Recent Books on Construction Economics

Developments in Construction Economics Research

Issues around the measurement, structure and performance of the building and construction industry, and its relationship with the economy and manufacturing, professional services and materials industries, have become the focus of CE in a series of books published since 2008. The contributions developed topics identified within the scope of CE in previous work, but they ranged widely and have consolidated the boundaries of CE while continuing to introduce ideas from elsewhere in economics. For example, the six books have contributions on the activities of large, international contractors that dominate the global construction industry, a topic that has been, and is, of continuing interest.  However, the global perspective in these books, while not new, marked another expansion of the topics and issues addressed, to include developments in market analysis, contractor strategies and in particular international cost comparisons and construction data. The following summary of the topics covered in the books illustrates the scope of CE research and current areas of interest.

The first two books ranged across practical, empirical and theoretical topics. In Economics for the Modern Built Environment (Ruddock 2008) seven contributions were on macroeconomic topics such as the economic effects of capital formation and investment, using construction statistics. There were five studies of markets and contractors, with three contributors emphasising the increasing divergence between global firms and local markets and two country case studies. The book brought a great deal of data together, and updated previous work in empirical CE on measuring construction activity and the broad construction industry. Modern Construction Economics: Theory and application (de Valence 2011) took an industry economics/industrial organization approach with contributions on market structure and competition, auctions and innovation. There were two on production theory and three others on methodology and experimental methods. Three of the contributions directly attacked the model of perfectly competitive markets with price taking firms, arguing construction markets can be concentrated and oligopolistic.

Between them the two books covered many topics and techniques and they carried on earlier debates over production theory and methodology. They included global and national research using macroeconomics, research based on industry economics, and case studies with managerial economics.  Importantly, they consolidated the expansion of the focus of CE from the SIC construction industry and its activity and management, and made the case for CE being about the economics of the built environment. Bridging the gap between the urban scale of the built environment and new building and construction projects, which will typically only deliver a few percent of the total stock each year, has always been a fundamental challenge for CE.

In Measuring Construction: Prices, output and productivity, Best and Meikle (2015) put the focus on data quality and international comparisons of construction costs, raising issues in the collection and use of construction data. As their 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” (p. 1). The twelve contributions covered measurement of construction work, productivity and prices at the global, national, industry and project levels. 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.’ (p. 256). A multiple models approach is indeed required to tackle the ‘various problems’ with construction data.

In Accounting for Construction: Frameworks, productivity, cost and performance (Best and Meikle 2018), the dozen contributions looked at different ways of measuring construction. With chapters on construction statistics, productivity, costs and data, the book both reviewed and extended previous studies. An ‘important thread’ in the book was “the lack of consistency in the way construction industry data is collected and how it is aggregated and/or disaggregated” (p. xiii). This thread became the focus of the next book in the series, Global Construction Data (Gruneberg 2019). The ten contributions included three on construction statistics, four used cost data, and the other three covered innovation, architectural services and international contractors’ make-buy decisions. In the title the book made explicit this important agenda 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. Those shortcomings are also a major theme in Best and Meikle (2015, 2018).

The sixth book in the series is Gruneberg and Francis’ The Economics of Construction (2019). They provide “a game theory account of the behaviour of firms”, the approach typically taken in other branches of industry economics. They discuss aspects of firms’ business models, financing, contractual disputes and power relations at length. A feature is the use of case studies of the collapse of UK contractor Carillion in 2018, Grenfell Tower, construction for the London Olympics and manufactured housing, demonstrating how the business environment a construction firm faces has become significantly more complex over the decades. The profit maximizing firm has evolved into one primarily concerned with growth and survival.

This work continues. The Elgar Companion to CE Research and volume 3 in the measuring construction series, again edited by Best and Meikle, are due in 2021.

 

References

Best, R. and Meikle, J. (eds.) 2019. Accounting for Construction: Frameworks, productivity, cost and performance, London: Taylor & Francis.

Best, R, and Meikle, J. (eds.) 2015. Measuring Construction: Prices, Output and Productivity Abingdon: Routledge.

de Valence, G. 2011. (ed.). Modern Construction Economics, London, Taylor and Francis.

