Construction Workers

Construction Industry Economics and Policy


Grattan Institute Transport Infrastructure Report

The Grattan Institute, a Melbourne based think tank for public policy, released an important report into procurement of Australian transport infrastructure projects. Their Megabucks for Megaprojects report has four chapters and makes 12 recommendations. The chapters contain a lot of carefully compiled and useful information, while the recommendations are all worthy and, despite their careful phrasing, make a strong case for greater client involvement in the design, documentation and management of large public sector projects.

Chapter 3 of the report is ‘Competition is fundamental’, addressing the issue of the dominance of tier one contractors. The chapter collects data on projects and contractors that is not readily available, with the sources and methodology detailed in the appendices. Their key point is the increase in size of projects since 2014, as shown in Figure 3.3 below.

For the last few years the quarterly value of work done on these large transport projects has been over $5 billion. In 2020 Australian governments spent a record $120 billion on road and rail transport projects.

The argument is that it is increasingly difficult for mid-tier contractors to win work on these very large projects, of the 11 projects above $3 billion 8 were ‘contracts involving multiple tier one firms’. These firms are ‘few and well-known’ in Australia and their Figure 3.10 shows how few, and how they consolidated their position through M&A over the last couple of decades.

The two sources of potential competition for the three tier one contractors are domestic rivals that might scale up sufficiently or new international entrants to the Australian market. In chapter 4 the report argues strongly for breaking up large contracts to allow greater participation from domestic firms, Recommendation 10 is: State governments should develop and use a systematic approach to determining an optimal bundling of work packages for large projects, including when to disaggregate bundles that include both complex and straightforward activities. While not a new idea it is still important because public clients do not generally do this, and often do not have the resources required to manage multiple contracts.

That leaves international entrants, which the report argues have been playing an important role since 2005: ‘International entrants add to local competition, and it’s very helpful to governments if there are a variety of market players willing and able to take on work. In particular, when tier one firms form a joint venture to bid on a large contract, the only source of genuine competition may be from international firms’. Their Figure 3.5 shows the distribution of contracts between new international entrants and firms that were already here in 2006. Of those firms, Bouygues won 4 contracts, Lang O’Rourke and Acciona 5 each.

There are barriers to entry when bidding for these contracts, on top of the high bid costs. These are the lack of transparency in the weighting given to selection criteria and the emphasis on local experience. The report’s Recommendation 8: In selecting a successful bidder, governments should not weight local experience any more heavily than is justified to provide infrastructure at the lowest long-term cost. Governments should publish weightings of the criteria used to select the winning bid for a contract. The Grattan Institute is strongly opposed to ‘market-led proposals’ from contractors, and strongly in favour of open tendering. The state with the highest transparency rating is NSW, also the state with the most contracts with new international entrants.

The report collects data on 51 projects over $1 billion in Australia since 2006. Their dataset of transport infrastructure projects includes 177 contracts worth more than $180 billion (in December 2020 dollars). That data makes this an important contribution to the debate about construction industry policy in Australia, to the limited extent that there is such a debate. A couple of decades ago this data would have been published by the Commonwealth, by the Department of Industry or similar organization, and incorporated into the procurement guides being developed by the Australian Procurement and Construction Council and related State agencies. The report concludes “these guidelines leave a great deal of room for subjectivity in the choice of contract type. Although some of the state guidelines and decision-support documents are quite detailed, none go so far as to prescribe a rigorous and systematic methodology for procurement strategy selection.”

This raises the awkward question of who the report is addressing. The fundamental problem is the politicization of the project selection process not the cost of delivery, Australian construction is not expensive by international standards. The recommendations address the problem obliquely by highlighting improvements in procedures and processes, all of which have merit, but not considering alternatives such as the role an independent authority could play or national coordination of procurement and other regulatory systems. In this it was something of a missed opportunity

State and Federal budgets have billions in unallocated funds for projects at all levels (community sports grants, local and regional infrastructure) and for major projects the Commonwealth has Snowy Hydro, the NAIF, the Murray-Darling Basin Plan etc etc. These projects, large and small, shovel money out the door with little or no accountability and there is no evidence that politicians are interested in change at this time.

