were reviewed by the authors, in order to make a similar distribution of costs for 2003-2004 in a specific geographic region, namely Southern California (Table 4). Costs are construction costs only, and do not include permitting costs, development, insurance and bonding costs, or profits. Sales taxes for applicable materials expenditures are included. The values in Table 4 demonstrate that, while there are obvious differences that may result from geographic or temporal influences, nonetheless the relative contributions of these various systems are similar in these data sets.

Table 4: Cost Contributions for Light Building Construction in Southern California

System Cost Contribution (%)

Structural 41%Envelope 15%Interior

Partitions13%

Finishes 10%Mechanical 10%Electrical 7%General

Conditions3%


The U.S. Department of Energy compiles data on building costs in the residential sector (http://buildingsdatabook.eren.doe.gov/frame.asp?p=/bookdisplay.asp). A cost breakdown for a typical 1998 new residential structure, consisting of a 200 square meter structure of wood frame construction, is presented in Table 5. These costs represent construction costs only, but it may be important to note that other cost components, including offsite improvements and utility connections, financing, overhead and general conditions, marketing, sales commissions, and profit can be 40 to 60% or more of the total price to the ultimate consumer.

Table 5: Cost Contributions for U.S. Single-Family Residence (source: US Dept. of Energy)


Inspection and Permit Fees

4%

Structural Framing Foundation

36% 23% 13%

Envelope Windows and doors Exterior cladding

and roof

17% 8% 9%

Interior Finishes 27%

Mechanical 10%

Electrical 6%

The distribution of construction costs for a structure is also a function of the type of construction. Davis Langdon provides approximate cost models for a wide range of construction, including for this specific example a high-rise structure in central London (http://www.davislangdon.com/europe_middleeast/uk/images/tall%20buildings%20-%20september%202002.pdf). The distribution of costs for such a structure is presented in Table 6 below.

Table 6: Cost Contributions for High-Rise Structure in Central London (after Davis Langdon 2002)


Similarly Hanscomb Limited publishes “Yardsticks for Costing: Cost Data for the Canadian Construction Industry” that provides a system by system breakdown of construction costs for a wide variety of construction projects from the residential and non-residential sectors. Table 7 shows the cost contributions for different types of construction projects for the year 2000 for Canada. This shows the influence of the final facility usage on the breakdown of cost by system.

Table 7: Cost Breakdown for Construction in Canada for Year 2000 (Source: Hanscomb 2000)

Systems

Multi Level

parking

Garage

Light Industr

ialWareho

use

Commercial Office Building

Elementary

School

High rise

office compl

exSubstructure 9.1% 8.7% 6.4% 2.1% 1.8% 3.7%Structure 58.3% 21.2% 18.9% 16.2% 11.5% 20.1%Exterior Closure 7.0% 19.3% 36.4% 14.2% 16.4% 16.0%Partitions and Doors 0.7% 0.9% 7.0% 5.0% 7.4% 4.7%Finishes 4.0 7.8% 0.6% 8.4% 10.3% 9.3%Fitting and Equipment 2.8% 5.6% 0.0% 5.3% 8.8% 9.6%Mechanical 6.2% 17.7% 20.9% 26.5% 25.6% 19.9%Electrical 4.9% 12.3% 2.4% 14.9% 10.7% 9.3%General 7.0% 6.5% 7.4% 7.4% 7.4% 7.4%



Structural 26%

Envelope 25%

Interior Partitions

13%

Finishes 9%

Mechanical 18%

Electrical 5%

General Conditions

17%

Requirements and Fees Total 100% 100% 100% 100% 100% 100%

Civil works projects exhibit similar trends. Illi and Illi (1997) present cost breakdowns for road projects in two African countries. The breakdown of building projects by functional system is a natural outgrowth of the characteristics of building projects. Building projects are characterized by a large number of items, installed in relatively small quantities. Thus, a breakdown by the type of item installed or by the type of work is generally not practical. By contrast, civil works tend to consist of large quantities of a relatively small number of items. For example, a large roadway project will consist of earthwork, haulage and transportation, gravel, and paving materials (concrete or asphalt) in large quantities, with some additional minor elements (culverts for example) in small quantities. Accordingly, in civil works division of the work by type or work or by material, rather than by final function in the project, is reasonable. This approach is used for the Illi and Illi cost distribution (Table 8).

