Measuring Construction

Prices, Output and Productivity

Rick Best, Jim Meikle, Rick Best, Jim Meikle

• Publisher: Routledge
• Year: 2015
• eBook ISBN: 9781134687282
• Edition: 1
• Topic: Technology & Engineering
• Subtopic: Construction & Architectural Engineering
• Index: Technology & Engineering

Despite the size, complexity and importance of the construction industry, there has been little study to date which focuses on the challenge of drawing reliable conclusions from the available data. The accuracy of industry reports has an impact on government policy, the direction and outcomes of research and the practices of construction firms, so confusion in this area can have far reaching consequences.

In response to this, Measuring Construction looks at fundamental economic theories and concepts with respect to the construction industry, and explains their merits and shortcomings, sometimes by looking at real life examples. Drawing on current research the contributors tackle:

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• industry performance

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• productivity measurement

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• construction in national accounts

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• comparing international construction costs and prices

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• comparing international productivity

The scope of the book is international, using data and publications from four continents, and tackling head on the difficulties arising from measuring construction. By addressing problems that arise everywhere from individual project documentation, right up to national industrial accounts, this much-needed book can have an impact at every level of the industry. It is essential reading for postgraduate construction students and researchers, students of industrial economics, construction economists and policy-makers.

1 Setting the scene

Jim Meikle and Rick Best

Introduction

Measurement is the first step that leads to control and eventually to improvement. If you can’t measure something, you can’t understand it. If you can’t understand it, you can’t control it. If you can’t control it, you can’t improve it.

H. James Harrington

Peter Drucker, a prolific writer on various aspects of management, is often erroneously cited as the originator of the phrase, “If you can’t measure it, you can’t manage it”. Exactly where the phrase came from is unknown, but the idea remains valid. Measuring construction in the sense of measuring quantities of building work is a well-established technical process carried out routinely by quantity surveyors and estimators, and in many places there are agreed-upon rules and procedures that are used for such work. Measuring construction industries or parts of those industries is another matter. While there must have been construction managers as far back as the Pyramid Project, the discrete discipline of construction management is relatively new, and serious scientific research in the area is still evolving. Measuring construction, in the sense of measuring things such as performance and productivity, is still the subject of some of that research, and methods for doing it are far from being fully developed and generally accepted by all interested parties.

The measurement of physical construction work gave rise to the emergence of quantity surveyors as a separate profession; the term ‘surveyor’ was used because people were required to go to sites and physically ‘survey’ or measure the quantum of work completed: lengths of walls of a certain height and thickness, for example, in order that the builder could be paid. Today there are standard methods for the measurement of physical building work, but the same cannot be said for the measurement of the characteristics of the construction industry. Even measuring construction cost can be done in a variety of ways, particularly if the aim is to measure cost, say, in a comparative exercise where costs in one place or country are compared to costs in another. This becomes more complex when the various costs are recorded in different currencies and/or different points in time.

Comparative studies

Industry comparisons are a primary focus of this book; for more than 60 years, researchers in academia and government have been trying to assess the relative performance of construction industries across countries. The initial aim is usually to measure various aspects of industry performance in order to compare the results in one place with those from another and thus to identify shortcomings in one place and then to look for ways to deal with them. If, for example, research in country A suggests that it is cheaper to build in country B, the natural question that follows: why is it cheaper? Is it because inputs such as materials and labour are cheaper, or is it that the way projects are set up and managed in country B leads to greater efficiency in the construction process and thus to reduced costs overall? Even finding a universally acceptable method for arriving at the conclusion that construction in country B is ‘cheaper’ is a major challenge, as assessing relative construction costs is far from an exact science, and there is no generally agreed method for doing it.

At face value, it appears to be a simple enough question that could be easily addressed by, for example, working out what it would cost to build a typical building in each country and then comparing the costs. In reality, it is quite a complex problem which has no simple answer. At the macro level, there are two major complications: one is that even if it were possible to devise a perfect method which was unanimously endorsed as the right way to make such comparisons, it is unlikely, for a number of reasons, that such a method could be successfully implemented. Second, that there is no ‘correct’ answer against which results can be compared, so it is impossible to know whether the method or the outcomes are robust and reliable.

At a detailed level, the problems multiply; some of the difficulties are:

• What is a ‘typical’ building? Even if we select a common type of building, say, a simple open-plan warehouse, local conditions, regulations, conventions and client expectations (among other things) will probably mean that the buildings may be functionally similar and even physically similar but far from identical.
• Is such a ‘typical’ building representative of the whole construction industry in a location, be it a city, region or whole country?
• It is most unlikely that buildings that are sufficiently similar in type and size will be constructed in different locations on similar sites at the same time.

