How to Research the Construction Industry?

Recent additions to the Construction Economics library

 

 

The construction industry is not like the typical industry found in economic textbooks, due to the physical nature of the product, the variability of demand, the method of price determination by auction, the contractual relationships between clients, contractors and suppliers. These characteristics require adjusting economic principles to adequately reflect the industry. Further, those four characteristics of construction vary between countries, as do the regulatory systems in different places. 

 

So, given this diversity of industry participants, products and process, how should research into the structure and performance of the construction industry and the management of firms and projects be done? Obviously, a variety of perspectives and a multi-disciplinary approach are required, and this is where Construction Economics (CE) contributes.

 

CE is the application of economic principles to the construction industry. However, because of the distinctive characteristics of the organisation of construction processes, the structure of construction markets, and the management of construction firms, this is not a straightforward process. Therefore, CE research uses a broad range of approaches to research the construction industry, its firms and projects. These include industrial organization and other management studies, financial and behavioural economics, econometric analysis and modelling, cost modelling, legal and institutional research, and transaction cost economics.

 

The library of CE research has been growing recently. The nine books below share an economic perspective that focuses on firms and industries rather than individual projects, which differentiates them from other books on specific topics like procurement, estimating, cost management, and life cycle costs, although all these topics are included in the CE books. This combining of economic theory and techniques with industry specific knowledge is a distinctive characteristic of CE research, and although most of the authors are academics, many of them have industry experience. 

 

In these recent publications the range of topics covered 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, decarbonisation, and government policies affecting the industry. Across the books there are differences in emphasis, sometimes marked. 

 

These books should become standard references for researchers and people working on policy issues related to construction and the built environment. They cover an extremely wide range of topics, many of which overlap related areas like business and project management, industry development and policy, innovation, sustainability and data quality. Some of the topics and issues discussed are extremely difficult to nail down, and there are a few general themes that weave through all the books.  

 

As these books show, when researching construction a variety of perspectives are required, some of which come from outside the neoclassical model of firms and markets, such as institutional or development economics. Therefore, CE has developed a distinctive research agenda on the production, delivery and management of the built environment in a wide range of conditions and countries. The five edited volumes have a total of 70 chapters, 10 of which are introductions and conclusions. The remaining 60 chapters demonstrate the current state of CE research and represent the range and diversity of that research. 

 

There are eight books from academic publishers. The five edited volumes, and three textbooks. Included at the end are links to the publishers’ websites where the table of contents, authors and descriptions for their books can be found. As academic publications they are not cheap, which unfortunately limits the potential readership, and the books will therefore be read mainly by academics and researchers through their institution’s library. Perhaps future collections could republish some of this work as in cheaper ebook and paperback options. 

 

Declaration of interest: I contributed one or more chapters to the edited volumes, two as co-author with Jim Meikle, and the Foreword to Christian Brockmann’s Construction Microeconomics. There is a ninth book, my one on technology and construction, at the end. 

 

 

Ofori, G. (ed.) 2022. Research Companion to Construction Economics, Edward Elgar

 

The book has 24 chapters in a collection that ‘represents a relatively complete work on the field of construction economics.’ And that’s right, there is a bit of everything: costs, markets, history, data, procurement, ESG, developing countries and so on. The table of contents are well worth a look, with the multi-disciplinary nature of CE on full display. The book gathers several decades of research in an overview of CE in 2022. 

 

It is thus a heavyweight academic publication, the chapters are comprehensive, dense and detailed and, as you would expect in a handbook, meticulously referenced. Intended as a library resource, it will be the starting point for researchers on many topics in CE and related fields for many years to come. 

 

Edited by George Ofori, the book makes the case for CE as an alternative to other approaches to researching construction that focus on issues such as culture or project management. His Introduction on the development of CE and review of the chapter topics can be downloaded from the e-elgar site by going to the link for a sample chapter under the Add to basket button. He started with this definition:

 

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

 

Not only is this an excellent definition of CE, it also makes clear the range of topics and issues CE can make a contribution to. The book is a significant milestone in the development of CE.

 

 

Gruneberg, S. (ed.) 2019. Global Construction Data, Taylor & Francis

 

In his Preface Stephen Gruneberg, the editor of Global Construction Data, says the ‘book covers several theoretical and practical aspects of global construction statistics and their use. It demonstrates the diversity of approaches and points in the direction of a need to co-ordinate the measurement of national construction industries’. The diversity of approaches is the great strength of the book, which demonstrate both the range of CE and its application.