Table 8: Cost Breakdown for Gravel Road Projects (source: Illi and Illi 1997)

Category Cost Contribution (%), Zambia

Cost Contribution (%), Kenya

Haulage 22% 35%

Site Clearing 5% 6%

Formation 15% 7%

Drainage Structures

25% 16%

Quarry and Distribution

13% 22%

Compaction 15% 4%

Preliminaries 5% 10%

In this particular case, one can see that the various portions of the work will have distinctly different contributions to the overall project cost, even for very similar classes of projects, between different countries.

Based on these data and the experience of the authors, and the observations in the field, several systems were selected for development of test SPDs. Table 9 provides information on each system, the relevant SPD’s


selected for that system, and brief explanations for the choices made in each system. Items listed in parentheses are materials only. A small number of materials were chosen for simple material pricing in order to analytically test the superiority of component-level comparisons. Based on the range of project value indicated, it appears that the SPDs recommended in the residential and non-residential sectors are broadly representative of the construction work in excess of 85% of total project value (on an average basis).

Walsh et al. (2004) completed an extensive study on predicting the output of engineering productivity using basic measurable components of engineering design. The engineering design effort is similar to the construction effort in that everything installed is first designed (so a large number of components receive design effort), and design effort varies widely by component. Via regression analyses of complete project data, a very small number of design components were found necessary to accurately predict total design effort. This result is encouraging for the deployment of a small set of components to the overall construction effort.

Table 9: Preliminary System and Component Selections

System Test Components

Comments

Structural

10-60% of project value

Foundation

Column

(Rebar)

(Cement)

Reinforced concrete was the dominant structural system in use in all of the countries visited. Structural elements were observably similar in terms of overall dimensions, steel ratio, level of embeds, and quality of construction.

Envelope


(Cement) Great differences were observed in every facet of envelope construction, especially in the dominant wall infill material used to provide an exterior barrier. Differences in infill material come with significant changes in connection and installation methods for fenestrations, and the details of manufacture of the fenestrations themselves also showed significant variability. Roof construction details, means, and methods were identified by the NSO’s at several of the countries visited as a source of significant variability in previous ICP rounds, and thus not promising as an approach. Cement-based stucco or mortar seemed to be commonly used in each country visited.


Finishings


Cement-Plaster

Painting

(Cement)

The dominant materials for finishing and the level of decoration were rather variable in many aspects of construction, with the exception of the wall surfacing materials.

Mechanical


None selected

Details of service level and HVAC sizing and capabilities were dramatically variable from country to country. This area does not appear to be a promising arena for comparison.

Electrical


Service point

Service levels were dramatically variable between the countries visited, as are details of equipment and fittings. However, the dominant activity in this system appears to be relatively similar. Accordingly, by leaving the actual service receptacle and wiring material specification somewhat flexible, a reasonable comparison can be made.

CONVERSION OF COMPONENTS DESCRIPTIONS INTO SPD FORMAT

For the 2004 ICP round the World Bank has created a new approach for description of products using the concept of Structured Product Descriptions, or SPDs and Product Specifications, or PSs. SPDs are developed for product clusters under a basic heading. A product cluster consists of a relatively narrow range of products that have similar characteristics, serve similar functions or may be used for similar purposes (The ICP 2004 Handbook). For example in construction, residential buildings is a basic heading under which reinforced concrete columns can be considered a cluster. For the BOCC approach a SPD can be developed for a typical concrete column. Based on a pre-survey that can be conducted using this SPD detailed PSs can be developed that describe in detail a square column and a round column. This is shown in Figure 16 and Figure 17. Using this simple approach the authors developed a number of SPDs and PSs for the three basic headings for the construction sector. The SPDs and PSs are attached in Appendix A.


Figure 16: Description of Product Cluster Concept

Figure 17: Square Column and Round Column

PRICING STRATEGY FOR CONSTRUCTION COMPONENTS

Recently, Ward (2003) has provided an extensive summary of broad pricing strategies for the construction sector. Three pricing strategies are available for the construction price comparisons (Walsh and Sawhney 2002). These strategies differ in the level at which the price estimates are made and in the source of the pricing data. The three strategies include:

1) Input Strategy: In this strategy prices of the input to the construction sector are used. For a given construction project input factors in terms of material, labor, and equipment is obtained. These factors are then priced in order to determine construction indices that are generally temporal indices.


