The Global Construction Industry

 Ducks In a Row

These days, the review of the global construction industry done 25 years ago by an American business academic, David Hawk, would be called a foresight exercise. The project was called Conditions of Success: The Internationalization of Construction and began in 1989. He interviewed managers from the world’s largest firms about their strategies and aims for the future, with 18 of the then 20 largest construction firms, the largest private real estate developer and the largest building materials producer participating. Since publication of the report those 60 firms involved became, through mergers and acquisitions, 25 firms by the time of Hawk’s 2006 follow-up published in Construction Management and Economics.

Importantly, his ten recommendations from the project resonate today. What is also interesting are a few recommendations that were deeply prescient (3, 6) while others have faded over time (2, 9), although all ten remain relevant. Hawk described the strategic challenge for management as “getting your ducks in a row” in addressing the issues he identified:

1. Embrace changing consumer ideals: Construction will need to be inventive in how it accommodates changing consumer values and expectations. Being innovative necessitates changes in how and where firms seek their clients, how they negotiate with clients over mutual realities, and how to maintain long-term relations around products with multiple shortcomings.
2. Seek new business ideas in new customer relationships: New opportunities for adding value emerge in new markets. Firms need to respond by being able to create more obvious value via more fluid operations. This is seen in industrial clients requiring their home-based construction firm to accompany them when they require facilities in other countries. At this point this is seen as more negative than positive for the construction firm.
3. Add new value potentials via innovative design and procurement processes: Value-adding is clearly central to the relationship between builder and customer but the value definition process is just as clearly changing is significant ways. An important area of untapped potential is seen in processes and products of design. Design in construction was once limited to the activity architects were paid a fee to go off and “do,” prior to the real men’s work of producing a building. In this study design is seen as an emergent activity that needs to be seen in a more general way, and one which needs to involve all participants in the process. Design can be used to pre-problem-solve and post-opportunity-create. There are additional opportunities in redesign to include new social processes and technologies for production, sales, distribution and use.
4. Use of global construction to discover new local visions: Even a global construction industry needs to be associated with the reality of the local. Real estate is the basis for all construction thus its products cannot have the economic mobility of autos, drugs and electronics. This offers special advantages to the industry but the mind-set behind the design of its products will need to be different. Construction needs to innovatively by-pass the dilemmas of the national while tapping more securely into the long-standing potentials of the local.
5. Accommodate diversity while embracing the contradictory: Much executive discussion centers on whether a construction company must accept the diversity it continually encounters, or can find ways to simplify its situations by redefining its core, or even defining away complexity.
6. Adapt and adopt new design and production processes for construction products: Construction clings to crafts and trades tradition. It resists some important concepts and practices that have been successfully applied to problems in other industries. Redesigning the idea of product and the tightly defined rules of traditional project management, to gain new opportunities for improved results, provides exciting alternatives for finding a more effective industry.
7. Find and organize new knowledge for the industry: Construction needs to invest in a stronger scientific-technical base for its continual improvement of the quality and efficiency of what it does. This could be seen as a renewal of the importance of R&D, or as developing a basis for renewed knowing in an industry that is often too proud of doing and not reflecting. Construction, as well as others, seems to suffer from the dilemma of knowing standing in the way of learning.
8. Innovatively avoid the Limits in Traditional Hierarchical Structures: Some construction activities can continue to operate effectively as autonomous, small-scale fragments. Others become much more efficient as part of an organized system. Finding management systems that can accommodate autonomy alongside complexity presents a great challenge.
9. Integrate the mutual strengths of the Asian and European models: The Asian model of construction offers an interesting philosophy and approach to future construction operations of European firms. Its strength lies in how it places high value on details, quality and collaboration between the stakeholders in the total process. A current shortcoming is seen its ethnocentricity. The western model has taught a great deal to eastern-based firms but has been seen to give too much emphasis to big ideas that are too often vacuous and end up being controlled by the vagueness allowed in speculative finance.
10. Learn to learn: Construction firms traditionally hire physically robust people proud of their low to moderate education and then place them in a stable value-adding stream. The assumptions behind this practice are breaking down. New challenges facing the industry’s clients and new untapped potentials in the industry are now called for. The industry needs to find ways to manage their employees so as to use more of their brains than brawn. This pushes construction to become like its clients and expect more of its employees.

