Construction Sector Comparisons using Basket of Construction Components Approach

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Construction Sector Comparisons using Basket of
Construction Components Approach
The World Bank Group
International Comparison Program for Asia and the
Pacific Construction Workshop 28-30 November,
2005 Venue Auditorium C

• Anil Sawhney, PhD and Kenneth Walsh, PhD (SDSU)

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Workshop Agenda

• Day 1
• Introduction and Logistics
• Construction Sector Background
• Conceptual Description of BOCC
• Implementation Details of BOCC
• Day 2
• Country Reports (Details)
• National Accounts
• Day 3
• Implementation Details of BOCC
• Site Visit
• Discussion

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Workshop Presenter

• Anil Sawhney
• Faculty member, Del E Webb School of
  Construction, Arizona State University
• Technical Consultant to Global ICP Office of The
  World Bank Group

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Construction Sector Background
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Construction Sector Background

• Construction Supply Chain is Complex
• Comparison RESISTANT Sector

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Construction Sector Output
7
Construction Sector Output
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Construction Sector Output
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Factors Impacting the Output

• Weather
• Local laws
• Labor skills
• Labor productivity
• Weather
• Financial conditions
• Equipment availability

• Environmental conditions
• Material availability
• Taxes and other levies
• Profit Margins
• Architects ad engineers fees
• Others

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Global Impact of the Construction Sector
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Construction Sector Globally

• Construction activity takes place everywhere
  there is human settlement. But the amount that a
  country spends on construction is closely related
  to its income
• Construction industry is one of the worlds
  largest industrial employer
• Annual output worldwide is estimated to be 3400
  billion dollars at present

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Construction Sector Globally

• In 1998, expenditure varied from US5 per head in
  Ethiopia to almost US5,000 in Japan. This means
  that construction output, by value, is heavily
  concentrated in the rich, developed world
• The high income countries of Europe are
  responsible for 30 of global output, the United
  States for 21 and Japan for 20. China, despite
  its huge size and rapid economic growth in recent
  years, lags a long way behind with only 6. India
  has 1.7 (?)

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Output Vs. Employment
Employment
Output
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Construction Sector Globally

• The distribution of construction employment is
  almost the exact reverse of the distribution of
  output. While three-quarters of output is in the
  developed countries, three-quarters of employment
  is in the developing world
• Official data suggest there are around 111
  million construction workers in the world, some
  80 million of them in the low and middle income
  countries

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Construction Sector in GDP
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ExamplePhilippine
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Value of Output
3.7 of GDP
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Number of Establishment
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Distribution of Employment
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Average Monthly Compensation
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Labor Productivity
Value added per paid employee
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ExampleChina
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Chinese Construction Sector

• Output Value in Construction Sector up by 21.7
  Percent in First Three Quarters National Bureau
  of Statistics of China 2005-11-02 081536 In
  first three quarters, the output value of
  construction sector grew steadily, the labor
  productivity continuously improved, and the
  operational efficiency of enterprises
  continuously enhanced

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Chinese Construction Sector

• The output value in completion was 949.9 billion
  Yuan, a rise of 18.2 percent. The contract value
  of all construction enterprises totaled 4026.3
  billion Yuan, increased 23.8 percent compared
  with the same period of the previous year. Of
  this total, the contract value for state-owned
  and state-controlled enterprises was 1908.1
  billion Yuan, a rise of 15.6 percent

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Chinese Construction Sector

• The total floor space under construction for all
  construction enterprises was 2.755 billion square
  meters, up by 21.3 percent
• The labor productivity of all construction
  enterprises calculated by the total output value
  was 81017 Yuan per person, increased 15.0 percent

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GDP and Construction Component
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Percentage Contribution
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ExampleIndia
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Construction Industry in India

• India ranks 12th and accounts for 1.75 percent of
  the world market for construction sector
• The construction sector in India, accounting for
  five percent of the GDP, is the second highest
  employer after agriculture, and provides direct
  or indirect employment to about 32 million people

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ExampleNepal
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GDP by Industrial Origin in Nepal
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ExampleUSA
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Construction Sector in the USA

• 1.1 Trillion in 2005
• 8 million workers
• 1 million construction companies
• 60 of the nations wealth is invested in
  constructed facilities
• 58.6 million new homes in the next 25 years

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Some Broad Characteristics of the Construction
Sector
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Characteristics of Construction

• From a spatial comparison perspective
• Potato is potato but a house is not a house
  theory
• Productivity differences
• Large variation in output

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Potato is potato but a house is not a house theory
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What is the difference?
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Lets Just Look at Housing
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Lets Just Look at Housing
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Lets Just Look at Housing
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Lets Just Look at Housing
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Lets Just Look at Housing
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Productivity Differences
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Productivity Comparison
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Could Technology be the Issue?
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Large Variation in Output
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Sectors of Construction
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Construction Sector Comparisons
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Two Types of Comparisons

• Temporal
• Spatial

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Temporal Comparison
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Some Examples
Like to know from countries!
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Spatial Comparisons

• Basket of Goods and Services or Basket of Input
  Materials
• Basket of Standard Construction Projects
• Basket of Construction Components

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Spatial Comparisons

• Since the 1970s construction sector comparisons
  under ICP were performed using Standard Project
  Method (SPM)
• Use of SPM has been problematic
• The crux of this approach is to ask countries to
  price using the unit price approach a number of
  standard construction projects

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What is SPM?