2) Output Strategy: Under this strategy the price of construction products is used to determine the price indices relevant to the construction sector. This allows inclusion of factors such as overhead, profit, and taxes etc.

3) Seller’s Price Strategy: This pricing strategy uses the prices of construction output paid by the purchaser or final owner of the output of the construction activity.

One thing is clear, that unlike the SPM approach, both BOCC and BOGS are amenable to multiple pricings within a country over the course of a year, thereby allowing one to capture variations in the price levels within a country and better capturing urban versus rural pricing. Comparisons and discussions of the basket-of-goods and standard project approaches often describe the implications of the difference between input prices in the former and output prices in the latter. In other words, the basket-of-goods or BOCC approaches will typically capture the prices that primary contractors will pay for goods, and hence measures input prices to the construction process. The standard projects approach, however, explicitly includes other cost categories, such as VAT, overhead, and profit. As previously explained in this report, the accuracy of the estimates of the other costs likely to be included in the BOQ pricing for the SPM is highly suspect, especially for reduced BOQ. Thus, while the question of pricing level is sometimes described as an advantage of the SPM, in the authors’ opinion this description is based on a flawed assumption. The authors understand that depending on how the national accounts are formulated in the construction sector it may be necessary to account for these other costs. However inclusion of these markup factors is going to be problematic regardless of the underlying price comparison methodology, and will require serious consideration by the ICP.

DESIGN OF EXPENDITURE WEIGHTS FOR BOCC APPROACH

The design of expenditure weights for the BOCC approach is a complex task and might require the service of a domain expert. The expenditure weighting process is likely to be problematic regardless of the method used for the construction-sector PPP. Development of a weighting method is outside the scope of this project. The authors have made adequate provisions in the design of the baskets to ensure future integration of expenditure weights; however it is ultimately decided to proceed. Such future incorporation of expenditure weights should not adversely affect the SPD data collection instruments.

The authors have come up with a preliminary design that can be adopted for aggregation of components and systems. For the BOCC approach, the following three steps might be required to handle the expenditure weights:

1. The construction components are deemed to be at a level that their quantities and expenditures can not be determined from national accounts. As such the estimation of elementary PPP for these components can be purely on the basis of the price observations


using methods described in the ICP 2004 Handbook. It is envisioned that the components are aggregated using a geometric mean as described in the handbook. This level of construction comparison becomes a binary comparison. Aggregation could be performed using the quasi-EKS approach. Wherever prices are not provided by the countries the Country Product Dummy (CPD) approach can be used to statistically determine missing data;

2. The second level of aggregation will occur at the system level where predetermined regional weights will be used. For example using residential construction sector as an example, first aggregation of components will occur system by system and then systems will be aggregated based on their relative weights. These weights for systems will be determined based on the principle described in Table 5. A similar approach will be used for the non-residential and civil engineering sectors; and

3. Construction sector PPPs will be derived by aggregating residential, non-residential, and civil engineering works basic headings. This level of aggregation will be performed using existing weights used by SPM.

This approach is described with the help of a hypothetical example. This example is shown in Table 10.

Table 10: Sector, System, and Component Aggregation for BOCC

System Component

Country A Country B Country C Country D

Syst

em 1

Component 1

DR1 DNR2 DR ND3

Component 2

DR DR DNR ND

Component 3

DR DR DR DNR

Syst

em 2

Component 4

DR ND DR DR

Component 5

DR DR DR DR

Syst

em

3

Component 6

ND DR DR DNR


Syst

em 4

Component 7

DNR DR DR DR

Component 8

ND DR DR DR

Component 9

DNR DR DR DR

Component 10

DR DNR DR DR

1 DR means price data available and representative; 2 DNR means price data available but not representative and 3 ND means no price data available

In the hypothetical example the basket used for comparison consists of four systems. Each system is further broken down into its respective components as shown in the table. Pricing data is collected from four countries in a given region. The pricing data collected is summarized in the table. Clearly some countries in this example were not able to collect prices for certain components and certain components that were priced were not representative of the local construction. In this hypothetical example the first step will be to statistically determine the missing price information using existing and tested methods such as CPD. Once all the pricing information is available comparisons of components can be performed. The component comparison will be conducted system by system i.e. components 1, 2 and 3 will be aggregated separately for system 1, components 4, 5 and 6 will be aggregated for system 2 and so on. After completing this step system level PPPs will be known. At the system level aggregation will be performed using system weights. Table 11 shows hypothetical system weights. Using these weights the systems can be aggregated. Once the system level aggregation is complete the basic heading level PPPs can established. So for example if this hypothetical basket is assumed to represent the civil engineering works sector the PPP values calculated using the process explained above will provide PPPs for civil engineering work.

