top of page
Construction Workers

Construction Industry Economics and Policy

A BLOG ABOUT THE STRUCTURE AND PERFORMANCE OF THE BUILDING AND CONSTRUCTION INDUSTRY

Updated: 2 days ago



I was once attacked by a colleague for, as he put it, ‘not considering the great mass of people employed in construction’. We were working for a government inquiry into collusive tendering and discussing recommendations to improve productivity and efficiency in the final report. At the time there were significant changes affecting the Australian industry that had far more impact than the legislative and regulatory reforms the inquiry led to. The industrial relations system was moving from a centralised award based one to a more decentralised system with enterprise bargaining and site agreements. International contractors were entering the market and the larger engineering and architecture practices consolidating. As the industry began to recover from a speculative office building bubble and the economy rebounded from a deep recession, construction employment increased and continued to grow for the next few decades. Construction as used here refers to all the firms and organizations involved in design, construction, repair and maintenance of the built environment.


Where these longer run trends were going was not obvious at the time. There have been significant changes in the range of activities and types of firms involved in construction of the built environment over the last few decades. Two trends underpinning those changes were the increasing use of multi-disciplinary project teams as the boundaries between professional disciplines became less distinct, and the inhouse versus outsourced decision about provision more common. Facilities management is an example, an activity that used to be done internally but is now often outsourced, sometimes but not always to construction contractors. Consultants bid for work as contractors, and contractors do consultancy and project management. Urban planning was once primarily associated with design, but is now linked to real estate and development. The process of structural change in industry occurs as technology, institutional and firm capabilities develop and change over decades.


Figure 1. Four industrial revolutions


When considering the relationship between construction of the built environment and technological change the past is really the only guide available, so the starting point for this discussion is the first industrial revolution in England at the beginning of the nineteenth century when modern construction and its distinctive culture began to form, followed by the twentieth century’s attempts to industrialise construction. This history is important because, after more than 200 years of development, construction of the built environment happens today within an established system of production based on a complex framework of rules, regulations, institutions, traditions and habits that have evolved over this long period of time.


But how useful is history and how can it be used? Are there appropriate historical examples or cases to study to see if there are lessons relevant to the present? The answers depend to a large extent on context, because a key characteristic of the history of technology is the importance of institutions and the political and social context of economic outcomes. Also, understanding how policies were developed in the past and how effective they were requires understanding the changing context of policy implementation. However, as economist Paul Samuelson pointed out ‘history doesn't tell its own story and ‘conjectures based on theory and testing against data’ are needed to uncover it. Drawing the right lessons from history is a nuanced exercise.


Over time industries and products evolve and develop as their underlying knowledge base and technological capabilities increase. The starting point for a cycle of development is typically a major new invention, something that is significant enough to lead to fundamental changes in demand (the function, type and number of buildings), design (the opportunities new materials offer), or delivery (through project management). Major inventions give a ‘technological shock’ to an existing system of production, which leads to a transition period where incumbent firms have to adjust to the new business environment and new entrants appear to take advantage of the new technology. Economist Joseph Schumpeter called this process creative destruction, and it leads to the restructuring and eventually consolidation of industries. That is what happened to construction and related suppliers of professional services, materials and components after the first industrial revolution.


The drivers of development for industries in the twenty-first century are emerging technologies such as augmented reality, nanotechnology, machine intelligence, digital fabrication, robotics, automation, exoskeletons and possibly human augmentation. Collectively, these digital technologies are described as a fourth industrial revolution, and their capabilities can be expected to significantly improve as new applications and programs emerge with the development of intelligent machines trained in specific tasks. Innovation and technological change is pushing against what are now long-established customs and practices of the industries in the diverse value chain that designs and delivers the projects that become the built environment.


