The scale of Puerto Rico's recovery efforts after Hurricane María means that these efforts are likely to fundamentally change Puerto Rico's economy in terms of labor, materials, and equipment. Researchers aimed to develop estimates of future construction costs and build factors that cost estimators can apply to current costs to reflect the future cost of construction. This report documents their approach, data, findings, and recommendations.

Cover: Forecasting Public Recovery Expenditures' Effect on Construction Prices and the Demand for Construction Labor
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Forecasting Public Recovery Expenditures' Effect on Construction Prices and the Demand for Construction Labor

by Aaron Strong, Jeffrey B. Wenger, Isaac M. Opper, Drew M. Anderson, Kathryn A. Edwards, Kyle Siler-Evans, Jessie Coe, R. J. Briggs

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Research Questions

  1. What are future construction costs likely to be for the Hurricane María recovery efforts in Puerto Rico?
  2. What kind of multiplicative factors can cost estimators apply to current costs to reflect the future cost of construction?

Alternative procedures for obtaining Public Assistance from the Federal Emergency Management Agency allow an applicant to bundle projects together and to not build back to the same state as predisaster. Cost overruns are the applicant's responsibility, and cost savings can be invested in other mitigation and risk reduction activities. In most cases, current construction costs are a good proxy for future costs, accounting for inflation. In the case of Puerto Rico's recovery from Hurricane María, the scale of the recovery efforts relative to the size of the economy means that these efforts are likely to fundamentally change the economy in terms of labor, materials, and equipment. As a result, in this project, the authors aimed to develop estimates of future construction costs and build multiplicative factors that cost estimators can apply to current costs to reflect the future cost of construction. To do this, they developed a disaster recovery expenditure simulator based on historical obligations; created a model to estimate expenditure scenarios' effect on prices of labor, materials, and equipment; devised an econometric approach to estimate substitutability of labor; and developed a labor demand estimator. This report documents their approach, data, findings, and recommendations.

Key Findings

  • The labor demands necessary for the recovery efforts are considerably more than what labor is available in Puerto Rico. The authors estimated that approximately 75 percent of the necessary labor for the efforts will come from sources outside Puerto Rico. Because imported labor is considerably more expensive than local labor, this will be one of the main drivers of cost increases for the recovery efforts.
  • Given Puerto Rico's small, open economy with supply chain connections to the continental United States, as well as international sources, material prices are not likely to increase significantly. At the early stages of the reconstruction efforts, there could be frictions in the supply chain that would increase costs over those in a small, open-economy assumption.
  • Implementing the estimated future price forecast factors requires an acknowledgment that cost estimators will always use the most-current prices. (The future price forecast is the portion of the increase in price that is due to the demand surge driven by the recovery efforts.) As a result, as time passes, current prices should embody part of the future price forecast. General inflation is addressed in Part E of the Cost Estimating Format, a Federal Emergency Management Agency tool for determining the cost of permanent work for large construction projects. Thus, monitoring the difference between current prices and estimated future prices is important to avoid double-counting price increases. As current prices increase, future price forecast factors need to decrease commensurately.

Recommendations

  • Because very little implementation has occurred under alternative procedures, provide guidance to applicants about when these procedures are appropriate.
  • Plan for a slower reconstruction process because bundled projects are considerably more complicated than simply building back to prestorm states.

Table of Contents

  • Chapter One

    Introduction

  • Chapter Two

    Understanding the Labor Supply Constraints for Recovery

  • Chapter Three

    Estimating Expenditure Scenarios

  • Chapter Four

    The Computable General Equilibrium Model

  • Chapter Five

    Estimating Construction and Nonconstruction Labor Substitutability

  • Chapter Six

    Results of the Modeling Approach

  • Chapter Seven

    Implementation

  • Chapter Eight

    Discussion and Limitations

Research conducted by

This research was sponsored by FEMA and conducted within the Disaster Research and Analysis Program of the Homeland Security Operational Analysis Center (HSOAC).

This report is part of the RAND Corporation Research report series. RAND reports present research findings and objective analysis that address the challenges facing the public and private sectors. All RAND reports undergo rigorous peer review to ensure high standards for research quality and objectivity.

The RAND Corporation is a nonprofit institution that helps improve policy and decisionmaking through research and analysis. RAND's publications do not necessarily reflect the opinions of its research clients and sponsors.