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Output and Income for Australian construction firms

Australian industry data is provided in the Australian Bureau of Statistics annual publication Australian Industry (ABS 8155), produced using a combination of the annual Economic Activity Survey and Business Activity Statement data provided by businesses to 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 sector, but includes non-profits in industries like health and education and government businesses providing water, sewerage and drainage services. The selected industries included account for around two-thirds of GDP. Excluded are ANZSIC Subdivisions 62 Finance, 63 Insurance and superannuation funds, 64 Auxiliary finance and insurance services, 75 Public administration, and 76 Defence. The most recent issue is for 2018-19.

The analysis is based on industry value added (IVA) and industry employment. IVA is the estimate of an industry’s output and its contribution to gross domestic product (GDP), and is broadly the difference between the industry’s total income and total expenses. IVA is given in current dollars in Australian Industry. The data is presented at varying levels for industry divisions, subdivisions and classes, but unfortunately does not include the number of firms. There is, however, some firm size data. Micro firms have less than 5 employees, small firms 3-19, medium firms 20-199 and large firms more than 200 employees.

Figure 1 shows large construction firms have 15% of employment, 30% of wages and salaries and 23% of output. Medium firms have 18% of employment, 27% of wages and salaries and 21% of output, and micro and small firms account for approximately 65% of employment but only 55% of output. The labour-intensive work of small firms largely explains the lack of long-run growth of productivity in construction.

Figure 2 shows large firms have twice the level of output and income per employee compared to small and micro firms, and medium firms nearly 50% more. There is no significant difference between micro and small firms. IVA per employee is an imperfect but useful proxy for productivity, and this shows the gap between large and medium size firms is significant.

The relationship between firm size and IVA per employee is not surprising, large firms are typically better managed than small firms. Management is the most important determinant of the capacity and capability of construction firms, because managerial skills give a contractor greater flexibility. How firms utilise their capabilities differentiates them within a diverse, location-based production system. It is widely recognised there are differences between industries in the way that production is organized and new technology adopted, adapted and applied, but differences within industries generally get less attention. Important differences are the individual characteristics of firms such as their size, the effects of competitive dynamics, and how the adoption of new technology by one company in an industry influences the adoption of technology by other companies in that industry. For building and construction this is significant, not only because of the number of small and medium size firms, but because of the size and reach of the major firms.

Figures 3 and 4 show IVA and income per employee for three years respectively. The most recent 2018-19 year is representative of the industry, based on this data. Construction firms convert around a third of their income per employee into IVA per employee, however large firms have twice the income per employee. These figures identify the balance sheet effect, as firms leverage the capital on their balance sheet to maximise revenue and profits.

Construction has a large number of small firms bidding for work in local markets with little or no control over prices. There is a diminishing number of firms that can deliver large projects in a given region or have national operations, and there are a few dozen multinational corporations in construction. Construction economics has a wide range of views on the types of markets these firms operate in and their competitive behavour. There is, however, universal agreement that construction is an industry of projects, and firms operate in markets for projects of many different types.

The relationship between firm size and contract value is therefore a fundamental reality in construction, and is also the foundation of the relationship between projects and firms. A firm is a legal entity and the typical reporting period is one year. A firm’s income is the cumulative cash flow of their portfolio of projects over a year. The focus on projects and construction management in construction research obscures the role of firms as the ongoing participants in the industry.

