Producer Price Indexes

Producer Price Index Introduced for the Nonresidential Building Construction Sector—NAICS 236221

With the release of data for July 2005, the Bureau of Labor Statistics expanded the Producer Price Index (PPI) by introducing an index measuring the changes in output prices for new warehouse building construction. This index is classified under a PPI-specific 2002 North American Industry Classification System (NAICS) code, 236221. Data for this industry reach back to December 2004. The index for NAICS 236221, new warehouse building construction, is the first measure developed and published by PPI as part of its Nonresidential Building Construction (NRBC) initiative. This index will appear in table 5 of the PPI Detailed Report and is available online through the BLS website.

In the late 1990s, BLS began the NRBC initiative to develop output price indexes for the nonresidential building construction sector of the U.S. economy. Ultimately, the initiative, as currently funded, will yield output price measures for four types of nonresidential building structures and for the work performed by contractors from four trade groups on nonresidential building structures. The initiative is noteworthy for several reasons. It expands coverage into an important sector of the U.S. economy previously not measured by the PPI. The value of private fixed investment in structures totaled $995 billion in the first quarter of 2005. This represented about 8.2 percent of the total gross domestic product (GDP) in the same period. Nonresidential structures alone represented $294 billion, or about 2.4 percent of total GDP. These new measures will provide BLS data users with information not available from other sources. The initiative also is important because the Bureau of Economic Analysis of the U.S. Department of Commerce has indicated an interest in using the BLS data to improve its GDP deflator estimates for the nonresidential building construction sector.

Prior to this initiative, neither BLS nor any other public or private entity published output price indexes measuring changes in average U.S. prices for nonresidential building structures. This deficiency in the available macroeconomic statistics measuring the U.S. economy has been a longstanding issue. (See, for example, National Bureau of Economic Research (NBER), The Price Statistics of the Federal Government (New York, Columbia University Press, 1961); and Paul Pieper, "The Measurement of Construction Prices: Retrospect and Prospect," in Fifty Years of Measurement: Proceedings of the Fifth Conference of Research in Income and Wealth (Chicago, University of Chicago Press and NBER, 1991), pp. 293-327.) BLS is following a methodological approach that will yield national weighted-average estimates of output price changes for selected building types. The approach adopted by BLS is one that will be sustainable over time given the constraints imposed by factors such as the PPI’s Laspeyres index framework and the fact that the PPI is a voluntary monthly survey completed by profit-maximizing firms.

Table 1 lists the output price indexes BLS has committed to develop as part of this initiative, along with the projected dates of public release for each index.

Table 1. Projected release dates of nonresidential building construction indexes

Index Projected year of public release
New warehouse building construction 2005
New school building construction 2006
New office building construction 2007
New manufacturing and industrial building construction 2008
Nonresidential electrical contractors 2008
Nonresidential plumbing, heating, and air-conditioning contractors 2008
Nonresidential roofing contractors 2008
Nonresidential concrete contractors 2008

Note that these indexes will include only work associated directly with building construction activities. Therefore, by definition, outputs such as preconstruction site preparation work, postconstruction landscaping or reclamation work, architectural fees, and building design fees are not in scope.

The basic steps in the current BLS nonresidential building construction index methodology are the following:

Step 1: Establish model building specifications
Step 2: Select survey respondent samples
Step 3: Select building assemblies for pricing
Step 4: Obtain monthly price updates

A major methodological hurdle that BLS faces in developing output price indexes for nonresidential building structures is how to price outputs in a Laspeyres index framework. The output of the nonresidential building construction sector is heterogeneous and takes months or years to produce. The approach being followed by BLS is a variation of those employed by other statistical agencies, particularly Statistics Canada, that have developed building construction output price indexes. BLS is using a methodology in which building models are developed and specified to represent the particular building type being constructed in the marketplace. Multiple warehouse models were developed to accommodate regional variations in warehouse building design. The building models are described as a series of unique production elements or "assemblies" in BLS terminology. Each building assembly represents a building construction activity that can be fully defined as a unique portion of the total project. Each assembly is made up of unit price components that define the specific type and quantity of materials, labor, and equipment necessary for the assembly’s installation. Table 2 is an example of this breakdown for the slab on grade (floor) assembly for a BLS warehouse model building.