Table 11: System Weights

System Percentage Weight

System 1 12 %

System 2 25 %

System 3 28 %

System 4 35 %


OTHER ISSUES RAISED

Several other significant issues need to be addressed in relation to comparison of construction prices in order to finalize the implementation framework. Examples include the possibility of so-called “front-end loading” (recall discussion of AHR and ALR on page 18) and the treatment of informal construction.

Front-end loading: In unit-price bidding, contractors sometimes unload unit prices for some items, making them unrealistically low, and load those prices onto some other unit rate, making those unrealistically high. For example, sometimes a contractor will report unit rates for the early stages of the work that are higher than actual costs, in order to support the mobilization effort and improve their cash flow, and then make up for that by bidding lower unit rates for some activities near the end of the project. If a contractor believes that unit rates on particular activities may be instrumental in the contractor selection, they may bid lower on those activities, and correspondingly higher on some other activities. In some cases, a contractor may believe that some activities will end up with dramatic quantity over-runs compared to the design documents. For example a contractor may suspect that soil conditions will turn out different than the design expectations and that as a consequence much more earthwork and much more foundation concrete than shown on the plans will be required. Based on this expectation, the contractor might bid unusually high unit rates for those activities, hoping to make windfall profits. They will often make up for this by giving lower-than-expected bids on some activities they expect to be quite well described on design documents. All of these schemes may occur in a real bid, and add to the variability of unit prices in the actual construction economy.

Because the component approach isolates components from their total project value, such artificial bids are unlikely to be provided on the component SPD’s. Construction experts approaching this pricing would have no motivation for front-loading or other manipulation of rates because the price survey instruments would be clearly different from the competitive bid projects in which these approaches are sometimes adopted. Given that the BOCC relies on producer prices, such manipulation should not be problematic anyway, because the differences between actual costs and abnormally high or low rates occur in the other costs/profit portion of the rate, and not so much in the producer costs portion of the rate. Furthermore, NSO’s are expected to enlist the aid of experts to complete the necessary pricing. The science of identifying AHR and ALR unit rates is well known and commonly conducted by owners or owner representatives in countries where such bidding practices are common. Thus, the construction experts working for the NSO’s should be readily able to distinguish any such artificial bids in the SPD results. Furthermore, the point has already been made that any construction expert providing component prices for ICP purposes will be well aware that these prices are for hypothetical and fictitious projects, so that they have no possibility of winning or losing any work based on the values they provide. Recall from above that the reason ALR and AHR


are bid at all is the perception that such bids will improve a contractor’s chances of winning a project. Given these facts, it is difficult to conceive of any motivation for consulting experts to manipulate the prices they report.

Informal Construction: Construction activities are conducted by ordinary citizens in all countries. The authors have completed many projects in their own homes, or on behalf of charities, that might otherwise have been contracted to a construction company to conduct. Informal or own-account construction such as this is a reality of capital formation in the construction sector that will be hard to appropriately accommodate in any system of construction price comparison one might adopt. Informal construction such as this is more common in rural areas than in urban settings, and is more prevalent in developing nations than in the developed nations. Further, in developing nations, construction using found materials is also prevalent, which means there are no expenditures for construction materials that might indicate such economic activity.

While the authors acknowledge that this kind of construction will require some treatment in the process, it seems clear that this could also be said for any of the systems for price comparison under consideration (SPM, BGS, or BOCC). In all of these approaches, prices collected directly for the comparison will not reflect the own-account construction variations between countries, particularly considering the variations in use of found materials. As a result, some level of correction will be required to appropriately treat this kind of construction. In the authors’ opinion, the issue relates more to the methods used for the development of the construction expenditure estimates for the national accounts than it does to the comparison of prices, but admittedly some harmonization in both aspects of the problem will be required.

