Showing posts with label construction industry economics. Show all posts
Showing posts with label construction industry economics. Show all posts

Monday 4 July 2022

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.

Sunday 20 February 2022

New US Data Shows We Have a False Picture of Construction Productivity

 Rises in Non-residential and Declines in Residential Construction Labour Productivity

 

 

The tools, techniques, components and materials used in modern construction can be seen on every building site. As anyone who works in construction knows, they have greatly increased the productivity of workers, but that increase in productivity cannot be seen in construction statistics. For decades there has been little or no growth in construction productivity as measured by national statistical agencies. 

A major problem is the inclusion in Construction sector statistics of residential building, non-residential building and engineering construction. These are three separate industries with significant differences in their characteristics, but statistical classifications group them together despite these differences.  For example, non-residential construction uses heavy machinery and equipment and is much more capital intensive than residential building. Most construction productivity research uses this aggregate data for construction because in the statistics published by national statistical agencies data on employment and hours worked at the level of the three industries is missing. 

Productivity estimates require both a measure of labour inputs, such as hours worked or people employed, and a measure of output, usually industry value added (the difference between total revenue and total costs) adjusted for changes in prices of materials and labour. That deflated measure of output is known as real construction value added.

 

The main reason for the low rate of measured productivity growth in construction are the deficiencies found in construction deflators. If real construction value added is underestimated due to the deflators used, construction productivity has also been understated. Thus the graphs of flatlining construction productivity, despite the obvious improvements in materials, tools and techniques over the last few decades. 

 

The major problem is a downward bias to output estimates because there is no adjustment for quality changes in buildings and structures.  Also, the application of a single deflator to heterogeneous goods, especially durable goods, overlooks the differences in age and function between different buildings and structures. This problem becomes more severe with long-life assets like buildings and structures. 

 

 

New Data on US Construction Productivity

 

Three economists at the US Bureau of Labour Statistics recently published productivity estimates for fourconstruction sub-industries using four different deflators, providing new, high quality estimates of real construction value added per hour worked in these industries, including subcontractor hours. The BLS research improves on previous research by using appropriate output deflators to develop measures of productivity growth,  and their measures are more reliable because the deflators are specifically designed for each industry. Their data and analysis is a significant advance on the aggregate construction productivity estimates that people are familiar with. The four industries are:

  • industrial building construction
  • single-family residential construction
  • multiple-family housing construction
  • highway, street, and bridge construction 

As the figure below shows productivity fell in single-family residential and multiple-family housing construction, but rose in industrial and highway, street, and bridge construction. Between 2007 and 2020 overall productivity was flat because these rises and falls balanced out. Also, 2007 was the peak of a business cycle, followed by a recession from December 2007 to June 2009 that ‘had both immediate and lasting impacts on the construction industries’ as the following figures show.




Two of the four industries show clear and strong productivity growth. Productivity growth in these industries remains positive with subcontractor labour included. Productivity grew fastest in industrial building construction

 

Labour Productivity in US Construction

The BLS figures below show trends in output, hours worked, and labour productivity for each of the four industries. Importantly, ‘labour hours always include partners and proprietors (P&Ps), who account for almost 20 percent of labour input in construction.’ Because of data limitations, the reference periods of the industries begin at different points. The BLS comments are under each figure. A short discussion on construction deflators follows. 


 

Single-family residential construction




For single-family residential construction labour productivity rose during the 2000-2005 period, primarily driven by a large increase in output. Starting in 2005, output fell through 2009 at a considerably faster rate than hours worked, leading to a sharp decrease in productivity in the period. These years correspond with the collapse of the housing market. Labour productivity grew from 2009 to 2013 but steadily weakened through 2019.