Since 1950, numerous attempts have been made to compare aspects of construction industry performance between countries. These include studies using varying methodologies based on single projects, real (e.g. Lynton 1993) or hypothetical (e.g. Xiao and Proverbs 2002) and multiple projects, real (e.g. Flanagan et al. 1986; Langston and Best 2000) or hypothetical (e.g. Langston and de Valence 1999; DLC 1999). Edkins and Winch (1999) reviewed many of the studies carried out in the latter part of the 20th century and outlined the variety of approaches adopted by various researchers in the search for robust methods for assessing how the UK construction industry was performing.

Some studies were based on functionally similar buildings (e.g. Freeman, 1981) where buildings that served the same purpose, rather than being physically identical, were used; the idea was to ascertain what it would cost to construct a building according to local requirements to satisfy a particular need, such as a single-family house that provides shelter and security for a family with average income. Such a house, however, in southern Italy, for example, is not likely to bear much resemblance to a house fulfilling the same need in Norway and, apart from the design of their houses, would an ‘average-income family’ in the two locations actually be similar in terms of size, income and so on. The potential differences are obvious, but do those differences make the comparison any less valid than pricing an identical house in both locations? Pricing a Nordic house in southern Italy would involve pricing extensive thermal insulation and central heating that would be unlikely inclusions in a Mediterranean house, so such a comparison may have little meaning.

Industry performance

Various stakeholders are interested in assessing the performance of the construction industry in their city, region or country and in comparing that performance to that of comparable industry sectors in other places. In the UK, for example, the Latham and Egan reports have been drivers for change in their construction industry; in Australia, governments (state and national) as well as interested groups such as the Business Council of Australia (BCA) have a keen interest in the efficiency and productivity of the construction industry. In 2012, the BCA published a major report in which it was claimed that Australia was a high-cost, low-productivity place to build infrastructure compared to the US (BCA 2012). The results of this study were reported in the media with a hint of sensationalism (Hepworth 2012; Forrestal and Dodson 2012), and it caught the attention not only of the government but also of various industry bodies such as the Australian Constructors Association. Best (2012) demonstrated that two aspects of the BCA study were flawed – one related to the data used and the other to the method that was used to compare AUD and USD costs. The Australian government subsequently directed the Productivity Commission to explore the broader questions of how public infrastructure is procured and how long lead times and high costs associated with such projects could be reduced (Productivity Commission 2014).

Data issues

Measurement of construction at an industry or sectoral level involves two main elements: data and methods. In this book, both are discussed in the contexts of construction output, prices, performance and productivity. Collecting reliable construction data is always problematic, and it is particularly difficult to observe construction activity, construction employment and construction costs or prices. Construction is carried out in projects; these are diverse in size, type and complexity and are always site specific to some degree.

Data is typically based on partial information and/or estimates. For example, measurement of construction activity should include new build as well as renovation and maintenance as well as do-it-yourself (DIY), informal and cash economy work that is not included in statements of income by those who carry out the work. While new construction of housing and major projects may be well recorded, much of the work in other categories is unrecorded and must be either estimated (a difficult task given the lack of information available) or ignored (a poor option, as a significant proportion of total activity may then be missed). In some developing countries, informal construction may account for anything up to 90% of construction activity (Meikle, 2011), yet quantifying such work with any accuracy is fraught with problems, not the least of which is how to express the quantum of work (usually measured in terms of monetary value) when much of the work is done by householders often assisted by local people on the basis of community spirit and goodwill with no money changing hands for labour inputs and materials sourced directly from the locale (e.g. mud bricks), by barter or second hand.

Other measures of activity that are typical of developed countries, involving concepts such as gross output, value added and contractors’ output, are interpreted differently, and thus data collected in different countries is often not directly comparable, as the data simply may not represent the same thing in different countries. Construction employment is similarly problematic, as it may or may not include casual workers and self-employed people or those carrying out DIY work. In fact, even placing boundaries on what a ‘construction industry’ includes is far from clear; for example, professional services such as project management and design fees may or may not be included. It is for this reason that any statement along the lines of ‘construction represents 10% of GDP’ must be treated with caution unless the parts of the broader industry that are included or excluded are clearly defined. If it is ‘contractors’ output’, it will be a different figure than one that includes fees paid by clients, although in many design and build (D&B) contracts, design costs are included in construction contracts. Rawlinsons (2014) suggest, for example, that in Australia, professional fees may represent somewhere between 6.5% and 17% of project cost depending on the size and type of project.