 

The ten contributions include three with detailed discussion of construction statistics, two on international comparisons, two use residential cost data for life-cycle costing and energy use respectively. The other three cover innovation and BIM, the global market for architectural services, and international contractor’s make-buy decisions. Taken together these chapters cover construction data at the international, national and project levels. 

 

The way we see and understand an industry starts with the data provided by national statistics agencies. How data on Construction is collected and how the categories within Construction are defined is clearly important. The former determines the quality and the latter the credibility of the statistics produced. In the title the book made explicit the importance of this as a specific topic in CE research. The reliability and quality of construction statistics is a well-known issue, going back to the 1960s, and the shortcomings of the SNA and SIC have not been overcome in the revisions since then. 

 

 

Best, R. and Meikle, J. (eds.) 2023. Describing Construction: Industries, projects and firms, Taylor & Francis

 

The last in a series of three CE books edited by Rick Best and Jim Meikle, Describing Construction addresses the question ‘What exactly is the ‘construction industry’? Research on defining and measuring construction at many different scales is a distinctive characteristic of CE, as this is not done elsewhere. The scales range from firms to projects to the broad construction industry, which includes all participants in the supply chain. The book has contributions at the three scales of industry, project and firm.

 

The chapters on industry definitions and boundaries, which includes one on construction in developing countries, argue for a new perspective on construction and for better data. At the project level, there are chapters on estimating, procurement and contracting. The chapters on firms cover characteristics and financial failure, strategic planning, innovation and industry transformation. The book combines several chapters that are analytical and empirical (using or about data) with some more general chapters that provide an overview of their topics. 

 

All the contributors to the 36 chapters in this series of books have extensive industry experience, which is apparent in the depth of discussion and awareness of the issues involved. The books will be used by researchers investigating construction and related industries for many years to come.  

 

 

Best, R. and Meikle, J. (eds.) 2919.  Accounting for Construction: Frameworks, productivity, cost and performance, Taylor & Francis

 

The second book from Rick Best and Jim Meikle was Accounting for Construction: Frameworks, productivity, cost and performance. The dozen contributions again look at different ways of measuring and comparing construction. With chapters on construction statistics, productivity, costs and data, the book both reviewed and extended previous studies. An ‘important thread’ was the lack of consistency in the way construction industry data is collected and how it is aggregated. 

 

Several chapters look at national construction statistics and their many peculiar characteristics in detail, explaining how data is collected and processed in national statistics. Issues affecting productivity performance and measurement are also discussed in several chapters, such as the building cycle, capital stock, innovation and the relationship between input costs and the technology used. 

 

The book is dense with information, with key topics that reappear across the chapters in different contexts with different perspectives. It is a starting point for construction economists and others who want to understand how industry data is compiled and can used, more about the nuts and bolts of construction data compared to the previous book on Measuring Construction, which was more of a toolkit. 

Best, R. and Meikle, J. (eds.) 2015.  Measuring Construction: Prices, Output and Productivity, Taylor & Francis

 

In Measuring Construction: Prices, output and productivity Rick Best and Jim Meikle put the focus on data sources and quality. As the introduction makes clear ‘there are standard methods for measurement of physical building work, but the same cannot be said for the characteristics of the construction industry’. The three broad topics addressed are costs and prices, activity and internationalisation, and construction productivity. Their conclusion was ‘there is no ‘correct’ answer to any of the questions this book explores … It is perhaps only by applying a variety of techniques to the various problems and comparing the results that we obtain that we will know if we are getting closer to developing an acceptable set of tools and methods.’

 

The chapters survey issues in the collection and use of construction data. The twelve contributions cover measurement of construction work, productivity measurement methods, and construction costs and prices at the global, national, industry and project levels. On each of these topics the research is detailed and focused, there are useful analytical and methodological insights, and a few chapters have models that could be applied and developed. 

 

There is a great deal of data in the book, as you’d expect from the title, and good empirical work showing how comparisons can be made and data used. One of the chapters on productivity argued for the use of artificial neural networks (i.e. AI) for construction estimating and management, a particularly forward-looking contribution in 2015.