How technological change affects these industries differs from more widely studied industries like computers, automobiles or aerospace because of the number and diversity of firms involved in designing, constructing and managing the built environment. With the range of separate industries these firms come from, construction of the built environment is the output of a broad industrial sector made up of over a dozen individual industries. Not an ‘industry’ narrowly defined, but a broad industrial sector that is organised into a system of production with distinctive characteristics. A second difference is the age of these industries, many of which are mature industries in late stages of their life cycle. These differences create a different context for questions about industry, innovation and technological change, about how firms compete and how the system of production is organised as fourth industrial revolution technologies like digital twins and drones spread through construction and the pace of digitization increases.


As well as the contractors, subcontractors and suppliers for new builds, there are also many firms and people mainly engaged in the alteration, repair and maintenance of the built environment. The broad base of small firms is a distinctive feature of construction, and these family-owned firms engaged in repair and maintenance work will largely continue to use the materials and processes they are familiar with. Old technologies can survive long after the innovations that eventually replace them arrived, such as the telegraph, fax machine and vinyl records with telephones, email and CDs. Stone, tile, brick and wood have been widely used materials for millennia, and industrialized materials like corrugated iron and concrete are ubiquitous. For maintaining and repairing the existing stock of buildings and structures, many of the skills, technologies and materials found today will continue to be used far into the future. That does not mean firms mainly involved in repair and maintenance will not be affected in some way by the fourth industrial revolution.


Figure 2. Functions of the built environment


Construction of the built environment has characteristic organizational and institutional features because it is project-based with complex professional and contractual relationships. How firms utilise technology and develop technological capabilities differentiates them within this location-based system of production. Emerging technologies in design, fabrication and control have the potential to transform construction over the next few decades, possibly less, and the book suggests firms will follow low, medium or high-tech technological trajectories, determined by their investment in the emerging technologies of the fourth industrial revolution.


A broad view of what future construction might look like is based on successful solutions being found for the many institutional and technical problems involved in transferring fourth industrial revolution technologies to construction. Without downplaying the difficulty of those problems, similar challenges have been met in the past, but those solutions led in turn to a reorganization of the system of production.


There are very many possible futures that could unfold over the next few decades as technologies like artificial intelligence (AI), automation and robotics develop. However, the key technology underpinning these further developments is intelligent machines operating in a connected but parallel digital world with varying degrees of autonomy. These are machines that have been trained to use data in specific but limited ways, turning data into information to interact with each other and work with humans. The tools, techniques and data sets needed for machine learning are becoming more accessible for experiment and model building, and new products like generative design for buildings plans, drone monitoring of onsite work and 3D concrete printers are available.


Intelligent machines are moving from controlled environments, like car manufacturing or social media, to unpredictable environments, like driving a truck. In many cases, like remote trucks and trains on mining sites, the operations are run as a partnership between humans and machines. There are also autonomous machines like autopilots in aircraft and the Mars rovers. As well as rapid development of machine intelligence, technological change in the form of new materials, new production processes and organizational systems is also happening. Sensors and scanners are widely used, 3D concrete printing is no longer experimental, cloud-based digital twins are available as a service, and online platforms coordinate design, manufacture and delivery of building components using digital twins.


A period of restructuring of construction occurred in the second half of the 1800s when the new industrial materials of glass, steel and reinforced concrete arrived, bringing with them new business models, new entrants and an expanded range of possibilities. The development of modern construction was not, however, a smooth upward path of progress and betterment. It went in fits and starts as new inventions and innovations arrived, slowly then quickly, often against critics of the modern system of production and workers, fearing technological unemployment and lack of government support during a time of technological transition, who resisted new technology and sometimes sabotaged equipment. The issue in the past, like today, was in fact not the availability of jobs but the quality of skills during the diffusion of new technologies through industry.


The only previous comparable period of disruptive technological change in construction of the built environment is the second half of the nineteenth century. Between 1850 and 1900 construction saw the rise of large, international contractors, who reorganized project management and delivery around steam powered machinery and equipment. In particular, the disruptive new technologies of steel, glass and concrete, which came together in the last decades of the century, led to fundamental changes in both processes and products. If that is any guide, we can expect technological changes to operate today over the same three areas of industrialization of production, mechanization of work, and organization of projects that they did then. And today, just as in 1820 when no-one knew how different construction would be and what industry would look like in 1900, we can’t see construction in 2100. That is a long way out, and we can only guess at the level of future technology. We can, however, use what we already know from both history and the present to form a view of what is possible over the next few decades based on what is currently understood to be technologically feasible.


