Intermediate Inputs Show Construction is a Production Industry
There is no agreement on what the construction industry produces. Some researchers believe the industry provides services (management, coordination, finance), others believe the industry delivers products (buildings and structures). The former group argues that the main task of the industry is one of coordinating site processes while the latter are more concerned with the physical production of buildings and works.
Is the industry’s output a service, the management of construction, or a product? Construction can be seen as a service industry because the industry uses subcontractors to do the majority of work onsite. The role of builders and contractors is to organise the production process, providing a service, while the delivery of the product (a building or structure) is the responsibility of the subcontractors who carry out the work.
By restricting analysis to the level of main contractors, it is a logical step to argue that the role of contractors is to provide management services for clients. Therefore the industry is a service industry, like finance and health, not a goods producing industry like mining or manufacturing.
While right about the role of contractors as managers, this mistakes one part of construction for the whole. Contractors are responsible for the purchase of all the intermediate inputs required for their projects, such as supplies of materials and components. Subcontracted onsite work is only one part of the production process, and the contractor is responsible for the final product.
Data from the Australian Bureau of Statistics supports the product view of construction, using the relative contribution to industry Output of Total Intermediate Use (TIU) and Gross Value Added (GVA). The ABS explains:
The graph illustrates the relative contribution to total Output of Australian Production by Total Intermediate Use (TIU) and Gross Value Added (GVA) components for 2020-21. The TIU to Output ratio for industries that primarily produce goods is typically different to that of industries that primarily provide services. Industries producing goods - Agriculture, Mining and Manufacturing – require relatively large amounts of material intermediate inputs, usually resulting in a higher TIU to Output ratio.
In contrast, service based industries such as Financial and Insurance Services, Education and Training, Health Care and Social Assistance have a much lower TIU to Output ratio as they rely more heavily on labour inputs. For example, Education and Training, Health Care and Social Assistance have TIU to Output ratios of 30.7% and 31.7% respectively.
The ratio of TIU to total output shows manufacturing with 72% and Construction at 70% are the industries with the highest levels. The majority of industries are around the 50% level.
On the definition of construction there are two views. On the one hand is the view that it is management of the productionprocess, and therefore a service. On the other hand some researchers see output as the production of buildings and structures, physical products with certain characteristics that differentiate construction from manufacturing or other industries.
The view that construction is a service industry is based on the role of contractors providing management of projects, which is a business service. However, service industries typically have a high share of labour costs and a low share of intermediate inputs, but the intermediate input share of construction output is 70%. Therefore, construction is not a service industry.
