The Ohio DOT Inflation Forecasting and Related Activities Jennifer McAllister, Ohio DOT presenting...

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

04/19/23

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

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

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Yearly Composite with Base Year Centered to (Jan 2002=100)

ODOT In-Place Construction Cost Index Aug2004 Aug2005 Aug2006 Aug2007 Aug2008Aug'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.]

Monitor Construction Cost Trends

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Annualized Monthly Inflation ChangeODOT Construction Cost Index

OhDOT In-Place Vs. BLS Hwy Index

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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

Macro Issues• US Construction Demand• Exchange rates• World demand• Regional Factors

– Ohio construction economy– Commodity specific

supply/demand

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“How might we model scenarios of in-place construction costs?”

1. Consultant– Pay for a final forecast

2. Best guess based upon industry publications3. A spreadsheet model tracking labor, energy,

materials, and equipment costs– Provides a system for a rudimentary forecast

4. Purely statistical model – Provides a statistically defensible forecast

• Methods 3 and 4 allow for in-house scenario testing

Simple

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.

Predicted Cost Inflation CY06-CY10: January 2006

CY06 CY07 CY08 CY09 CY10

High 12.0% 7.0% 6.0% 6.0% 5.0%

Most Likely 8.5% [12.6%] 5.5% 5.0% 4.0% 4.0%

Low 7.0% 4.5% 4.0% 3.0% 3.0%

FY07 FY08 FY09 FY10 FY11

High 14.0% 7.0% 6.0% 5.5% 5.5%

Most Likely 11.5% [11.6%] 6.0% 4.5% 4.0% 4.0%

Low 8.0% 4.0% 3.5% 3.0% 3.0%

Predicted Cost Inflation FY07-FY11: July 2006

[%] – Actual construction cost inflation (OhDOT Construction Cost Index)

Historical OhDOT Forecasts


High 10.5% 9.5% 7.0% 5.0% 5.0%

Most Likely 6.0% [6.3%] 5.5% 5.0% 4.0% 4.0%

Low 4.0% 3.5% 3.5% 3.0% 3.0%



High 14.5% 14.0% 13.0% 10.0% 8.0%

Most Likely 10.0% [4.4%] 10.0% 8.0% 6.0% 5.0%

Low 7.0% 6.5% 5.0% 4.0% 3.0%



[%] – Actual construction cost inflation (OhDOT Construction Cost Index)


Business Plan 10.0% 8.0% 7.0% 6.0% 5.0%

Budget Forecast Inflation FY08-FY12: November 2007


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%




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

• Exchange Rates04/19/23

Energy – Liquid Asphalt• OhDOT placing index

– Indicator of state asphalt binder prices

ODOT Asphalt Placing Index ($/ton)

346 355 379407

437

553

393421 441 467

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613

300350400450500550600650

Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08

PG 64-22 PG 70-22M

55% Increase in CY 200859% Increase in CY 2008

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West Texas Intermediate Oil Price: Four Scenarios

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BART,($160, Dec - 2009)

Investment Bank Forecasts

($200, Dec - 2009)

Regulated Market Forecasts

($102, Dec - 2009)$0

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BART Estimate WTI - Historical High Oil Low Oil

Scenario Modeling - 17Jul2008.xlsxScenario Modeling - 17Jul2008.xlsxScenario Modeling - 17Jul2008.xlsxScenario Modeling - 17Jul2008.xlsx

Futures Contracts -Nominal Terms ($149, Dec - 2009)

Scenarios incorporated in July 2008 construction cost forecast.

Steel

• Iron & Steel Products (WPU101) rose 37% from December 2007 through June 2008.

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Iron and Steel Producer Price Index

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%

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Calendar Year

2008 2009 2010 2011 2012 2013

US GDP GROWTH:

0.50% 0.75% 2.00% 2.50% 3.00% 3.00%

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)

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Competition and Inflation

04/19/23

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.

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3 Month Avg. # of Bidders per Worktype

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

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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

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Actual Composite Predicted Composite Combined Actual & Predicted Inflation Rate

Forecasted

Scenario Modeling - 17Jul2008.xlsx04/19/23

The Ohio DOT Inflation Forecasting and Related Activities Jennifer McAllister, Ohio DOT presenting...

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