DEVELOPMENT OF TEST SPD FOR BOCC

BRIEF SUMMARY OF FIELD WORK

Field work to support the development of Afro-centric SPD’s based on the BOCC concept was conducted in February and March, 2004. Seven African countries were visited, as shown in Figure 18 and Table 12. The visits were arranged at the invitation of the National Statistical Offices in the respective nations, under the auspices of the African Development Bank Group.

Field visits were conducted to obtain several kinds of information, including:

An understanding of the means, methods, and materials of construction in use in the respective nations. Photographic documentation of several construction sites was obtained in each nation (except in Egypt where government policy disallows photography of state buildings by foreign nationals). In addition, discussions with architects, engineers or construction managers


were conducted regarding standard construction details in several systems.

An understanding of the construction economy in each nation, in particular the extent and capability of construction companies in the respective nations.

Some general ideas for sources of pricing information or construction cost values, if available.

An understanding of the process used by the National Statistical Office for developing price statistics in the construction sector, in particular in regards to the International Comparison Program.

Table 12: Visit Schedule for this Project

Country Visitor Dates of VisitTunisia Walsh February 10-16, 2004Egypt Walsh February 16-21, 2004

South Africa Sawhney February 21-24, 2004Ghana Walsh February 21-24, 2004

Rwanda Sawhney February 25-29, 2004Cameroon Sawhney March 1-4, 2004

Kenya Sawhney March 5-8,2004

Figure 18: Geographic Distribution of Visits on the African Continent (shaded countries were visited)

The overall objective of these visits was to identify components of sufficient similarity between countries that they could serve as portions of


the BOCC (Figure 19). In order to ensure that the eventually-selected components were representative and comparable, it was necessary to make direct observations of methods on the ground, as this kind of detailed information is not found in archived documents, texts, or other secondary sources. Equally important to the observation of similar components is the identification and appreciation of dissimilar components. For example, the materials and methods used for exterior building envelopes differed dramatically among the various countries visited. Based on this observation, it is quite clear that a representative set of components or projects for pricing based on the exterior building envelope would be very problematic to develop.

Figure 19: Relationship between Field Visits and Project

In advance of our visits, the National Statistical Offices in each country received the following summary of possible questions:

1. Describe the process you use to obtain prices for the construction sector price comparison. It may be helpful as a means of providing context to this question to describe the process used for the standard projects method in the last round of ICP data collection. Is the process you use for obtaining prices in the construction sector similar to that you use in the other sectors?


2. Describe your opinions of the standard projects method. Did the method work well, in your opinion? Why or why not? Did the method require allocation of resources to obtain the necessary prices? Do you have confidence in the results? It may be necessary and appropriate to have different opinions regarding the different projects.

3. Provide general descriptive statistics about the construction industry in your country? These would include the approximate size of the industry by turnover or percentage of GDP, the approximate number of citizens employed in this sector, and the approximate number of construction companies. Preferably, this information could be broken down into construction materials suppliers and construction contractors. If possible, please estimate the percentage of construction contracts completed by companies native to the country, compared to those completed by companies from abroad. Similarly, what fraction of construction materials are manufactured primarily in-country, versus imported, and what types of construction materials must be imported?

4. What percentage of construction is financed by the government as compared to private individuals (may vary by sector, i.e., residential, non-residential, and civil works)?

5. To what extent are construction material prices controlled by government intervention?

6. In the residential sector, roughly what percentage of housing is owner-constructed, and of this what percentage might be composed largely of found materials?

Items of interest on construction sites:

1. Foundations under construction at residential (single and multi-family) and office buildings (or other commercial), roadways. Under ideal circumstances, we would like to observe some construction while it is actually occurring, in order to get a sense of labor and equipment requirements.

2. If possible, copies of plans or blueprints for projects observed, showing dimensions and relevant specifications for these specific elements. That is, a copy of the structural plan sheets showing the foundation detail, the foundation plan, and relevant specifications covering, for example, structural concrete and reinforcing steel, would be desirable.

3. What safety equipment do workers commonly use? What kinds of training are offered to workers?


In no case were all of these details available in each country. The visits were, by design, intended to develop largely qualitative understanding of the industries rather than quantitative results.

