Construction is Not a Service Industry

 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.

Incremental Innovation in Construction

 The example of concrete

 

Construction of the built environment has an interlocking set of economic, political, legal, and social barriers that make innovating difficult. As long as current technology meets the expectations of clients and users for prices and dominant products, there will be significant market imperfections such as network economies, lumpiness, split incentives, requirements for collective action, and transaction costs that inhibit diffusion of more efficient, advanced technologies. There is also an institutional structure that imposes regulatory hurdles or other policy disadvantages, favours existing technology or discourages new entrants, and a financing system based around incumbents. Educational curricula, career paths, and professional standards use existing technology. And because organizations, people and technical standards are embedded within a production system, the tendency is for technologies to develop along defined trajectories unless or until deflected by a powerful external force.

 

Construction of the built environment is a project-based system of production with complex professional, organizational, contractual and working relationships, and is geographically distributed. Moreover, the context is one of wider networks containing many small and medium size firms with a range of organizational and institutional relationships, where external contracting is common. All these factors are seen as inhibiting, although not preventing, innovation and diffusion of new technology. Within such a system incremental innovation improves industry products and processes without affecting the structure of the system. 

 

In construction, many technical advances have come from materials suppliers or component, plant and equipment manufacturers, who have been responsible for the introduction of new products and equipment, such as excavators, cranes, facades and lifts, using incremental innovation directed at improving existing products and processes. Across the construction supply chain firms don’t create new industrial networks to develop or exploit new technologies such as lifts and elevators, glass facades, and interior wall systems, instead these firms become part of the existing network, which is the modern construction production system. As a well-developed industrial system many of its sub-markets are expected to be concentrated and oligopolistic, with a few large, well-established firms exactly like those economic historian Joseph Schumpeter suggested would be most likely to engage in R&D, invention and innovation.

 

The process where inventions are developed, tested and extended, and finally put into production is one of incremental innovation. Firms refine specific parts of a production system, usually in response to something changing elsewhere in the system as production and distribution methods evolve over time, step by step. Although this form of innovation is incremental, it should not be dismissed as unimportant. Examples are the increase since 1950 of mining truck loads from 4 to 400 tonnes and the increase in lifting capacity of tower cranes to over 1,000 tonnes. Another example is the development of computer-aided design (CAD) software, which went on for two decades before Autodesk was started in 1982, one year after the first IBM PC. Over the decades Building information models (BIM) have advanced through 2D and 3D versions to the 4D (schedule) and 5D (cost) iterations today. Now software linked to cameras on helmets or drones can provide real time augmented reality (AR) images from a building site linked to the BIM model of the project.

 

Building and construction products and processes are the outcome of a long development path. Many of the industry’s global leaders are well-established, Bechtel for example is over 100 years old, and other firms like Hochtief, Skanska, and AECOM can trace their origin stories back over a similar period. Shimizu is over 200 years old. Most of today’s manufacturers also have their roots in nineteenth century firms. It’s a remarkable fact that construction today is a production system that has been developing for more than 150 years, since the arrival of steam, steel and concrete, using incremental innovation to gradually improve products and processes. 

 

In the industry life cycle, after emergence and the initial growth stage, technology stabilises around standardised products and processes. In many cases industries are oligopolistic, with a few specialized firms in market niches or layers in the supply chain. Consolidation leads to industry concentration with large firms dominating their markets, the car industry is an example. Construction materials like cement, concrete and glass, and components like building management systems, interior walls, plumbing fixtures, lifts and elevators are all oligopolistic industries in an established supply chain.[i]

 

 

Incremental Innovation: The example of concrete 

 

The development of concrete is an example of how effective incremental innovation in construction can be. By the 1880s the increasingly widespread use of concrete had changed its status from hobby to a modern industry, as scientific investigation into its material properties revealed its shear and compressive characteristics. With the development of reinforced concrete there was change in architectural concepts of structures and approaches to building with concrete. The industrial standards of concrete technology influenced ways of thinking based on building systems and standardized building elements. These became identified with what was known as the Hennebique System, a simple to use system of building with reinforced concrete columns and beams patented in 1892. By 1905 Hennebique’s system had spread across Europe and elsewhere and his company employed 380 people in 50 offices with 10,000 workers onsite.[ii]

 

Concrete then set the agenda for the development of construction as a technological system over the next hundred years driven by the modernist movement in architecture, as it explored the possibilities of these material for increasing the height and scale of buildings, and modern construction materials and methods.[iii] For over one hundred years, since Hennebique, there has been ongoing refinement and development of the world’s most widely used construction material, as shown in Table 1.

