Simonson Says: Construction Assumes Growing Role in Producer Prices

This month, the federal government revamped a key price indicator to include construction costs for the first time. The changes make contractors’ contributions to accurate price information even more important. AGC members have been involved for more than a decade with an initiative by the Bureau of Labor Statistics (BLS) to develop reliable data on the costs of new buildings. For the past several years BLS has asked contractors each month to estimate what they would charge to construct specific building types, given a set of components or “assemblies” specified by BLS. (BLS gets the cost of the assemblies from a construction materials costing firm.) BLS uses the answers to create producer price indexes (PPIs) for new school, industrial, office, warehouse and health care building construction. The agency also publishes PPIs for new, maintenance and repair work on nonresidential buildings by concrete, electrical, roofing and plumbing, heating and air conditioning contractors. The indexes have been used by contractors, owners, budget planners and others to document changes in construction costs. However, until now the indexes had not been integrated into the widely reported overall PPIs. Beginning with the January 2014 PPI, BLS has changed the headline PPI from “finished goods” to “final demand.” The scope of coverage has been more than doubled by adding “final demand construction” and “final demand services” to what had been mainly a measure of goods prices. Final demand is divided among private capital investment, government, personal consumption and export. The indexes for “final demand for capital investment” and “final demand government” reflect the PPIs for the same five nonresidential building types but in different proportions, since private and public owners buy different amounts of warehouses and schools, for instance. (There is no PPI for residential or nonbuilding construction, or for other nonresidential building types. Since there is no index for residential construction, “final demand for personal consumption” does not include construction. “Final demand export” excludes construction since buildings are not exported.) In addition, BLS has added indexes for “intermediate demand,” which feeds into four stages of production. Intermediate demand for construction consists of maintenance and repair construction that enables facilities to produce goods (and services) for later stages of production. All previous PPIs are still being published. Thus, contractors can continue to see the overall PPI for materials for construction, as well as specific inputs such as ready mix concrete. To help contractors sort through the plethora of new terms and concepts, AGC has posted an explanation and tables focusing on construction prices and costs. Members with questions can contact simonsonk@agc.org.   BLS relies on contractor participation in the PPI survey process to make the construction price indexes as accurate as possible. AGC encourages members who are contacted by BLS to participate.