Construction Cost Index — Technical Manual

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References

International methodological handbooks

The presented technical manual is prepared by the National Statistics Office of Georgia according to the international methods and practices and is based on the following handbooks:

“Producer Price Index Manual: Theory and Practice”, International Monetary Fund, 2004.
Responsible organizations: International Labor Organization (ILO), International Monetary Fund (IMF), Organization for Economic Co-operation and Development (OECD), United Nations Economic Commission for Europe (UNECE) and World Bank.
https://www.imf.org/…
“Sources and methods — construction price index.”
Responsible organizations: Organization for Economic Co-operation and Development (OECD), European Statistical Office (Eurostat).
http://www.oecd.org/…
“Methodological aspects of construction price indices”, Eurostat, 1996.
https://publications.europa.eu/…

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1. Introduction

1.1 Construction Cost Index and its use

The Construction Cost Index measures the average price level of construction materials and services used for the construction of residential, non-residential, and civil buildings in the reporting period compared to the reference period.¹ Along with this, the index does not reflect changes in the construction technologies or the productivity of the input materials.

The CCI covers the following cost categories:

Construction materials — costs of materials used by construction organizations during the construction process;
Wages — expenses for remuneration of workers employed in the construction process (does not include remuneration of project managers, architects, engineers and other similar positions);
Machinery — expenses incurred on the use of machinery and equipment (crane, concrete pump, excavator and other construction equipment) during the construction process. In case of rented equipment, it implies the cost of the rent, while in case of owned equipment the depreciation is used (the expenses on construction machinery does not include the fuel and the labor costs associated with it);
Transportation, fuel and electricity;
Other costs — all other costs incurred during the construction process (does not include the costs of land and architectural project).

The Construction Cost Index is used for the following purposes:

The CCI has an important role in deflating different economic indicators;
The index is used for indexation of contracts in both public and private sectors;
The index is an analytical instrument for researchers and representatives of the business sector.

¹ From October 2022, the quarterly index was replaced by a monthly index. The coverage of the latter has increased and includes not only residential, but also non-residential and civil buildings.

1.2 Coverage of the index and the observable prices

For the purpose of compilation of the CCI, prices are collected from organizations operating across the country, for construction materials and services supplied by them on the market.

The observable price of a material (service) is the value of the construction material (service) purchased by a construction organization for construction of residential, non-residential, and civil buildings in the specified period.

2

The selection of organizations and materials (services) for observation

In order to select the observable construction materials and services and to identify their characteristics, on the first stage large construction companies operating in the country are surveyed through an additional questionnaire. The companies are required to indicate the following information (according to the data of buildings constructed by them during the last 2 years):

Main building materials used in the construction process, their detailed descriptions, measurement units, provider organization of the material and the total cost incurred on the specific type of material;
Costs of remuneration of workers employed in the construction process (according to their positions);
Expenditure on the use of machinery and equipment (crane, concrete pump, excavator and other construction equipment);
Costs of transportation, fuel and electricity;
Other costs incurred during the construction process.

After the selection of construction materials and services, on the second stage the supplier companies are selected (based on the information from the additional questionnaires and the data of enterprise statistics) for the purpose of further price observation of the construction materials and services provided on the market.

During the selection process of the construction materials and services maximally detailed specifications are determined for them. To follow the specifications is the most important part of price registration since the monthly recorded difference between prices should be caused by the pure price change of a material or a service, rather than by changes in characteristics of the materials or services.

Relying on the obtained survey data, the prices for sampled construction materials and services are recorded monthly.

For the purpose of price registration for construction materials and services, the sample of organizations is updated annually based on the data of enterprise statistics. In case a company stops functioning in the reporting period, the substitution does not occur until the sample update.

3

Price collection fieldworks

During the price collection fieldworks, the representative of the organization fills the questionnaire published on the Geostat website. The price collection fieldworks are conducted from the 1st to the 8th of the month following the reporting period (month). The questionnaire contains the following information: description of the selected construction material (service), measurement unit, the prices in the reporting, reference and the previous month (the average selling price for construction material or service provided by organization) and also, in the case of a price change the reason of this change.

The information about the prices of construction material and service provided by organizations is confidential and is protected by the “General Administrative Code of Georgia” and article 28 of the “Law of Georgia on Official Statistics”.

Unless otherwise provided for by the legislation of Georgia, legal entities registered in the Register of entrepreneurial and non-commercial legal entities are obliged to provide Geostat, upon Geostat’s written request, including such request in electronic form, with the available information (including confidential information) in paper or electronic form.

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Wages

For the purpose of calculating the CCI, a monthly survey of wages in the construction industry has been introduced. For this purpose, entities engaged in construction activities will be selected according to the following criteria:

During the last 2 years, they carried out construction activities;
Construction activities include: I) residential and non-residential building construction; II) road, highway, and tunnel construction;
The enterprise used hired labor.

Data collection is carried out directly on the wages of persons employed in the construction process (qualified construction workers, machine operators, metal processing industry workers, unqualified workers, etc.) on the basis of the International Standard Classification of Employment — ISCO-08.