Hawk does not mention globalisation, the study was done before it became the defining feature of the 1990s, but implicitly the report was about how to be a successful participant in an emerging global construction industry. This industry was not confined to activities on-site, but covered everything from design to material to construction to finance. The challenges successful firms were responding to were new technologies and organisational structures, and changes in the products and services they delivered to expand and create new markets.

Two other important issues were responding to changing consumer expectations such as higher quality, lower costs and improved environmental sensitivity, and finding new business ideas and customers by providing environmental sustainability, one-stop shopping, intelligent buildings, PPPs and innovative linkages to other industries. The over-riding theme was how to add value through integration of the total process and respond to the advantages opened up by the globalisation of the world economy.

In terms of the process of construction, Hawk emphasised industrialisation of on-site activities by replacing the crafts tradition with organisation by industrial concepts, and investing in a scientific-technical base for continual improvements to support it. This would create the preconditions for replacing the traditional hierarchy system with a system based on decentralised decision making. He argued organisation of the firm needs to allow small autonomous groups to efficiently function within large companies to link the operational advantages of smallness to the symbiotic advantages of integration.

Hawk concluded international construction was entering a new stage. Global construction firms were becoming more similar to other global businesses, in other industries, than the traditional, small scale, low technology service industry which it had left behind. The changes in how these firms functioned were so radical that Hawk called it the development of a new industry, the new international construction industry. This new industry would have a small number of large firms producing, not a service (project management) like the rest of the industry, but a product in a business model that owes more to conventional manufacturing than to traditional building and construction.

 

From Hawk, D. Conditions of Success: A platform for international construction, Construction Management and Economics, 2006.

Therefore Hawk’s new construction industry would not compete with the traditional fragmented building industry, which will continue to provide largely undifferentiated management services, allocated on price, to erect buildings designed and financed by the client, in a local or regional, or sometimes national market. It will continue as a low-technology industry in an environment where new technology is restricted to the process itself, and where product technology has to be financed and driven by suppliers and clients. The old and the new industries could be so far apart that it is possible there will be few technological spillover effects from the new industry.

Hawk concluded the new industry would be a global manufacturing oligopoly, where a small number of large firms compete in a global market. Their products will be packages, complete buildings, designed, financed, built, maintained, operated and possibly also demolished, as increasingly demanded by the clients, or rather customers. The firms in the new industry will exploit economies of scale and new technologies to grow. Partly that growth will be in turnover, partly in geographical coverage, and partly in new services and products. Mergers and acquisitions are likely to continue to be a major strategy for generating this growth. The consolidation will be ongoing.

Hawk’s report was published as Forming a New Industry: International Building Production in 1992. Long out of print, it used to circulate as samizdat copies at conferences. What is striking, however, are the similarities and differences in the global industry today to the industry Hawk envisaged.

Pre-Modern Building Procurement

 A Short History of Building Procurement: Part 1

This short history describes the evolution of procurement in the building and construction industry, from the early modern system of production in the 17^th and 18^th centuries to the emergence of the general contractor and the professions with modern methods of procurement in the 19^th century. Procurement here is the commissioning or purchasing of buildings and structures, and any associated supplies and services required, by a client that pays for the work. A historical overview is useful because there is a surprising, and often not well-recognized, continuity in the methods used and problems found.

The process of designing and delivering buildings is as old as civilization. However, the procurement of projects has not attracted as much attention as the buildings and structures themselves, or the organisation of the work, because in the distant past this was done by imperial edict for essential granaries, armories, pyramids or temples. Procurement itself dates back to a red clay tablet found in Syria, dated from between 2400 and 2800 B.C. This earliest procurement order was for “50 jars of fragrant smooth oil for 600 small weight in grain” (Coe 1989: 87).