In pursuit of these details, country visits included some or all of the following:

Meetings with the National Statistical Office

Meetings with construction managers, engineers, architects, or other representatives of the construction industry

Visits to construction sites

Visits to outlets for the sale of construction materials

Visits to retail outlets for other (non-construction) consumer goods

Taking advantage of proximity the visit to Tunisia also included meetings with personnel from the African Development Bank Group.

PRESENTATION AND DISCUSSION OF COMPONENTS AND THEIR SPDS

Based on the data that was collected during field visits a number of construction components belonging to a number of construction systems for different types of construction projects were identified. The identified components along with the construction sectors they belong to are listed below in Table 13.

Table 13: List of Construction Components

Basket Component Name Construction System

Res

iden

tial S

ecto

r

Structural Column StructuralFooting StructuralPortland Cement StructuralReinforcing Steel StructuralCement Plaster FinishPainting FinishElectrical Service Point Electrical[Air handler] Mechanical[Install DH Alum frame window]

Envelope

[Install pre-hung door] Interior Partitions

Non

-re

side

ntia

l Se

ctor

Structural Column StructuralFooting Structural[Elevated concrete slab] StructuralPortland Cement StructuralReinforcing Steel StructuralCement Plaster Finish


Painting FinishElectrical Service Point ElectricalNetwork Service Point Electrical[Air handler] Mechanical[Install DH Alum frame window]

Envelope

[Install pre-hung door] Interior Partitions

Civ

il En

gine

erin

g W

orks

Se

ctor

[Excavate 100m trench] Site Preparation[Compact ___m3 of fill] Site Preparation[Move ___m3 of soil a distance of ___km]

Haulage

Structural Column (bigger?)

Concrete

Footing ConcretePortland Cement ConcreteReinforcing Steel Concrete[Pave 1 lane-km of roadway]

Asphalt concrete

[Drainage culvert] or [Pipe Installation]

Utility/Drainage works

These components were then converted into SPD and PS format. A sample SPD is provided in Appendix A.

PRELIMINARY TESTING

A wide range of testing is possible for this effort, ranging from qualitative review of the SPD’s through a detailed numerical evaluation of the results captured. Numerical assessment of the results is not appropriate at this point, as the focus of this project was developmental. Collection of data using these instruments can proceed as recommended in this report, which will facilitate the necessary numerical testing.

Qualitative testing of SPDs has been performed, with the objective of obtaining feedback on whether they can be readily priced and understood. Qualitative reviews were obtained via the ICP-Africa workshop, where the proposed SPD’s were presented for discussion. Comments from these sessions were incorporated in the final SPD’s included herewith. Additionally, the feasibility of pricing these instruments in a wider context was tested via attempting to price them using readily available industry data in other regions. Using such procedures, the authors found that the instruments can be very readily priced in Canada, Australia, and the US, using readily available archival sources. This finding is very encouraging, as it suggests that the SPD’s may be appropriate for pricing in a wide range of ICP contexts. Evaluation of the quality of any resulting PPP’s calculated from these PPP’s will be greatly enhanced via some theoretical consideration of the appropriate benchmark for comparison of construction sector PPPs.


ADVANTAGES OF BOCC

The authors envision numerous advantages of the BOCC approach. One key benefit stems from the fact that the proposed BOCC approach significantly reduces resource requirements in the price collection process. This reduces the strain on NSOs which was generally felt in past ICP rounds due to the SPM method. Additionally the BOCC approach shows promise as a temporal index method. Many countries that are in the process of building construction price indices for their countries can consider using a modified form of the BOCC approach. This will allow significant overlap between the ICP effort and country specific temporal index exercise. Statistical capacity building efforts especially for developing countries can be significantly impacted by such efforts. Both the resource requirement reduction and this overlap provide significant benefit in furthering the sustainability issue of ICP into the future. The authors found this aspect especially encouraging during there visits. Countries such as Rwanda and Cameroon that are in the process of establishing their national statistical institutes showed great enthusiasm at the prospect of utilizing ICP efforts in their country specific statistical work. Numerous other African countries showed strong interest in this work during the ICP-Africa Workshop in Yaoundé in April 2004.