Every month, for the relevant segment, data on the wage-fund and the average number of employees are received. On the basis of this, average wages are calculated. Field works are conducted from the 1st to the 20th of the next reporting month, and data analysis — from the 20th to the 25th.

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Validation procedures

The CCI validation procedures are conducted in two stages:

On the first stage validation takes place simultaneously with the price registration fieldworks. In the case of a price change, the person responsible for filling the questionnaire is required to define by a comment the reason of the change. After the data is sent to the central office, a responsible employee conducts analysis and logical control of the data.

On the second stage the accuracy of the prices, which are extremely deviated from the previous month, is checked after calculating the indices.

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Weights

Weights for an individual material/service in the proper construction segment (residential, non-residential, and civil) represent the share of the cost of the material/service in the overall construction expenditures in the segment.

The weight of each segment in the total index is determined based on the statistics of completed construction.

The information is obtained from the additional questionnaires. The weights are updated once every 5 years, based on the cost of buildings constructed by construction organizations. During updating the weights the list of materials and services included in the index may change.

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Price imputation techniques

During the calculation of the CCI, if in the reporting period no price is recorded for one of the materials or services, an imputation method will be used — repeating the latest recorded price before the reappearance of the real price.

8

Quality adjustment

If in the reporting period an organization stopped selling the observable material or service but sells another similar material/service, it is possible to replace the old material or service with a new one.

If the characteristics of the observable material/service have changed, but the criteria for comparison is not violated, it is allowed to compare the old and new material/service. In this case, it is important that the price change caused by quality change is not reflected in the index.

In order to compare registered prices it is necessary to use a quality adjustment method, for which a conditional base price is calculated using the following methods:

Method 1 — Qualitative difference is known

If in the reporting month a replacement material is qualitatively different from the material in the previous month, and the value of the difference is evaluated, the base price for the replacement material is calculated using the previous month’s price and the qualitative difference defined by the person responsible for filling the questionnaire.

Table 1.

Material	Base price (prev. yr. Dec.)	March price	April price	Qual. diff.	Price ratio (Apr./Dec.)
Material A	4.55	4.50	—	—	—
Qual. different Material B	5.86*	—	8.50	1.30	8.50/5.86≈1.45

* Imputed base price

Imputed base price for Material B Base price = (4.50 + 1.30) / (4.50 / 4.55) \approx 5.86

Method 2 — Previous month’s price is available

If in the reporting month it is possible to define previous month’s price for the replacement material, the base price for it is calculated using this price and the index of the previous month.

Table 2.

Material	Base price (prev. yr. Dec.)	March price	April price	Ratio (Mar./Dec.)	Ratio (Apr./Dec.)
Material A	4.55	4.50	—	4.50/4.55=0.99	—
Replacement Material B	5.26*	5.20	5.50	—	5.50/5.26≈1.05

* Imputed base price

Imputed base price for Material B Base price = 5.20 / (4.50 / 4.55) \approx 5.26

Method 3 — Group index method

If in the reporting month a price enumerator discovers that material A will no longer be supplied on the market, and it is impossible to get information on the previous month’s price and the value of qualitative difference for replacement material B, the entire difference is treated as qualitative difference. The imputed base price of the replacement material is calculated based on the current month’s index and the price of material B.

Table 3.

Material	Weight, %	Base price	March	April	LT index Mar.	LT index Apr.
Material A	0.051	4.55	4.50	—	0.99	1.15*
Replacement Material B	0.051	6.09**	—	7.00	—	—
Material C	0.032	5.20	5.20	5.50	1.00	1.06
Material D	0.067	5.00	4.50	5.50	0.90	1.10

* Imputed long-term index ** Imputed base price

Calculation of imputed base price for Material B Group LT index April = 1.06\times[0.032/(0.032+0.067)] + 1.10\times[0.067/(0.032+0.067)] \approx 0.34+0.74 = 1.08 Group LT index March = 1.00\times[0.032/(0.032+0.067)] + 0.90\times[0.067/(0.032+0.067)] \approx 0.32+0.61 = 0.93 Group ST index April = 1.08 / 0.93 \approx 1.16 Imputed LT index for Material A = 1.16 \times 0.99 \approx 1.15 Imputed base price for Material B = 7.00 / 1.15 = 6.09

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9. Calculation of the Construction Cost Index on different levels

9.1 Calculation of the lowest level index

An index calculated for an individual material or service represents the lowest level index for the proper construction segment (residential, non-residential, and civil). The lowest level long term index is obtained from the ratio of the average geometric prices for comparable types of materials/services in the reporting (t) and reference (0) periods.

