Modern Construction Economics

Theory and Application

Gerard de Valence

• Publisher: CRC Press
• Year: 2010
• Print ISBN: 9780415397063
• eBook ISBN: 9781134153688
• Edition: 1
• Topic: Architecture
• Subtopic: Architecture Methods & Materials

Traditional building economics has primarily been concerned with issues around project appraisal and cost management techniques. On the other hand, modern construction economics has a wider focus with stronger links to mainstream economics, reflecting an increased interest in a range of theoretical issues in construction economics, both at the macro and micro level. In Modern Construction Economics: Theory and Application, a variety of approaches are used to present a coherent vision of synthesis between industry economics and project economics.

Topics covered include:

• developing construction economics as idustry economics
• competition and barriers to entry in construction
• innovation in construction
• theory testing in construction management research
• collusion and corruption in the construction sector.

Including contributions from academics in the UK, Sweden, Hong Kong, and Australia, this is a truly global review of a core issue for the construction industry worldwide. The result is a unique book that will push toward the development of a comprehensive theoretical framework of construction economics. This is a must-read for all serious students of construction economics, and all practitioners looking for a deeper understanding of their industry.

1
Theory and construction economics

Gerard de Valence

INTRODUCTION

There has been an ongoing discussion about the future development of construction economics (CE) and the role theory should take in that development. One aspect of that discussion is the lack of agreement on a definition for CE. Broadly, there are three views of CE. The first follows Hillebrandt and her definition of CE as the application of ‘economics to the study of the construction firm, the construction process and the construction industry’ (2000: 3). Raftery (1991) and Cooke (1996) also cite this as their approach. A second view is based on the classic definition of economics as ‘the study of the allocation of scarce resources’ by Robbins (1927: 2). Ofori (1990), Gruneberg (1997) and Myers (2004) use this as their starting point.

The third approach is somewhat more eclectic, but could be described as economics with a focus on building and construction. Runeson (2000) does not define building economics (the title of his book) but explains at length the characteristics of economics as a science and the methodological implications of that, a theme investigated further in his chapter in this book. The books by Gruneberg and Ive (2000, and Ive and Gruneberg 2000) also do not neatly fall into one of the two categories above, and offer an alternative approach. Many of the other books on the economics of construction (e.g. Briscoe 1988; Ball 1988, 2006; Finkel 1997) or the economics of the built environment (Warren 1993) do not define CE at all. Although this is a small sample of the field it is representative, and shows why Ofori (1994) could confidently claim then that no definition had been accepted for CE, a situation that still exists today.

Perhaps there is no definitive answer to the ‘What is CE?’ question, or perhaps the answer depends on the reason for asking the question in the first place. Reflecting the different views of CE there are two approaches to the debate over the future development of CE. The origins of this debate can be traced back to Bon (1989), and has been taken up by Ofori (1994), Myers (2003) and de Valence (2006). Comments by Bon (2001) and Bröchner (2002) put forward the view (in different ways) that CE has not established itself as a distinct discipline. A recent contribution by Ive and Chang (2007) also considers this issue. In the discussion here these six papers are divided, with the contributions of Bon, Ofori and Myers seen as largely concerned with the domain of CE, while those from Bröchner, de Valence, and Ive and Chang more concerned with the relationship between economics and CE.

An aspect of this debate is the gap between the practice of CE, by quantity surveyors, cost consultants and consulting economists who do life-cycle costing, investment appraisal and cost–benefit analyses, and CE research done mainly by academics. It would be fair to say that the debate over future development of CE and its theoretical foundations is not a major concern for practitioners. But is it really a concern for CE academics? If it is, what is being done about it, and if not why not?

THE DOMAIN OF CONSTRUCTION ECONOMICS

The proposition that building economics is not established as an academic discipline was first made in Bon’s Building as an Economic Process: An introduction to building economics. In the Preface of that book he stated: ‘my main purpose is to provide the foundations of a theoretical framework that will inform further development of building economics’, and this will be ‘a first step toward a consistent framework for an explanation of economising behaviour in the building arena’ (xiii). The five chapters in the book covered building economics, capital theory, the building process, business and building cycles and suggestions on future research. Further, the ‘objective of this book is to assemble in one place those concepts that may contribute to the development of building economics as a distinct discipline’ (Bon 1989: 25).

In Bon’s note on ‘The future of building economics’ the argument from the 1989 book was restated, the future being ‘in fields like corporate real estate and facilities management’ (Bon 2001: 256). While the future has turned out to be rather more complex than that statement implies, the significance of topics connected to facilities management such as building use and reuse decisions has increased greatly over the last decade, and this has been accompanied by a growth in importance of building life cycles. As Bon put it ‘buildings will be designed and constructed with the entire building process, that is, the whole building life, in mind’ (2001: 256), again reprising his ideas from 1989. This view was echoed by Myers (2003) in his conclusion that the sustainability agenda was central to the future of building economics.

