FTA Oversight Procedures - Federal Transit Administration - U.S. ...

• Producer Price Index (PPI) – This index is prepared by the U.S. Department of Labor, Bureau of
Labor Statistics. It tracks producer price data by industry and develops the index from these
prices. The Producer Price Index is a family of indices that measure the average change in the
selling prices received by domestic producers of goods and services. The most pertinent index
available for this project application is the Highway and Street Construction Index. The average
annual increase of this index from 2000 to 2005 is 5.05%.
These four indices are all constructed using differing methods. They measure the effects of price change
in various portions of the economy. The most relevant portions of the economy for this application of
escalating transit estimates are the heavy construction field and highway construction. Certain indices are
historical, documenting actual price change. Other indices are predictive, estimating future change in
prices or costs of various goods and services. These four indices represent the wide range of available
indices and associated values.
The FTA Transit Price Index is a predictive inflation index. This means that it converts its historical price
change research into forecasting future price change. The other three indices are historical indices that
document actual price change in the economy.
The [commerial cost index] Heavy Construction Cost Index and the Engineering News Record
Construction Cost Index are both developed for general heavy construction and do not include the more
unique systems requirements typically found in transit projects. The FTA Price (Cost) Index was
developed from the detailed DRI/McGraw Hill forecasts for the more specific transit capital project
requirements. As such, FTA may provide better estimates for this exercise.
As is evident from above, the [commercial cost index] Cost Estimates’ annual inflation factor compares
favorably and falls within the range of the other four indices surveyed. Only the PPI Highway and Street
Construction Index is greater, at 5.05%.
Potential Escalation Risk Elements
Given that the escalation application method is sound, the main risk factors to the escalation costs are the
escalation percentage and the projected design and construction schedule. If the escalation percentage
were to increase due to economic and market conditions, the escalation costs will increase accordingly.
Furthermore, if the design and construction schedule were to be extended or delayed, the corresponding
design and construction costs would occur in different out years than currently estimated and the applied
effective/compounded escalation factor would be greater for the new years than the previously estimated
years.
Therefore, various risk scenarios exist. Singularly, either the escalation percentage can increase or the
design and construction schedule can be extended. A worst case scenario would occur if the escalation
percentage was greater than the anticipated 4.0% and the design and construction schedule was to slip.
As a result of any of these scenarios, the escalation costs would be greater than the $56,691,000 reflected
in [Grantee’s] Cost Estimate Summary.
The annual escalation of 4% used in the [Grantee’s] Project Cost Estimates compares favorably with the
various representative benchmarks previously discussed. However, if an escalation percentage of 5.05%
is used as reflected in the PPI Highway and Street Construction Index, the project’s escalation cost would
increase by approximately by $17,350,000 (or 30.6%) to $74,045,000.
OP 33 Capital Cost Estimate Review
Revision 0, June 2008
Page D-10