 

Multiple-family housing construction



Multiple-family housing had large gains in productivity from 1993 to 2007, as output increased faster than hours worked, followed by a sharp decrease in output and a moderate drop in hours worked, leading to decreasing productivity until 2010. From 2010 to 2016, output rebounded substantially, leading to significant productivity growth. However, productivity dipped from 2017 to 2020 due to growth in hours worked outpacing growth in output


 

Industrial building construction


For the industrial building construction industry, from 2006 to 2018 the productivity and output indexes rose until 2009, then fell sharply in the 2007-2009 recession, recovered from 2011 to 2015, and then declined again through 2018. The change in hours worked was slow and uneven, but positive over the 2006-2018 period. In 2019, the rising output and falling hours worked series moved in opposite directions, which led to the first gain in productivity since 2015.


 

Highway, street, and bridge construction



Productivity in the highway, street, and bridge construction industry increased during the 2007-2009 recession. Output rose as hours worked declined during this period. Then, until 2018, productivity fell most years as output saw no net growth while hours worked did. Since 2018, there has been little change to output, hours worked, or productivity.

 

Construction Productivity

Construction productivity has been notable for its absence for decades. The low rate of growth in Australia, the United Kingdom, the European Union and the United States and elsewhere became an issue in the late 1960s, when declining output per hour worked and output per person employed in the construction industry first attracted attention. The measured rate of growth of productivity of the construction industry since then has been poor even by comparison with a long-run overall industry average in the order of two to three per cent a year. Construction productivity in the US has been falling since the late 1970s, as in the figure below.

Possible reasons for the low growth of construction productivity are many and various. They include the high labour intensity of the residential industry, the number of small firms, few economies of scale in the industry, a lack of competition, regulatory impediments, low R&D, poor innovation and management practices, and a low level of training and skill development.  Alternatively, it is possible that the data and methods used to estimate the level of productivity in the industry might be faulty, and we have a false picture of construction productivity.

A second and more technical problem is the method used to adjust industry output for changes in prices of materials and labour to find changes in the quantity of output of completed buildings and structures. This deflation of output is typically done with input price indexes or producer price indexes. The problem with input price indexes is they assume a constant relationship between input and output over time, so there is an assumption of no change in productivity which means that, if productivity is increasing, input price indexes will be upwardly biased.

There is an extensive literature on deflators, the problems of deflation, and the effects on estimates of construction output of commonly used deflators. The issues raised by the use of price indexes for deflation have not been solved to date, and appear to have no simple, or readily available solutions.  These include the fact that the deflator used to adjust for price changes will systematically overstate the rate at which prices increase and underestimate growth in output if indices for labour and material costs are used instead of output price indices (which are generally not available). I have a 2001 paper on Construction Deflators and Measurement of Output

 

Another problem is the application of a deflators to the diverse range of buildings and structures, and differences in quality and function between them. As the energy efficiency and quality of finishes has improved, and as the share of building costs due to mechanical and electrical services has increased over time (providing greater amenity), the deflators used have not been adjusted to take these trends into account.  In effect, the deflators assume there has been no change in the quality of buildings, and their inability to capture quality changes in the buildings and structures delivered by the construction industry has adversely affected the measurement of productivity.  

 

The US Bureau of Labour Statistics recently published productivity estimates for four construction sub-industries used four deflators from different government databases. Their research addresses the problem with new data: ‘The main difficulty is that buildings differ widely in their characteristics and features. Similarly, the nature of the underlying terrain varies widely among construction projects. Consequently, economists, both in general and within the BLS productivity program, have found it exceptionally difficult to develop reliable output price deflators to convert observed revenues into meaningful measures of output growth over time. Good output price deflators are therefore the key to more accurate measures of productivity growth in construction.’

 

The researchers say: ‘we examine only those industries in which the deflators exactly match the industry boundaries. Previous work generally looked at the total construction sector. Since the many new deflators now available did not exist then, these prior studies had to use the single-family housing deflator and an associated cost index to deflate production in most or all of construction.’

