Construction Economics

A New Approach

Danny Myers

• Publisher: Routledge
• Year: 2022
• eBook ISBN: 9781000593839
• Edition: 5
• Topic: Business
• Subtopic: Architecture General
• Index: Business

Construction Economics provides students with the principles underlying the relationship between economic theory and the construction industry. Its new approach specifically examines the problems of securing sustainable construction and this fifth edition broadens the message to address the immediacy of the problems relating to the carbon-based world that we have constructed.

Embracing the whole process of the construction life cycle, the new edition discusses the economic impact of the Covid pandemic on the industry and the broader implications of the promise to build back better. It also includes new coverage of the opportunities offered by technology, the establishment of higher standards to achieve greater energy efficiency and wellbeing, the adoption of the principles of a circular economy, the retrofit of existing buildings and the recycling of materials. New sections also highlight the methodology of the subject to identify the boundaries of construction economics and clarify what to expect and what can be achieved.

As with previous editions, it retains a tried and tested format including:

• a clear and user-friendly style
• use of colour for emphasis
• regular summaries of key points
• a glossary of key terms
• extensive use of tables, figures and data
• readings from Construction Management and Economics
• tutorial questions to review each section
• research guidance
• reviews of useful websites.

This invaluable textbook is essential reading across a wide range of disciplines. It provides the economic context to the relevance of sustainability and debates about climate change, highlighting the vital contributions that surveyors, contractors, project managers, engineers, architects and developers can offer to take it forward.

1 An Introduction to the Basic Concepts

This book is written for students from many backgrounds: architecture, surveying, civil engineering, mechanical engineering, structural engineering, construction, project or estate management, property development, conservation and, even, economics. Economics students may find it possible to skip over some of the standard analysis, but should be forewarned that in many ways construction is quite distinct from other sectors of the economy. An important aim of this text is to draw out these distinctions and clarify the unique nature of the industry. In this first chapter we begin to outline the main characteristics of firms involved in construction markets, introducing the complexity of the construction process and diversity of activities. As the chapter develops you will sense that there are a number of possible ways to describe the construction industry. Table 1.1 identifies a range of activities that can be included in a broad definition of the industry. By contrast, Table 1.2 (see page 11) divides the construction process into a number of professional stages and Table 1.3 (see page 19) outlines a simple classification system that narrowly defines the industry as firms that just construct and maintain various types of buildings and infrastructure.

Table 1.1 The construction industry – broadly defined

The key actors include:

✓ Suppliers of basic materials, such as sand, cement, aggregate and bricks

✓ Manufacturers of site equipment, such as cranes and bulldozers

✓ Manufacturers of components, such as windows, doors, pipes and radiators

✓ Site operatives who bring together components and materials

✓ Project managers and surveyors who coordinate the overall assembly

✓ Architects and engineers who design new buildings and infrastructure

✓ Facility managers who manage and maintain property

✓ Property developers who initiate new projects

✓ Providers of complementary services, such as demolition, disposal and clean-up

Table 1.2 Parties traditionally supplying a construction project

Parties involved in supply	Responsibilities
Architects and Designers	Provide specialist advice concerning structural, electrical, mechanical and landscape details. Identify key specifications.
Project Manager	Manages project in detail. Liaises between the client and the construction team.
Cost Consultant	Prepares bills of quantities, cost plans, etc.
Main Contractor	Manages work on site.
Subcontractors	Supply specialist skills.
Suppliers	Provide building materials and components.

Table 1.3 The construction industry – narrowly defined

Areas of construction	Examples of type of work
Infrastructure	Water and sewerage Energy Gas and electricity Roads Airports, harbours, railways
Housing	Public sector (e.g. housing associations) Private sector (e.g. new estates)
Public non-residential	Schools, colleges, universities Health facilities Sports and leisure facilities Police and fire stations
Private industrial	Factories Warehouses Oil refineries
Private commercial	PFI (and similar public private partnerships) Schools/hospitals (where privately funded) Restaurants, hotels, bars Retail (outlets and shops) Offices
Repair and maintenance	Extensions and conversions Renovations and refurbishment Planned maintenance

The aim of the text is to demonstrate that underlying the construction process, from conception to demolition, is a lot of useful economics. As suggested in the introduction, economics should not be regarded as solely related to the appraisal of costs. The subject matter is far broader, and this text introduces a number of branches of economic theory. These have been selected to provide fresh insights into the performance of construction firms and a greater understanding of the need for a more holistic approach if the industry is to contribute to an efficient and sustainable economy in the future. These economic ideas should inform the work of all professionals concerned with the construction and maintenance of buildings and infrastructure – in the that think.

The next section explains some of the key concepts used by economists. Further clarification is provided in the glossary at the back of the book, where all the economic terms highlighted in the text as well as other concepts and ideas relevant to construction economics are defined.