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

Gruneberg, S. and Francis, N. 2019. The Economics of Construction,

Ruddock, L. (ed.) 2008. Economics for the Modern Built Environment, London: Taylor and Francis.

 

Construction Four

Industry Structure and General Purpose Technologies

A new general purpose technology (GPT) becomes the basis of a system of industrial production. For the construction industry and the production of the built environment, the emerging technologies collectively known as the fourth industrial revolution* will be transformative. 

Prior industrial revolutions were driven by steam in the nineteenth and electricity and computing in the twentieth century. Over this period the structure of the construction industry evolved through three stages, first from mediaeval master builders and craft guilds to contractors and tradesmen, then to the modern project manager-subcontractor structure. Interestingly, the transition to steam and the end of the guild system affected the organization of the construction industry far more than the ones to electricity and computers. With electricity, the organization of the industry evolved from contractors to project managers in a structurally, if not contractually, similar production system. And electricity did not affect on-site construction in the same way it did manufacturing, which needed to reconfigure factory layouts, because on-site steam powered machines such as cranes and excavators were replaced by petrol and diesel ones doing similar work. Computers and information technology have restructured office work everywhere, and affected industries like retailing, travel and entertainment far more than construction.

The adoption of steam power was an earlier experience of technological disruption leading to a restructuring of the construction industry. Steam power was a new GPT and industrial materials fundamentally restructured the industry from the craft-based industry of the eighteenth century. Over the nineteenth century this led to the emergence of the architectural, engineering and quantity surveying professions, and an industry structure of contractors and tradesmen for production. The three areas of construction that were transformed in the nineteenth century were identified in the eight case studies by Peters (1996) as industrialization, mechanization and organization:

1.  Industrialization of production methods with standardisation of components and mechanized mass production, and the development of new materials like steel, plate glass and plastics. This led to a new design aesthetic, with more modular components and internal services, and separated the envelope from the structure. The infrastructure of materials suppliers and equipment producers developed, and scientific R&D joined the industry’s traditional trial and error approach to problem solving.

2.  Mechanization of work based on steam power, with cranes, shovels and excavators common by the mid-1800s. This in turn led to a reorganization of project management, with the new form based around logistics and site coordination to maximise the efficiency of the machinery and equipment.

3.  Organization of the modern construction industry was developing by the mid-1800s. Large general contractors had emerged by the 1820s, undertaking projects on a fixed-price contract often won through competitive bidding. This system of procurement was supported by the new professions of architects, engineers and quantity surveyors, which were institutionalising in the early nineteenth century.

Automation and AI in the twenty-first century can be expected to work along these dimensions, as the fourth industrial revolution reconfigures them by linking data through the life of a project. The role of AI enhanced, cloud-based platforms that integrate design, production and delivery of components and materials with digital production technologies that allow mass customisation will be significant in the production of components and materials. Gershenfeld (2017) argues digital fabrication will follow a similar exponential development path as digital computers, with the number of fabrication laboratories (Fabs) doubling every two years and their cost halving, making local production of many objects and items possible. Gershenfeld, who founded the first Fab in 2003, suggests the technology is now ready to become widespread, at the stage PCs were in the early 1990s. If this exponential growth eventuates, much of the current construction supply chain based on mass-production of components might become redundant. For example, an on-site or nearby Fab with printers and moulders might produce many of the metal, plastic and ceramic fittings and fixtures for a building. 

For mechanization, the characteristic changeability of construction sites is challenging for automated and robotic systems, and it might take decades of investment for machines able to do site work or for humanoid robots to do human tasks. In some case a human supervisor operating a team of robots or several pieces of equipment, each with limited autonomy, might work better. A worker with a smart helmet could monitor these machines both on the project and in the site model. Beyond site preparation however, there may not be many tasks left if site processes are restructured around components and modules that are designed to be assembled in a particular way, and machines to assemble those components and modules can be fabricated for that purpose. For an industry with an aging workforce there are exoskeletons for site work, a form of human augmentation beginning to be used in the aerospace and automotive industries.

