Transcript Slide 1

The Ohio DOT Inflation Forecasting
and Related Activities
Jennifer McAllister, Ohio DOT presenting for
Jeff Hisem
What is BART??
• Who does inflation forecasting at Ohio DOT?
– BART (Bid Analysis & Review Team)
• Created by Jeff Hisem, Office of Estimating
• Multi-person group combines the knowledge and
expertise of economics and construction
• Currently 2 economists
• Open position for engineer/construction experience
BART’s History with Forecasting
• In 2005 BART was requested to track and
explain historical trends in construction prices.
• Starting in 2006, BART was requested by the
director to create an inflation forecast.
– In March 2006, BART presented its first forecast
Cost Estimation and Inflation Trends
• Produce forecast January and July each year
– Annual forecast out five years into future
7/17/2015
Predicting OhDOT Construction Cost Inflation
• Monitor past OhDOT in-place construction cost
trends.
• Research developments for key construction
commodities.
• Model likely scenarios of in-place construction costs
7/17/2015
Monitor Construction Cost Trends
Yearly Composite with Base Year Centered to (Jan 2002=100)
ODOT In-Place Construction Cost Index
Aug2004 Aug2005 Aug2006 Aug2007 Aug2008
Aug'07-Aug'08
Growth
Aggregate Base (304) [ 3%]
105.4
106.5
130.1
132.3
138.2
4.5%
Asphalt (Surface and Intermediate Courses) [ 26%]
107.1
116.8
143.8
165.5
178.3
7.7%
Asphalt Bituminous Base (301 & 302) [ 4%]
106.8
117.0
145.8
162.6
173.6
6.8%
Drainage [ 7%]
110.0
113.5
140.2
132.5
132.0
-0.4%
Earthwork [ 11%]
101.4
109.6
125.1
147.9
160.6
8.6%
Guardrail [ 3%]
102.9
123.3
125.4
129.5
131.1
1.2%
Maintenance of Traffic [ 9%]
112.7
107.6
100.5
103.2
96.4
-6.6%
Pavement Marking [ 3%]
133.4
144.9
163.8
168.7
178.4
5.7%
Portland Cement Concrete Pavement [ 5%]
112.1
120.2
136.0
145.2
139.9
-3.7%
Structures including Maintenance [ 29%]
104.6
122.8
130.8
144.6
153.5
6.2%
Composite ODOT Construction Index
107.5
117.4
132.0
146.4
153.7
5.0%
[The weight given to each category for calculating the Composite.]
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Annualized Monthly Inflation Change
ODOT Construction Cost Index
Annualized Inflation Rate
14%
12%
10%
8%
6%
4%
2%
0%
7/17/2015
OhDOT In-Place Vs. BLS Hwy Index
190
180
Index Value (Jan 2002 = 100)
170
160
150
140
130
120
110
100
90
DATE
7/17/2015
Composite ODOT Construction Index
BLS Highway Construction Cost Index (PCUBHWY)
Research Developments for Key
Construction Commodities
Key Drivers
• Aggregate
• Ready Mix Concrete
–
Cement
• Energy
– Oil
• Diesel
• Liquid asphalt
– Electricity
– Natural gas
• Steel
• Labor
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Macro Issues
• US Construction Demand
• Exchange rates
• World demand
• Regional Factors
– Ohio construction economy
– Commodity specific
supply/demand
“How might we model scenarios
of in-place construction costs?”
1. Consultant
–
Simple
Pay for a final forecast
2. Best guess based upon industry publications
3. A spreadsheet model tracking labor, energy,
materials, and equipment costs
–
4.
Purely statistical model
–
•
Provides a system for a rudimentary forecast
Provides a statistically defensible forecast
Methods 3 and 4 allow for in-house scenario
testing
Complex
Model Likely Scenarios Of In-Place
Construction Costs (continued)
• Key considerations for forecasting group
–
–
–
–
Group with multiple perspectives
Unbiased & insulated from politics
Group consensus forecast (not an average)
Inclusive process that informs key stake holders:
• Planning
• Finance
}
Provide insight about OhDOT’s future
spending plans so that these expenditures
can be included in the forecast model.
