Analysis of construction cost variations using macroeconomic, energy and construction market variables
Shahandashti, Seyed Mohsen
MetadataShow full item record
Recently, construction cost variations have been larger and less predictable. These variations are apparent in trends of indices such as Engineering News Record (ENR) Construction Cost Index (CCI) and National Highway Construction Cost Index (NHCCI). These variations are problematic for cost estimation, bid preparation and investment planning. Inaccurate cost estimation can result in bid loss or profit loss for contractors and hidden price contingencies, delayed or cancelled projects, inconsistency in budgets and unsteady flow of projects for owner organizations. Cost variation has become a major concern in all industry sectors, such as infrastructure, heavy industrial, light industrial, and building. The major problem is that construction cost is subject to significant variations that are difficult to forecast. The objectives of this dissertation are to identify the leading indicators of CCI and NHCCI from existing macroeconomic, energy and construction market variables and create appropriate models to use the information in past values of CCI and NHCCI and their leading indicators in order to forecast CCI and NHCCI more accurately than existing CCI and NHCCI forecasting models. A statistical approach based on multivariate time series analysis is used as the main research approach. The first step is to identify leading indicators of construction cost variations. A pool of 16 candidate (potential) leading indicators is initially selected based on a comprehensive literature review about construction cost variations. Then, the leading indicators of CCI are identified from the pool of candidate leading indicators using empirical tests including correlation tests, unit root tests, and Granger causality tests. The identified leading indicators represent the macroeconomic and construction market context in which the construction cost is changing. Based on the results of statistical tests, several multivariate time series models are created and compared with existing models for forecasting CCI. These models take advantage of contextual information about macroeconomic condition, energy price and construction market for forecasting CCI accurately. These multivariate time series models are rigorously diagnosed using statistical tests including Breusch-Godfrey serial correlation Lagrange multiplier tests and Autoregressive conditional heteroskedasticity (ARCH) tests. They are also compared with each other and other existing models. Comparison is based on two typical error measures: out-of-sample mean absolute prediction error and out-of-sample mean squared error. Based on the unit root tests and Granger causality tests, consumer price index, crude oil price, producer price index, housing starts and building permits are selected as leading indicators of CCI. In other words, past values of these variables contain information that is useful for forecasting CCI. Based on the results of cointegration tests, Vector Error Correction (VEC) models are created as proper multivariate time series models to forecast CCI. Our results show that the multivariate time series model including CCI and crude oil price pass diagnostic tests successfully. It is also more accurate than existing models for forecasting CCI in terms of out-of-sample mean absolute prediction error and out-of-sample mean square error. The predictability of the multivariate time series modeling for forecasting CCI is also evaluated using stochastically simulated data (Simulated CCI and crude oil price). First, 50 paths of crude oil price are created using Geometric Brownian Motion (GBM). Then, 50 paths of CCI are created using Gaussian Process that is considering the relationship between CCI and crude oil price over time. Finally, 50 multivariate and univariate time series models are created using the simulated data and the predictability of univariate and multivariate time series models are compared. The results show that the multivariate modeling is more accurate than univariate modeling for forecasting simulated CCI. The sensitivity of the models to inputs is also examined by adding errors to the simulated data and conducting sensitivity analysis. The proposed approach is also implemented for identifying the leading indicators of NHCCI from the pool of candidate leading indicators and creating appropriate multivariate forecasting models that use the information in past values of NHCCI and its leading indicators. Based on the unit root tests and Granger causality tests, crude oil price and average hourly earnings in the construction industry are selected as leading indicators of NHCCI. In other words, past values of these variables contain information that is useful for forecasting NHCCI. Based on the results of cointegration tests, Vector Error Correction (VEC) models are created as the proper multivariate time series models to forecast NHCCI. The results show that the VEC model including NHCCI and crude oil price, and the VEC model including NHCCI, crude oil price, and average hourly earnings pass diagnostic tests. These VEC models are also more accurate than the univariate models for forecasting NHCCI in terms of out-of-sample prediction error and out-of-sample mean square error. The findings of this dissertation contribute to the body of knowledge in construction cost forecasting by rigorous identification of the leading indicators of construction cost variations and creation of multivariate time series models that are more accurate than the existing models for forecasting construction cost variations. It is expected that proposed forecasting models enhance the theory and practice of construction cost forecasting and help cost engineers and capital planners prepare more accurate bids, cost estimates and budgets for capital projects.