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Über dieses Buch

This revised edition of an established classic textbook brings the subject right up to date. It applies economic theory to the formation of demand on the construction industry and to the way the industry responds. This edition provides a topical assessment of the implication for competition of new methods of procurement, includes a new chapter on rehabilitation, repair and maintenance, and extends the use of theory to issues such as the problems of appropriate technology for developing countries, and contractors' diversification.





1. The Nature of Construction Economics

Construction economics consists of the application of the techniques and expertise of economics to the study of the construction firm, the construction process and the construction industry. To understand this definition and the scope of the subject, it is necessary to know what economics is about, what constitutes construction and why the construction industry deserves a special branch of economics to itself.

Patricia M. Hillebrandt

2. Some Basic Concepts in Economics

There are some concepts used by economists which it is appropriate should be explained at the outset, in order that the flow of the argument in later chapters is not interrupted by a digression to explain their meaning. First, the meaning of market as opposed to industry is considered. There follows a discussion of various types of cost, and of price and profit. The nature of marginal analysis and the concepts of supply and demand are then explained and, finally, two ways of handling economic data for analysis are described. For further definitions of terms, the reader is referred to the index where page references to definitions and explanations of the use of a term are shown in heavy type.

Patricia M. Hillebrandt

3. The Construction Industry and the Economy

The construction industry is important partly because its output is large and therefore that it is a significant part of the economy. The gross output of the construction industry is the value of all the buildings and works produced by the industry in a given period of time, normally a year. In the world as a whole it is probably about 10 per cent of Gross National Product (GNP), that is 10 per cent of all the goods and services produced, or of the order of US$3,000 billion in 1997. There is a considerable difference between various types of economy and geographical locations. Davis Langdon Consultancy (DLC, 1997) estimated that in 1990 the percentage shares were: Western Europe 30 per cent; Asia 28 per cent; North America 25 per cent; Eastern Europe 7 per cent; South America 5 per cent and Africa, Middle East and Oceania just under 2 per cent each. These estimates are similar in general conclusions to those by Drewer (1999) who estimated that developed market economies accounted for 78 per cent of global construction output in 1990. In Europe, gross construction output was around 10 per cent of GDP in 1997, marginally less for the EU and slightly more for countries of the former Soviet Union (DL&E, 2000).

Patricia M. Hillebrandt

The Demands on the Construction Industry


4. Demand for Housing

The construction of housing enables a benefit to be available for direct consumption. In a minority of cases, the client of the industry is the user, as in privately commissioned housing. Most housing, however, is either produced by a private developer in advance of orders by users or by a public, quasi-public or private organisation for renting (or sale) to users. The private developer is known as a speculative builder — speculative in the sense that there is uncertainty as to whether the dwelling will be sold. In this sense at least a large part of the output of manufacturing industry is speculative. The manufacturer of toothbrushes does not know his clients when he produces the brushes. However, the sheer size of the purchase of a house and the fact that it is a postponable capital transaction renders speculative housing a more uncertain business than the manufacture of toothbrushes.

Patricia M. Hillebrandt

5. Demand for Industrial and Commercial Building

The demand for factories and offices is not dependent directly on the ultimate consumer, but on those who produce goods for them. It is known as derived demand. Its analysis benefits from the concern of economists with the relationships between investment and consumption. The initial discussion will be mainly in terms of industrial building, followed by a consideration of the extent to which the same analysis is applicable to commercial building.

Patricia M. Hillebrandt

6. Demand for Social-type Construction

The two preceding chapters on demand for construction, started by considering the factors which were relevant to the decision to build in a broad sector of demand, and the theoretical concepts which were of assistance in understanding the interrelationships of the relevant factors. This chapter deals with a heterogeneous sector of construction in which the common features are that the product is used by a large number of persons or households collectively — for example, hospitals, museums, roads, schools — or that it is used by persons or households individually, but who individually are neither able nor willing to pay for the product, but which the ‘community’ decides should be available.

Patricia M. Hillebrandt

7. Demand for Refurbishment, Repair and Maintenance

The demand for modernisation, rehabilitation and refurbishment of buildings and works is dependent on factors similar to those relevant for the equivalent type of product of a new build. Aikivuori (1996) describes refurbishment as being an option at the end of the service life of a building and this occurs when the building fails to perform as required in use. She identifies three causes for this failure: deterioration in the building, changes in the requirements of performance of the building (obsolescence) and change in use. Maintenance is described by Wall (1993) as encompassing ‘that ongoing process dealing with maintenance or restoring to good condition any part of a building that becomes defective or nonfunctioning to an acceptable standard to sustain the utility and life of a building (Building Maintenance Committee, 1972; Dixon, 1990; Mole (1991)’.