It should be clear that the role of fourth industrial revolution technologies will be to augment human labour in construction of the built environment, not replace it. Generative design software does not replace architects or engineers. Optimization of logistics or maintenance by AI does not replace mechanics. Onsite construction is a project-based activity using standardized components to deliver a specific building or structure in a specific location. The nature of a construction site means automated machinery and equipment will have to be constantly monitored and managed by people, with many of their current skills still relevant but applied in a different way. Nevertheless, in the various forms that building information models, digital twins, AI, 3D printing, digital fabrication and procurement platforms take on their way to the construction site, they will become central to many of the tasks and activities involved. Education and training pathways and industry policies with incentives for labour-friendly technology will be needed.


Figure 3. Construction of the built environment


Because construction involves so many firms and people the technology driven changes discussed here will have significant and profound economic and social consequences. This would be a good opportunity for government and industry to work together to develop policies and roadmaps for those firms, and to support ‘the great mass of people’ employed in construction of the built environment who will be affected by them. The future is not determined, although technological change and creative destruction continue to reshape and restructure industry and the economy, decisions made today create the future.



From the Introduction to my new book available from Amazon.on technological change and construction:







18 views0 comments

Thinking Like an Economist: How Efficiency Replaced Equality in U.S. Public Policy, by Elizabeth Popp Berman (Princeton, 2022).


The book details how what she calls “the economic style of reasoning,” has become the dominant way of thinking about public policy in the United States. This is usually (almost universally) seen as a result of the movement led by Hayek and the Mont Pelerin Society that became known as neo-liberalism. Instead, Berman argues, “the most important advocates for the economic style in governance consistently came from the center-left.”


In the 1960s two intellectual communities within economics played the crucial role. One was a systems analysis group from RAND Corp. at the beginning of the Kennedy administration. The other was a network of university economists specializing in industrial organization, first at Harvard University and later at the University of Chicago.


These economists became key advisors and formulators of policy, introducing cost-benefit analysis and other tools for assessing government policies and raising efficiency above other policy goals. As macroeconomics descended into doctrinal disputes about fiscal and monetary policy in the 1970s, US conservatives turned this into a deregulatory agenda. At the same time institutional economists lost their standing in university departments as the mathematical turn after Samuelson marginalised their work.


The book records (in great detail) the development of the economic style, how many of its leading advocates came from the Democratic party and the left, and how the right strategically used these ideas to promote policies that turned social, moral and ethical issues into ones about markets, allocation and tax. Highly recommended.



10 views0 comments

Industries are groups of firms with common characteristics in products, services, production processes and logistics, subdivided by the SIC into a four-level structure. The highest level is alphabetically coded divisions such as Agriculture, forestry and fishing (A), Manufacturing (C) and Information and communication (J). The classification is then organized into two-digit subdivisions, three-digit groups, and four-digit classes. SIC codes are therefore two, three and four-digit numbers representing industries, defined as firms with shared characteristics.


The SIC definition of the construction industry captures the onsite activities of contractors and subcontractors, and this data on building and construction work is taken to represent the industry. However, onsite work brings together suppliers of services, materials, machinery and equipment, products, components and other inputs required to deliver the buildings and structures that make up the built environment. When enough firms share sufficient characteristics they are often described as an industry cluster or sector.


The data used here is provided in the Australian Bureau of Statistics annual publication Australian Industry (ABS 8155), produced using a combination of data from the annual Economic Activity Survey and Business Activity Statement data provided by the Australian Taxation Office. The data includes all operating business entities and Government owned or controlled Public Non-Financial Corporations. Australian Industry excludes the finance industry and public sectors, but includes non-profits in industries like health and education and government businesses providing water, sewerage and drainage services.[1] The industries included account for around two-thirds of GDP and the data is presented at varying levels for industry divisions, subdivisions and classes. The most recent issue is for 2020-21.