Price (or cost) data may be out-turn costs (the total price finally paid by the client to ‘purchase’ construction work), input costs (prices paid by contractors for resources that include materials, components, labour and equipment) or tender or contract sum (the amount that the client agrees to pay to the contractor when the contract is let – this will, however, seldom be the same as the eventual out-turn cost). All these values have their attendant difficulties. True out-turn prices are seldom available but are generally different from project estimates and may vary considerably from the original contract sum once all variations, extensions of time and the like are added.

Input prices have a different set of constraints; list prices for materials and equipment hire often conceal major variations as a result of market conditions and the buying power of purchasers. Major contractors may obtain (or major projects may be eligible for) significant bulk discounts and/or loyalty discounts that suppliers offer in the hope of securing repeat business from large customers. Conversely, smaller firms or projects will often pay list price or above for what they buy. Similarly, in times of high demand, suppliers will raise prices and/or demand payment in advance, while in times of low demand, discounts and favourable credit terms will be more easily obtained.

Labour costs may be quoted from basic wage award agreements all the way through to all-in charge-out rates that include all allowances, oncosts and contractor’s margin; the difference may be as much 3 to 400%. For example, according to Cordell (2014), the minimum award rate for a licensed plumber in Queensland, Australia, is AUD21.39/hour, while the same source quotes AUD68.00/hour for a subcontracted plumber. Rawlinsons (2014) suggest a charge-out rate including profit and overheads of AUD73.00 to 84.00/hour. For small domestic jobs, this rate (in April 2014) can approach AUD100.00/hour or more.

Material and labour prices can also vary considerably within countries, particularly physically large countries. The Bureau of Labor Statistics (2014) gives 2013 US hourly wage estimates for construction labourers ranging from USD9.46/hour to USD28.32/hour, with the hourly mean wage for labourers in New York (USD23.23) nearly double that in Texas (USD13.01). Ready-mixed concrete shows smaller but still significant regional price variations: according to RSMeans (2014), one cubic metre of 3000psi (approx. 20MPa) concrete in Washington, DC, costs USD154, which is around 25% more than the cost of the same item in Houston (USD123). The national average price is USD130/m³.

In all of these cases, margins of error or uncertainty can be high, and when datasets are combined, for example, when productivity is measured using data on both output and employment, the problems are compounded. In this book, various authors recognize these issues and, where possible, offer at least partial solutions such as gathering multiple observations of prices, or triangulation or statistical methods.

Method issues

Even when good data is available, the methods used in working with it are not straightforward. Comparisons of price, for example, over time or across countries, require costs to be adjusted using price indices or currency normalizers. Using commercial or money market exchange rates (which economists refer to as ‘nominal exchange rates’) as the single conversion factor for all components in an economy is as inappropriate as using general inflation figures to normalize housing prices or overall construction costs over time.

The idea of using price indices to bring costs from different times to a common base date is familiar to most, but the idea of using currency normalizers rather than commercial exchange rates is not so well understood. As a result, there is one chapter in this book that deals with price indices, but there are a number that address international construction cost comparisons in general and the problem of currency conversion in particular. More specifically, the concept, formulation, production and use of purchasing power parities (PPPs) as an alternative to exchange rates is discussed in detail. The development of PPPs is not in itself an exercise in assessing the performance of construction or any other industry sector; PPPs are simply a neutral way of stating costs recorded in various national currencies in a single currency so that valid comparisons can be made. While costs are typically converted to US dollars, there are other noncurrency options that include ‘construction dollars’ and even hamburgers; these are discussed in later chapters.

It must be said, however, that no matter how good the method used, poor data will produce poor results. Discussions of method, if they are to produce anything that is useful in a practical sense, must include considerations of implementation, particularly in regard to the existence and availability of sound data. Even where data does exist, it may be difficult to obtain due to commercial confidentiality; data on defects and rework, for example, is not information that construction firms are keen to release if it has the potential to damage their reputation for quality. Methods are thus needed that produce at least reasonable results using data that is readily available.

Another point that should be considered is that the act of measurement may change the result. This notion is encapsulated in Goodhart’s Law, which came originally fro...

Table of contents

• Cover
• Title
• Copyright
• Dedication
• Contents
• Acknowledgements
• Preface
• Contributors
• 1. Setting the scene
• 2. Background to purchasing power parity indices
• 3. International construction cost comparisons
• 4. The International Comparison Program and purchasing power parities for construction
• 5. A review of construction cost and price indices in Britain
• 6. Measuring and comparing construction activity internationally
• 7. Internationalization of the construction industry
• 8. Performance measures for construction
• 9. Refining the citiBLOC index
• 10. A review of the theory and measurement techniques of productivity in the construction industry
• 11. Construction productivity and cost estimation using artificial neural networks
• 12. Determining levels of productivity in the construction industry using data envelopment analysis
• 13. Endnote
• Index