Technical Guide for the Building Construction Price Index, 2023

1. Introduction

This technical guide describes the
estimation of the Building Construction Price Index. It explains the component
cost methodology, the aggregation structure, and the data sources used to
derive price relatives that are appropriately aggregated to estimate the index.

The Building
Construction Price Index (BCPI) measures the quarterly change over time in the
prices that contractors charge to construct a range of new residential and
non-residential buildings. It is composed of two separate indexes: the
Residential Building Construction Price Index and the Non-Residential Building
Construction Price Index. The index is available for 15 Census Metropolitan
Areas (CMAs) – St. John’s, Moncton, Halifax, Quebec, Montréal,
Ottawa, Toronto, London, Winnipeg, Regina, Saskatoon, Calgary, Edmonton, Vancouver,
and Victoria – as well as for a Canada-wide composite.

The BCPI is used by government agencies and other users for economic analysis and evaluating the economic impact of price changes in the construction industry. Statistics Canada, for example, uses the BCPI in preparing estimates of the construction industry’s contribution to national expenditure, real output, capital stock, building permits and construction investment. Other uses include re-evaluating expenditure and output for construction work, adjusting project costs for escalation, indexing municipal development charges, as well as forecasting financial requirements for proposed projects and real rates of return on investment.

2. Component Cost Methodology

The component cost
approach uses the price change of sets of standardised homogenous components
representing typical operations in the construction of a representative
building construction project.  

It begins with
identifying representative building projects and all the cost components required
for these building projects. Of all the cost components required for a building
project, a sample of representative cost components is selected with a target
coverage of components that together account for about 80% of the total expenditure
of the project. The price movements of these representative components are
tracked over time.

Price movements
of the cost components are collected from contractors in the 15 CMAs to account
to account for regional differences. These movements are aggregated by division,
building type, structure type, CMA, province, and across CMAs to derive a 15-CMA
composite price index for residential and for non-residential building
construction.

Additional
details about the representative construction project and representative cost
component selection processes are provided in the appendix.

3. Aggregation Structure

The BCPI aggregation
structure is presented in Figure 1. It illustrates the various levels of
aggregation from the elementary aggregates at the cost component level, to
higher level indexes at the division, building and structure levels, up to the
total residential building construction and non-residential building
construction index.

The index at
each of these levels is compiled as a weighted aggregation of the cost
components associated with the major construction divisions. The index at the division,
building, structure and aggregated residential or non-residential levels is
available for each of the 15 CMAs surveyed and as a 15-CMA composite.

4. Data Sources

The BCPI uses a
multi-stage sample design, starting with the selection of representative cost
components, which is detailed in the appendix.

4.1. Prices

The index is
calculated based on estimated prices in the real market for the cost
components. The current price for each cost component is estimated by adjusting
the previous quarter’s price to reflect quarterly changes in the value of its
material, labour rate, overhead and profit components. Information on price
changes is collected from respondents or derived from administrative data or
other Statistics Canada survey sources as described below. These current
quarterly prices are then used in the quarterly calculation of the BCPI.

4.1.1. Electronic
questionnaire – Construction Contractors Survey

For cost
components categorized under the general requirements, architectural and
structural trade groups, price information is collected using an electronic
questionnaire called the Construction Contractors Survey (CCS). The electronic
questionnaire was originally designed, tested and refined in consultation with
the Questionnaire Design Resource Centre within Statistics Canada and with
residential and non-residential general contractors operating in the Vancouver,
Toronto, Ottawa-Gatineau and Montréal CMAs. The
electronic questionnaire is sent quarterly to a sample of building contractors
that work on building project types covered by the BCPI and their response to
the survey is mandatory.

A sample of active
general contractors is selected for each CMA. The contractors must be actively
bidding and winning a share of the residential and/or non-residential
construction jobs and are usually members of local construction associations
who are knowledgeable and capable in their pricing. Their reported price
movements are considered to be representative of market conditions in their
CMA.

Many of these
contractors report intended building construction projects to Statistics
Canada’s Building Permits Survey. Other sources include the companies listed on
Statistics Canada’s Business Register (BR) as well as external research by
Statistics Canada. 

Over time, contractors
enter and exit the construction market. To ensure that the BCPI continues to
measure price changes for residential and non-residential buildings, the sample
of contractors must be monitored and refreshed on a quarterly basis. Statistics
Canada subject matter staff continuously review the contractor sample size and
composition to remove those that are no longer in business or determine when new
units need to be added.

The electronic
questionnaire collects information on price movements of the cost components
included in building projects in their respective CMA, the reasons for those
movements and local construction market conditions. With reference to a project
built or bid on in the previous quarter, respondents are asked to report how
much the estimated costs for each cost component would have changed if they
repeated the build or bid in the current quarter. Respondents are asked to
compare the price on the 15^th day of the middle month of the
previous quarter to the price on the 15^th day of the middle month of
the current quarter (i.e. February 15^th compared to May 15^th)
or to the nearest business day prior to the 15^th.

