SOURCES AND METHODS CONSTRUCTION PRICE …

1 1 SOURCES AND METHODSCONSTRUCTION PRICE INDICESS tatistics Directorate, Organisation for Economic Co-operation and Development, ParisStatistical Office of the European Community, Luxembourg2 FOREWORDThis publication is the result of joint work between the Statistics Directorate of the Organisation for Economic Co-operation and Development (OECD) and the Statistical Office of the European Communities (EUROSTAT). Theobjectives of this collaboration were to outline conceptual problems in the development of CONSTRUCTION PRICE indices,based on a comparative description of the methodologies currently used by Member countries of the OECD and theEuropean information will enable national statistical institutes, or other organisations compiling CONSTRUCTION priceindices, to compare their methodology and data SOURCES with those currently used in other countries. It will alsoprovide a range of options for countries in the process of creating their own indices, or overhauling existing present there is very little multi-country documentation available on CONSTRUCTION PRICE level of activity in the CONSTRUCTION sector is one of the key determinants of the level of short-term economicactivity in Member countries.

2 The demand for reliable CONSTRUCTION PRICE indices arises from the need to assess realchanges in the output from these activities which cannot be derived solely through reference to regular building andconstruction statistics. These indices have a wide range of applications including deflation of components of nationalaccounts, adjustment of CONSTRUCTION contracts and leases, and as a basis for indexation for insurance the moment, there is considerable variation in the concepts underlying the compilation of CONSTRUCTION priceindices by Member countries, as well as in the PRICE components and methodologies used. This variation is the resultof the different administrative and legislative environment, and differing physical characteristics, such as geographicsize, population density, climate, etc. in which organisations undertaking CONSTRUCTION activity operate in eachcountry. Another factor are the different uses of the CONSTRUCTION indices Statistics Directorate of the OECD and EUROSTAT are greatly indebted to the statistical offices of OECD andEuropean Union Member countries for their co-operation.

3 Without this assistance, it would not have been possible toproduce this publication is presented on the joint responsibility of the Secretary General of the OECD, and the Director-General of KincannonYves FranchetDirectorDirector-GeneralStatisti cs DirectorateEUROSTATOECD5 TABLE OF CONTENTSPageIntroduction .. 7 Section 1: Basic 9A. Relationship of producer PRICE indices to CONSTRUCTION PRICE indices .. 9 Terminology used in this publication .. 9 Elements of CONSTRUCTION industry prices .. 10 CONSTRUCTION PRICE indices .. 10B. Main types of CONSTRUCTION PRICE indices .. 12 Input PRICE indices .. 12 Output PRICE indices .. 12 Seller s PRICE indices .. 12 Relation between the three types of indices .. 13 Types of CONSTRUCTION PRICE indices compiled in OECD and European Union Membercountries .. 13C. Typology of METHODS used by OECD and European Union Member countriesfor compiling CONSTRUCTION PRICE indices .. 17 Prior breakdown METHODS .

4 17 Standard factorsComponent cost methodSubsequent breakdown METHODS .. 18 Quoted pricesSchedule of pricesMatched modelsBuilding volume or areaHedonic methodD. Outline of processes in developing a CONSTRUCTION PRICE index .. 20E. Uses of CONSTRUCTION PRICE 21 Use of CONSTRUCTION PRICE indices for deflating components of national accounts .. 22 Section 2: CONSTRUCTION PRICE Index Compilation 24A. Important considerations in the compilation of CONSTRUCTION PRICE indices .. 24 Diversity of CONSTRUCTION activity .. 24 Changes over time .. 24 Selection of appropriate prices .. 24 Range of items for inclusion .. 25 Ensuring geographic representativeness of the index .. 26 Types of CONSTRUCTION firms to include .. 26B. Particular problems/issues for transition countries .. 266 TABLE OF CONTENTS (cont.)PageC. SOURCES of information used to compile CONSTRUCTION PRICE indices .. 27D. Major elements of CONSTRUCTION PRICE indices .. 28 CONSTRUCTION type/activity coverage.

5 28 Geographic coverage .. 29 Items in the index .. 30 Basis of prices .. 31 PRICE collection .. 32 Index review .. 33 Index formulae .. 34 Frequency of 34 Section 3: Description of Country 35A. Explanatory notes .. 35B. Input CONSTRUCTION PRICE indices .. 37 Australia .. 37 Austria .. 39 Belgium .. 42 Canada .. 43 Denmark .. 49 France .. 55 Iceland .. 60 Japan .. 65 New 67 Norway .. 69 Portugal .. 71 Spain .. 73 Sweden .. 76 Turkey .. 78 United Kingdom .. 79C. Output CONSTRUCTION PRICE indices .. 81 Australia .. 81 Austria .. 84 Canada .. 88 France .. 90 Germany .. 977 TABLE OF CONTENTS (cont.)PageLuxembourg ..106 Sweden ..109 United Kingdom ..111 United Seller s CONSTRUCTION PRICE indices ..118 Canada ..118 Spain ..120 United 4: Country Summary 1: Main data SOURCES 2: METHODS for deriving 5: International Classifications Relevant to the Compilation of CONSTRUCTION PRICE International Standard Industrial Classification (ISIC), Rev.

