Lectures at Tsinghua Summer School
Part 1: Some Features of
Construction and their Implications
At the end of the session, students should
• what the construction industry is
• nature of construction industry, construction
projects, construction organisations
• implications of features of construction for studies
and practice in the industry
– root of problems, challenges, possible action
– basis of strategisation
– elements of good practice.
• Application of knowledge on industry in…
– market analysis
– bid or no-bid decisions. 2
Nature and Lessons for strategies,
features of other countries action in key
Current What is to be in which much
position on done in your can be
various aspects country achieved
What How to develop Why little
construction construction progress is
needs industry made
What to look out for 5
Construction industry … definition
• Is there a construction industry?
– continuing argument…
• a distinct industry
• a „sector‟ comprising „industries‟
• none of these.
• Standard Industrial Classification of Economic
Activities (United Nations publication) … considers
only contractors and units making components
only for construction.
• World Trade Organisation refers to…
– Business services … includes consultancies and
– Construction services … includes (i) Construction and
Engineering Services Enterprises; (ii) Construction
Specialists (technicians; skilled, unskilled site workers).7
Construction industry … definition ..2
• Legislation on construction … usually what it
includes and does not include.
• Industry‟s own definition…eg. in South Africa:
(i) „building‟; (ii) „construction‟ representing
anything “not building”.
• Building and Construction Authority, Singapore
… (i) „building‟ seems to be the process; (ii)
„construction‟ is industry.
• Our definition…
“The part of the economy which plans, designs,
constructs, alters, repairs, retrofits and
demolishes buildings and items of infrastructure.”
Construction industry … definition ..3
• We consider construction industry to include…
– contractors … undertaking physical work on site
– consultants … undertaking design, preparing
documentation, supervising construction on site
– clients … investing in projects.
• Other “definitions” take a “total value chain”
approach, and may include:
– materials manufacturers
– materials suppliers
– insurance firms dealing with construction.
• Thus, possibility of diversification by firms via…
– vertical integration
– strategic alliances. 9
Construction Industry … definition ..4
• Our intention in this definition is to…
– indicate industry‟s boundaries to identify its true
constituent parts to facilitate its development
– show its true size and importance
– ensure consistency in approach.
• Is construction a goods or service industry?
– Demand expressed before supply
– Customer may be involved in process of fulfilling
demand; thus, customers with knowledge can influence
– Inputs obtained from many other sectors and assembled
– Expertise alone can be „exported‟, domestically,
Nature of construction industry
• Construction industry…
– is a distinct sector of economy
– has many products, with different features, created to
fulfil particular clients‟ objectives
– comprises companies which operate in project-based
• Construction is a significant sector of the
economy of every nation (by size).
– contributes significantly to GDP (5-10%; more if
industry is defined widely)
– stimulates activities in many other sectors
– creates much of nation‟s savings (45-65% of GFCF)
– employs significant part of labour force. 11
Measures of construction volume
1. Gross Output ... total value of work done in period (“Total
2. Value Added ... total value of work minus industry‟s inputs
from other sectors (comparison of construction to national
GDP must be via V.A., not gross output)
3. Capital Formation ... „useful‟ output (additions to nation‟s
4. Demand ... work put to industry in period.
5. Capacity … gross output industry can produce
(considering medium-term) without straining resources,
which would lead to inflation.
6. Growth Rate … comparison with same period in previous
Measures of volume ..2
1. Gross Output ... Of interest to policy makers, client
organisations and construction enterprises.
2. Value Added ... True indication industry‟s contribution to
the economy. Of interest to policy makers, economists,
researchers; not industry. (Comparison of construction to
national GDP must be via V.A., not gross output.)
3. Capital Formation ... Indication of nation‟s real
investments in construction work. Of interest to policy
makers, economists, researchers; not industry.
4. Demand ... Indication of industry‟s forthcoming workload.
Of interest to policy makers, industry, economists,
5. Capacity … may be compared with Gross output ; and
Demand. Shows level of commitment of industry‟s current
resources. With globalisation, capacity no longer a major
constraint to industry‟s expansion. 13
Measures of volume ..3
1. Gross Output ... Compared to Value
Added, shows proportion of industry‟s
„domestic product‟. Per capita of population.