 

 Brockmann, C. 2023. Construction Microeconomics, Wiley Blackwell

This is the first book to focus on microeconomic aspects of construction, and that focus allows an extended discussion of topics than found in previous CE books. Microeconomics studies the interaction of producers and consumers of goods and services in specific industries and markets, and the tools and techniques used are well-known. In a simple exchange market, where the transaction is complete, the analysis of demand and supply is relatively straightforward, but construction markets are not like that. Christian Brockmann introduces the idea of contract goods that are delivered over time and priced by bids from contractors, and the analysis of how those characteristic features of construction affect the behaviour of owners and contractors in Construction Microeconomics is both original and insightful.

 

Chapters 2 to 9 cover micro basics: principles, consumers, producers, perfect markets, imperfect markets, factor markets, information, and game theory/auctions. Part II contains the adaptation of microeconomics to construction, with chapters on the construction sector, owners, contractors, construction goods, construction markets, contracting, imperfections, government policy, and public goods.

 

This book discusses the behaviour of firms and the nature of construction products and processes in detail. In particular, bidding for work in auctions and contracting under uncertainty for owners and clients who are risk adverse raises complex issues around marginal costs and prices, incentives and behaviour, and information asymmetry and bargaining power. The analysis draws on developments in industry economics to support the points made and the approach taken. 

 

This micro focus of the book provides a deeper understanding of the complex relationships between construction industry participants, and has been deeply informed by the author’s industry experience. It demonstrates how economic principles can be applied to a market that uses auctions and tenders to set prices, essential knowledge for regulators and management in industry. 

 

Christian Brockmann has built on previous work and brings a new perspective to issues and topics that are fundamental to CE. The book will be of interest not just to academic researchers but also to industry, regulators and policy makers. His Construction Microeconomics focuses on the operation and organisation of construction from a micro perspective, and is an important addition to the CE library. A companion volume is in the works: Construction Macroeconomics, by Horst Brezinski, Christian Brockmann, Kira Coleman and Huojin Xiong.

 

 

Gruneberg, S. and Francis, N. 2019. Economics of Construction, Agenda Publishing

Stephen Gruneberg and Noble Francis’ The Economics of Construction provides ‘a game theory account of the behaviour of firms’, the approach typically taken in other branches of industry economics. The Gruneberg and Francis book does not have much discussion on macroeconomic matters, however they discuss innovation and productivity, aspects of firms’ business models and financing, and contractual disputes and power relations in construction. 

 

There are case studies of the collapse of UK contractor Carillion in 2018, the Grenfell Tower fire, construction for the London Olympics, and manufactured housing in the UK. These are used to illustrate how the business environment a construction firm faces has become significantly more complex over the decades as the traditional turnover and profit maximizing contractor or supplier has evolved into one primarily concerned with growth and survival. While that may be a matter of degree, it is not insignificant. 

 

Gruneberg and Francis argue contracting markets compete profits down to the point firms cannot invest in productivity improvements, the outcomes of a business model that tends to focus on the volatility of demand and managing risk at the expense of improving efficiency. Construction firms operate in an industry Gruneberg and Francis describe as ‘a highly fragmented project-based industry, with very low profit margins and a high risk of failure for the many firms operating in a very complex supply chain’. This is a widely held view, however many large construction firms are over 50 years old and there are significant barriers to entry for major projects. It is an industry with a majority of small firms and relatively few large multinational contractors and manufacturers, some of which have substantial bargaining power in the supply chain. 

 

In the last two chapters they point to an emerging field of research on the economics of construction projects, combining project financial and feasibility studies with procurement strategies, using research applying transaction cost economics to construction. The book is an outstanding example of CE research as the application of economic principles to construction. It combines industry specific knowledge with insights from economic reasoning and shows how those insights improve our understanding of the industry.

 

 Myers, D. 2022. Construction Economics: A new approach (5^th ed.) Routledge

 

Danny Myers Construction Economics: A new approach is intended for undergraduate students in construction and other built environment courses who have a single economics subject included in the course. The new approach is sustainability. Although UK-centric, this is a readable and accessible introductory textbook that has a bit of everything.