SUMMARY AND CONCLUSIONS

Several methods are available for the comparison of prices in the construction sector. The authors have broadly classified them as the SPM, BOGS, and BOCC methods. Based on calls for the consideration of alternatives to the SPM (Stapel 2002, Dubner & McKenzie 2002, Heston 1999, Ward 2003), an implementation of the BOCC approach has been developed for the African context. In the next section, a detailed depiction of the recommended application of this method is described.

In order to develop necessary background on construction means and methods in Africa, the authors conducted field investigations of construction in seven Africa countries widely spread across the continent in February and March, 2004. These visits provided practical insights which confirmed expected concerns about the application of the current standard projects pricing used in the CIP (Walsh and Sawhney 2002). Based on the field observations, the authors conclude that there continue to be problems both conceptual and practical with the SPM, even with the reduced set.

A key finding which supports the viability of the BOCC-based approach was the observation that many strikingly similar components are available for pricing in all of the countries observed. Indeed, many components were observed which suggest the possibility that the component approach will be quite viable in a larger international context, given similarities observed between components in the African context and the authors experience with other regions. However, some significant differences in several components were also observed, leading the authors to conclude that pricing across an


entire project is unlikely to be both representative and comparable. Furthermore, dramatic differences in the degree to which equipment was used to replace labor and the concomitant differences to be expected in labor productivity suggest that a BGS approach is unlikely to be effective at the international level, but might be workable in comparisons in relatively homogeneous regions.

RECOMMENDED PROCEDURE FOR IMPLEMENTATION

The authors recommend that the African Development Bank Group provide assistance to National Statistical Offices across the African region to collect data using the Standard Product Descriptions and Product Specifications for the construction components attached to this report, and those still under development. This phase of deployment can be perceived as a testing or pilot phase, wherein additional requirements for guidance in the SPDs/PSs can be identified and the representativity and ubiquity of the components can be checked. With this round of testing, the resulting data will allow a complete computational test of the price comparison via several different methods. Most critical to test at this point appear to be weighted and un-weighted methods.

The price comparisons recommended by the authors are to be performed using the three baskets developed for the construction sector. These baskets consist of construction components that have been identified by the authors. Table 13 shows the three baskets and the components included in these baskets.

NSO’s with the assistance of construction experts are required to obtain prices for all components included in the three baskets. For this pilot phase, prices should be obtained based on construction in the capital city, and assuming mid-year prices are appropriate. Future implementation can be conducted in multiple locations across the country (including rural locations), and at multiple times, given that the effort to price the components is not excessive. The price collection will occur in the provided SPDs and PSs. The price data can also be uploaded via the ICP ToolPak.

It is recommended that the pricing information from African countries be collected centrally by AfDB. Once all the price data is obtained from AfDB a regional aggregation will be performed. For the pilot study, the authors propose to use binary comparisons to get the PPP, relying on a mean or EKS* approach.

An additional study that would improve the implementation and allow testing of the weighting versus non-weighting methods could be supported by this round of data collection if the NSOs also ask their consultants to provide at least 20 project cost breakdowns from real projects conducted that year in the country, in the national currency, in each sector. A range of project types and sizes for each project as wide as possible would be desirable. The authors recommend that region by region studies should conducted to assign value percentage for each component. The authors


could come up with some approximate weights for this stage as part of the pilot, if needed, at least in the building sectors.

One critical problem for this proposed testing of the BOCC concept is that it is not at all clear how the “correctness” of the answers can be assessed. The results from BOCC can be converted to construction sector PPP’s which will likely be different from the overall PPP calculated using current methods that do not incorporate the construction sector, and from PPPs based solely on some other sector(s). Thus, it is important to recognize that some theoretical consideration of how one can assess the quality of the resulting PPPs must be conducted. Further, while the set of components suggested in this research is significantly smaller to price than the current (SPM) method, and also less than the 60 recommended by Dubner and McKenzie (2002), it remains possible that even this set is too large (or too small). Some rational approach to testing the size of the basket should be conducted, but this work presupposes the completion of the theoretical assessment of PPP quality suggested above.

