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COMPONENT COST METHOD (CONSTRUCTION PRICE INDICES)

Statistics Directorate    
Definition:
This approach is used for the compilation of output construction price indices. It regards construction output as bundles of standardised homogeneous components. These components correspond to the supply of standard operations.

Examples would be: the supply and laying of so many square metres of roofing tiles; installation of a hot water tank of a given capacity; construction of so many square metres of brick wall etc.

Context:
Price indices are compiled using the prices of these homogenous components. A representative construction (or number of projects) is also chosen.

However, the actual work entailed in its completion is broken down into precisely defined standard services or components.

A number of representative construction firms that have recently performed any of these services are surveyed to determine the price they have actually agreed or invoiced for these services. A price index is then created for each standard component.

These indices are then aggregated for the buildings initially defined as the benchmarks. The actual buildings are used only to define a selection of services and the corresponding weights.

A variant of this approach involves the re-specification of a number of the representative projects on a cyclical basis.

The difference between an index based on input factors and one based on standard components is essentially one of degree, since components are only factors at a more advanced stage of production. However, the standard component cost index also incorporates productivity gains and changes in profit margins, as it reflects not only the cost of the factors, but also the price of the finished product paid by the customers of the construction firm. It will therefore include more of the price elements listed above that determine the prices of finished construction work.

Another advantage of this method is that the prices obtained are for components which remain comparable over time.

Fluctuations due to differential quality or execution are eliminated. However, while components are more homogeneous than completed buildings it is unlikely that they will be completely identical for different completed buildings.
If there is a permanent change in the way a component is performed its definition is changed, and the new price series is spliced to the old one by means of chaining taking account of changes in quality.
Selecting truly representative standard components, and determining weighting coefficients that accurately reflect construction techniques and the way buildings, etc. are usually constructed during the base year is the hardest and most important part of compiling the index.

However, every standard component does not have to be priced separately. For example, if the price change characteristics of brick laying and paving are similar then prices of only one of (similar) standard components need to be incorporated in the construction price index.

An advantage of both the standard factor and standard component cost methods is that they can produce different indices merely by changing the weighting of the indices for each component. For example, indices could be compiled by type of work, by trade, or as in the example of the conventional construction price indices compiled in Germany, by type of building.

Source Publication:
Sources and Methods: Construction Price Indices, OECD, Eurostat, 1997, page 19.

Cross References:
Construction price indices
Prior breakdown methods (construction price indices)

Statistical Theme: Prices and purchasing power partities

Created on Friday, March 14, 2003

Last updated on Friday, April 12, 2013