The earliest records on construction procurement are from Rome in the middle of the first millennium before the present era (around 500 BC). What is significant about the history of procurement is the continuity they show, in how the basic characteristics of the methods used have been around since then. Straub (1952) quotes Plutarch on construction where ‘artists’ submit estimates and drawings and “they select the one who, at the lowest price, promises the best and quickest execution”. It appears to have been common to divide large projects into work packages, with the Long Walls of Athens broken into 10 and the Roman Coliseum into four separate contracts (Morris 2013: 14, again based on Plutarch).

Along with continuity of procurement methods, issues around client and contractor performance are also familiar. The stereotypes of capricious and poorly informed clients and duplicitous contractors have a long history. For example, Marshall Vauban was a military engineer and builder of fortifications for the French monarchy who insisted suppliers should be selected on quality, not just on price. In a letter from 1685 (cited by Callender 2003) to his Minister he complained of delays due to budget cuts and argued:

Breaking of contracts, failures to honour verbal agreements and new adjudications, only serve to attract those firms which do not know which way to turn, rogues and ignoramuses, and to make those with the knowledge and capability of directing firms, beat hasty retreats.

I would add that they delay and inflate considerably the cost of these works, which are the worst since these cuts and the cheapness sought are imaginary. For the contractor is ruined … He does not pay the merchants who supply the materials, pays badly his employees, cheats on those he can, has only the worst, and since he is cheaper than the others, uses the poorest materials, quibbles about everything and is always crying for mercy … go back to plain dealing; pay the price for the works and do not deny an honest salary to a constructor who fulfils his duties; that will always be the best deal you can find.

This history of procurement is about its development in England, and in particular in London where capital (often made through the expansion of trade) was concentrated and many of the major projects of the time were built. These developments are relevant to many countries today because, more than any other nation, England has shaped our modern language, laws, institutions, and governance over the past half-millennium. While ideas like competitive tendering, enforceable contracts, subcontracting and measurement of costs with a bill of quantities are now widespread and common, this was not the case 200 years ago. In other countries, especially the US and elsewhere in Europe, the details of their history of procurement are different, but the modern system established in England and the UK at the turn of the 18^th century is the foundation on which they are built.

Early Procurement Methods

Through the Early Modern period in Europe, until the end of the 17^th century, the usual way of getting building work done was to employ craftsmen directly. If the client did not supervise the work himself, an agent would be appointed, and craftsmen were employed at daily wage rates set by medieval craft guilds that guaranteed quality. The trades and guilds were based on the materials used, such as wood and stone, and had an apprentice-journeyman-master structure that set standards of fairness enforced by the courts run by their Companies (Knoop and Jones 1933). This had been the normal way of building for centuries, although even then there were different methods of employment and payment.

While the common system was direct employment at day rates, sometimes work was done under a system known as ‘measure and value’, where work done in the different trades was valued based on an agreed set of prices and wages rates. Master craftsmen would make an agreement (in effect but not in form a contract) for building, and employ other craftsmen and labourers to do the work, called task work. The payment was still usually on a measure and value basis not for an agreed price, although there was some lump sum work. As use of this method of ‘contracting’ increased the direct labour system declined, with wages and prices still regulated by the guilds. Measuring was usually done on completion and had its own issues, mainly with delay, disputed work and associated litigation.

A third way of contracting was known as in grosso (by the great), meaning for an agreed, fixed sum. Harvey found examplnes from the 15^th century where what today would be called a lump sum contract was used to deliver projects. An important difference was that they involved separate agreements with the various tradesmen, however in this case the price was agreed in advance instead of work getting valued when done. This form of contracting was strongly opposed by many clients and craftsmen, who felt that the in grosso formula would produce poor quality and high prices, and sureties were often demanded to guarantee completion if the contractor did not complete the work as agreed. The method of contracting ‘by the great’ led to the end of regulated prices and undermined guilds.

