Construction Costs

Good evening, I feel bad making this request since you are always so good and propmt about responding to questions, but any chance you could answer my question below today? I am trying to get some numbers to my client by the end of the day. Sorry to pester you. Thanks.

Hi Urban Economist. Based on your recent Forum Post, which sector to model the construction impacts will depend on the type of structure you are analyzing. If the structure is commercial, Sector 34 would be an appropriate candidate to use to input your $32 million in construction cost. If the structure is residential, then Sector 37 would be the likely candidate for your analysis. In either case, we recommend that you import an industry spending pattern for your sector by Navigating to Activity Options>Import>Industry Spending Pattern, scroll down, select your sector, and click “Import” to bring the spending pattern into your model. From there, you should edit the spending pattern to remove Architectural, Engineering, and related Services to avoid double counting since you are modeling these impacts separately. In addition, these special services could be under different Sectors and if you want to see what is captured in the various Sectors you could go to Explore> Social Accounts> Balance Sheet (Tab), and select View By: Industry Balance Sheet and the Commodity Demand tab and see what the appropriate Sector (34-38) purchases that you may need to edit out of your spending pattern. Sector 369 is would be the sector to model the impact of the Architectural, Engineering, and related Services. Relative to the construction, 369 is technically a backward linkage so you might want to apply LPP to SAM unless you know that only local architectural services were used. If this is run as an Industry Change you may want to add the total Direct to 369 into the total costs of building, but take the actual impact (which as a result of LPP will likely be somewhat smaller than 10MM) and sum that into the rounds of Indirect along with the associated comp and Employment. Run the analysis of each Event. To run a combined impact of both Events, create a third Scenario named “Construction Combo” and select the Activities “Construction” and “Architectural” to include in the analysis and run. Now, you have the combined impact of the $32 million in construction cost and $10 million in Architectural, Engineering, and Related Services. With the above approach, you are dividing the project along the lines of “Hard Cost”--Construction and “Soft Cost” -- Architectural, Engineering, and related Services. When you summarize your results, they will both be considered “Temporary” impacts. As this project becomes operational, those impacts will be more permanent. Please let us know if we can be of further help.

Hello, I have a follow up question on this. I am trying to import an industry spending pattern for sector 34. What I have done is: 1) Navigated to Activity Options>Import>Industry Spending Pattern, scroll down, selected sector 34, and click “Import” to bring the spending pattern into the model. 2) Edited the spending pattern to remove Architectural, Engineering, and related Services (set coefficient = 0) to avoid double counting since I am modeling these impacts separately. From here is is just an Analysis by Parts, correct? Also, I wantd to ask...my construction budget includes $2million in leasing comissions. When I look at the commodity demand for sector 34 I see that it includes expenditures in sector 3360? Should I zero that sector out and do an ABP? Also, my construction budget includes $1million in interest payments. When I look at the commodity demand for sector 34 I see that it includes expenditures in sectors3354, 3355 and 3356? Should I zero those sectors out and do an ABP? Thank you for your assistance

Hello Urban Economist, A couple of things. You actually won't want to set the coefficients to zero for these, but to completely remove the Events from the spending pattern and then normalize the resultant spending pattern. If you just zero out to coefficient, you will have the Sum of Event Values be less than you should. The value of Activity Level for Industry Spending Pattern should be the total value of the building in an unadjusted spending pattern. Thus the Sum of Event Values is equal to the Intermediate Expenditure coefficient for that expenditures pattern based on the equation Output = Intermediate Expenditures + Value Added. If you reduce the value of the value of the coefficients without making any adjustments then you are actually leaking some of the Intermediate Expenditure value before the first round of the impact even takes place. Normalizing will set the Sum of Event Values = to 1.0 so you will want to adjust your Activity Level to reflect the budgetary spending goods and services less the amount of the budget redistributed to outside Event such as your are describing and that you are modeling separately. It is also important to note that if you do run these Events (architecture, real estate and financial) separately as Industry Change or Commodity Change Activity Types you will want to sum the resultant Direct Effects of the particular Events into the Indirect column to keep with the standard definitions of IMPLAN construction Sectors. Also as regards you leasing commissions are those a one-time expenses associated to the construction, or since it is leasing, is that an annually reoccurring expense? Likewise, are the interest payments all being made during the construction period? If these are ongoing, you may want to handle them completely separately. As to zeroing out the other factors, financial Sectors and real estate whether or not you want to zero these out or try to adjust them will depend on whether or not you know if the external values you are using represent all the related expenditures for your project in these Sectors. Certainly zeroing out at worst will be a conservative estimate. Hopefully this helps