 

It starts with the fundamentals of economic theory on firms and markets, and then analyses competition, demand, tendering, costs and prices. The main micro, macro and industry economics topics are covered, and the relevance to construction is maintained through breakout boxes with short examples and case studies from construction throughout the book, which are a feature. 

 

Myers emphasises environmental issues and sustainability, and this is another one of the reasons for its success as these topics have become embedded in university curricula. The book is now in its fifth edition, which is I think another milestone in CE, and Danny Myers is to be congratulated on the achievement. 

  

de Valence G. 2022. Creative Destruction and Constructing the Built Environment: From the first industrial revolution to the fourth, CER

 

This is my book about technological change, general purpose technologies (like steam power, IT and AI), and construction since 1800. Because I can set the price it is cheap, not expensive, and available from Amazon. The Introduction can be read here.

 

Creative destruction is the effect of technological progress on the economy as, over time, new technologies bring new industries and products to challenge established industries. Innovation and technology have restructured construction of the built environment in the past, and today powerful new technologies like digital twins, AI and 3D printing are leaving their development stage and finding their way into the design and delivery of buildings and structures. The book argues it might take a decade or more for these technologies to become central to construction of the built environment, but the development path taken will be distinct and different from the path taken in other industries. This path dependence varies from both industry to industry and between firms within industries. 

 

 

 

Publishers’ Pages 

 

Best, R. and Meikle, J. (eds.) 2023. Describing Construction: Industries, projects and firms, Taylor and Francis.

 https://www.routledge.com/Describing-Construction-Industries-Projects-and-Firms/Best-Meikle/p/book/9780367608903

 

Best, R. and Meikle, J. (eds.) 2919.  Accounting for Construction: Frameworks, productivity, cost and performance, Taylor & Francis.

https://www.routledge.com/Accounting-for-Construction-Frameworks-Productivity-Cost-and-Performance/Best-Meikle/p/book/9781032093246#

 

Best, R. and Meikle, J. (eds.) 2015.  Measuring Construction: Prices, Output and Productivity, Taylor & Francis.

 https://www.routledge.com/Measuring-Construction-Prices-Output-and-Productivity/Best-Meikle/p/book/9780367738341

 

Brockmann, C. 2023. Construction Microeconomics, Wiley Blackwell.

https://www.wiley.com/en-ie/Construction+Microeconomics-p-9781119831938

 

de Valence G. 2022. Creative Destruction and Constructing the Built Environment: From the first industrial revolution to the fourth, CER.

https://www.constructioneconomicsresearch.com/creative-destruction-book

 

Gruneberg, S. (ed.) 2019. Global Construction Data, Taylor & Francis. 

https://www.routledge.com/Global-Construction-Data/Gruneberg/p/book/9781032177472

 

Gruneberg, S. and Francis, N. 2019. Economics of Construction, Agenda Publishing. 

https://www.agendapub.com/page/detail/the-economics-of-construction-by-stephen-gruneberg/?k=9781788210157

 

Myers, D. 2022. Construction Economics: A new approach (5^th ed.) Routledge. 

https://www.routledge.com/Construction-Economics-A-New-Approach/Myers/p/book/9781032262611

 

Ofori, G. (ed.) 2022. Research Companion to Construction Economics, Edward Elgar.

https://www.e-elgar.com/shop/gbp/research-companion-to-construction-economics-9781839108228.html

 

Reorganizing Construction with 3D Printing

 Combining Offsite, Onsite And Nearsite Manufacturing In Construction  

  

 

The current mix of onsite construction and offsite manufacturing has become a well-

developed and efficient system of production, but the level of efficiency and productivity achievable is limited by the lack of significant economies of scale in a project-based industry. With 3D printing and digital fabrication this is no longer the case, and a new off/on/nearsite production mix that combines offsite mass production with onsite and nearsite manufacturing is possible. This introduces a new option in the organization of construction.

 

Can the industry greatly increase the share of components manufactured onsite or nearby, and do so while reducing embodied carbon and increasing choice and quality for clients? Could a significant share of components be manufactured onsite or nearby, using automated machinery to provide just-in-time delivery of structural elements as well as fixtures and fittings?

 

 

The Current System Combines Onsite Work and Offsite Manufacturing

 

Onsite construction is a project-based activity to deliver a specific building or structure in a specific location. It is a dense, highly regulated network of industries, utilising standardized materials and components to deliver buildings and structures using well understood processes. The system may not be elegant, but it is flexible, sophisticated and resilient, and coordinates many firms in a widely distributed value chain. Because this is an efficient system, any new technology will have to perform extremely well to have any significant effect on an industry as large and diverse as construction.