Historical OhDOT Forecasts
Predicted Cost Inflation CY06-CY10: January 2006
High
Most Likely
Low
CY06
CY07
CY08
CY09
CY10
12.0%
7.0%
6.0%
6.0%
5.0%
8.5% [12.6%]
5.5%
5.0%
4.0%
4.0%
7.0%
4.5%
4.0%
3.0%
3.0%
Predicted Cost Inflation FY07-FY11: July 2006
High
Most Likely
Low
FY07
FY08
FY09
FY10
FY11
14.0%
7.0%
6.0%
5.5%
5.5%
11.5% [11.6%]
6.0%
4.5%
4.0%
4.0%
8.0%
4.0%
3.5%
3.0%
3.0%
[%] – Actual construction cost inflation (OhDOT Construction Cost Index)
Historical OhDOT Forecasts
Predicted Cost Inflation CY07-CY11: January 2007
High
Most Likely
Low
CY07
CY08
CY09
CY10
CY11
10.5%
9.5%
7.0%
5.0%
5.0%
6.0% [6.3%]
5.5%
5.0%
4.0%
4.0%
4.0%
3.5%
3.5%
3.0%
3.0%
Predicted Cost Inflation FY08-FY12: July 2007
High
Most Likely
Low
FY08
FY09
FY10
FY11
FY12
14.5%
14.0%
13.0%
10.0%
8.0%
10.0% [4.4%]
10.0%
8.0%
6.0%
5.0%
7.0%
6.5%
5.0%
4.0%
3.0%
[%] – Actual construction cost inflation (OhDOT Construction Cost Index)
Historical OhDOT Forecasts
Budget Forecast Inflation FY08-FY12: November 2007
Business Plan
FY08
FY09
FY10
FY11
FY12
10.0%
8.0%
7.0%
6.0%
5.0%
Predicted Cost Inflation CY08-CY12: January 2008
CY08
CY09
CY10
CY11
CY12
High
7.0%
6.0%
6.0%
6.0%
6.0%
Most Likely
5.0%
4.0%
4.0%
4.5%
4.5%
Low
-1.0%
-2.0%
0.0%
2.0%
2.0%
Historical OhDOT Forecasts
Predicted Cost Inflation FY09-FY13: July 2008
FY09
FY10
FY11
FY12
FY13
High
12%
10%
9%
8%
7%
Most Likely
7.5%
6%
5%
4%
4%
Low
4%
2%
2%
2%
2%
Application of inflation forecast
• Inflation adjust bid histories for creation of bid
history models used in Estimator and CES.
Application of inflation forecast
• OhDOT administration determines own inflation
forecast for program budgeting
(after BART construction cost forecast)
• Budget forecast application
– Planning future road maintenance costs.
– Planning estimates for major projects.
• In Estimator software inflation applied as
contingency.
• Inflation calculated for mid-year of construction
– “Inflation calculator:” tool available to aid calculation
Review Forecast to Actual
• Continually improve the methods for forecasting
Energy
• Diesel
– Of all our commodities, diesel is the most prone to international
influences
• Liquid Asphalt
–
–
–
–
Pricing is regionally based
Few regional refineries
OhDOT is a major consumer of asphalt*
Shortage of polymer modified asphalt
• Production interactions between asphalt, diesel, and gasoline affect
pricing
• Speculation trading
• 7/17/2015
Exchange Rates
Energy – Liquid Asphalt
• OhDOT placing index
– Indicator of state asphalt binder prices
ODOT Asphalt Placing Index ($/ton)
650
55% Increase in CY 2008
600
59% Increase in CY 2008
550
500
421
450
393
400
350
355
346
300
Jan-08
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Feb-08
613
441
467
407
500
553
437
379
Mar-08
PG 64-22
Apr-08
May-08
PG 70-22M
Jun-08
West Texas Intermediate Oil Price: Four Scenarios
$350
Investment Bank
Forecasts
($200, Dec - 2009)
$300
Dollars per Barrell
$250
BART,
($160, Dec - 2009)
$200
$150
Futures Contracts Nominal Terms
($149, Dec - 2009)
$100
Regulated Market
Forecasts
($102, Dec - 2009)
$50
$0
BART Estimate
WTI - Historical
High Oil
Low Oil
Scenario Modeling - 17Jul2008.xlsx
Scenarios incorporated in July 2008 construction cost forecast.
