Guidance on When to Estimate a Future Price Factor

Development of Criteria and Thresholds

by Isaac M. Opper, Priscillia Hunt, Lucas Husted, Jessie Coe, Kathryn A. Edwards, Aaron Strong, Jeffrey B. Wenger

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Research Question

  1. When should the Federal Emergency Management Agency use a future price forecast when estimating construction costs for Public Assistance following a disaster?

The Federal Emergency Management Agency (FEMA) increasingly seeks fixed-price contracts for Public Assistance expenditures to help communities rebuild after disaster. FEMA and those communities have large incentives to estimate costs correctly before contracts are signed.

One challenge to providing an accurate estimate of construction costs is that the cost of rebuilding can be affected by the reconstruction effort itself. One way to account for such changes is to use a future price forecast (FPF) factor, which adjusts a project's cost estimate to account for overall price-level increases caused by a disaster.

The purpose of this study was to help FEMA identify when to use an FPF. To carry out the study, the authors convened panels of experts to discuss scenarios of hypothetical disasters—in particular, how these disasters could affect local economies. They also tested a variety of community and disaster-related measures that might be predictive of large cost increases and explored the relationship between different types of skills and labor-mobility variables and disaster effects on construction costs. They then estimated how often disasters cause large increases in construction costs and identified criteria to use in determining when an FPF might be warranted. They also explored the implications of these criterion thresholds by estimating FPFs in some what-if scenarios.

Key Findings

  • Motivated by expert scenario planning workshops, researchers tested a variety of community and disaster-related measures that might be predictive of large cost increases. They found strong support for the predictive power of two measures: in-migration and disaster-related property damage.
  • A county that has historically low in-migration is quite likely to see increases in its average construction wages after a large disaster; in contrast, an area with a high in-migration rate never sees a large increase, even after a large disaster.
  • Disasters of less than $1,000 per capita in damage (in fiscal year 2018 dollars) are highly unlikely to cause large cost increases (of 10 percent or greater), regardless of in-migration rate. However, between $1,000 and $10,000 per capita, the in-migration rate matters, and areas with low in-migration rates are more likely to have large disaster effects. Beyond $10,000 per capita, a future price forecast is probably warranted, although the data contain very few disasters with this level of damage, so whether it is $10,000 per capita or another number is not yet well known.
  • Although the researchers found that few disasters cause large changes in average construction wages, wages in general are not particularly stable over time, and increases of more than 20 percent are not uncommon. The wide distribution of wage changes, although not necessarily related to a disaster, suggests that there is a lot of uncertainty in how much contractors are going to have to pay.

Recommendations

  • To determine receipt of a future price factor (FPF), follow a three-step process: Determine whether the disaster meets predetermined thresholds to trigger the estimation of an FPF; if so, contract for an economic forecast for the region; if the forecast model anticipates future sustained costs in excess of 10 percent as a result of the disaster, adopt the FPF and use it as part of the Cost Estimating Format.
  • Use the following predetermined thresholds to trigger the estimation of an FPF: (1) If Public Assistance (PA) damage is less than $1,000 (in fiscal year [FY] 2018 U.S. dollars), do not estimate an FPF. (2) If PA damage is between $1,000 and $10,000 per capita (in FY 2018 U.S. dollars) and the in-migration rate is less than or equal to 2.5 percent, estimate an FPF. (3) If PA damage is between $1,000 and $10,000 per capita (in FY 2018 U.S. dollars) and the in-migration rate is greater than 2.5 percent, do not estimate an FPF. (4) If PA damage is between $10,000 and $55,000 per capita (in FY 2018 U.S. dollars) and the in-migration rate is less than or equal to 2.5 percent, estimate an FPF. (5) If PA damage is between $10,000 and $55,000 per capita (in FY 2018 U.S. dollars) and the in-migration rate is greater than 2.5 percent, conduct a preliminary analysis to determine whether estimating an FPF is warranted. (6) If PA damage is $55,000 per capita or greater (in FY 2018 U.S. dollars), estimate an FPF.

Table of Contents

  • Chapter One

    Introduction

  • Chapter Two

    Data Description

  • Chapter Three

    Methodological Details

  • Chapter Four

    Results of the Cost Effects of

  • Chapter Five

    Potential Criteria: Correlates of Disaster Cost Effects

  • Chapter Six

    Assessing Potential Thresholds

  • Chapter Seven

    Conclusions

  • Appendix A

    Simulations

  • Appendix B

    Potential Correlates Studied

  • Appendix C

    The Threshold Methodology

  • Appendix D

    Estimated Coefficients

  • Appendix E

    The Stress-Testing Method, Data, and Results

  • Appendix F

    Within-Laborshed Analysis of Property Damage and Wage Increases

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.

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