There is data at the two digit subdivision level for the Construction services and Property operators and real estate services industries. For the subdivisions in Professional, scientific and technical services and Building cleaning, pest control and other services the data includes contributions from other classes outside the built environment. Therefore, for these industries the two digit subdivision estimates have to be weighted using the four digit class data for the built environment component. These proportions are released as supplementary tables and provide data at the class level. Professional, scientific and technical services were included in 2015-16, and in 2016-17 this data was provided for two divisions: Rental, hiring and real estate services, with subdivisions Rental and hiring services (except real estate), and Property operators and real estate services; and Administrative and support services, with subdivisions Administrative services and Building cleaning, pest control and other support services.


The data is not complete because some industries cannot be separated into the relevant classes from Australian Industry. For example, rental of heavy machinery and scaffolding (class 6631) is in subdivision 66 but the data is not available to separate it from the other classes. Also, services such as marketing, legal, insurance and financial are important inputs, but again are not identifiable. Government spending on infrastructure and investment in departments like health and education is included through supply industries, although any maintenance and work done internally will generally not be included. That also applies in industries like retailing and transport where some unknown proportion of work is done in-house.


There is also leakage around the boundaries of industry statistics: some glass is used in mirrors, some in car windscreens; textiles are used in buildings; architects design furniture; engineers repair machines as well as structures, and so on. Because Australian Industry uses tax and business register data, it is the self-classification of firms to SIC industry classes that fundamentally determines the structure and scope of that data. Needless to say, such classifications are not perfect, particularly in regard to large multi-unit or multi-divisional organisations. The data here includes sixteen industries that together form one of the largest and most important industrial sectors in the economy.


Table 1. Australian Built Environment Industries

Supply industries Demand industries Maintenance industries

Quarrying Residential property Water, sewerage and drainage

Building construction Non-residential property Waste collection, and disposal

Heavy and civil engineering Real estate services Building and industrial cleaning

Construction services Building pest control services

Architectural services Gardening services

Surveying and mapping services

Engineering design and consulting

Manufacturing industries


Figure 1.


Table 2. Economic Contribution of Australian Built Environment Industries 2020-21

Employment IVA $billion

Total Australian Built Environment Industries 2,228,000 282

Total Australia Employment and GDP 12,369,000 2,069,178

Built Environment share of Australia total 16.9% 13.6%


Sources: ABS 8155, ABS 5206, ABS 6202.


Figure 2.


Figure 3.


Figure 4.



Figure 5.


The IVA of the sixteen built environment industries contributed 13.6 percent to Australian GDP in 2018-19, within a long-run range between 13 and 15 percent of GDP since 2006-07. The sixteen built environment industries share of total employment was 16.9 percent, and its long-run range was between 16.5 and 17.5 percent of total employment.


Figure 6.


Figure 7.




[1] Excluded are ANZSIC Subdivisions 62 Finance, 63 Insurance and superannuation funds, 64 Auxiliary finance and insurance services, 75 Public administration, and 76 Defence.

14 views0 comments

About the Blog

This blog is interested in the organisation of the building and construction industry and its role in the creation and maintenance of the built environment.

Like other industries, it is being reshaped by rapid and widespread advances in materials, technology and capability. How those advances might affect an industry changes slowly over time is, I think, an interesting question.The blog collects data and discusses these trends and their effect on industry structure and performance.

 

The economic perspective focuses on firms and industries rather than individual projects.

Previous Posts

Gerard 2.jpg

Gerard de Valence

I studied politics, philosophy and economics at Sydney University and worked in the private sector for a decade before becoming an academic in the School of the Built Environment at the University of Technology Sydney and UCL’s Bartlett School of Construction and Project Management in London. The ABOUT page has my bio.