2. Value Added ... as proportion of GDP
3. Capital Formation ... per capita of
4. Demand ... per registered company (this
indicates concentration of industry).
Table 2 Top Eleven Nations in Construction Spending (US$ bn)
Country 2003 2004 2005 2006 2007 2008
1. United States 1,040 1,159 1,210 1,218 1,244 1,289
2. Japan 465 507 544 572 587 610
3. China 242 269 300 338 388 440
4. Germany 221 247 258 267 282 292
5. France 173 197 208 218 234 245
6. Italy 160 182 193 203 218 229
7. United Kingdom 151 178 183 190 201 211
8. Spain 144 166 179 190 204 215
9. Canada 106 123 132 141 151 160
11. India 65 74 79 85 92 100
Source: Global Insights Inc., 2005
Future international construction market
• Share of market demand for large projects
expected to increasingly move away from
industrialised countries to Asia-Pacific, Africa,
– economic development, industrialisation will lead to
• infrastructure, energy generation and distribution
• industrial, manufacturing, process development
• transportation, communication links.
• China, India, Indo-China, Indonesia, Russia
mentioned as countries, areas with fastest
growing construction markets.
Construction Spending p.c., ($) 1998
1. Japan 4975
2. United Arab Emirates 4340
3. Germany 3838
4. Switzerland 3696
5. Denmark 3618
6. Singapore 3209
7. Norway 3079
8. Sweden 2711
9. Hong Kong 2600
10. Netherlands 2565
12. United States 2411
17. UK 1779
19. France 1666 22
20. S. Korea 1586 … Bon & C.
• Thus, construction…
– investment used by governments to introduce
desired changes in economy
– investment viewed an indicator of economy‟s
– is the only sector which appears twice in
• in gross domestic product (GDP) tables (economic
activity/stimulus and growth feature)
• in gross fixed capital formation (GFCF) tables
• A construction project has a distinct start and end
(but both are not always clear).
• Client expresses demand through procurement; many
– “traditional” procurement form differs from country to
– other procurement forms…
• design and build
• project management
• management contracting
• turnkey contracting
– differences in procurement paths mainly in…
• persons/companies involved in project
• roles of project participants (including team leader)
• relationships among project participants.
Construction project ..2
• Design requires development planning and building
– Possibility of using statute, administration to impose
sanctions; provide incentives for good practice
• In Singapore, main contractor appointed,
subcontracts parts (most) of the work
– some work, eg. piling and earthworks;
mechanical and electrical installations done by
specialist subcontractors, who may be nominated
by the client.
• Each project requires inputs of materials,
components; suppliers important part of project
– Possibility of using: (i) procurement; (ii) supply chain
management, as operating strategy. 26
Construction project ..3
• Standard contract forms … public and private sector…
– rights, responsibilities of client and contractor
– terms of agreement for completion of the work
– dispute resolution mechanism.
• One „leader‟ (Architect under “traditional” procurement
in Singapore) serves as client‟s representative
…clients want “one-stop” service, hence evolution of
• Building control authorities may visit site…
– to ensure compliance with approved plans
– to check on safety and health aspects.
• Lead consultant…
– certifies payments to contractor periodically
– certifies completion of project.
Construction project ..4
• Defects liability period after completion…
– defects found must be rectified by contractor
– part of contract sum retained.
• Maintenance, management of building in operation
by another team.
• Each project has many stakeholders.
• Persons involved, tasks undertaken, approach to
management not the same in all countries…
– possibility of mutual learning from good practice
– construction is a local industry…
• need to be familiar with local regulations, practices,
• transaction costs, learning curves. 28
Construction project ..5
• Building has long physical life but may suffer
from other forms of obsolescence („economic‟,
… need for monitoring, facilities management.
• During its lifetime of usage, building may be
modified in minor or major way…
– alterations and renovations
– adaptive re-use.
• These activities (also construction projects)
unlikely to involve original construction team.
… should this be the case?
– Contractors, including…
• main contractors
• specialist contractors
• labour-only subcontractors
contractors may be required to register, categorised by
size, indicating tendering capacity
– Design consultants (with many specialisations)…
design professionals may be required to be licensed
• private; large, small; commercial, individual
• public-private partnerships.
Construction organisations ..2
– Public: clients, regulators, managers
– Private: professional institutions and trade associations... lobbying,
welfare of members, industry improvement.
