Developing a Chained Fisher Construction Cost Index for a State Highway Agency

Construction cost indexes (CCI) are important to state highway agencies (SHA) to provide an indicator of construction cost escalation over time and to update old bid cost information to current year pricing. The Federal Highway Administration publishes a National Highway Construction Cost Index (NHCCI) based upon cost data from several states for SHA to use. The Wisconsin Department of Transportation (DOT) uses a CCI to measure the changes in purchasing power of their construction dollar from one year to the next. Currently, the Wisconsin DOT uses a fixed-weight index to compute the CCI for a fixed basket of seven construction items. However, the current Wisconsin DOT CCI is subject to considerable short-term variation and does not accurately reflect the project bid costs that the department is experiencing. This paper presents results of a study requested by the Wisconsin DOT to develop an approach for calculating a more representative, reliable, and objective CCI. The paper presents various approaches to calculating a CCI, highlighting their properties and characteristics. The paper also outlines the process used to select a representative basket of items to calculate the index and outlines the data preparation steps needed to improve data quality. The recommended methodology uses a chained, two-stage aggregation computation process. This paper compares the newly constructed Wisconsin DOT CCI to the old CCI as well as to the NHCCI. The impact from selecting different size baskets of items is also investigated; it is concluded that a basket containing a representative number of items is sufficient to calculate a reliable CCI.