The Management of Construction Firms

The large firm is a phenomenon of the 20th century. At the time of the development of micro-economics, the typical firm was small and owner-controlled. The owner took risks backed by his own capital, and was accountable only to himself. Economists focused on such a firm, within markets where products were standardised, buyers and suppliers were large in number and well informed about the conditions prevailing in these markets, and where prices were set by the market forces. That is perfect competition.

‘Strategy’ has now become a word in business which is widely used, and consequently devalued, and is still poorly understood. It is necessary, therefore, to define strategy as used in business theory prior to determining those elements which have relevance for large contractors in the construction industry.

In this chapter, ‘diversification’ is defined as the process by which firms extend the range of their business operations outside those in which they are currently engaged. This broad definition includes (a) the process referred to as backward vertical integration — that is, the acquisition or development of businesses whose products are inputs to the firm’s own main operations, (b) forward integration — that is, the extension of the firm’s activities to those of the normal purchaser of its products, (c) horizontal diversification — that is, a movement into other markets not involving the firm in any vertical relationships as in (a) and (b) above. Any of these forms of expansion may take place either by internal development or by merger or takeover.

The primary objective of this chapter is to integrate those aspects of international construction, some of which have already been mentioned, within a framework of international production economics. The theory of foreign direct investment (FDI) is arguably the most useful tool for this purpose. It allows detailed economic analysis of the firm in an international competitive context and includes the influence both of the country of origin of the enterprise (the ‘home country’) and the country in which the enterprise is located (the ‘host country’). The analysis is founded upon the eclectic paradigm put forward by Dunning.’ This is an approach which selects the relevant parts of various economic theories and adapts them to analyse and explain the behaviour of international production units, notably the multinational corporation. The framework provides a synthesis of existing theories of FDI and it is a particularly useful vehicle for the industry-specific investigation of international competition in both a micro and macro context. This chapter presents a summary of the eclectic approach, together with the application of the theory to international contracting in Section 4.2. Some policy implications are given in Section 4.3.

Contracting is a service which is related to individual projects each one of which may be likened to a firm with a relatively short and finite life. In the short term, the number of projects which a firm can undertake is more or less fixed by its management or skills capacity, and it is usually found that relatively few projects account for the major part of the operations of the firm. If one project fails, for whatever reason, the effect can thus be very damaging to the overall health of the firm. This is especially so because the potential loss is a very high proportion of total turnover, and hence of the total resources of the firm.

There are a number of theoretical approaches to the analysis of the structure and processes of establishments and firms which are known variously as organisation theory, organisation studies and the theory of behaviour. In this chapter, the theory of social technology has been selected as being of greatest relevance to the construction industry. It is a theory which has been formed by a selective fusing of elements from management theory, economics, engineering and the social sciences. Its prime objective is to provide a framework for prescribing those forms of work organisation which are most likely to be viable in different contexts. The theory is rational and analytical, and it assumes that firms which depart from the theoretically appropriate recipe will be eliminated through market competition. The theory is therefore prescriptive and explanatory, albeit in a limited way. The version to be used relies particularly on the notion of social technology by Perrow (see Section 6.5.1). The theory can be used to explore the impact of innovation and the implications which innovation might have for the learning of skills.

This chapter focuses on the individual manager within the organisation. First, it deals with what sort of person the manager is and what may be his own goals and aspirations; secondly, it looks at the roles of the manager in the firm; and thirdly, at some of the ways in which the manager functions. Clearly these aspects of managers and management are interrelated — for example, the sort of person the manager is will be one of the factors determining what he sees as his job and how he can carry out that job. However, for clarity they are dealt with separately. The relationship between the type of manager and structural features of the organisation is analysed in the last section.

Manpower management in the construction industry is heavily influenced by the particular characteristics of the industry described in the Introduction. The most significant include the substantial fluctuations in demand for construction, the labour intensive nature of much construction, employment instability, an unstable industrial structure which has been referred to as the ‘construction jungle’,¹fragmented bargaining structures and the interdependence of trades as well as pervasive regulation. Analysis is also complicated by the diversity of labour management practices. Within private construction unionised trades and firms coexist with a significant non-union sector and a large casualised subcontracting industry. The emphasis in this chapter is on private sector construction and particular attention is paid to the growth of ‘labour-only’ subcontracting.

The objective of this chapter is to outline the economic principles underlying price determination in the building industry. The focus is drawn in a deliberately narrow way in that it is concerned solely with price determination of a complete building project rather than that of individual components or elements of a building. However, many of the principles identified apply as much to subcontractors as to main contractors.