A basic outline of economic considerations that come to play in construction management - Essay Example

?The economic implications and constraints of construction management are among the most important concerns that any building design, engineering, orconstruction project must face. Not only do simple economic theories of supply and demand come to play on construction management but, due to ultimate contingencies such as extended liability horizons, the global trade environment, and inevitable regulatory and resource uncertainties that impact both small and large scale projects, the process of estimating and controlling for economic variables through construction management can mean the difference between successful and unsuccessful project ventures, as well as profitable and unprofitable companies. In this brief report, a basic outline of economic considerations that come to play in construction management will be weighed, including essential concerns of economic theory, general implications of market functions, and industry-specific applications. Throughout the report, an attempt will be made to define the economic concerns of construction and engineering management in such a way that proactive steps can be outlined for UK construction management stakeholders to successfully navigate the difficult economic environment of modern construction management. Economic Theory and Implications Economic theory, despite its crucial impact upon the ultimate success of construction projects and corporations, is often insufficiently understood by construction management professionals. Warren (2001) argues that this is due, at least in part, to an insufficient linkage between economic theory and the contexts of construction applications that such professionals hold as their primary disciplinary concern. After all, most construction professionals enter the engineering and building field because they want to design and construct physical structures, not in order to apply economic theory. However, as Hillebrandt (2002) argues, basic economic theories must be weighed when approaching construction management because they impact everything from cost of contracts, procurement of resources, and pricing of services offered. In this section, a very basic outline of economic principles that apply in construction management will be offered. The presentation here is kept deliberately simple because, as De Valence (2011) argues, construction economics has yet to define a consensus approach to economic theory that accommodates the conditional realities of construction management. Specifically, De Valence argues that construction economies, as a “still emergent” field, has not yet developed a set of disciplinary applications of economic theories, but merely borrows from a number of other fields, such as finance or economics itself. This is clear in discussions offered by Warren, (2001), Ruddock (2000), Hillebrandt (20002, and others, who often argue from theoretical principles that are applied generally to specific construction case studies. While De Valence (2001) argues that construction management has developed as a discipline for managing the processes and stages of production, therefore, construction economics has not yet found a suitable approach for managing the various economic implications that come to play at each of the various stages. In light of this realty, the discussion of economic theory here will include only the most basic concerns as they apply to the more general applications of construction management. There is no economic factor that impacts upon construction management to a greater degree than the relationship between price and demand for construction services. Ruddock (2009) argues that demand constitutes a major concern for construction economists because it is at the heart of the problem of forecasting costs as well as setting prices that ultimately drive competitiveness. Table 1 provides a simple view of demand concerns as they apply to such pricing and cost impacts. Table 1. Relationship between Demand and Price/Cost Source: Riley, 2006. This demand-price curve is perhaps the most basic general principle underlying all economic theory, and it applies in all aspects of construction management. Clearly, as demand increases for a given product or service – such as labor, steel products, or technology components – the cost of the good or service increases. This has an associative effect in that, in cases of scarcity of a given resource, the cost will rise. Such scarcity may be the result of varied conditions such as labor shortages due to industry and business cycle development, resource shortages due to global trade or transportation developments, or the like. Such concerns may have negative impacts upon both the short–term completion of projects on-time and on-budget, and the long–term economies of whole-nation industrial sectors. Murray and Langford (2003) argue, for example that the UK construction industry benefited for many years during the latter part of the Twentieth Century from lower labor costs relative to the rest of Europe (largely as a result of deregulation) but that, in the last decade, with the increase of technology to manage projects, that competitive advantage has all but disappeared. The costing of such concerns as labor and materials have, therefore, variable effects on construction demand over time that greatly impact financial competitiveness. Such variations may be unforeseen during the forecasting process when financial plans are made for carrying out a project. Table 2 shows the implications of such contingencies. Table 2. Demand Contingencies Related to Price Source: Riley, 2006. Table 2 shows that, at a given at a given price x, the variability of demand can change from one time to another based on factors that are not specifically tied to the price of the good or service itself. A change in resource supply or labor supply, for example, may negatively impact upon the ability to procure needed resources to complete a given project. Even at a contracted price, a given supply of resources may be reduced due to other supply/demand features such as resource availability, regulatory developments, and the like. Construction management must therefore weigh the implications of the relationship between demand and price in its approach to developing economic management of project forecasting. A further consideration that will be made here is a distinction between the kinds of goods and services that are characteristic of the construction industry. Brockman (2011) argues that in weighing the principled relationship between price and demand in construction economics, we must make distinctions between exchange goods and contract goods. Exchange goods consist of those items that are bought and sold in the market in which there is no promise or future liability implied except for a warranty that the product will perform as promised. Property rights in such goods and services are exchanged for the cost of the good or service and in making the purchase, the buyer seeks only to secure ownership of the product. In construction, however, there is a specific and implied contract that exists in the relationship between buyer and seller, whether the agents be end-user occupants of a given space or subcontractors providing services for a given part of the construction process in relation to the builder. The implied relationship between buyer and seller is that of principal/agent, in which the principal (the client) makes