6 3 ..132B. Statistical Classification of Economic Activities in the European Community (NACE), Rev. 1 ..133C. Provisional Central Product Classification (CPC) ..134D. Classification of Types of CONSTRUCTION ..137 Bibliography ..138 Glossary ..1396 ABBREVIATIONSCPIC onsumer PRICE indexESAE uropean System of National andRegional Accounts in theEuropean CommunityEUROSTATS tatistical Office of the EuropeanCommunitiesGDPG ross domestic productGFCFG ross fixed capital formationISICI nternational Standard IndustrialClassificationNACES tatistical Classification ofEconomic Activities in theEuropean CommunityOECDO rganisation for Economic Co-operation and DevelopmentPPIP roducer PRICE indexSNAS ystem of National AccountsVATV alue added tax7 INTRODUCTIONThis publication provides an outline of the sourcesand METHODS used by OECD and European UnionMember countries in the compilation of priceindices for CONSTRUCTION activity.

7 Its objectives are:to provide information on techniques used on acountry by country basis; a conceptual frameworkfor the compilation of CONSTRUCTION PRICE indices;and indications of best practice in the compilationof these indices. Such information will enableOECD and European Union Member countries tocompare their methodology/data SOURCES with thosecurrently used in other countries. It will alsoprovide a range of options for countries in theprocess of creating their own indices, oroverhauling existing indices. These options may beeither adopted in their entirety, or modifiedaccording to their own term CONSTRUCTION covers a wide variety ofactivities, these include the CONSTRUCTION ofdwellings, non-residential buildings, and civilengineering works such as roads, bridges, dams,etc. CONSTRUCTION activity also encompasses repair,renovations, rehabilitation and maintenance ofexisting structures, diversity of CONSTRUCTION activity is the cause ofone of the major problems in the compilation ofconstruction PRICE indices, that of items comprising an index and their relativeweights are the result of different norms andstandards that apply in each country.

8 For example,when comparing indices compiled by differentcountries for housing CONSTRUCTION , account needsto be taken of differences in climate, culture, levelof affluence, legislative standards, physicalcharacteristics ( geographic size, populationdensity, terrain) etc. These factors even influencewhat is included in a house , and therefore therange of items included in a PRICE index of houseconstruction. There is considerable variationbetween countries in the inclusion/exclusion ofitems such as land, utility connection, fixtures,transport of materials, architects fees, etc. fromtheir present there is very little multi-countrydocumentation available on CONSTRUCTION priceindices. This publication complements twoprevious publications produced by the OECDin 1994, Consumer PRICE Indices - SOURCES andMethods, and Producer PRICE Indices - SOURCES andMethods, and a publication produced byEUROSTAT in 1995, Industrial Trends: February 1996 EUROSTAT hosted a seminar onconstruction PRICE indices.

9 Papers from thisseminar providing detailed descriptions ofmethodologies for the compilation of these indicesfor some European Union countries will bepublished in Methodological Aspects ofConstruction PRICE Indices in late demand for PRICE indices for constructionactivity arises from the need to assess real changesin the output from these activities ( to create aconstant value series) which cannot be derivedsolely through reference to regular building andconstruction PRICE indices are used in guaranteedvalue clauses in rental, leasing, and other contracts;adjustment of sales contracts for buildings underconstruction; and as a basis for indexation forinsurance purposes. They are also used to deflatenational accounts estimates of output ofconstruction activities, and gross fixed capitalformation in residential summary, CONSTRUCTION PRICE indices are used totrack changes/trends in the cost (or PRICE ) ofconstruction.

10 They do not provide information onthe current market value of CONSTRUCTION work,earning capacity, or rental publication comprises three 1 outlines basic concepts and describes therelationship between producer PRICE indices andconstruction PRICE indices, elements of constructionindustry prices, the main types of constructionindices, and a typology of METHODS used by OECDand European Union Member countries in 2 outlines the major problems involved incompilation of CONSTRUCTION PRICE indices, sourcesof information used, and describes some of themajor elements in their compilation. The latter8includes CONSTRUCTION activity coverage, items in theindices, the calculation of weights, basis of prices,the alternate approaches to PRICE collection, andissues relating to area coverage. Examples of bestpractice are also 3 briefly describes each of the three mainconstruction PRICE indices compiled in OECD andEuropean Union Member countries.