• Research institutes
– National research institutes
• as part of national science and technology institute
• as separate organisation
– Company-level institutes, especially in Japan
• International organisations
– United Nations Human Settlements Programme
• improvement of living conditions
– International Labour Office
• employment creation, poverty alleviation
– Research groupings, such as International Council for Research
and Information in Building and Construction (CIB).
• Davis Langdon and DEGW announce merger
3 August 2009
Leading global construction consultancy Davis Langdon and strategic design
consultants DEGW have today announced a merger. The move comes as Davis
Langdon continues to grow its global service offering and move further into strategic
consultancy. With the construction world focusing on gaining maximum value from
existing assets, the combined forces of both firms will provide strategic solutions that
use space more productively and enhance organisational performance.
• DEGW is a global market leader in its field and is best known for its work consulting
on high-performance workplaces for Fortune 500 companies. The firm works on
behalf of clients to help them align their physical space with their organisational
objectives, allowing them and their people to thrive. Their impressive client list
includes the likes of Microsoft, Google, GSK, Pfizer, Cisco, Nokia, RBS, Deutsche
Bank, BP, BBC, Accenture, WPP, Unilever, Phillips, Shell and Vodafone. The firm
employs 145 people globally in a network of 12 offices in the UK, mainland Europe,
Asia, Australia and North America. The combined office network of the two
organisations will provide a strong presence in mainland Europe. It will also further
strengthen the Davis Langdon and Seah International office network worldwide.
• On announcing the merger Rob Smith, Davis Langdon‟s Senior Partner, said “The
merger will add a fourth dimension to our offer in that we will now be able to
measure, value and manage „place‟ in addition to „cost‟, „quality‟ and „time‟. In the
current market, our clients are focusing on their costs – the biggest of which is
usually their people and places. The coming together of the two firms will mean we
are the construction consultant best placed to advise.”
• On the benefits of the merger, Despina Katsikakis, Chairman of DEGW commented:
“For over 35 years we have focused on managing change through the effective
integration of people, process and place. The coming together with Davis Langdon
enables us to measure the value of place in delivering business performance for our
features of construction
and implications for firms
Challenges or opportunities?
• Nature of construction activity poses challenges to
construction firms, both contractors and consultants.
• Features of construction require special knowledge
(of practitioners), corporate attributes (of firms) to
address successfully, to enable companies to survive
• Features of construction often seen as obstacles,
constraints, reasons for lack of good performance on
projects, and progress in the industry. The
innovative person should see them as…
– factors to take advantage of
– sources of strengths which can be tapped, and built
• Constructed items are fixed to their locations:
– process of creation must take place in location
owing to bulkiness of materials, equipment,
– construction contractors must be mobile
(operating a “moving assembly plant”)
• on roads, railways, this movement is lateral, with
implications of differing site conditions
• on buildings, it is vertical, with implications for
technology, logistics, safety
– contractors must be able to procure, assemble
required resources, fix them together where
item is required
Location specificity ..2
– limits to scale of inputs imposed by practical
considerations in transportation and handling
– limits to extension of “outsourcing” of parts of
production by weight and bulkiness
– production process affected by weather, with
implications for productivity.
… logistics are a key consideration
… risks are evident, eg., owing to uncertainties
in site conditions.
Construction versus manufacturing
• Contractors must choose markets carefully ... but
all countries are potential candidates.
• Because of fixity of construction items, contractors
must be mobile, willing, able to work..
– in "strange" places
– with unfamiliar companies
– using personnel of various nationalities
– following different procedures
– under various climatic conditions
– confronting various social values, etc.
Size of projects
• Construction projects are large, indivisible,
– high financial exposure of contractor, developer
– both developer, contractor usually borrow funds
– stage payments are a necessity
• need for procedures of justification and verification
– importance of financial management
– huge corporate resources vital
– owing to high costs
• clients choose contractors carefully
• contractors should choose clients with care, too.
… projects are becoming even larger. 38
Construction projects have long gestation periods,
owing to large number, complexity, variety of
tasks. Thus, they are vulnerable to:
– exchange risk fluctuation
– political instability
– social agitation.
… planning, especially for contingencies, and financial
… monitoring and timely control critical.