Reported price
movement quotes undergo an outlier treatment process by subject matter experts.
An average is taken for all of the treated price movement quotes that are reported
by respondents for a cost component within a CMA. This average price movement
is applied to the output price of the previous quarter to obtain the output
price for the current quarter. These steps are repeated for each cost component
in a particular building. Since the price movements reported by contractors
include labour, overhead and profit margins, no further manipulations are
necessary.

As an example,
assume that the mean of all movements reported in the electronic questionnaire averages
to 3% for a particular cost component. If the unit output price in the previous
quarter for that cost component was $5.00, with a 3% price increase, the unit
output price in the current quarter would be ($5.00 x 1.03) = $5.15.

4.1.2. Administrative data sources

For cost
components under the mechanical and electrical trade groups, administrative
data from a variety of secondary sources is used to collect prices. These
sources include construction industry costing catalogues and in-house data such
as the Industrial Product Price Index and the Machinery and Equipment Price
Index. Additionally, labour rates are obtained from the Construction Union Wage
Rate Index (CUWRI).

Unit prices are
obtained for the labour and material factors of each cost component by mapping
to similar components from the various administrative data sources. For
instance, the 8” PVC pipe is a component in various
BCPI building models, which is mapped to a particular product carried by an
industry supplier. The price of this product is provided in a costing catalogue
from where the price movements are tracked over time to be reflected by the 8”
PVC pipe component.

Since the
administrative data sources do not provide prices that are inclusive of labour,
and overhead and profit. These are added to calculate the output price of each
cost component. While labour rates are derived from CUWRI, the overhead and
profit rates are applied as determined during the initial specification of representative
building models. Overhead and profit rates vary between 7% and 11.5% for the
various representative cost components.

As an example,
assume that the previous quarter unit input price is determined to be $3.33 for
a certain amount of PVC piping material and $2.22 for the plumber needed to
install the piping, respectively. This unit output price is determined from the
contractor’s initial specifications for the building model. Then,
administrative or alternative data sources are searched to find appropriately
similar products and their corresponding prices for both the previous and
current quarters.

In this case, a
previous quarter material price of $350.80 and a current quarter material price
of $361.30 may be available for a different amount of the same type of PVC
piping material. Similarly, a previous quarter wage rate index of 130.20 and
current quarter wage rate index of 134.10 may be available from the Toronto
Plumber construction union wage rate index. From the latter sources, a price
movement can be calculated between the relevant quarters as 3% for both the
material price and labour wage rate. This price movement can then be applied to
the previous quarter unit input price to determine the current quarter unit input
price for the material and labour costs being $3.43 and $2.29, respectively.
Finally, an overhead and profit rate of 11% is added to calculate the total
current quarter output price for the relevant cost component: ($3.43 + $2.29) x
1.11 = $6.34.

4.2. Weights

The BCPI
utilizes two sets of weights. Component weights are used for cost components within
building types and CMAs. Building permit weights are used to aggregate building
types within geographical levels.

Component
weights are derived from the detailed costs originally provided by consultants
when the building construction projects were chosen. For non-residential
buildings and high-rise apartments, this was in 2015; for all other residential
buildings, it was in 2017. The weight assigned to each cost component reflects
the share in the total project cost that was attributable to the sampled
component and the other components that it represents.

The weight for
the same cost component may vary by building type and by CMA. For example,
since more lumber is necessary on average in residential construction projects
relative to non-residential construction projects, a relatively higher weight
will be attributed to lumber in the various residential buildings (except for
high-rise apartment buildings). As component weights are price updated quarter
to quarter and these price movements can differ between CMAs, each CMA will
have differences in the weight distribution of the cost components across a
particular building type.

Building permit
weights are used to reflect the relative importance of particular buildings in
the higher level indexes and within a CMA. The unadjusted annual estimates of
the value of building permits by CMA and building type are provided by
Statistics Canada’s Building Permits program. The building permit weights are
based on a three-year moving average of building permit values for residential
and non-residential building construction approved in each CMA.

The annual weight
update process occurs as a part of the second quarter release. The process
redistributes component weights based on the updated building permit weights,
resulting in one set of annual weights, which are specified by cost component,
building type and CMA.

4.3. Revision and seasonal adjustment

The BCPI series
are subject to a one-quarter revision period after publication of a given
quarter’s data. The indexes are not seasonally adjusted.

