Economics of Property Management: The Building as a Means of Production

Herman Tempelmans Plat, Frank Heynick

• Publisher: Routledge
• Year: 2012
• Print ISBN:
  9780367578787
• eBook ISBN:
  9781136408786
• Topic: Business
• Subtopic: Architecture General
• Index: Business

The economic analysis of a building is a complex subject and traditionally it has focused on a single aspect of the structure or a single part of the construction process. Dr Tempelmans Plat is a leading proponent of a new methodology which focuses on the building as a stock of services to be supplied over a long lifespan. This method is more realistic since it takes into account the changes in use and the adaptation of the building over its life. This book will be the first to make this method comprehensible to a wide audience of postgraduate students and professionals in the field of construction economics.

Part One

Production of a building and use of its services

A building is meant to produce the space services used in a production or consumption process (i.e., a primary process). This is true of the entire range of buildings (or other structures) and processes using their services: dwelling → household, factory → production, office building → administration, stadium → rugby, bridge → traffic. Thus the demand is not for the building as such, but for the changing set of services to be generated by the building acting as a durable means of production in an exploitation process, sometimes over quite a long life span. These services, required by a primary process, have to be well defined and distinguished from the components that comprise the building, i.e., the specifications of the technical solutions. This is especially important since decisions about services will be taken on various levels related to various levels of solutions as well.

The building and the services are, respectively, a production factor (B = building) in, and the product (S = service) of, an exploitation process (Tempelmans Plat, 1992) (Figure I.1). In generating services, the exploitation process relates the primary process (the use of services as one of the means of production) to an appropriate building production process (design and construction). Each of these three processes – primary, exploitation and building production – involves its own production decisions, according to the market for the production factors they require and the market on which their products will be supplied.

Fig. I.1 The market for buildings and the market for space services link the exploitation process to the design and construction process and to the primary process:
F final product, S space service, B building, L labour.

Consequently, the various agents – e.g., project developer, investor, architect, contractor, facilities manager – in the various stages of the building process, from initiative to demolition, have to be aware of their complementary roles, as well as of the differentiation in demand and cost information needed for the various production decisions. Each of them should – from their own viewpoint – deal with the split up of the set of services, i.e., levels in decision-making.

A complicating factor in the definition of demand and cost and in the transformation of the various types of demand definition into one another and cost definition into one another is the large difference between the length of the planning period for the primary process and that for the exploitation process. Demand for services involves a rather short period, over which an individual primary process can be planned (usually between five and ten years). The total exploitation period for the building – taking a range of successive users into account – is much longer (typically at least several decades). The building is the most important (and durable) means of production in the exploitation process and so the investor's decision requires cost (and income) information relating to its life span along with his expectation of the demand for services to be supplied. The building is a more or less static (but discretely adaptable) means of production, while the demand for services is constantly changing. Consequently, life cycle cost information about a building has to be transformed into cost data on a changing flow of services, i.e., on each type of service, most of which are supplied over a rather short period.

1

Use of a building as means
to the ultimate goal

A building is produced by the designer and the contractor, but only as a means of production in the exploitation process, which produces services such as housing and work space. These space services are in turn used to generate the final products of the primary process, such as light bulbs, legal advice, and domestic living (Figure I.1). Only by explicitly defining the exploitation process can the technical and economic relation between building and services become clear, and, as a result, the proper decisions be made.

1.1 Production of a building as a product

The architect and the contractor usually consider their work done when the building has been completed, meeting the technical requirements specified in the programme. The principal checks whether the building fulfils his wishes as defined in the contract. This definition, however, usually involves static demand at the moment of signing the contract, rather than the changing demand that will come in the course of time. The technical solutions provided by the architect and contractor are therefore likewise static.

Consequently in building production and in cost calculation, the focus usually is on the static non-adaptable building as the final product of the new construction or adaptation (e.g., upgrading or refurbishing) process. To the extent the principal and the producers look to the future, they take maintenance into account but hardly any adaptation (to be expected after a period of 15 or more years) for keeping the building usable for the original user or for other users in the market. Occasionally there is focus on technical flexibility, but without regard to long-term demand and economic consequences (Hermans and Damen, 1998).

Decision-makers are myopic as far as future demand and expenditures are concerned (Bon, 1985). Human beings find it difficult to imagine situations beyond five to ten years, while professional decision-makers feel as entrepreneurs unable to influence long-term results. A fair economic balance between new construction expenditure and future adaptation expenditures is not taken into account. The result is a set of (in the long run) non-optimal technical solutions and consequently expensive or inadequate services.

In order to be able to decide about and produce the best building for the long run, information about the services required over a ‘foreseeable’ period is needed.