 

 

 

Leo Sveikauskas, Samuel Rowe, James D. Mildenberger, Jennifer Price, and Arthur Young, "Measuring productivity growth in construction," Monthly Labor Review, U.S. Bureau of Labor Statistics, January 2018, https://doi.org/10.21916/mlr.2018.1.

 



Tuesday 22 June 2021

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.

Tuesday 25 June 2019

Why We Should Measure the Built Environment Sector


Construction, management and maintenance of the built environment




The built environment is important.  We are surrounded both by it and by its construction, management and maintenance. Of necessity, there is an industry, in fact a collection of industries, that create, manage and maintain the built environment.

 The building and construction industry, at around seven percent of gross domestic product (GDP), is responsible for on-site work, but with that work the construction industry brings together an extensive network of suppliers in production of the built environment.

This can be thought of as the difference between an industry cluster, made up of contractors and sub-contractors supported by plant and equipment suppliers, consultants, manufacturers, distributors and others, and the on-site work that is measured as ‘construction activity’. Then, once produced, buildings and structures need to be maintained.

 A term which encompasses the large number and diverse range of participants and industries in the production, operation and maintenance of the built environment, from suppliers to those responsible for management and maintenance, is the Built Environment Sector (BES). The Australian BES combines data for 16 industries, in one of the largest and most important industrial clusters. All else equal, better data leads to better informed policy.


The Australian Built Environment Sector

The method used to measure the size and extent of the BES is to collect the data for output and employment for the relevant industries and sub-industries available from the Australian Bureau of Statistics (ABS). Economic activities are subdivided into industries, which are groups of firms with common characteristics in products, services, production processes and logistics.   


 

Industry value added (IVA) is an estimate of an industry’s output and its contribution to gross domestic product (GDP), and is broadly the difference between the industry’s total income and total expenses. Employment and IVA in current dollars for industries is provided annually in Australian Industry (ABS 8155), with the most recent issue for 2017-18. The three largest contributors to BES output and employment are Construction (1,115,000 employed), Property operators and real estate services (341,000) and Professional, technical and scientific services (248,000). 

 

Macroeconomic Significance

Construction projects have many participants and extensive linkages with other sectors, measured through the industry’s high multiplier effect of close to 3. Through those linkages the impact of construction on other parts of the economy is much greater than the direct contribution, which gives the industry an important macroeconomic role, seen clearly in the effects of the Commonwealth Government’s fiscal response during the financial crisis in 2009-10.

Separating the BES from the other industries in the ABS data shows how that government spending on school buildings and infrastructure flowed through to the wider economy over the following year. Later, in the residential boom from 2013-17, the BES supported output across the economy during the transition at the end of the mining boom, as business investment fell from 18 percent of GDP to 8 percent.

Another factor that regularly emerges is capacity constraints, which strongly affects prices and is again becoming an issue with current infrastructure projects. The quantity of materials like gravel and concrete that can be produced in one year is limited, there are only so many engineers and project managers, and so on. The ABS data also shows a significant part of the 2009-10 spend went on increased prices and profits for building and construction projects, and the mining boom significantly increased wages in the engineering sector.

With over ten years of data measuring the BES its relationship to the business cycle can be identified, and the output and employment indicators used as a factor in the pipeline of planned infrastructure projects. The BES also appears to be a potentially useful leading indicator of activity in the wider economy.




Policies, Objectives and BES Metrics

In a time of rapid urbanisation and great social and environmental challenges, the built environment and city policies have become central issues in public policy. The quality of the built environment the BES delivers is a major determinant of our quality of life. Further, in a fundamental sense, how cities function depends on how well the BES can deliver the projects required, and the 37 capital and regional cities in Australia generate two-thirds of GDP.