an investment in the agent (the contractor), and the expectation is that the agent will produce the specified product as promised – including through accounting for contingencies of scheduling, resources availability, and the like – and the principal will pay in a timely fashion. Given the implications of uncertainty that are implied in Table2, in which a necessary product or service that is required for project completion can vary in access and/or price across time, the nature of this relationship holds great import for the construction or engineering firm. In order to suitably account for forecasting difficulties given their contractual obligations and the inherent uncertainties of resource availability and supply, therefore, construction management goes to great lengths to understand market functions and account for their variability. Market Functions When developing pricing and other economic concerns in the context of construction management, it is critical to account for market factors such as the overall health of the economy and specific concerns within the industrial sector. The way that companies within the industry account for such concerns is critical to their long-term and short-term financial health. Forecasters and estimators are hired based upon their ability to account for the appropriate concerns within the market and to weigh these in the planning and costing of projects. Snyman (2009) argues that the market fluctuates based around general developments in the overall business cycle and that there are particular leading economic indicators that such professionals must account for when developing economic arguments for a given project. In order to understand market functions in the construction industry, therefore, we will focus here upon the different inputs that serve as markers or leading indicators and in the next section on the different approaches for considering such factors within a context of forecasting and construction management. Again, as in the previous section, the generalizable economic principles will be kept simple, with specific applications to construction concerns weighing as the most important factors, in line with the approaches taken by Warren (2001) and others. Among the number of economic inputs that have been pointed out in the literature for construction economics, none is more important than expected demand compared to expected supply. Construction economists attempt to weigh the likely availability of certain products and services at a given time during the construction process so that construction plans can be carried off without delays in deliveries or increases in prices. Critical components or items that have long-lead delivery times, therefore, may be purchased/contracted well in advance of their need in order to ensure their availability. The success of a given construction estimate will therefore depend on the ways that such long-lead or critical items are procured and other contingent products or services are accounted for through planning and on-the-fly alterations that may be required in cases where problems occur. Ruddock (2009) argues that problems associated with economic forecasting of construction projects are impacted by such factors as global competition in which, for example, labor or resource supplies can quickly change due to free-flowing entry of new players and projects, regulatory changes in which both governmental and interest-group politics can impact upon construction plans through litigation, and even financial concerns in which currency exchange rates and availability of credit (for either the primary contractor of the subcontractor) may change due to factors such as the global economic environment. These critical component, regulatory, global economic, and financial concerns are only some of the inputs that must be made when developing economic plans for construction. Others include environmental impacts statements, safety and healthcare costs for workers, and even such concerns as corruption and contracting. Ruddock argues, in fact, that the functioning of markets has changed so much during the last decade that construction management is essentially an entirely new enterprise that must deal with increasing uncertainty in the context of increasing competition for resources and management contingencies. Even such concerns as the linkage between the real estate market and commerce have come to play heavily on decision-making in construction economics, as the availability and processing of information has come to play a central role in forecasting of economic concerns in ways that include much more than mere procurement of physical resources. Industry Applications The various ways the construction industry has approached the problem of managing forecast and planning changing and increasingly competitive markets have included (among others) supply chain management and lean construction. Supply chain management is cited by London (2008) as a primary means of the industry to deal with the “fractious” nature of the market in such a way that goods and materials re delivered on-time, when needed and at cost, in order to effectively manage costs and project efficiencies. It consists of both project and industry level concerns, and is focused on ensuring that there are adequate networks in place to make certain that such concerns as transportation, resource and manufacturing alternatives, and the like can be called upon in order to effectively manage project needs. Due to the uncertainties and competition that are inherent in construction management, the ability to manage the procurement process through a series of interlinking chains between firms is seen as crucial to organizational viability in the difficult economic environment of modern construction. As opposed to focusing upon meeting the needs the changing demands through supply change management, lean construction takes a slightly different approach and concerns itself with carefully managing resources and timing of project delivery so that such concerns as waste and inventory are carefully accounted for. Often combined with supply chain management, lean construction attempts to account for market fluctuations and economic imperatives by doing the most with the least, so that (for example) technology is used in planning to achieve efficiencies an standardizations, and systemic concerns are highlighted to increase planning certainty. In line with lean construction, for example, some products are pre-assembled to facilitate installation at a later date. Conclusion The problem of managing economic concerns in construction management are many and varied. However, as this paper has shown the basic theories of economics that apply are fairly simple. Construction management attempts to manage uncertainty with forecasting in ways that account for the varieties of inputs such as regulation and resource fluctuations to allow managers to reduce divisions between supply and demand concerns. In achieving these ends, it has been argued that the industry often uses supply chain management and lean construction to account for contingencies. While, of course, the subject of construction economics can be complicated by a number of other variables, this simple presentation shows the basic factors of the discipline in a way that allows for straightforward consideration of its essential factors. Arbulu, R., & Ballard, G. Lean supply systems in construction. 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