 

Concrete shows how incremental innovation in materials played a significant role in the reorganization of site production methods as mixers, pumps and chemicals were refined and developed in a long process of interconnected innovations. One of the characteristics of a successful technology are these spillover effects, with advances in one industry leading to complimentary developments in related industries. 

Table 1. Incremental innovation in concrete since 1800

Source: Jahren, P. 2011. Concrete: History and Accounts, Trondheim: Tapir Academic Press.

Innovation is continuing today with 3D concrete printing (3DCP). Research into 3DCP has focused on developing the equipment needed and the materials used, and by 2019[iv] over a dozen experimental prototypes had been built. By 2022 the commercialisation of 3DCP was underway, with two types of systems available. One using a robotic arm to move the print head over a small area, intended to produce structural elements and precast components, the other a gantry system for printing large components, walls and structures. 3DCP combines BIM models, new concrete mixtures and chemicals, and new printing machines. Again, a combination of new materials and new machinery is required for this technology to work.

 

In 2022 the Additive Manufacturing Marketplace had 34 concrete printing machines listed, ranging from desktop printers to large track mounted gantry systems that can print three or four story buildings. Companies making these machines are mainly from the US and Europe, and Table 2 also has details on the type and size of a selection of machines. There are also several companies offering 3DCP as a service at an hourly or daily rate.[v]

 

Concrete printing is only one part of the development of additive manufacturing. In mid-2022 the Additive Manufacturing Marketplace listed 2,372 different 3D printing machines from 1,254 brands. The number of printers and materials used were: 364 metal; 355 photopolymers; 74 ceramic; 61 organic; 34 concrete; 24 clay; 20 silicone; 19 wax; and 19 continuous fibres. Many of these printers could be used to produce fixtures and fittings for buildings. Producing components onsite from bags of mixture avoids the cost of handling and transport, and for large items avoids the load limits on roads and trucks. There are also printing services and additive manufacturing marketplaces being set up. These link designers to producers with the materials science, specialised equipment and print farms capable of large production runs and manufacture on demand. Examples are Dassault Systems 3DExperience, Craft Cloud, Xometry, Shapeways, 3D Metalforge, Stratasys and Materialise.

Table 2. Some companies making 3D concrete printers

Source: Additive Manufacturing Marketplace, 2022. 

 

 

Conclusion

 

Innovating in a complex, long established industrial sector like construction of the built environment can be difficult. The institutional architecture can impose regulatory hurdles or other policy disadvantages on new technologies, and government expenditures often support existing technology. Lenders are risk averse. There are subsidies and price structures that favour incumbents and ignore externalities like the environment and public health. Educational curricula, career paths and professional standards are oriented to existing technology. The dominance of existing technologies is further reinforced by imperfections in the market for technology such as network economies, lumpiness, split incentives and the need for collective action.[vi]

 

The construction industry has become used to incremental innovation and a gradual rate of change since the modern industry emerged over the last few decades of the nineteenth century. At the beginning of the twentieth century there was a great deal of resistance to change: ‘the older assembling industries like engineering were slow to change. Each firm took a proprietary pride in its own work’, and the trades were ‘fearful of technological unemployment and fought all changes in conditions of work.’[vii] Nevertheless, by the 1920s construction had reorganised the system of production around concrete, steel and glass. 

 

We are at a similar point today. The development of digital construction using combinations of BIM, offsite manufacturing, 3DCP, drones and robots, is an emerging new system of production, and the adoption and adaptation of these technologies will depend on incremental innovation continually improving their performance, which can only happen if they are put to use. There is a strong case here for public clients, who will be major beneficiaries of the improved efficiency of digital construction, to sponsor demonstration projects that use these technologies and measure the improvements in waste, carbon, defects, time and cost that are delivered. 

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[i] Syverson, C. 2019. Macroeconomics and Market Power: Context, Implications, and Open Questions, Journal of Economic Perspectives, 33, 3, 23–43. Syverson, C. 2008. Markets: Ready-Mixed Concrete, Journal of Economic Perspectives, 22, 1, 217–233.

[ii] Pfammatter, U. 2008. Building the Future: Building Technology and Cultural History from the Industrial Revolution until Today. Munich: Prestel Verlag.

[iii] Cody, J. 2003. Exporting American Architecture 1870-2000, London: Routledge. 

Huxtable, A. L. 2008. On Architecture: Collected Reflections on a Century of Change, New York: Walker Publishing Company.

[iv] Sanjayan, N. and Nematollahi, B. (eds.) 2019. 3D Concrete Printing Technology: Construction and building applications. Butterworth-Heinemann.

[v] https://www.aniwaa.com

[vi] Bloom, N., Van Reenen, J. and Williams, H. 2019. A toolkit of policies to promote innovation. Journal of Economic Perspectives, 33(3), 163-84.