Table 2. Cost breakdown for a sample building assembly

Activity Description Quantity Measure Material cost Installation cost Total cost
Assembly Slab on grade, 5" thick, heavy industrial, reinforced 37,500.00 S.F.1 $87,987.12 $87,871.04 $175,858.15
Unit Fill, gravel fill, compacted, under floor slabs, 4" deep 37,500.00 S.F.1 $5,625.00 $3,586.73 $9,211.73
Unit Fine grade area to be paved with grader, small area 4,125.00 S.Y.2 $0.00 $8,043.75 $8,043.75
Unit Expansion joint, premolded, bituminous fiber, 1/2" x 6" 8,250.00 L.Y.3 $3,135.00 $4,400.00 $7,535.00
Unit Forms in place, slab on grade, edge forms, to 6" high, wood 1,125.00 L.Y.3 $454.62 $1,362.30 $1,816.92
Unit Welded wire fabric, sheets, 6 x 6 - W2.1 x W2.1 (8 x 8), 30 lb/CSF 375.00 C.S.F.4 $3,532.50 $5,688.39 $9,220.89
Unit Concrete, ready mix, regular weight, 3,500 psi 562.50 C.Y.5 $39,093.75 $0.00 $39,093.75
Unit Curing, sprayed membrane curing compound 375.00 C.S.F.4 $1,942.50 $999.16 $2,941.66
Unit Placing concrete, including vibrating, slab on grade, 4" thick, direct chute 562.50 C.Y.5 $0.00 $4,626.54 $4,626.54
Unit Finishing floors, monolithic, machine trowel 37,500.00 S.F.1 $0.00 $13,003.64 $13,003.64
Unit Finishing floors, granolithic topping, 1:1:1-1/2 mix, 1" thick 37,500.00 S.F.1 $10,672.50 $33,130.43 $43,802.93
Unit Finishing floors, hardener, metallic, heavy service, 1.0 PSF, add 37,500.00 S.F.1 $22,500.00 $11,003.08 $33,503.08
Unit Building paper, polyethylene vapor barrier, standard, .006" thick 37,500.00 S.F.1 $1,031.25 $2,027.03 $3,058.28

    

1 Square foot

2 Square yard

3 Linear foot

4 100 square feet

5 Cubic yard

A professional cost-estimating firm developed the building models under BLS direction. To achieve an output price, BLS combines the detailed material and installation (labor and related equipment) cost data, which are updated quarterly by the cost-estimating firm, with margin (overhead and profit) data collected monthly by BLS directly from building construction contractors. BLS aggregates output price changes captured at the assembly level each month to represent the change in output price for the total structure. Therefore, the BLS output indexes attempt to measure changes in the input costs for these structures plus the change in contractor markups.

When the model specification step is completed, BLS selects a sample of survey respondents to provide overhead and profit percentages that are applied to the cost data obtained from the cost-estimating firm. BLS asks general contractors to provide an overhead and profit figure for managing the project and to provide overhead and profit percentages for any assemblies that the firm would typically install. To select the assemblies that trade contractors price, BLS identifies which trade would install each of the 50-plus assemblies that are included in each model. BLS requests that each participating trade contractor provide overhead and profit figures for up to four assemblies that the firm would install in the specified warehouse. The region in which each firm is based determines which warehouse model BLS uses for obtaining the requested overhead and profit information from that firm.

Each month, survey respondents receive a pricing form for each assembly for which the firm has agreed to provide an overhead and profit percentage. The form includes the current quarter’s estimated costs for materials and installation (labor and related equipment), the assembly description, a general description of the warehouse, and the most recent overhead and profit figures provided by the respondent. While not requesting actual transaction prices, BLS asks survey respondents to submit the overhead and profit figures they would add to the estimated cost information if their firm were to submit a bid for this warehouse project in the current month. BLS instructs respondents to consider the normal factors that affect their bidding decisions, such as their firm’s current level of work inventory, project complexity and size, and prevailing economic conditions. Each month, BLS asks the firms to consider these factors anew when submitting their current overhead and profit figures.

BLS plans to update the building models every 5 years, according to the process outlined earlier in this article. In the intervening years, the vendor will make adjustments to the assemblies in the models as shifts in construction practices dictate. BLS will attempt to make quality adjustments for these changes. BLS intends the indexes to reflect price changes associated with the current materials and construction techniques used in the marketplace to construct the targeted structures.

Last Modified Date: January 3, 2006

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