5. Index Estimation and Aggregation

The BCPI is
based on a fixed sample, where quarterly price changes for building
construction are measured over time by using a fixed set of cost components
that are used in the construction of a building. The BCPI is calculated for the
current period and compared to the previous period to measure price movement.
Estimates are calculated using a weighted average of price relatives by cost
components which are chained together to form an index series. Two separate
indexes are produced: the Residential Building Construction Price Index and the
Non-residential Building Construction Price Index. These indexes are fixed-weight
Laspeyres indexes available at the CMA, province, and the 15-CMA composite
levels.   

The BCPI
encompasses both elementary aggregates and higher-level aggregate indexes.
Elementary aggregates measure the price movements at the building level by CMA using
price-updated component weights for cost components. For higher level indexes,
building permit weights are applied to each building under a structure or the
aggregate residential and non-residential levels by CMA. To calculate the
provincial or 15-CMA composite indexes at any level, the building permit
weights are adjusted to reflect the relative importance of each building type across
the relevant CMAs.

5.1. Price relatives

The starting
point in the estimation of the index is to determine the initial output price
and the current output price in unit terms. This calculation differs between
the general requirements, architectural,  structural, mechanical, and electrical trade
groups.

5.1.1. General requirements, architectural and structural trade groups

For the general requirements, architectural
and structural trade group cost components, the price movements are derived
from the responses of building construction contractors in the electronic
questionnaire (see section 4.1.1). These average reported price movements for
each component in each CMA are multiplied by the initial output price to arrive
at the current output price.

5.1.2. Mechanical and electrical trade groups

For the
mechanical and electrical trade group cost components, the output prices are
calculated using the contractor’s original detailed specifications for each building
construction project (see section 4.1.2). Each cost component that was priced
in the original building specification is mapped to similar items from
administrative and secondary data sources. The previous quarter and current
quarter prices are obtained for this similar item and a price movement is then calculated
for the cost component.

The cost
components in these trade groups are split up into material, k, and labour, l, factors and
price movements for the factors are determined. The labour wage rates and the
material prices from the previous quarter are then multiplied by the price
movement for each factor, respectively, and aggregated. Since the
administrative data sources do not include overhead and profit margins, these
are added to arrive at a complete initial output price:

$$p_{mc}^t=[(k{p}_{mc}^{t-1})k{\Delta }_{mc}^t+(l{p}_{mc}^{t-1})l{\Delta }_{mc}^t](1+o)$$

$p_{mc}^t$   : The current output price.

$k{p}_{mc}^{t-1}$   : The initial material price which equals the material price for
the previous quarter.

$k{\Delta }_{mc}^t$   : The material price movement for cost component $m$ for CMA $c$ at time $t$.

$l{p}_{mc}^{t-1}$
   : The initial labour wage rate which equals the labour wage rate
for the previous quarter.

$l{\Delta }_{mc}^t$   : The labour wage rate movement for cost component $m$ for CMA $c$ at time $t$.

$o$   :  The overhead and profit rate.

5.2. Elemental indexes

The estimation
of elementary aggregates is the first step in index aggregation. The elementary
aggregate is a weighted price relative for each cost component by CMA mapped to
the building model types being estimated.

$$P{R}_{mbc}^t=\frac{p_{mc}^t}{p_{mc}^{t-1}},$$

$P{R}_{mbc}^t$   : The price relative of cost component $m$ in building $b$ for CMA $c$ at time $t$.

$p_{mc}^t$   : The current output price for the cost component $m$ for CMA $c$ at time $t$.

$p_{mc}^{t-1}$   : The output price for the cost component $m$ for CMA $c$ at time $t-1$.

$$E{A}_{mbc}^t=(P{R}_{mbc}^t)w_{mbc}^t$$

$E{A}_{mbc}^t$   : The elemental aggregate
of cost component $m$ in building $b$ for CMA $c$ at time $t$.

$w_{mbc}^t$   : The component weight for cost component $m$ in building $b$ for CMA $c$ at time $t$.

$$I_{mbc}^t=(I_{mbc}^{t-1})E{A}_{mbc}^t$$

$I_{mbc}^t$   : The elemental index for cost component $m$ in building $b$ for CMA $c$ at time $t$.

$I_{mbc}^{t-1}$   : The elemental index for cost component $m$ in building $b$ for CMA $c$ at time $t-1$.

5.3. Higher level indexes

Since
the Laspeyres index is consistent in aggregation, at all aggregation levels
higher than the elemental index, the elementary aggregates can be weighted and
aggregated as necessary to compile higher level indexes. The indexes by CMA for
the structure, residential aggregate or non-residential aggregate levels are
calculated as follows:

$$I_{xg}^t=(I_{xg}^{t-1}){\displaystyle \sum _{xg}[(E{A}_{mbc}^t)w_{mbc}^t]}$$

$I_{xg}^t$   : The index at level

$x=(division,building,structure,residentialaggregate,non-residentialaggregate)$ for geography level $g=(CMA,province)$ at time $t$.