Health and safety implications
Construction projects have implications for safety
– governments everywhere enforce strict regulations
– participants have high social responsibility.
Knowledge of building regulations essential: these
may be different from home country‟s, may
involve additional costs.
Construction projects involve many corporate,
individual participants, performing inter-related
and interdependent tasks which must be
May involve companies, persons with different
nationalities, cultures, traditions.
… management of different companies, corporate and
national cultures, essential on projects
… need for alignment of motivations.
Nature of the work
• Construction projects are relatively labour intensive, with
– technology choice from project to project
– small countries rely on foreign workers
• social issues are important
• Construction industries have generally poor image…
– difficulty in recruiting good calibre personnel
• Construction enterprises must choose their projects carefully
in order to…
– minimise adverse impacts of nature of construction activity and its
– derive best use/advantage of firm‟s internal features and strengths
– attain maximum competitive advantage. 42
Summary of construction features
• Large size and expense of individual projects
– Long period of gestation
• Importance of industry in economy
• Location specificity
• Involvement of several persons
• Implications for health and safety
• Government‟s role
– as client
– as regulator
– as manager
– as facilitator.
Consequences of features
• These features influence many aspects of…
– Construction market
• each project has a peculiar demand matrix
– Roles of participants
• often defined to deal with risks and uncertainties on the project
– Procedures and practices.
• Generally, …
– construction is a local industry
– firms must be mobile to undertake projects in various locations
– each project may involved different firms, possibly from many
– industry is highly regulated.
These consequences of features of construction have major
implications for all construction firms, practitioners.
Summary: Overseas market classification
• Overseas market may be classified by…
– economic grouping
– continent or region
– political or religious system
– language or ethnic compatibility
– stability/reliability factors
– availability of natural resources
– availability of construction resources
– monetary support arrangements
– availability of preferences
– bidding eligibility
– availability of useful contacts. 45
application of knowledge
To bid or not to bid – a UK firm’s checklist
– Do we have work there already?
– Do we wish to work there?
– Is it friendly to the company and home-country?
– Does company have language capability?
• Type of work
– High/low technology
– Does company have expertise?
– Has company worked for client before?
– Does company wish to work for this client?
– What is client‟s payment record?
– Scale and value of work
– Value against possible profit; and against possible risk 47
Bidding – a firm’s checklist … 3
– By contractor
– By client or lender/aid agency
– Home-country tied aid?
• Export Guarantee
– Can company get insurance cover?
– Can company get finance cover?
• Capital/Cash flow
– Advance payments
– How much initial capital required?
– How much working capital?
– How much retention?
– Can company get loan facility?
Bidding – a company’s checklist … 4
– Should company find a partner?
– Has company been asked as a partner or subcontractor?
– Number of competitors
– Any preference for local contractors?
– Any preference for home-country firms?
– What are company‟s advantages?
– What are competitors‟ advantages?
– Company‟s capacity
– Period for bidding and its implications
Bidding – a company’s checklist … 5
• Conditions of Contract
– General conditions
– Bonds, insurances
• Type of contract
– Lump sum
– Cost plus
– Is the bill format reasonable?
– Are quantities taken off?
– Are quantities accurate?
– Can quantities be advantageous to company?
Bidding – a company’s checklist … 6
– What suitable plant does company have?
– How much capital required to buy necessary plant?
– Can it be written-off against the job?
– Does company have any in location?
– Does company have any worldwide?
– Can it be hired or subcontracted?
– Does company want it in its fleet?
– Will it have residual value?
– Will it have to be shipped from home-country?
Bidding – a company’s checklist … 7
– Rise and fall
– Labour unrest
– Will company have to design the project?
– Does it have design experience of similar building/works?
– Can company do design or must it engage consultant(s)?
– Can company design an alternative?
Bidding – a company’s checklist … 8
– Number required
– Any particular types required?
– Are available staff experienced in specific field?
– How much will tender cost?
– Any government support for tendering?
• Chances of success
– An assessment
* Bid * Ask for more time
* Seek partner * Do not bid.
Steps for success in foreign market
Key steps for success in a foreign market (Darling and
– Analyse market opportunity
– Assess product potential
– Establish market entry mode
– Make a sincere commitment
– Allocate necessary resources
– Identify technical issues
– Develop strategic marketing plan
– Organise operational team
– Implement marketing strategy
– Evaluate and control operations.