 

Mass production of standardized products justifies the capital investment in plant required for products where market demand is well known and stable, unlike the highly variable demand for buildings which rises and falls with the business cycle. However, while there are factory made structures and components, the number of standard buildings is limited and onsite production is organized around standard parts and materials. Manufacturing, in contrast, is organized around standardized products and continuous production runs. 

 

The current system is therefore an efficient mix of onsite work and offsite production of prefabricated and manufactured components, with the combination varying depending on the type of project and location. The alternative that has been attempted many times with varying degrees of success is to replace onsite work with assemblies like panels, pods and modules that are manufactured offsite. However, the economies of scale of offsite manufacturing (OSM) are counterbalanced by the significant capital and transport costs involved, and OSM is not yet a viable alternative for many projects, at a time when improving the productivity of construction is a crucial element in addressing current issues in delivering housing and the energy transition. 

 

Is there another alternative to OSM? What would a different way of organizing construction look like? What would be the effect of increasing the amount of work done onsite by manufacturing more, or most, of the structure and components on or around the construction site? How can that be done? 

 

 

Onsite and Nearsite Manufacturing with Digital Fabrication

 

Over the last decade digital tools such as building information modelling (BIM), digital twins and design for manufacture and assembly (DfMA) have become widely, although not universally, used in construction. While these have been applied to OSM, they have not solved the fundamental problems of limited economies of scale and large capital requirements. However, instead of reducing the amount of onsite work, these tools can be used to produce many of the components of a building anywhere, using new production technologies based on digital fabrication. 

 

Digital fabrication turns design information into physical products using automated processes, providing the cutters, printers, millers, moulders, scanners and computers needed for designing, producing and reproducing objects. The tools include traditional subtractive ones for cutting, grinding or milling, but the focus has been on research into new methods of additive manufacturing using different methods of layering materials using 3D printers. The information needed to create a 3D blueprint is generated during design, and it is a relatively small step to move from a digital model to instructions for a 3D printer. Printing of metal, ceramic and plastic objects from online design databases in fabrication laboratories (fabs) has found industrial applications.

 

There are three methods for 3D printing: stereolithography, patented in 1986: fused deposition modelling, patented in 1989: and selective laser sintering, patented in 1992. It didn’t take long before research into 3D concrete printing (3DCP) began, focused on developing the equipment needed and the performance of the materials used. 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. In November 2023 the Additive Manufacturing Marketplace has 44 concrete printing machines listed, ranging from desktop printers to large track mounted gantry systems that can print three or four story buildings.

 

Figure 1. Concrete printers

 

Clockwise from top left: COBOD, Cybe, Luyten, Kamp, Black Buffalo

 

Once a BIM model of a project has been created it can be used to provide instructions for production of both the structural elements and other components of a building. When a concrete printer is used to build the walls it is an example of onsite production, but 3DCP can be used to make stairs, columns or other elements onsite as well. 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. However, site space and access is often restricted, so setting up a fab nearby would still take advantage of the lower transport costs of bulk materials and a shorter distance for delivery while maintaining control over the production process. That is nearsite production. Local suppliers offering manufacturing on demand with print farms (factories with many machines) and many different printers that can produce large runs and specialised components is a nearsite form of production rather than OSM. 

 

The potential of 3D printing in construction is not limited to concrete. The Additive Manufacturing Marketplace had 1,852 printers listed, and many of those printers could be used to produce fixtures and fittings for buildings. Suppliers offering manufacturing on demand with print farms for local production of building components might include the established manufacturers with specialized fabs producing metal, plastic and ceramic finishes, fixtures and fittings. A modular fab in a container customised for construction, or even a specific construction project, can be set up onsite to produce components as the schedule requires. Larger sites might need a fleet of fabs. Restorations and repairs can be done with replacement parts made onsite from scans of the original.