Next Ofori (1994) agued that construction economics has not yet developed to the point where it could be recognised as a distinct part of general economics. The main reason for this was the lack of consensus on the ‘main concerns and contents’ and a lack of a coherent theory (1994: 304). Ofori also argued for the term ‘construction economics’ as preferable to ‘building economics’ because of its wider scope (1994: 296), a distinction dismissed by Runeson in this book.

The contribution to the debate from Myers (2003) came in a paper that followed on from Ofori (1994) and Bon (2001). In his analysis of the syllabus content of quantity surveying, construction management and civil engineering courses at 10 UK universities he followed Ofori’s division of the discipline into two types of construction economics: construction industry economics, concerned with the application of economic theory; and construction project economics, concerned with cost planing and control, lifecycle costing and investment analysis. Myers found this distinction reflected in the courses offered, with the emphasis typically on one or the other of these, and thus ‘construction economics continues to lack any coherent conceptual structure’ (2003: 103). Myers went on to argue the future of CE will be based on sustainability, and this will provide both a common purpose and conceptual approach, thus solving the two major problems identified by Bon and Ofori in their papers.

ECONOMICS AND CONSTRUCTION ECONOMICS

The other three contributions to the debate are less concerned with the topics that CE could or should include in its domain than with the nature of the relationship between economics and CE, and the direction of the flow of ideas.

Bröchner’s (2002) paper was a Keynote at a CIB W55 Symposium and a progenitor of his chapter in this book. He asked where building economics should be heading, and answered ‘certain types of economic theory are useful for not only providing ideas for restructuring commercial relationships in the sector, but also for predicting the relative sustainability of new patterns’ (2002: 1). The issue Bröchner addresses is whether building economics has a role to play in reforming the industry and suggests that proposals to change the way the industry works have come from sociology and psychology. Further, ‘building economists appear to have been timid’ in their application of economic theory:

is the application of economic theory a small niche with diminishing relevance to a larger community of researchers and industry practitioners? On the other hand, how far can construction management research proceed if it is based exclusively on case studies, interviews and e-mail questionnaires, with few strong attempts at theory building, somewhat lax in assumptions that are clearly spelled out and where the reasoning is weak on testable predictions?

(Bröchner 2002: 2)

Bröchner concludes that a closer engagement with economic theories of industrial organization (also called industry economics) will provide public and private policymakers with a better understanding of incentives for the efficient use of scarce resources in the construction and management of facilities (2002: 7). The chapter in this book on barriers to entry is an example of an idea from industrial organisation applied to the construction industry, as is Brockmann’s chapter on collusion.

De Valence (2006) suggested the arguments and propositions found in the debate over CE provided four distinct paths to the future. Two paths were the based on the distinction between construction industry economics and construction project economics, with the former drawing on economics for its ideas and the latter including building economics topics like cost management and planning, investment appraisal and cost–benefit analyses. These cover what has typically been the set of topics most commonly found in the field. The third path linked building economics to facilities management as Bon advocated, and this would include life-cycle analysis and the sustainability agenda proposed by Myers. This could be seen as a transfer of topics like life-cycle costing in construction project economics into a new category of ‘facility sustainability’ focused on the application of environmental economics to the built environment. The fourth path is ‘closer engagement with economic theories of industrial organization’ that Bröchner argued for in 2002, an argument developed further in his chapter here. In an analysis of topics found in fifteen CE texts de Valence (2006: 662) allocated a significant number to the industry economics/industrial organisation area. This lends support to Bröchner’s argument about the potential and importance of topics that come from industry economics as a theoretical base for CE. De Valence went on to suggest:

One of the other interesting things about the range of topics covered in these books is the way that many of them are not found in the CE and CM journals. Examples of this are Hillebrandt’s stages of procurement and market power typology, market definition as in Gruneberg and Ive, the industry as perfectly competitive (Runeson, Cooke) or not (Ive and Gruneberg), and whether the output of the industry is a product (Ofori) or a service (Runeson, Hillebrandt). These would seem to be debates worth pursuing, because the discussion would contribute to our understanding of the nature of the industry, the activities undertaken, relationships between players and theoretical foundations for CE.

(de Valence 2006: 663)

De Valence then suggested ‘an alternative fifth’ path based on emerging economic theories and approaches that have changed or challenged widely held views on macroeconomic issues such as capital theory, the business cycle and interest rates, and provide alternatives to the neoclassical synthesis that worked so well in macroeconomics for several decades. Examples of new macroeconomic theories include endogenous growth theory, with its emphasis on capital investment and innovation, real business-cycle theory and the effect of supply side shocks, evolutionary economics with its focus on capital, productivity and the dynamics of growth, and new Keynesian economics which emphasises the roles of time and capital. All...

Table of contents

• Contents
• Figures
• Tables
• Contributors
• Preface
• 1 Theory and construction economics
• 2 Developing construction economics as industry economics
• 3 Collusion and corruption in the construction sector
• 4 Competing in construction auctions
• 5 On theory of production in economics and production management
• 6 Competition and barriers to entry in the construction industry
• 7 Comparing construction costs between countries
• 8 Innovation in construction
• 9 Theory testing in building economics research
• 10 Market types and construction markets
• 11 The methodology of building economics research
• Index