Research Companion to Construction Economics

Construction Economics applies economic theory, concepts and analytical tools to the construction industry, the companies and organisations comprising it, andthe projects it undertakes. Over time, the field has been extended beyond the minimisation of capital cost on projects to include life-cycle cost considerations, theidea of value, sustainable construction and climate change, and applications of technology. Attention has also  included consideration of companies andorganisations, and strategic, industry-level considerations involving the economy and construction markets, government policy, and international finance andeconomics. 

The Elgar Research Companion on Construction Economics provides an overview of current research and a critical examination of complex issues in the field. It also provides the opportunity for some new or under explored issues in the field to be discussed. Each chapter analyses the existing knowledge on the topic, compares the various views on it, and presents a reference point for further research leading to further development of the subject. The book has 24 chapters authored by recognised experts on their topics. This is an influential collection which represents a relatively complete work on the field of constructioneconomics. 

This important milestone in the development of construction economics is published by Edward Elgar. Details on the contents and contributors can be found here.

What is Construction Economics?

 Construction economics investigates issues and topics associated with the construction and maintenance of the built environment by firms, industries and projects, using economic theory, concepts and analytical tools.

 Construction economics is also concerned with the macroeconomic role of the construction industry and its relationship with associated manufacturing, professional services and materials industries. 

Construction economics applies a broad range of approaches to economic aspects of the construction firms, industry, and projects. These include industry economics, industrial organization and other management studies, financial and behavioural economics, econometric analysis and modelling, legal and institutional research, and transaction cost economics.

Topics of interest in construction economics include the roles of participants and processes, productivity and value for money, environmental performance and sustainability, the delivery process and procurement, the financing, viability and competitiveness of construction firms and projects, technological and institutional development, construction statistics and measurement, international construction, regulation, and government policies affecting the industry. 

Some of the earliest construction economics publications were on developing economies, bidding strategy, input-output data, building cycles, multinational firms, market structure, firm performance, size and scope, and the role of construction in long run economic growth. Over time organizational behaviour, transaction costs, decision making under risk and uncertainty, R&D and innovation were added. Recent work has been on issues around construction statistics and data and the measurement and performance of the construction industry and construction projects. 

Over the last five decades, contributions to construction economics have come from diverse viewpoints and places. There have been contributions from economists like Patricia Hillebrandt, Paul Strassman, Graham Ive, Stephen Gruneberg, Martin Skitmore and Goran Runeson, but also from architects, quantity surveyors, sociologists and engineers like Ducio Turin, Ranko Bon, George Ofori, Jim Meikle, Graham Winch, David Gann and Lauri Koskela. Construction economics is multi-disciplinary and uses multiple models to disentangle and analyse issues associated with the construction industry in particular and the construction of the built environment more broadly.

Fewer Large Contractors in Australia

Long-run Changes in the Number and Size of Firms in the Australian Construction Industry 

There have been five Construction Industry Surveys (CIS) by the Australian Bureau of Statistics (ABS), the most recent for 2011-12.  All five surveys found the construction industry is overwhelmingly made up of small firms which contribute most of the industry's output and account for almost all of the number of enterprises. Table 1 shows the breakup between contractors in Building and Engineering and the subcontractors in Construction services (which were called trades in the earlier surveys). The 2002-03 survey used different categories of businesses (not establishments) in residential, non-residential and non-building, and trade services and is not comparable with the other surveys. In 2002-03 there were 339,982 businesses of which 269,228 were trade services and 70,753 were residential, non-residential and non-building businesses.

How the size of firms is measured in the CIS has changed twice. The three surveys in 1996-97, 1988-89, and 1984-85 divided firms into three sizes: employ less than 5, employ 5-19, and employ 20 or more. The 2011-12 survey divided firms into small 0-19, medium 20-199 and large with over 200 employees. The 2002-03 survey divided firms by income and the data cannot be compared to the other surveys however, although income was used to classify firms, the 2002-03 survey produced a similar result, finding 90% of firms were small or very small. Here the 1996-97 survey and the 2011-12 survey data is presented. The breakup of firms by size is in Table 2.

In the 1996-97 survey businesses with less than five employees accounted for 94% of all businesses and over two-thirds of all employees. Less than 1% of businesses employed 20 or more. Businesses with less than five employees accounted for slightly less than half the total income and expenses, whereas businesses with employment of 20 or more accounted for almost one-third of these. The data in Table 3 is percentages, showing the importance of the 0.62% of large firms. Their 13.6% of employees earned 32.3% of salaries and wages, generated over 28% of income and nearly 25% of gross output.

The survey in 2011-12 classified firms by the number of employees into small 0-19, medium 20-199 and large with over 200. The same data for the 2011-12 survey is in Table 4. The changes between 1996 and 2012 are revealing. The total number of firms has increased marginally from 195,000 to 210,000, but the share of small firms has increased from 94% to 98% as the number of medium and large firms fell from 12,300 to less than 5,000. There was a trend with the number of medium sized firms decreasing to less than half, while slightly increasing their share of industry employment.

In 2011-12 less than 0.1% of firms were large, employing 18.6 % of the workforce, paying 32% of wages and salaries and generating 27% of industry income and 25% of output. 

 

These are remarkably similar to the 1996-97 CIS numbers, however, the 186 large firms in 2011-12 had almost the same share of employment, income and output that 1,200 firms had in 1996-97. This was a significant increase in industry concentration. In the 1996 survey the 1,200 firms employing 20 or more had a total of 66,000 employees and accounted for 13.6% of employment and 24.4% of industry output. 

 

In 2012 there were 186 firms employing 200 or more with 177,000 employees, accounting for 18.6% of employment and 25.5% of IVA. These long-run changes in industry structure can not only be the result of business failures, which are common with SMEs but less so for large firms. Instead, there has been a long wave of mergers and acquisitions reducing the number of large firms and increasing industry concentration. 