Good morning! Thanks for all your input on this. I put together a "How-to" guide to summarize all the information on this thread (at least how I understand it). Is it possible to get some feedback to make sure that understood the information you provided correctly? Thank you in advanced. PS, I meant to include an attachment to this post, but was unable to do so. Is there an email where I could send it? Thanks

Hi Urban Economist , Overall your paper looks really good. A couple of additional thoughts... Typically construction has a high level of proprietor contractors. Unless you know that your particular construction site does not include proprietor contractors you might want to split the Labor Income component over Employment Compensation and Proprietor Income. Since you are using the Industry Change Event for the Direct you could use the split in the Event for this estimation or you could use the data found at the Explore> Social Accounts> Balance Sheet (Tab), and select View By: Industry Balance Sheet and the Value Added Demand tab to calculate the ratio of Employment Compensation : Proprietor Income. Additionally if you'd like you can sum the results of Sector 369 into the Indirect and Induced impacts of the final results. This process would involved summing the reported Direct Effects of the Scenario into the Indirect Effects (since these are definitionally a first-round Indirect purchase and then sum the remaining summary rows together. Hope this helps. Please let us know if you have any additional questions,

Thank you for the response. Could you elaborate on the "split of the labor income"? I am not really clear on what you mean by it. Also, with respect to summing the results of sector 329 into the indirect and induced results...why would that be the case? for this project the developer is spending the $2 million in architecture and engineering services, so isn't that a direct impact? Thanks again.

Hello, Regarding splitting Labor Income: If you are setting up your analysis as an analysis by parts, and are thus running a Labor Income Change Activity, the Labor Income Change Activity allows you to choose whether you want your Event (i.e., your Labor Income value) to be for Employee Compensation ('sector' 5001) or Proprietor Income ('sector' 6001). In the case of the new construction sectors, proprietors represent contractors - thus, you may want to set up two Events in your Labor Income Change Activity - one for Employee Compensation and another for Proprietor Income, and split your total Labor Income value amongst those two types. Note that both EC and PI spend their money the same but PI has different tax impacts since proprietors pay both sides of social insurance taxes. In most construction projects, pre-development activities (soft costs that include engineering, environmental, architectural, and marketing services) are undertaken long before the construction company even begins to build. The developer (who is often a separate entity from the construction company) typically undertakes the soft costs first because they have to get development approval from the local jurisdiction before site preparation or construction can begin. There is often a lengthy period between when a developer submits plans to the city for approval and when that approval is actually obtained. Because of this most developers divide spending into two major categories: soft costs and hard costs (actual construction activity). Soft costs are usually accounted for as a separate line item from hard costs in the overall construction budget. These two types of costs represent distinct spending streams, one to the architect and engineers, the other to the construction company. It is not uncommon for soft costs to be undertaken even before the developer has accepted a final bid from the construction company. Because of this, the simplest way to account for soft costs in a construction scenario is to include them as a separate industry event, such as Sector 369. Because our construction spending pattern only accounts for purchases directly attributable to actual construction activity, these soft costs are not included in the spending pattern. Therefore, there is no double counting if soft costs are included as a separate industry event. This is a much simpler method to use then modifying spending patterns or underlying industry. \ Please let us know if this helps answer your questions.

Thank you again.

Not sure how much of a help this is, but when I dug into the production function for the aggregated construction sector, there were quite a few expenditures that seemed far more applicable to the overall development process rather than construction per se. these included high spending coefficients for architectural, legal & financial services, and other related services that didn't appear to my eye as directly related to construction. to remedy this situation I created a crosswalk between the IMPLAN construction sectors and the Economic Census' construction sectors, ran the total EC spending value adjusted the direct impact output to reflect the broad EC categories, and used the industry template to create a modified construction industry that looked like the EC.