[vii] Hughes, T. P. 1989: 495. American Genesis: A Century of Invention and Technological Enthusiasm 1870-1970, Chicago: University of Chicago Press. 

The Fourth Industrial Revolution and Construction

 Technological Change and Constructing the Built Environment

I was once attacked by a colleague for, as he put it, ‘not considering the great mass of people employed in construction’. We were working for a government inquiry into collusive tendering and discussing recommendations to improve productivity and efficiency in the final report. At the time there were significant changes affecting the Australian industry that had far more impact than the legislative and regulatory reforms the inquiry led to. The industrial relations system was moving from a centralised award based one to a more decentralised system with enterprise bargaining and site agreements. International contractors were entering the market and the larger engineering and architecture practices consolidating. As the industry began to recover from a speculative office building bubble and the economy rebounded from a deep recession, construction employment increased and continued to grow for the next few decades. Construction as used here refers to all the firms and organizations involved in design, construction, repair and maintenance of the built environment.

 

Where these longer run trends were going was not obvious at the time. There have been significant changes in the range of activities and types of firms involved in construction of the built environment over the last few decades. Two trends underpinning those changes were the increasing use of multi-disciplinary project teams as the boundaries between professional disciplines became less distinct, and the inhouse versus outsourced decision about provision more common. Facilities management is an example, an activity that used to be done internally but is now often outsourced, sometimes but not always to construction contractors. Consultants bid for work as contractors, and contractors do consultancy and project management. Urban planning was once primarily associated with design, but is now linked to real estate and development. The process of structural change in industry occurs as technology, institutional and firm capabilities develop and change over decades.

Figure 1.

When considering the relationship between construction of the built environment and technological change the past is really the only guide available, so the starting point for this discussion is the first industrial revolution in England at the beginning of the nineteenth century when modern construction and its distinctive culture began to form, followed by the twentieth century’s attempts to industrialise construction. This history is important because, after more than 200 years of development, construction of the built environment happens today within an established system of production based on a complex framework of rules, regulations, institutions, traditions and habits that have evolved over this long period of time.

 

But how useful is history and how can it be used? Are there appropriate historical examples or cases to study to see if there are lessons relevant to the present? The answers depend to a large extent on context, because a key characteristic of the history of technology is the importance of institutions and the political and social context of economic outcomes. Also, understanding how policies were developed in the past and how effective they were requires understanding the changing context of policy implementation. However, as economist Paul Samuelson pointed out ‘history doesn't tell its own story and ‘conjectures based on theory and testing against data’ are needed to uncover it. Drawing the right lessons from history is a nuanced exercise. 

 

Over time industries and products evolve and develop as their underlying knowledge base and technological capabilities increase. The starting point for a cycle of development is typically a major new invention, something that is significant enough to lead to fundamental changes in demand (the function, type and number of buildings), design (the opportunities new materials offer), or delivery (through project management). Major inventions give a ‘technological shock’ to an existing system of production, which leads to a transition period where incumbent firms have to adjust to the new business environment and new entrants appear to take advantage of the new technology. Economist Joseph Schumpeter called this process creative destruction, and it leads to the restructuring and eventually consolidation of industries. That is what happened to construction and related suppliers of professional services, materials and components after the first industrial revolution. 

 

The drivers of development for industries in the twenty-first century are emerging technologies such as augmented reality, nanotechnology, machine intelligence, digital fabrication, robotics, automation, exoskeletons and possibly human augmentation. Collectively, these digital technologies are described as a fourth industrial revolution, and their capabilities can be expected to significantly improve as new applications and programs emerge with the development of intelligent machines trained in specific tasks. Innovation and technological change is pushing against what are now long-established customs and practices of the industries in the diverse value chain that designs and delivers the projects that become the built environment.

 

How technological change affects these industries differs from more widely studied industries like computers, automobiles or aerospace because of the number and diversity of firms involved in designing, constructing and managing the built environment. With the range of separate industries these firms come from, construction of the built environment is the output of a broad industrial sector made up of over a dozen individual industries. Not an ‘industry’ narrowly defined, but a broad industrial sector that is organised into a system of production with distinctive characteristics. A second difference is the age of these industries, many of which are mature industries in late stages of their life cycle. These differences create a different context for questions about industry, innovation and technological change, about how firms compete and how the system of production is organised as fourth industrial revolution technologies like digital twins and drones spread through construction and the pace of digitization increases. 