 

This does not suggest the end of mass production of all standardized components, economies of scale are the economic equivalent of gravity, but onsite and nearsite manufacturing using digital fabrication does not have to achieve the same economies of scale needed for mass production. The price of a mass-produced item includes its packing, storage, transport and delivery, costs that local just-in-time production avoids while providing more control over the supply chain. Then there are the potential economies of scope from integrated design-production-installation processes, which could be provided through platforms developed by companies like PT Blink and Project Frog, or the UK Product Platform. 

 

The view here is that, over the next decades, the diffusion and spread of new production technologies will deeply affect how construction delivers buildings and structures. The options available between onsite, nearsite and offsite production will broaden considerably as 3D printing and digital fabrication capabilities increase, and the choice will be determined by the economies of scale and installed cost of local versus offsite manufacturing. The tradeoff between the cost, time and quality of the current onsite/offsite production mix and a new off/on/nearsite production mix will vary greatly across locations and projects, so this new way of organizing construction will coexist with the current system for many decades to come. 

 

Figure 2. Print farms

 

Clockwise from top left: Zortrax, 3D Systems, Design 3D Print, Formlabs, Optomec

 

The combining of robotic and automated machinery with 3D printing of parts will open up further possibilities. Site processes can be structured around components and modules designed to be assembled in a particular way, and machines to assemble those components and modules can be fabricated for that purpose. The FBR bricklaying machine below is an example of this, designed to use custom made blocks larger than conventional bricks. Another is the RoBIM robot making wall panels from prefabricated components. 

 

Designing an automated production process that includes the machines and equipment needed to move and install parts produced by printers and robots puts digital fabrication at the core of an integrated system of design, manufacturing and assembly. This can work as well in construction as in any other industry. 

 

Figure 3. Construction automation

 

From left: RoBIM wall panel robot, Hilti Jaibot for M&E fixing, ABB robot team, FBR bricklayer

 

Production technologies based on digital twins link localised digital fabrication with online design databases and, as well as concrete, materials like steel, ceramic and plastic can be used to make components and fittings. The robotic and automated machinery and equipment being developed for construction is also based on digital twins, as are the various types of drones used to layout and monitor construction sites. 

 

 

Combining Offsite, Onsite and Nearsite Production 

 

The combination of digital twins and digital fabrication will be transformational if it significantly alters existing economies of scale in the industry. Digital fabrication is a technology whose use has a high probability of becoming ubiquitous as the cost of fabs falls and the supply chain of raw materials continues to develop. Advances in automation and mechanization have the potential to significantly increase onsite and nearsite production in construction, using 3D printers to make and finish both structural elements and a wide range of fixtures and fittings.

 

This introduces a new option in the organization of production for delivery of buildings and structures. The current choice between onsite work and offsite manufacturing is a well-developed and efficient system, but the level of efficiency and productivity achievable is limited by the lack of significant economies of scale in a project-based industry. With digital fabrication this is no longer the case, and a new production mix that combines onsite and nearsite manufacturing with onsite construction work is now possible. 

 

Is Productivity Growth in Construction Possible?

Efficiency beats productivity in construction

Has the construction industry reached a level of high efficiency where sustained productivity growth is no longer possible? 
 

The level of technical efficiency of an industry is determined by the technology used in the production process, which is embodied in the machinery, equipment, software and devices available to producers. The most efficient firms in an industry are on or close to the efficiency frontier, and typically there is a distribution of firms within an industry with some small firms having the lowest level of efficiency. Although some firms are on the efficiency frontier, many firms are inside the frontier (i.e. are less efficient), and the level of industry productivity will be around the average level of all firms. Construction fits this picture.

 

This post first looks at recent research on productivity measurement issues, which finds their well-known problems are not a satisfactory explanation for the lack of growth in construction productivity. Then recent research using Data envelopment analysis (DEA) is reviewed, an econometric method used to measure the efficiency of firms and industries. Construction is found to be at a high level of technical efficiency and close to the limits of current technology. Therefore, to increase construction productivity new technology will be required. 

 

 

Productivity and Real Output

 

Productivity is determined by the amount of machinery and equipment used (physical capital) and the level of skills and training of employees (human capital). Over time, as firms and industries replace old machinery and equipment with new, upgraded versions, productivity is expected to increase. The mystery of construction productivity is why there has been no increase in productivity, despite the improvements in human and physical capital, since the first attempts to measure it in the 1960s (in the US). 