• Standard projects are selected
• Standard projects are described
• Bills of Quantity are prepared
• Bills of Quantity are used for price collection
• PPP values are calculated

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Standard Project Method
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Sample BOQ

• Standard project
• 15 Bills of Quantity
• 10 to 20 Chapters
• 100 to 1000 Construction Items

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Sample BOQ
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Basis of Using SPM

• The Handbook of International Comparison Program
  provides the following four reasons for this
  difference in approach
• The nature of construction projects performed in
  various countries is different one from another
• Each construction project is unique and it is
  hard to match projects across countries
• The cost of construction projects is influenced
  by random factors such as soil conditions,
  weather, culture, means and methods of
  construction etc. and
• From an operational perspective the technique
  devised by EuroStat was deemed to produce
  reasonable results (United Nations 1992).

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Basket of Input Material (BIM)

• Pricing a basket of construction inputsmaterial,
  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

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Tests for BIM
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Tests for BIM
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Tests for BIM
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Discussion of Spatial Comparison Methods
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Discussion

• The use of the SPM has been debated widely over
  the past two decades
• 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.

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Discussion

• Traditionally the calculations for the
  construction sector are handled by developing
  estimated costs for 20 standard construction
  projects
• 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)

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Discussion

• 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
• There is growing concern that the level of effort
  and resources required for this process is
  prohibitive for expansion and continued
  application

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Discussion

• 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)

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Discussion

• 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)

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Discussion

• 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
• 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)

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Overview of BOCC
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Brief Background

• In 2002 World Bank initiated a study to address
  this issue that formed the basis of the Basket of
  Construction Components (BOCC) approach
• TAG and Global Office in 2004 recommended the
  deployment of BOCC for ICP 2005-2006

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Basket of Construction Components

• BOCC requires pricing of identified construction
  components
• Construction components are the building blocks
  of a construction project
• Construction projects have some similar
  construction components

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BOCC Concept
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Concrete Footing Component
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Cement Plaster Component
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Concrete Slab Component
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Roadway Component
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Proposed Hierarchy in BOCC
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A Project

• 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.

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A System

• 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.

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A Component

• 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.

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Levels of Estimation
Less Representative
Std. Proj.
BOCC
BOG
More Representative
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Key Design Issues

• House is not a House Theory
• Comparability and Representativity
• Accuracy of Cost Estimates
• Construction Productivity
• Combination of a Number of Inputs
• Labor and Equipment Trade-off

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House is not a House Theory
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Comparability Representativity
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Accuracy of Cost Estimates

• 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)
• 50 variation between estimated and actual
  construction cost, down to as little as 5,
  depending on the level of effort expended
• Wealthier nations are likely to be willing and/or
  able to devote the effort required to obtain
  accurate estimates for a standard project
• Less wealthy nations may not be willing or able
  to do so, and as a consequence may develop less
  accurate estimates
• Reduce the Level of Effort!!

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Construction Productivity
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Not Just Materials!
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Labor/Equipment Trade-Off
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Key Features

• The BOCC provides 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 Banks program
  of statistical capacity building and will also
  further the goal of making ICP sustainable.

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Key Features

• 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

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Key Features

• 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

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Key Features

• 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). 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)

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Field Mission
7 countries in Africa and 5 countries in Asia and
Middle East
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Key Observations from the Field

• Major differences in construction methods and
  materials at the construction project level
• Similarities at the construction component level
• Temporal Indices produced using BOGS approach
  with little overlap with ICP
• National accounts pertaining to construction vary
  by country

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Generalized Observations

• Many similarities observed in basic components
• As expected, differences were observed
• Often quite different from US practices
• Many differences in materials and methods between
  countries
• Wide variations in degree of documentation,
  inspection, worker safety

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Features of the BOCC Approach
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Materials vs. Put in Place
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Construction Productivity
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Construction Labor
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Labor/Equipment Trade-Off
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Labor/Equipment Trade Off
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Concrete Mixing Methods
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Vertical Transportation Methods
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Excavation Methods
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Safety Procedures
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Identify Construction Components
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Questions/Discussion