INTRODUCING CONSTRUCTION ECONOMICS

Construction economics – like pure economics, its mainstream equivalent – is concerned with the allocation of scarce resources. This is far more complex than it at first appears. Many of the world’s resources (factors of production such as land, labour, capital and enterprise) are finite, yet people have infinite wants. We are, therefore, faced with a two-pronged problem: at any point in time there is a fixed stock of resources, set against many wants. This problem is formally referred to as scarcity. In an attempt to reconcile this problem, economists argue that people must make careful choices – choices about what is made, how it is made and for whom it is made; or in terms of construction, choices about what investments are made, how these are constructed and on whose behalf. Indeed, at its very simplest level, economics is ‘the science of choice’.

When a choice is made, therefore, some other thing that is also desired has to be forgone. In other words, in a world of scarcity, for every want that is satisfied, some other want, or wants, remain unsatisfied. Choosing one thing inevitably requires giving up something else. An opportunity has been missed or forgone. To highlight this dilemma, economists refer to the concept of opportunity cost. One definition of opportunity cost is:

the value of the alternative forgone by choosing a particular activity.

Once you have grasped this basic economic concept, you will begin to understand how economists think – how they think about children allocating their time between different games; governments determining what their budgets will be spent on; and construction firms deciding which projects to proceed with. In short, opportunity costs enable relative values to be placed on all employed resources.

This way of thinking emphasises that whenever an economic decision is made there is a trade-off between the use of one resource for one or more alternative uses. From an economic viewpoint the value of a trade-off is the ‘real cost’ – or opportunity cost – of the decision. This can be demonstrated by examining the opportunity cost of reading this book. Let us assume that you have a maximum of four hours each week to spend studying just two topics – construction economics and construction technology. The more you study construction economics, the higher will be your expected grade; the more you study construction technology, the higher will be your expected grade in that subject. There is a trade-off between spending one more hour reading this book and spending that hour studying technology. In this example there is fixed trade-off ratio. In practice, however, some people are better suited to some subjects than others and the same thing can be applied to resources. As a general rule, therefore, resources are rarely equally adaptable to alternative projects.

In construction, or any other economic sector, it is rare to experience a constant opportunity-cost ratio, in which each unit of production can be directly adapted to an alternative use. It is far more usual in business trade-off decisions to see each additional unit of production cost more in forgone alternatives than the previously produced unit. This rule is formally referred to as the law of increasing opportunity costs. This can be illustrated with the ‘guns or butter’ argument – this states that, at any point in time, a nation can have either more military goods (guns) or civilian goods (butter) but not in equal proportions. For example, consider the hypothetical position in which all resources in the first instance are devoted to making civilian goods, and the production of military goods is zero. If we begin production of military goods, at first production will increase relatively quickly, as we might find some engineers who could easily produce military goods and their productivity might be roughly the same in either sector. Eventually, however, as we run out of talent, it may become necessary to transfer manual agricultural labour used to harvesting potatoes to produce military goods – and their talents will be relatively ill-suited to these new tasks. We may find it necessary to use fifty manual labourers to obtain the same increment in military goods output that we achieved when we hired one sophisticated engineer for the first units of military goods. Thus the opportunity cost of an additional unit of military goods will be higher when we use resources that are inappropriate to the task. By using poorly suited resources, the cost increases as we attempt to produce more and more military goods and fewer and fewer civilian goods.

The law of increasing opportunity costs is easier to explain using a production possibility curve. Using these curves, it is possible to show the maximum amount of output that can be produced from a fixed amount of resources. In Figure 1.1 (see page 4) we show a hypothetical trade-off between units of military goods and civilian goods produced per year. If no civilian goods are produced, all resources would be used in the production of military goods and, at the other extreme, if no military goods are produced, all resources would be used to produce civilian goods. Points A and F in Figure 1.1 represent these two extreme positions. Points B, C, D and E represent various other combinations that are possible. If these points are connected with a smooth curve, society’s production possibility curve is obtained, and it demonstrates the trade-off between the production of military and civilian goods. These trade-offs occur on the production possibility curve. The curve is bowed outwards to reflect the law of increasing opportunity cost. If the trade-off is equal, unit for unit, the curve would not bow out, it would simply be a straight line. Other interesting observations arising from the production possibility curve are shown by points G and H. Point G lies outside the production possibility curve and is unattainable at the present point in time, but it does represent a target for the future. Point H, on the other hand, lies inside the production possibility curve and is, therefore, achievable, but it represents an inefficient use of available resources.

Figure 1.1 The trade-off between military goods and civilian goods

Points A to F represent the various combinations of military and civilian goods that can be achieved. Connecting the points with a smooth line creates the production possibility curve. Point G lies outside the production possibility curve and is unattainable at the present time; point H represents an inefficient use of resources at the present time.

There are a number of assumptions ...

Table of contents

• Cover Page
• Half Title Page
• Title Page
• Copyright Page
• Table of Contents
• Introduction to the Fifth Edition
• Chapter 1: An Introduction to the Basic Concepts
• Part A Effective Use of Resources
• Part B Protection and Enhancement of the Environment
• Part C Economic Growth that Meets the Needs of Everyone
• Glossary
• References
• Index