 

Measurement problems and data issues are the most widely accepted reasons for the lack of construction productivity growth, the construction deflator may underestimate industry output thus lowering the level of measured productivity. However, recent research has found these measurement issues cannot fully account for the lack of productivity growth. The problem is real and another explanation is necessary, with results from a different branch of productivity research suggesting that explanation may be a high level of technical efficiency. 

 

The accepted reason for the low rate of construction productivity growth is the underestimation of real output, measured as value added (the total value of goods and services produced after deducting the costs in the production process and adjusting for movements in prices).  The construction deflator may not fully take improved quality and relevant input price movements into account, leading to underestimation of real value added. Recent American research has investigated this issue.

 

Addressing the problem of measuring real output in an industry as diverse as construction, Sveikauskas and colleagues at the US Bureau of Labour Statistics published estimated real construction value added per hour worked in four construction sub-industries, using four specific deflators and including subcontractor hours. Between 2007 and 2020 productivity fell in single-family residential and multiple-family housing construction, but rose in industrial and highway, street, and bridge construction, following a rising volume of work in the latter two sub-industries. Overall productivity for the four sub-industries was flat because these rises and falls balanced out.

 

Garcia and Molloy asked ‘Can Measurement Error Explain Slow Productivity Growth in Construction?’. Their answer was no, ‘we estimate that productivity was essentially flat in the construction sector from 1987 to 2019,’ although it was not as low as implied by official statistics when they adjusted for the improved quality of houses. Their analysis found a small upward bias in deflators related to unobserved improvements in structure quality, ‘but the magnitude is not large enough to alter the view that construction-sector productivity growth has been weak. We also find only small contributions from other potential sources of measurement error.’ The implication of this research is that a small increase in productivity has been absorbed by higher but unobserved (i.e. not in the data) quality, therefore no growth in measured construction productivity. 

 

Another recent significant contribution came in a paper from Goolsbee and Syverson with the arresting title ‘The Strange and Awful Path of Productivity in the U.S. Construction Sector”’. The time period is 1950 to 2019. They focus on measurement problems as an explanation of poor performance: ‘we update some of this previous work and extend it to some new data sources and hypotheses. Together, these new approaches seem to reinforce the view that the poor performance is not just a figment of measurement error.’ 

 

Their paper concludes, however, that measurement error is ‘probably not the sole source of the stagnation’, i.e. the statistics may have some issues, but the problem is real. Construction productivity, despite the obvious improvements in materials, tools and techniques over the last few decades, has not increased. And this is not unique to the US, for countries around the world, the same result has been found. It is a universal problem.

 

 

Technical Efficiency

 

Technical efficiency is defined as the ability of firms and industries to produce as much output as possible, given the inputs of labour and capital used and the level of technology available. At maximum efficiency, to increase output requires adding another input to the system of production, such as an extra worker or another machine.

 

Data envelopment analysis (DEA) estimates efficiency by measuring the ratio of total inputs employed to total output produced for each member of a group. This ratio is then compared to the others in the sample group of firms, industries or countries to estimate relative efficiency. DEA identifies the most efficient provider of a good or service by the ability to produce a given level of output using the least number of inputs, then measures relative efficiency against that benchmark for the sample group.   

 

With DEA it is important that the level of technology used is similar across the firms or industries in any comparison. In construction, firms have access to current technology, in the form of materials, components and equipment, and the organization of production is based on high level of standardization of parts and processes. With a few exceptions for specialised work (tunnels etc.), the technology available to and used by firms does not vary much from firm to firm.

 

DEA has been used to assess productivity and efficiency levels in many industries. DEA was first applied to the construction industry in Hong Kong in the late 1990s, and over the last few years there have been DEA papers on construction in Spain, Sweden, Europe, Hong Kong, China, New Zealand and Australia. This research broadly found construction productivity has slowly increased over time, but it is pro-cyclical and follows rises and falls in the volume of work. There are two other common findings. The first is not surprising, larger firms are more efficient than small ones and there is a significant within-industry difference between the best and worst firms. The second, however, is not so obvious. 

 

These DEA studies find the overall level of technical efficiency in construction is high, and for the best firms very high. This may not be something many people dealing with the day-to-day information and coordination problems in construction would agree with but, using DEA and industry level data, that is what this research finds. And like productivity, technical efficiency is strongly pro-cyclical, rising and falling as the volume of work increases and falls. Periods of full technical efficiency coincide with periods of the strongest productivity growth.