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Steel
• Iron & Steel Products (WPU101) rose 37%
from December 2007 through June 2008.
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Index Value (Jan '02 = 100)
Iron and Steel Producer Price Index
280
270
260
250
240
230
220
210
200
190
180
170
160
150
140
130
120
110
100
Iron & Steel Products (WPU101)
Steel Mill Products (WPU1017)
Last 12 Month % Inc/Dec (WPU101) = 39.6%
Last 12 Month % Inc/Dec (WPU1017) = 30.4%
Month - CY (4 year)
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Steel
• Input costs and manufacturing costs:
– Rising energy and transport costs
– Rising thermal and coking coal prices
– Increases in iron ore & scrap steel costs in 2008.
• Weak dollar
– Reduced imports
– Increased exports
• Result: rapidly rising prices in short-term
– Iron & Steel Products (WPU101) rose 37% from December
2007 through June 2008.
• Assumption: Short-term price increases that are maintained
in the long-term.
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U.S. Gross Domestic Product
• GDP growth acts as a proxy for overall construction demand in the US.
• GDP ASSUMPTIONS:
– BART – GDP growth is slow in the short term and improves towards the
long term rate of ~ 3% - 4%
Calendar
Year
2008
2009
2010
2011
2012
2013
US GDP
GROWTH:
0.50%
0.75%
2.00%
2.50%
3.00%
3.00%
7/17/2015
Commodities, GDP and the OhDOT Index
• STAGFLATION:
“an inflationary period accompanied by rising
unemployment and lack of growth in consumer demand and business
activity”
– For the first time, OhDOT forecasts an economic future
in which we must marry rising commodity prices with an
overall depressed demand for construction services.
OhDOT Index = ƒ(commodity prices, economy’s health)
7/17/2015
Competition and Inflation
Through many studies, OhDOT has proven that increased competition has a
downward effect on prices. Recent declines in vendor competition may be a
result of the challenges associated with volatile commodity prices.
3 Month Avg. # of Bidders per Worktype
9.00
8.00
Number of Bidders
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
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2 per. Mov. Avg. (Average # of Asphalt Bidders)
2 per. Mov. Avg. (Average # of Bridge Repair Bidders)
2 per. Mov. Avg. (Average # of Earthwork Bidders)
2 per. Mov. Avg. (Average # of General Bidders)
Statistical Inflation Forecast Model
• The model says that most of the movement of the OhDOT Cost Index
since 2002 can be estimated by tracking:
–
–
–
–
West Texas Intermediate Oil Prices
Steel Mill Prices
The Price for Asphalt binder type PG 64-22
U.S. Gross Domestic Product (GDP)
OTHER WORK:
– Review peer works
– Contact other economic professionals
7/17/2015
Vendor Analysis
• How is vendor behavior affecting competition
and thus prices?
– Who owns whom?
– Are there sole-source owners?
– Founded on game theory from the business and
economics realms
• Using this analytical work, BART can provide
suggestions for modifying bidding rules to
enhance competition as the construction
environment changes over time.
Industry Analysis
• BART provides situational awareness
– BART understands how events external to the
jobsite affect prices.
OhDOT Actual Composite, BART Modeled Index and the
Combined Actual and Predicted Inflation Rates
230
Forecasted
210
190
170
150
130
110
90
Actual Composite
7/17/2015
Predicted Composite
16%
15%
14%
13%
12%
11%
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
-1%
Combined Actual & Predicted Inflation Rate
Scenario Modeling - 17Jul2008.xlsx