Digital platforms providing building design, component and module specification, fabrication, logistics and delivery will become widely used. Platforms provide outsourced business processes, usually cheaply because they are standardized, and are available to large and small firms. Also, platforms use forms of AI to monitor and manage the data they produce, the function of intelligent machines. Examples are Linkedin (matching jobs and people), Skype (simultaneous translation of video calls), AWS and other cloud-computing providers, and marketing, legal and accounting software systems. If these digitised business processes are cost-effective and become widely used, they can provide much of the data needed to train machines as project information managers.

The BIM model of the project, which might be outsourced, can link the design and fabrication stages to the site and the project. In 2019 the International Standard 19650 was released, providing a framework for creating, managing and sharing digital data on built assets. Digital fabrication produces components and modules designed to be integrated with on-site preparatory work and assembled to meet strict tolerances. Project management would become more focused on information management, and the primary role of a construction contractor could evolve into managing a new combination of site preparation work and integration of the building or structure with components and modules, some of which may be produced on-site in a Fab if economies of scale permit. In this case, the industry would, perhaps slowly, reorganise around firms that best manage on-site and off-site integration of digitally fabricated parts. With outsourced business processes and standardized site and structural work, that would be a key competitive advantage of a construction firm. Firms would become more vertically integrated if they become fabricators as well, reinventing a business model from the past when large general contractors often had their own carpentry workshops, brick pits or glass works and so on.

Dimensions of construction industry development

Technological developments are combining intelligent machines with engineered materials, deep learning capabilities, human augmentation and new organizational concepts, and are pushing against established custom and practice in a mature technological system. Because the system is mature the effect of new technology and the changes it brings could spread slowly across the industry as a whole, and unevenly because of the many small and medium size firms. While this was case with twentieth century GPTs like electricity, a period of disruptive change in the construction industry occurred during the second half of the nineteenth century, and a new system of production eventually resulted in a new form of industry organization led by contractors instead of architects and engineers. That disruptive transition took several decades, as industrial materials replaced craft ones and site work was mechanized and reorganized. Then, over the twentieth century contractors evolved into project managers and the traditional trades became subcontractors.

Large contractors delivering major projects ended up at the core of the construction technological system at the end of the twentieth century. By this stage the technological system had a clear outline, and a very clear structure, for bringing together the products, suppliers and materials needed for building and engineering projects, and had stabilised around particular forms of procuring, financing and managing those projects.

With a technological trajectory for industry based on AI, digital fabrication and associated emerging production technologies, the view taken here is that there will be a transition period of perhaps a decade, possibly two, as the commercial contracting part of the industry adopts these innovations. As that happens the organization and structure of the industry will also change, from one centred on project managers to one based on integrators that combine site preparation with production and assembly of components and modules. AI as a new GPT may be as disruptive as steam power in the nineteenth century, and lead to a similar restructuring of the industry. Neither electricity nor computing had a significant effect on the organization of the construction industry, because the evolution of the industry from contractors and trades to PMs and subcontractors was not driven by those technologies. However, the change from master builders and crafts to contractors and trades was a break from the past, and the result of industrialization and mechanization.

* This imprecise concept has been popularized by the World Economic Forum, following David (1990). Their description is: “The First Industrial Revolution used water and steam power to mechanize production. The Second used electric power to create mass production. The Third used electronics and information technology to automate production. Now a Fourth Industrial Revolution is building on the Third, the digital revolution that has been occurring since the middle of the last century. It is characterized by a fusion of technologies that is blurring the lines between the physical, digital, and biological spheres.”

 

 References

David, P. A. 1990, The Dynamo and the Computer: An Historical Perspective on the Modern Productivity Paradox, American Economic Review. 80, 355 - 361.

Gershenfeld, N. 2017. The Science, and The Roadmap, in Gershenfeld, N., Gershenfeld, A. and Cutcher-Gershenfeld, J. Designing Reality: How to Survive and Thrive in the Third Digital Revolution, in New York: Basic Books. 95-116, and 159-182.  

Peters, T. F. 1996. Building the Nineteenth Century, Cambridge, Mass.: MIT Press.