Development of Unit Price Indices and Estimating Inflation for Potable Water and Wastewater Pipeline Capital Works Construction
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The importance of sustainable financial management of water and wastewater pipeline infrastructure has grown in recent years due to the increasing backlog of maintenance, renewal and replacement of aging water and wastewater infrastructure. As the water and wastewater infrastructure age, the condition of the water and wastewater infrastructure will continue to deteriorate increasing the cost for renewal and replacement. In response to the aging and deteriorating potable water and wastewater infrastructure Public Sector Accounting Board PS3150 and Regulation 453/07 under the Ontario Safe Drinking Water Act were established. PS3150 requires local governments to report their tangible capital assets along with their depreciation on financial statements. One key component of this reporting is determining the need for and cost of the replacement of these assets. Ontario Regulation 453/07 requires public utilities to prepare and submit long term financial plans for water systems. One key principle of the financial plans is that the expenses of operating water systems should be paid by revenues generated from providing the water systems. A crucial aspect of PS3150, Ontario regulation 453/07 and the financial management of water and wastewater infrastructure are accurate estimates of future capital works construction prices. Historically, construction indices are used to forecast construction prices. Engineering New Record (ENR) Construction Cost Index (CCI), Federal Highway Administration (FWHA) composite National Highway Construction Cost Index (NHCCI) and Consumer Price Index (CPI) have been used to estimate future construction prices of water and wastewater infrastructure in Canada. However, these indices do not accurately represent the circumstance of the water and wastewater infrastructure construction sector, which can lead to errors and inaccuracies in construction price forecasts. It is recommended sector specific construction indices be used to forecast construction prices. However, there are few construction indices available for the water and wastewater infrastructure sector and available indices are not based on actual construction data. This thesis presents a methodology to accurately estimate future construction prices for water and wastewater pipeline capital works based on actual construction price data. The methodology contains three components: construction data processing, development of unit price indices for watermain and sanitary sewer construction, and estimation of inflation in watermain and sanitary sewer construction. The data processing component cleans and transforms actual construction price data from the City of Niagara Falls from 1981 to 2014 into a centralized, organized and auditable construction price dataset. Based on the construction price dataset, unit price indices specific to the watermain and sanitary sewer construction sector were developed. Unit price indices were developed and calculated for watermain projects, pipes, valves, and hydrants, and sanitary sewer projects, pipes, and maintenance holes. Geometric Brownian Motion was used to estimate inflation in and forecast future construction prices for watermain and sanitary sewer capital works construction based on the developed unit price indices. A Microsoft Access relational database containing the data processing function, calculation of watermain and sanitary sewer unit price indices, and estimation of inflation was developed to improve the accuracy, efficiency and consistency of the methodology. Additionally, the methodology allows contractor markup in watermain and sanitary sewer construction and factors influencing watermain and sanitary sewer unit price indices to be examined. The inflation of watermain reference project construction is 5.79% per annum from 1982-2014, while the inflation of sanitary sewer reference project capital works construction is 4.66% per annum from 1981-2014. The inflation rates of watermain pipe, valve and hydrant construction from 1982-2014 are 6.36%, 5.09%, and 2.81% per annum, respectively. The inflation rates of sanitary sewer pipe and maintenance hole construction from 1981-2014 are 7.41% and 5.25% per annum, respectively. Inflation of watermain and sanitary sewer reference projects is above inflation of CPI, NRBCPI and LDCCT at 2.25%, 3.17% and 3.77% per annum, respectively, but below inflation of S&P/TSX composite index at 6.90% per annum. This indicates when forecasting future prices within a construction sector, the use of a proxy index will result in inaccurate estimates of future construction prices. In the water and wastewater pipeline construction sector the use of CPI, NRBCPI or LDCCT will result in significant underestimation of future construction prices. To obtain accurate estimates of future construction prices it is important to use sector specific indices which the developed unit price indices represent for the water and wastewater pipeline construction sector. In this thesis contractor markup is defined as a financial premium in excess of market inflation in the form of a per annum interest rate surcharge. Contractor markup includes risk premiums, overhead and profit. The contractor markups for watermain and sanitary sewer projects are 3.54% and 2.41%, respectively. As the number of tender bids submitted for a project increase, the unit price of reference projects generally decreases. This is caused by an increase in the competition among contractors resulting in a decrease in the unit prices of the reference projects as bidders attempt to win the project. The Infrastructure Stimulus Fund increased the total number of projects and the total value of projects in 2009 and 2010 but did not significantly alter the watermain and sanitary sewer unit price indices.
Cite this work
Brendan James Shapton (2017). Development of Unit Price Indices and Estimating Inflation for Potable Water and Wastewater Pipeline Capital Works Construction. UWSpace. http://hdl.handle.net/10012/11906