There are many issues affecting the built environment, many of which are wicked problems of great complexity that range widely across industries, institutions and regulatory systems. How measuring the BES helps is by providing an overview of the value chain, from suppliers to end users, and offering a view of pathways to future policy goals. It does this by allowing possibilities for deeper integration between these participants. For example, contributions to reducing the carbon footprint across supply (particularly concrete), construction (transport) and commercial and industrial use (energy) could be allocated across the BES with targets for each sector. And if sufficient firms were to commit to the target, many of which are already investing in modular building, rooftop solar, improving energy efficiency and so on, this could be done by industry instead of government.

For government, an important area of application could be evaluating the effects of the City Deals and Smart Cities policies, with their focus on the built environment. There are now nine City Deals underway in Australia, bringing together federal, state and local governments in a long-term strategic plan, typically focused on transport infrastructure and economic development. The Western Sydney Airport deal is a good example. The BES is the transmission channel for turning that investment into infrastructure, communities and jobs. Similarly, the rollout of smart city technologies will involve

These City Deals and Smart Cities policies come under the Department of Infrastructure. A problem they identify is the lack of current data on the effectiveness of these policies:

 



It is important that we are able to measure the success of our Smart Cities Plan, particularly our City Deals which will outline defined development goals. For many of these goals, there is no baseline data readily available to determine and track a city’s performance. We will work with the states and territories, councils, communities and the private sector to identify key city metrics and the data required to assess performance. This data will be critical in the design of targeted policies, reforms and capital investments, and to measure the effectiveness of these actions.

The BES metric of most interest could be changes in employment, in both the number and composition of jobs. Over the ten years of a City Deal, jobs in the BES are created first in supply industries like materials, manufacturing and construction, then in the demand and maintenance industries like property, real estate and building services. From this data other metrics like industry value added per employee can be found. A significant part of the economic growth after the city deal will be from growth in the region’s BES.

In a similar way, the BES also allows a view of industrial development. Economies grow by upgrading the products they produce and export, but the technology, capital, institutions, and skills needed to make new products are more easily adapted from related products with common labour and capital requirements. This network of relatedness between products means that industries move through a product space by developing goods close to those they currently produce. The technological options available for an industry are strongly influenced by its current position in the BES product space and its ability to adapt to new products.

With the wide range of new production technologies currently emerging, such as 3D printing of concrete, automated machinery and buildings made with new materials like engineered wood, the BES is a laboratory for the fourth industrial revolution. Because it is not possible to know now, which of these technologies will work at scale, a role of policy as facilitator will provide opportunities for new methods of production, organisation and management to be tested on demonstration projects.

Another issue that has arisen is build quality and product safety. The recent Shergold Weir report -Building Confidence - highlighted how difficult policy-making in the built environment is. The report mainly addressed the issue of flammable cladding, and made 24 recommendations, but acknowledged these were the responsibility of state governments in Australia. There is a wide variety of legislation, and different parties are involved during design, construction and certification (professional services, contractors and suppliers, and public and private certifiers respectively).

In February the NSW Government announced the appointment of a Building Commissioner, following the report’s central recommendation, to act as a consolidated building regulator with responsibility for licensing and auditing designers, requiring their building plans to specify a building that will comply with the Building Code of Australia, and for builders, who will have to declare that buildings have been built according to their plans. Banks have risk compliance officers, the BES may need product compliance officers.

The Commissioner’s proposed role cuts across the BES, taking the objective of product safety and built quality and allocating responsibility across the supply chain by having the relevant compliance and certification required for all parties at each stage of design, construction and operation. Consolidating the data on the range of industries and firms involved supports that role, and could improve the effectiveness of policies.

Finally, taking a broader view of an industrial sector provides perspective on its role and significance in economic and technological development. When economic activities are spread across a wide range of individual industries the contribution of the whole is not obvious. This is why the tourism industry has an annual Tourism Satellite Account produced by the ABS. This brings together the contributions of a number of industries like accommodation, tour operators and entertainment, to estimate their total output and employment. The contribution of tourism to GDP was 3.1 percent in 2017-18, and the share of employment was 5.2 percent.