There are also early examples of fixed-price contracts, typically with the separate tradesmen involved on a particular project. These were quite rare. It was not unknown, however, for a single person to carry out a complete project through subcontracts or direct employment, and this led eventually to the modern contracting system. Harvey (1975) describes the building of the jail in York in 1377 using a fixed price and a contractor with agreed stage payments.

Christopher Wren, in a 1681 letter to the Bishop of Oxford, explained that there were three ways of getting a job done and the problems with each one: working by the day, by measure, and by the great. His preference was to work by measure, although good measurers were hard to find, and he argued that contractors employed by the great who were not familiar with the tasks “doe often injure themselves, and … shuffle and sligh the worke to save themselves” (McKellar 1999: 86). In the building of St Paul’s after the Great Fire of London during the 1670s, responsible for both supervision of the work as well as the design, Wren employed different sets of craftsmen under these three different types of contracts to do the work, but most of the work used the method of separate contracts with different trades, a form of contracting by the great. This spread the risk and became the most common form used in the late 1700s.

By the end of the 17^th century some procurement was being done through a building agreement, usually for speculative property developments, between the client or developer and the builder. These were legally binding documents that specified the structure or structures, their size and materials, payments and any financial penalties incurred after the agreed time. McKellar (1999: 83) describes these as “fairly comprehensive and sophisticated”. They contained arbitration clauses, and resort to the courts only happened when arbitration failed. The main problem was quality control, and common phrases like ‘well made’ or ‘good work’ made disputes over quality common.

The role of property developers and speculative builders at this time is an important element in the development of the building industry. Some of these were lords (Bedford, Southampton, St.Albans) but many were not (Babon, Cubitt, Bond). Literate and, essential for estimating, numerate master craftsmen became master builders. Usually bricklayers or carpenters, these men would build for the speculative market and employ or contract with tradesmen. They used surveyors to mark out building sites and measure completed work to settle contracts. There was a wave of house building in the mid-seventeenth century, documented by Summerson, led by ambitious craftsmen and opportunistic developers who were not deterred or prevented from building by royal decrees or church interests, unlike the other European capitals:

London is above all a metropolis of merchandise. The basis of its building industry is the trade cycle rather than the ambitions and policies of rulers and administrators. The land speculator and adventuring builder have contributed more to the character of the Georgian city than the minister of the Crown … or the monarch (Summerson 2003: 9)

At this time the industry was clearly undergoing changes. For many years, even centuries before, building had been done by independent craftsmen belonging to guilds, or Companies, who usually worked directly for a client. The end of the 1700s, however, was the time of transition from these old, established ways to what eventually became known as the ‘modern system’ of contract labour and measuring to determine costs. This was not some linear, steady progress, but an overlapping of the old procurement methods with the new system, as both continued to be widely used. As McKellar observed:

The guild system had broken down well before the late seventeenth century and certainly in London any remaining vestiges of power that the Companies had were annihilated by the legislation following the Fire which allowed ‘foreigners’ from outside the city to work within its boundaries. The building industry might still be organized around separate trades, however the relationships between these different crafts and the methods of contracting were undergoing a profound transformation. (1999: 71).

Importantly, as part of this transition to an industry with more of the characteristics seen today, the different construction professions began to form, as experienced tradesmen started to specialize in various aspects of building and construction and professional architects appeared. Morris (2013: 15) describes the emergence of the roles of architect, engineer, surveyor and contractor during the rebuilding of London after the Great Fire of 1666 under Christopher Wren and Robert Hooke. A hundred years later, toward the end of the 18^th century, the general contractor had arrived as a new type of firm, responsible for organising the building process and employing craftsmen to undertake work directly or as subcontractors. 

This is part 1 of a three part series, the following parts are on The Great Transition and The Modern System. A pdf of the full document is here.