1.2 Use of a building's services

The user of the building's services – perhaps represented by the facilities manager in the primary process – may find immediately after completion or some time later that the services supplied by the building are not exactly what he needs. The total costs of the primary process (e.g., light bulb manufacturing) may have been less, had a better balance been struck between primary production factors (e.g., labour, equipment and materials) and the supporting production factors (e.g., work space) (Figure I.1). Put differently, the addition of the supporting production factors to the primary process (Davis and Szigeti, 1999) may be (too) low, i.e., the ratio of marginal productivity and marginal cost may not be equal to that of the other production factors. It may be that the transformation of the demand for work space into the building as a set of technical solutions was not correct, or that demand has not been well defined, or has been influenced by changes in the primary process. This may be due to the fact that demand has been defined in an early stage by a project developer without information from the potential – still unknown – user.

In any event, the user in fact does not need a building as such, but services to be generated by the building over a reasonable planning period which depends on the primary process. In fact we deal with a set of services, supplied by different parts of the building and to be decided about separately to some extent, i.e., levels in the built environment and (related to them) in decision-making. These services should have been defined, along with a (annual) budget from the point of view of the primary process. So, in fact, the building acts in a process separate from the process in which its services will be used.

1.3 Exploitation as intermediate process

Although final demand is for services, communication with the supplier of building production activities usually concerns only design and construction of the building. However, the decision to use services differs principally from the decision to invest in the building and to exploit it. The period over which a set of services is generated by the building without minor or major adaptation is usually shorter than the investment period, which in turn is shorter than the building's life span. Consequently decision-making concerns various planning periods, which have to be linked.

Fig. 1.1 Demand and cost transformation between building and service.

Demand for services by the primary process has to be transformed by the presumed investor (or the property manager or project developer representing him) into demand for the construction or purchase of a building so that he may generate an income by exploiting it. The separate role of the investor has to be recognized even if he is also the user of the building's services.

There is a market for services (S) linking the exploitation process to the primary process, and a market for buildings or building production activities (B) linking the exploitation process to the building production process (Figure I.1). The balance between cost and income of the exploitation process depends on the prices on these markets. The income involves a real rental income or benefits from own use (represented by a comparable market rent). The cost side of this balance involves – amongst other things – the purchase of a technical solution in terms of building components (which require initial and future expenditures). Appropriate decision-making in the exploitation process requires adequately defined demand and a reliable method of comparing the annual income from services with the costs of the technical solution (Figure 1.1).

1.4 Conclusion

The exploitation process uses a building to generate services. The changing demand for a building's services by the primary process has to be transformed into demand for an adequate building to be produced by the building production process. In the other direction, costs of the building production have to be transformed into costs of the services.

2

Service and technical solution

Once the three processes (primary, exploitation and building production) have been distinguished, the exploitation (intermediate) process has to be described in terms of product and means of production. Since in each process the product has to be made available at minimized costs, the technical and financial relation between input and output needs to be defined. For this the performance concept is useful, but is effective only if used as initially intended: all technical solutions able to generate the service required should be taken into account. The dimensions of services and technical solutions have to be defined.

2.1 The performance concept

The performance concept is particularly meant to make the best possible choice from among the technical solutions, which, during exploitation, fulfil the requirements for services of the primary process. By not defining demand of the primary process in terms of technical solutions (whether existing or yet to be conceived), it maximizes the solution space and may stimulate new developments. For a choice to be made in accordance with the performance concept, demand for services is transformed into solutions and the cost consequences of the solutions into costs of services. The best choice is one that generates the desired services in the cheapest way (Tempelmans Plat, 1996b).

Unfortunately, the agents in the primary processes still usually define their requirements for the built environment not according to the performance concept, but by defining the specifications, or even the materialization, of the technical solutions. In these cases, their demand involves such things as level of insulation of the outside walls or even the materials to be used. The functional demand from the primary – production or consumption – process concerning the built environment (work or living space) is transformed into technical solutions partly intuitively and partly on the basis of common solutions. As a consequence, not all solutions available will be taken into account when the programme of (in fact, technical) requirements is defined. Furthermore, the push to develop new solutions does not come from the services demand side, at least not as directly and as strongly as it could.

Fig. 2.1 Transformation of user-needs into (building-)parts; attr...

Table of contents

• Front Cover
• Title Page
• Copyright
• Contents
• Foreword by John Habraken
• Preface
• Acknowledgements
• List of figures
• Introduction
• Part One Production of a building and use of its services
• Part Two Cost calculation and valuation as a basis for decision-making – a theoretical framework
• Part Three Consequences for agents in the building process
• Epilogue
• References
• Glossary
• Index