For firms in construction markets annual revenue is the aggregated income from current work, or contracts won but not completed. Construction firms and contracts range widely in duration, size and value, but the amount of work a firm can take on must be related to the capital a firm has available. This relationship between firm size and the annual value of contracts or projects undertaken is based on the assumption that construction firms seek to maximize revenue but are constrained by their working capital. In construction the contract packages reflect the complexity of work, so there is a wide range of contract sizes. Construction contracts can, therefore, be arranged based on contract size and complexity. This is a well-known and widely agreed characteristic of the industry, with the relationship first researched in the 1980s. Competing contractors’ bids were affected by the type of project and by the value range, small firms considered both contract type and size, and large firms were more successful when bidding for large contracts. Contract size and complexity are also important because the wide range of contract sizes in the construction market is the major determinant of the number of firms. In a project-based market, defined by project size and complexity, there are many standardized projects but few companies able to undertake particularly difficult projects, those large construction firms deliver large projects and/or with a high degree of complexity.

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Updated: May 31

Long-run Changes in the Number and Size of Firms in the Australian Construction Industry

There have been five Construction Industry Surveys (CIS) by the Australian Bureau of Statistics (ABS), the most recent for 2011-12. All five surveys found the construction industry is overwhelmingly made up of small firms which contribute most of the industry's output and account for almost all of the number of enterprises. Table 1 shows the breakup between contractors in Building and Engineering and the subcontractors in Construction services (which were called trades in the earlier surveys). The 2002-03 survey used different categories of businesses (not establishments) in residential, non-residential and non-building, and trade services and is not comparable with the other surveys. In 2002-03 there were 339,982 businesses of which 269,228 were trade services and 70,753 were residential, non-residential and non-building businesses.

How the size of firms is measured in the CIS has changed twice. The three surveys in 1996-97, 1988-89, and 1984-85 divided firms into three sizes: employ less than 5, employ 5-19, and employ 20 or more. The 2011-12 survey divided firms into small 0-19, medium 20-199 and large with over 200 employees. The 2002-03 survey divided firms by income and the data cannot be compared to the other surveys however, although income was used to classify firms, the 2002-03 survey produced a similar result, finding 90% of firms were small or very small. Here the 1996-97 survey and the 2011-12 survey data is presented. The breakup of firms by size is in Table 2.

In the 1996-97 survey businesses with less than five employees accounted for 94% of all businesses and over two-thirds of all employees. Less than 1% of businesses employed 20 or more. Businesses with less than five employees accounted for slightly less than half the total income and expenses, whereas businesses with employment of 20 or more accounted for almost one-third of these. The data in Table 3 is percentages, showing the importance of the 0.62% of large firms. Their 13.6% of employees earned 32.3% of salaries and wages, generated over 28% of income and nearly 25% of gross output.

The survey in 2011-12 classified firms by the number of employees into small 0-19, medium 20-199 and large with over 200. The same data for the 2011-12 survey is in Table 4. The changes between 1996 and 2012 are revealing. The total number of firms has increased marginally from 195,000 to 210,000, but the share of small firms has increased from 94% to 98% as the number of medium and large firms fell from 12,300 to less than 5,000. There was a trend with the number of medium sized firms decreasing to less than half, while slightly increasing their share of industry employment.

In 2011-12 less than 0.1% of firms were large, employing 18.6 % of the workforce, paying 32% of wages and salaries and generating 27% of industry income and 25% of output. These figures are remarkably similar to the 1996-97 CIS numbers, however, the 186 large firms in 2011-12 had almost the same share of employment, income and output that 1,200 firms had in 1996-97. This was a significant increase in industry concentration. In the 1996 survey the 1,200 firms employing 20 or more had a total of 66,000 employees and accounted for 13.6% of employment and 24.4% of industry output.

In 2012 there were 186 firms employing 200 or more with 177,000 employees, accounting for 18.6% of employment and 25.5% of IVA. These long-run changes in industry structure can not only be the result of business failures, which are common with SMEs but less so for large firms. Instead, there has been a long wave of mergers and acquisitions reducing the number of large firms and increasing industry concentration.

A stylized representation of construction industry firms by market type is in table 5, showing how concentrated markets can be the outcome of either firm size or specialization. Figure 1 relates market type to contract size. As a firm gets larger it takes on bigger projects and compete with fewer other firms.

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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.

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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.