Patricia M. Hillebrandt

8. How Demand is Put to the Industry

In order to appreciate the reaction of the industry to the demands upon it, it is necessary to understand the way in which demand is placed. In this chapter a brief description of the construction process is given with emphasis on those aspects which affect the type of theoretical analysis required to understand the behaviour of construction firms.

Patricia M. Hillebrandt

The Supply of Construction


9. Objectives of the Firm

Economists use the word ‘firm’ to mean a business unit. The person who takes the decisions and risks of business is known as the ‘entrepreneur’.

Patricia M. Hillebrandt

10. Costs of the Construction Firm

One of the peculiarities of the construction industry is that work is obtained in the form of contracts for projects which are large and indivisible but that the work load relating to each project is spread over a long period of time. Costs (and revenue: see Chapter 13) have therefore to be examined in three distinct ways. Firstly, the cost of the project as a whole; secondly, the cost of the total project must be related to the work load over time; and lastly, the cost of various alternative work loads at a given point in time must be analysed. The usual cost curves of economic analysis are of this last type. The method of transition from the first to the third will be discussed first.

Patricia M. Hillebrandt

11. Market Supply Curves

While it is a truism that the supply curve of the market is made up of the total of what the firms in that market are able to supply at various prices, the variability of firms complicates the summation of individual supply curves. Moreover, other factors, which could be ignored for the firm having a relatively small share of the market, may dominate the market supply curve, thus making the total market supply curve different from the sum of the individual firms’ supply curves. These problems are discussed below and the conclusion for the supply curves of the firm and of the market are summarised in Table 11.1.

Patricia M. Hillebrandt

12. Equilibrium in Various Market Situations

It was shown at the beginning of Chapter 10 how the costs of the individual large contract, obtained at a single point in time but with work spread over a long period, are relevant to the usual cost curves of economic analysis which represent the answer to the question: If the output of the firm were higher or lower than a given level, what would be the effect on costs? The remainder of the chapter was devoted to a detailed consideration of this question.

Patricia M. Hillebrandt

13. Demand Curves Facing the Individual Firm

In discussing the demand curves facing the firm, it is important to realise the diversity of practice across the world. In a substantial number of countries, open or selective tendering is the procurement method for most, often virtually all, of the projects in the formal organised sector. In the description of how work is put to the industry in Chapter 8, about ten alternative procurement methods were described and there are, in fact, many variants of these. However, even in the UK, where some of them have been developed, they are still responsible for procurement in only a relatively small percentage of total construction projects, although, because the projects are generally large, they account for a high percentage of output. This is because many of these procurement methods are not suited either to small projects or to repair and maintenance which, in developed countries, account for a high proportion of the work. In the discussion which follows, attention is given to these unusual projects both because they pose interesting questions for the future shape of the construction industry and because their use is spreading and is likely to spread further.

Patricia M. Hillebrandt

14. Price Determination for a Single Project

In the construction industry, price is determined for large indivisible amounts of work, each one of which may represent a large proportion of the work load of the contractor or of that part of his organisation operating in a particular market. The most usual form of price determination is some form of competitive tendering, but negotiation is important and the whole process is complicated by the wide range of non-traditional processes (see Chapter 8).

Patricia M. Hillebrandt

15. Conclusions on Costs, Revenue and the Equilibrium of the Contracting Firm

Having completed a study of the costs of the firm and the industry (Chapters 10, 11 and 14) and of the demand facing the firm (Chapters 12–14) and the industry (Chapter 4–8), it is appropriate first to summarise the main findings and then to combine them, and to draw some conclusions on the equilibrium position of the firm on the two main assumptions of the objectives of the firm, namely profit maximisation and maximisation of turnover with a profit constraint (Chapter 9).

Patricia M. Hillebrandt

Broader Issues


16. Choice of Inputs and Capacity: The Project, the Firm and the Industry

In this chapter the choice of inputs will be considered from the point of view of the contractor and the designer and also, using some of the same pieces of theory, from the perspective of a government of a developing country wishing to utilise the construction industry in the best interests of the economy.

Patricia M. Hillebrandt

17. Markets and Strategy

In the previous chapters on the supply of contracting services, it has generally been assumed either that the contractor was operating in one market or that the markets were so similar that they could be considered as one. Firms’ outputs are not usually confined to a single product. In the construction industry, not only do firms produce different products within the contracting operation, but they also go outside the contracting business into property development, materials production and other activities. A study of twenty large UK contractors (Hillebrandt and Cannon, 1990, p. 40) even found firms engaged in very diverse activities having virtually no relation to construction, including manufacture of boats, computer software and gold mining.

Patricia M. Hillebrandt


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