 

The industry in all the countries where construction has been analysed with DEA is efficient, based on the econometric instrument of DEA and data on the volume of work, industry value added, capital stock and employment. Full technical efficiency is the complete use of all available inputs of capital and labour in the production of output and value added, or to put it another way, there is a point where the industry is at maximum capacity and there are no underutilised inputs. At that point on the efficiency frontier more input is required to increase output, such as an extra worker or machine. 

This can go a long way as an explanation of the productivity problem. When the level of work is high and increasing, productivity improves until the industry is approaching the efficiency frontier, where more workers are needed to increase output. Therefore productivity stops growing. As the volume of work falls during the contraction phase of the building cycle and firms retain workers in the expectation of future work, so the level of industry productivity falls, ending up where it started. 

 

The Australian construction industry illustrates this pattern. Between 2007 and 2022 the volume of construction work done increased by 29 percent, and construction employment by 26 percent. This similarity in the changes over time indicates that, over this period, the industry has turned inputs into buildings and structures using current production technology (machinery, materials, management etc.) at a high level of technical efficiency. It also identifies the strong relationship between an increase in work done (output) and employment, which will also increase. In construction, an increase in output requires more workers, over time productivity as output per worker doesn’t change. 

 

Figure 1. Three measures of productivity 

 

Between 2007 and 2022 the industry went through a long cycle as the volume of work done first rose by 50 percent, peaking in 2013, but then contracted by 23 percent between 2013 and 2022.  There was a significant increase in work done per person employed due to the large amount of machinery and equipment required during the engineering construction boom of 2011-14 (e.g. offshore oil rigs and LNG plants). Industry gross value added (broadly the difference between revenue and expenses) per person did not increase as much because that machinery and equipment was purchased as an intermediate input to construction from other industries, resulting in a short-lived, pro-cyclical increase in construction productivity, which ended up where it began.

 

Conclusion: Why efficiency beats productivity in construction

 

Despite the efforts made by governments, industry organisations and firms over the past decades, there has been no growth in construction productivity. The rate of growth of productivity of the construction industry has been poor since the 1960s, even by comparison with a long-run overall industry average around two percent a year.

 

Construction is a labour intensive industry in comparison with manufacturing, with which it is often unfairly compared, but there has been a significant increase in the offsite component of construction, and construction methods have become more capital intensive as the performance of machinery, equipment and tools used has improved. However, the expected productivity growth has not occurred, according to the data from national statistical agencies. 

 

This is the mystery of construction productivity: why there has there been no increase in labour productivity, despite the improvements in human and physical capital, since the first attempts to measure it in the 1960s? Measurement issues leading to underestimation of output are widely believed to be the main problem, however this is not the case, although there may be some underestimation the lack of growth in construction productivity is real. Another explanation is required, and the high level of technical efficiency in construction is suggested. 

 

This post first looked at recent research on productivity measurement issues, which finds their well-known problems are not a satisfactory explanation for the lack of growth in construction productivity. Then recent international research using Data envelopment analysis (DEA) is reviewed, an econometric method used to measure the efficiency of firms and industries, defined as the ability of firms and industries to produce as much output as possible, given the inputs of labour and capital used and the level of technology available.

 

There is a relationship between the technical efficiency and productivity. The same inputs of labour and capital are used, but efficiency is the quantity of output given inputs while productivity is the ratio of output and those inputs. Labour productivity, for example, is the number or value of units produced divided by the number of hours worked or the number of people employed. The DEA studies find the overall level of technical efficiency in construction is high, and for the best firms very high, and is strongly pro-cyclical, rising and falling as the volume of work increases and falls with high levels of technical efficiency and productivity growth at the peak of the cycle. 

 

The level of technical efficiency is determined by the use of the capital stock available to workers. As the level of capital per worker (machines, software etc.) increases so does output per worker, but as the level of output per worker increases it approaches the limits of the technology currently used in production and, at a high level of technical efficiency, productivity growth is no longer possible. 

 

If productivity growth is no longer possible with the technology currently used in the system of production, which in construction has been developing for well over one hundred years, industry will focus on efficiency and getting the most out of the labour and capital available. Efficiency trumps productivity in construction.