A stylized representation of construction industry firms by market type is in table 8, showing how concentrated markets can be the outcome of either firm size or specialization. Figure 5 relates market type to contract size. As a firm gets larger it takes on bigger projects and compete with fewer other firms. How construction economists sought to reconcile theoretical and conceptual models of construction firms with the messy reality of the construction industry is discussed in the next section.

Production of the Built Environment as an Industrial Sector

 Industries, clusters and sectors

Parts of the economy that involve many different contributors and participants are often called an industrial or economic sector, an example is the non-profit sector with its wide variety of organisations. Although the idea of an industrial sector has no precise meaning, it is often used to describe a loose collection of firms with one or more common characteristics, like ‘manufacturing’ or ‘the business sector’, though firms in these sectors come from many different industries.

 

The starting point is the concept of an industry, which is defined in the Standard Industrial Classification (SIC) used by national statistical agencies as a group of firms with common characteristics in products, services, production processes and logistics. These firms are classified into a four-level structure. The highest level is alphabetically coded divisions such as Agriculture, forestry and fishing (A), Manufacturing (C) and Information and communication (J). The classification is then organised into two-digit subdivisions, three-digit groups, and four-digit classes.

 

The boundaries around an industry are tightly defined by the SIC, to allow identification of individual industries as producers of goods and services and measurement of their contribution to output and employment in the economy. However, to produce something supplies are needed, purchased from other producers, and these relationships between industries are also important. For example, bricks are manufactured products supplied to property developers to provide buildings for their customers. Many industries are structured around such supply chains and production networks, and when enough firms share sufficient characteristics they are often described as an industry cluster. 

 

An industry cluster brings together a group related firms and was originally applied in the 1990s to specific locations like the wine industry in California’s Napa Valley or Bordeaux in France. Over time, the concept itself broadened as different types of clusters were identified, such as creative industry hubs or knowledge centres. Two types of industry cluster are:

 

1.     Geographical – industries using the same resources in a specific location

·       Movies – Hollywood US, Bollywood India;

·       IT – Silicon Valley CA, Silicon Alley NY, Silicon Glen Scotland, Bangalore India;

·       Leather goods, spectacles and glasses – Italy;

·       Health – Boston US, Oxford England, Chennai India;

·       Electronics – Guadalajara Mexico, Cordoba Argentina, Guangdong China;

·       Finance – London England, New York US, Geneva Switzerland; and 

 

2.     Vertical – a hub and spoke value chain from suppliers to end products

·       Automotive – Detroit US, Dusseldorf Germany, Turin Italy, Curitiba Brazil;

·       Aerospace – Toulouse France (Airbus), Seattle US (Boeing);

·       Smart phones – Guangdong China (Apple), Hanoi Vietnam (Samsung).

 

Some industries do not have central locations like the clusters in IT, wine, finance etc., or major hubs where production is concentrated like automobiles and aerospace. These industries are built around decentralised production, distribution and delivery networks that make their products widely available to clients and customers. Four examples are:

·       Pharmaceuticals – a globally distributed industry, with countries combining some form of domestic production and imported supplies;

·       Shipbuilding – brings many suppliers together in a few locations;

·       Electricity generation – brings many suppliers together in many locations;

·       Building and construction – the world’s most ubiquitous industry, sharing the most widely used materials of wood, clay, glass, steel and concrete. Is this really a cluster?

 

Building and construction, in fact, is only one of the many industries involved in the production of the built environment. There is a diverse collection of industries that create, manage and maintain the built environment. On-site work links suppliers of materials, machinery and equipment, products and components, and all other inputs required to deliver the buildings and structures that make up the built environment. Consultants provide design, engineering, cost planning and project management services. Once produced, buildings and structures then need to be managed and maintained over their life-cycle, work done by another group of related industries. The built environment also needs infrastructure and services like water and waste disposal, provided by yet more industries. 

 

A dense network of many different firms and participants such as this is often called an industrial or economic sector, because it is too diverse and distributed to be a cluster. There is no definition of an industrial sector, beyond a broad collection of firms with one or more common characteristics, like ‘manufacturing’ or ‘the business sector’, though firms in these sectors come from many different industries. There are also sectors based around a definable market, two examples being:

·       Defence - there is no defence ‘industry’ because suppliers come from many different industries like IT, aerospace and shipbuilding, but as a sector share resources and clients; and 

·       Tourism - which brings together the contributions of industries like accommodation, tour operators and entertainment. Australia has an annual Tourism Satellite Account produced each year (cofounded by industry and government). 

 

If the built environment encompasses the entirety of the human built world, then the built environment sector (BES) is the collection of industries responsible for producing, managing and maintaining the buildings and structures that humans build. To be included in the BES an Industry needs a direct physical relationship with buildings and structures. Those industries can be divided into those on the demand side and those on the supply side, like materials or specialised tradesmen, Demand side industries like property developers and facility managers pull output from the supply side, both for new output and for servicing and managing existing assets. Therefore the BES is a sector more like defence than tourism, because it also produces long-lived assets for clients outside the sector (governments and owners respectively) that require repair and maintenance, and that R&M generates significant ongoing revenue for firms across the broad industry sector that produces those assets. 

The concept of the BES is broad and extensive, so cannot be precise and exact. While the boundaries of industries and markets are important, in practice the data and SIC definitions are the starting point for the data used. The industries included are selected because they clearly have a relationship with construction, management and maintenance of the built environment. This may not capture every last contribution to the BES, but it does allow the development of a profile of the sector. Measuring the BES provides data on its relationship to the wider economy and is relevant to a wide range of policies and issues currently facing the built environment.