Lowest level index — geometric mean Iᵢ t/0 = \prod j=1 n (pⱼ t / pⱼ 0) 1/n = [\prod j=1 n pⱼ t] 1/n / [\prod j=1 n pⱼ 0] 1/n Where: Iᵢ t/0 — proper segment’s lowest level index for construction material/service i in reporting period t, compared to reference period 0 j — type j of material/service for which a comparable price is registered pⱼ t — type j of the material/service price in period t pⱼ 0 — price of type j of the material/service in the reference period 0

Graph #1. The structure of the Construction Cost Index

9.2 The Construction Cost Index, both for individual segments and as a whole

The long term index for the proper construction segment (residential, non-residential, and civil) compared to the price reference period is calculated using the following Laspeyres-type formula:

Laspeyres-type aggregate index I t/0 = Σ n i=1 (Iᵢ t/0) \times sᵢ b Where: Iᵢ t/0 — (i)-cost category long term index compared to the price reference period (0) sᵢ b — weight of (i)-cost category in the weight reference period (share of expenditure on i-cost category in total cost), where Σsᵢ b =1

The same formula is used for calculating all upper level indices. For example, the total CCI is calculated by weighting the long term indices of all construction segments (residential, non-residential, and civil) where the sum of the weights of the indices is 1.

A short term index compared to the previous month is obtained from the ratio of long term indices in the reporting and previous periods, calculated comparing to the price reference period.

9.3 Chain index

During the update of weights, the list of construction materials and services may also be updated. At this time prices are collected for types of materials and services both in the old and new samples, which enables chain-linking of indices calculated for different samples. Chaining enables to calculate indices with a long term reference period.

For example, before December 2018 the index was calculated compared to December 2017, using wᵢ weights, whereas starting from 2019 the index is calculated compared to December 2018, using kᵢ weights (see Table 4).

Table 4.

12.2017=100	12.2018=100
12.2018: I^12.18/12.17 = ΣIᵢ^12.18/12.17×wᵢ = 106	12.2018: I^12.18/12.18 = ΣIᵢ^12.18/12.18×kᵢ = 100
X₁	01.2019: I^01.19/12.18 = ΣIᵢ^01.19/12.18×kᵢ = 102

Chain-linking formula 106 / X₁ = 100 / 102 \Rightarrow X₁ = (106 \times 102) / 100 \approx 108 I 12.18/12.17 \times I 01.19/12.18 = 106 \times 102/100 \approx 108

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10. Publication

10.1 Press release

A press release for the Construction Cost Index is published monthly through the Geostat website. It contains information about monthly and annual index (from 2023) data and contributions of cost categories to the index formation.

10.1.1 Contribution of groups to the percentage change of the overall index

Calculation of contributions of certain cost categories to the percentage change in the proper construction segment index (residential, non-residential, and civil) provides a powerful analytical tool for analyzing the index. The contribution of a material or service to the change in the proper segment index is defined as the percentage change caused by the price change of the given material/service only, providing the permanence of prices of the other materials/services.

The contribution of any material or service to the change in the proper segment index is calculated using the following formula:

Monthly contribution formula Contributionᵢ (monthly) = (Iᵢ t / Iᵢ t‑1 - 1) \times 100 \times (Iᵢ t‑1 / I a t‑1) \times wᵢ t Where: Iᵢ t — index of material/service (i) in period (month) (t) Iᵢ t‑1 — index for material/service (i) in period (t‑1) I a t‑1 — the CCI for proper segment in period (t‑1) wᵢ t — weight of material/service (i) in period (t)

Contribution of certain cost categories to the monthly index for proper segment represents the sum of contributions of each material and service included in it.

In the case of weights change, the contribution of material/service (i) to the annual index for proper construction segment is calculated using the following formula:

Annual contribution formula (with weight change) Contributionᵢ (annual) = [(Iᵢ L - Iᵢ t‑12) / I a t‑12] \times wᵢ t‑12 \times 100 + [(Iᵢ t - 100) / I a t‑12] \times I a L \times wᵢ t Where: Iᵢ L — index for material/service (i) in the weight change period Iᵢ t‑12 — index of material/service (i) in period (t‑12) (previous reference period=100) I a t‑12 — CCI for proper segment in period t‑(12) wᵢ t‑12 — weight of material/service in period (t‑12) Iᵢ t — index for material/service (i) in period (t) I a L — CCI for proper segment in the weights change period wᵢ t — weight of material/service (i) in period (t)

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Example: Using the above formula, the contribution of price change for different categories of construction materials to the change in the proper segment index of October 2018, considering the weights of 2017 and 2018 (0.35 and 0.28, respectively) can be calculated as follows (see Table 5).

Table 5. Indices compared to December of the previous year

	Dec. 2016	Oct. 2017	Dec. 2017	Oct. 2018
Index for the categories of construction materials	100.0	101.2	101.7	102.2
CCI for proper segment index	100.0	101.6	103.2	101.8

Worked example Contribution = [(101.7-101.2)/101.6]\times0.35\times100 + [(102.2-100)/101.6]\times0.28\times103.2 = 0.8%

According to the given data, the contribution of categories of construction materials to the annual proper segment index of October 2018 amounted to 0.8 percentage points.

10.2 Time series of the Construction Cost Index

Along with the press release, different time series of the CCI are published on the website on a monthly basis:

The CCI compared to the previous month;
The CCI compared to February 2022;
The CCI to the same month of the previous year (from 2023).

The published indices are rounded to four digits and are final data.

The CCI data is also disseminated through an android application.