ACKNOWLEDGMENTS

This work and the resulting reports would not have been possible without the support of a number of people and institutions. First and foremost, the authors wish to acknowledge the contributions of Mr. Yonas Biru of the World Bank Group for his guidance and support. His detailed comments on earlier drafts and his suggestions helped shape the BOCC approach that the authors here advance. The authors will also like to acknowledge the support of the African Development Bank Group (AfDB) and the World Bank. Alan Heston, Michael Ward, and Derek Blades reviewed the draft report and provided numerous suggestions that resulted in improvements to this report. The authors will like to acknowledge them for their suggestions.

In addition the authors will like to thank the following individuals for their assistance, support and encouragement in the work performed for this report:

Mr. Charles Lufumpa and, Mr. Michel Mouyelo-Katoula, and the ICP-Africa team at the AfDB

Mr. Joe De Beer and Mr. Eugene Kgantsi, Statistics South Africa, Pretoria, South Africa

Mr. Philippe Gafishi, Jean Baptiste Nyarwaya, and Mr. Obald Hakizimana, Ministry of Finance and Economic Planning, Kigali, Rwanda

Mr. David Otieno Nyasio, Mr. Pasquel Kagema Gichohi, and Mr. David Mwalika Mboni, Central Bureau of Statistics, Nairobi, Kenya


Mr. Joseph Tedou, Mr. Joseph Guy Benjamin She Etoundi, Mr. Claude Tchamda, and Théophile Bougna, National Institute of Statistics, Yaoundé, Cameroon

Mohamed Fotoh Aboul-Atta, Bakr Abu El-Nasr Sultan, and Makarem salí Azer, Central Agency for Public Mobilization and Statistics, Cairo, Egypt

Asuo Edward Afram, Philip Venyo Debra, and Bema Wadieh, Ghana Statistics Service, Accra, Ghana

Naceur Garboubi, Abdelkader Saddoud, and Ridha Benzarti, National Statistics Institute, Tunis, Tunisia


REFERENCES

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http://www.worldbank.org/data/icp/documents/dean.doc

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APPENDIX A

SPDs for Construction Components


Structural Footing (SPD/PS for the Residential and Non-Residential Sub-Sector)

Source Information:Date of price collection:

Describe source of price

□ Architect □ General Contractor

□ Engineer □ Specialty Contractor

□ Average, Price Index data collection □ Other (_________________________)

Quantity and Details:This item is intended for collection of pricing data for a footing element for a structure. A general case price is desired, reflective of the most common conditions faced for installation of this component of a structure. For purposes of this pricing, assume that the total structure contains 36 column footings with dimensions shown in the figure below. The pricing information required is for a single column footing. This item is intended for collection of prices for the structural phase of construction only. Excavation and any preparation of the footing base (such as compaction, placement of a layer of gravel, or placement of a layer of lean concrete) is specifically excluded from this item. The item includes all labor, equipment, and materials required to erect the formwork, tie and place the reinforcing steel and place concrete as shown.

Product Characteristics:Reinforcing Steel Characteristics:

Tensile Strength (MPa):Grade:Concrete Characteristics:

Compressive Strength (MPa):Cement Type:

Concrete mixing method:□ Site mixed

□ by hand


Maximum aggregate size: □ mechanical mixer□ Ready-mix delivery

Concrete transport method:□ hand carried□ block/tackle□ crane lift

Formwork materials:□ Prefabricated form□ Plywood □ Steel□ Steel or aluminum

Pricing Information: (For One Column Footing)Material Costs (in national currency)Type Quantity

(Column 1)

Unit Cost

(Column 2)

Extended Material Costs (Column 1 X

Column 2)

Concrete (includes a 15% overrun)

0.104 cubic meters

Steel 0.012 Tonne

Formwork

Other (List)

TOTAL COST FOR MATERIALS (in national currency): _____________(a)

Labor Costs (in national currency)

Type:

Number of Hours Required (Column 1)

Rate per hour

(Column 2)

Extended Labor Costs (Column 1 X Column 2)

Unskilled Labor

Skilled Labor (list by type):


TOTAL COST FOR LABOR (in national currency): _____________(b)

Equipment Costs (in national currency)

Type:

Number of Hours Required (Column 1)

Rate per hour (Column 2)

Extended Equipment Costs (Column 1 X Column 2)

TOTAL COST FOR EQUIPMENT (in national currency): _____________(c)

Total Price for one column footing(in national currency – sum of a, b, and c): _____________________


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