 

As well as the contractors, subcontractors and suppliers for new builds, there are also many firms and people mainly engaged in the alteration, repair and maintenance of the built environment. The broad base of small firms is a distinctive feature of construction, and these family-owned firms engaged in repair and maintenance work will largely continue to use the materials and processes they are familiar with. Old technologies can survive long after the innovations that eventually replace them arrived, such as the telegraph, fax machine and vinyl records with telephones, email and CDs. Stone, tile, brick and wood have been widely used materials for millennia, and industrialized materials like corrugated iron and concrete are ubiquitous. For maintaining and repairing the existing stock of buildings and structures, many of the skills, technologies and materials found today will continue to be used far into the future. That does not mean firms mainly involved in repair and maintenance will not be affected in some way by the fourth industrial revolution. 

Figure 2. 

Construction of the built environment has characteristic organizational and institutional features because it is project-based with complex professional and contractual relationships. How firms utilise technology and develop technological capabilities differentiates them within this location-based system of production. Emerging technologies in design, fabrication and control have the potential to transform construction over the next few decades, possibly less, and the book suggests firms will follow low, medium or high-tech technological trajectories, determined by their investment in the emerging technologies of the fourth industrial revolution. 

 

A broad view of what future construction might look like is based on successful solutions being found for the many institutional and technical problems involved in transferring fourth industrial revolution technologies to construction. Without downplaying the difficulty of those problems, similar challenges have been met in the past, but those solutions led in turn to a reorganization of the system of production. 

 

There are very many possible futures that could unfold over the next few decades as technologies like artificial intelligence (AI), automation and robotics develop. However, the key technology underpinning these further developments is intelligent machines operating in a connected but parallel digital world with varying degrees of autonomy. These are machines that have been trained to use data in specific but limited ways, turning data into information to interact with each other and work with humans. The tools, techniques and data sets needed for machine learning are becoming more accessible for experiment and model building, and new products like generative design for buildings plans, drone monitoring of onsite work and 3D concrete printers are available.

 

Intelligent machines are moving from controlled environments, like car manufacturing or social media, to unpredictable environments, like driving a truck. In many cases, like remote trucks and trains on mining sites, the operations are run as a partnership between humans and machines. There are also autonomous machines like autopilots in aircraft and the Mars rovers. As well as rapid development of machine intelligence, technological change in the form of new materials, new production processes and organizational systems is also happening. Sensors and scanners are widely used, 3D concrete printing is no longer experimental, cloud-based digital twins are available as a service, and online platforms coordinate design, manufacture and delivery of building components using digital twins. 

 

A period of restructuring of construction occurred in the second half of the 1800s when the new industrial materials of glass, steel and reinforced concrete arrived, bringing with them new business models, new entrants and an expanded range of possibilities. The development of modern construction was not, however, a smooth upward path of progress and betterment. It went in fits and starts as new inventions and innovations arrived, slowly then quickly, often against critics of the modern system of production and workers, fearing technological unemployment and lack of government support during a time of technological transition, who resisted new technology and sometimes sabotaged equipment. The issue in the past, like today, was in fact not the availability of jobs but the quality of skills during the diffusion of new technologies through industry. 

 

The only previous comparable period of disruptive technological change in construction of the built environment is the second half of the nineteenth century. Between 1850 and 1900 construction saw the rise of large, international contractors, who reorganized project management and delivery around steam powered machinery and equipment. In particular, the disruptive new technologies of steel, glass and concrete, which came together in the last decades of the century, led to fundamental changes in both processes and products. If that is any guide, we can expect technological changes to operate today over the same three areas of industrialization of production, mechanization of work, and organization of projects that they did then. And today, just as in 1820 when no-one knew how different construction would be and what industry would look like in 1900, we can’t see construction in 2100. That is a long way out, and we can only guess at the level of future technology. We can, however, use what we already know from both history and the present to form a view of what is possible over the next few decades based on what is currently understood to be technologically feasible.

It should be clear that the role of fourth industrial revolution technologies will be to augment human labour in construction of the built environment, not replace it. Generative design software does not replace architects or engineers. Optimization of logistics or maintenance by AI does not replace mechanics. Onsite construction is a project-based activity using standardized components to deliver a specific building or structure in a specific location. The nature of a construction site means automated machinery and equipment will have to be constantly monitored and managed by people, with many of their current skills still relevant but applied in a different way. Nevertheless, in the various forms that building information models, digital twins, AI, 3D printing, digital fabrication and procurement platforms take on their way to the construction site, they will become central to many of the tasks and activities involved. Education and training pathways and industry policies with incentives for labour-friendly technology will be needed.

Figure 3.

 

Because construction involves so many firms and people the technology driven changes discussed here will have significant and profound economic and social consequences. This would be a good opportunity for government and industry to work together to develop policies and roadmaps for those firms, and to support ‘the great mass of people’ employed in construction of the built environment who will be affected by them. The future is not determined, although technological change and creative destruction continue to reshape and restructure industry and the economy, decisions made today create the future.

 

 

From the Introduction to my new book available from Amazon on technological change and construction.