• are interrelated issues
• must be carefully analysed by top management 54
• must be continuously reevaluated, reassessed, integrated.
Steps for success in foreign market
- develop strategic marketing plan
• Develop strategic marketing plan
– Executive summary: Overview of plans for foreign
– Introduction: Why company should do business in the
– Part I: A statement of foreign market commitment
– Part II: Background/Situation analysis
• Overview of market opportunity
• Primary target market segments
• Analysis of competitive situation
• Assessment of potential of service
• Identified market entry mode
• Operational strengths, weaknesses
• Resources of firm to be allocated
• Organisational structure for market
Steps for success in foreign market
- develop strategic marketing plan..2
– Part III: Strategic foreign marketing plan
• Identified marketing goals
• Product analysis and selection
• Warranties and other conditions of service
• Pricing, other terms of trade
• Host country partners or agents to be used
• Logistical issues
• Market information systems needed
• Methods of advertising, promotion
– Part IV: Operational budget and pro forma financial
– Part V: Implementation schedule and timetable
– Part VI: Procedure for evaluation and control, including
periodic operational/management audits. 56
Pre-project country study
• Economic indicators
– GDP and its growth rates
– rate of inflation (because construction projects have long
– capital market
– banking system
– currency rate and its fluctuations
– balance of trade
– external debt
– employment and unemployment
– distribution of wealth
• Political stability
– internal strife
– relations with neighbouring countries
– national laws and attitudes to international trade
– federal-state relations
Pre-project country study..2
• Legal and fiscal framework
– legal liability of foreign companies
– environmental laws and approval procedures
– legal provisions on commercial contracts
– tax provisions including…
• allowances and incentives
• divestment provisions
• taxation of expatriates
– tariffs on imported equipment or materials
– laws on winding up of a joint venture
– legal provisions on exit of foreign business from the
• sale or transfer of shares
• repatriation of funds) 58
Pre-project country study..3
• General business and industrial environment
– human resource situation including…
• local availability of skills
• productivity levels
• attitudes to work
• language or cultural restrictions
– time frame for, and possible delays from, formal
– shortages of resources
– import restrictions
– price regulation
– business ethics, integrity
– Corruption. 59
Pre-project country study..4
• Infrastructure and logistics
– road network
– social infrastructure for expatriates, such as…
• shopping facilities
• Industry study
– level of demand over time and influencing factors
– projections of demand
– project types and sizes
– market shares
– prices, variations, taxes
– availability of materials, etc
– marketing and business development opportunities and efforts
– statutory approvals required for projects. 60
Pre-project country study..5
• Sources of information
– embassies and consulates
– international financial institutions, eg
• World Bank
• regional banks
– credit rating agencies
– government publications, eg. economic reviews and surveys,
statistical reports, investment promotion centre publications
– home country export promotion agency publications
– commercial banks
– consultancy organisations
– trade fairs, exhibitions
– local or international trade associations
– relevant books, trade magazines, newsletters
– annual reports of major international companies
Project Feasibility Study
• Project feasibility study – if country and market studies are
positive, a detailed study on the project is necessary. Key
• technical arrangements for…
– project management
– operation concerning capabilities of local or foreign firms selected
• adequacy of contractual arrangements
• sources of supply of materials and equipment, their…
– past record
– quality assurance procedures
• local client or promoters, their…
– reputation in industry
– management experience
– past achievements 62
Project Feasibility Study..2
• schedule of implementation…
– important milestones
– degree of realism of assumptions made
• availability of materials, equipment, personnel, their quality,
prices and wages
• need for external inputs and expatriate personnel and facilities
required for the latter
• standards, codes, specifications to be followed
• environmental and safety standards to be complied with
• project costs, broken down into key components…
– degree of accuracy
– impact of inflation
• financial plans, including…
– extent of project finance to be committed
– terms of loan agreements
– cost of capital 63
Project Feasibility Study..3
– profitability projections under local conditions and
– statutory approvals required, their…
• major conditions
• time frame
• difficulties they pose
• equipment supplies
– letters of credit and their relevant conditions
– delivery period
– shipping procedures including…
• export documentation.
• Interdependence and uncertainty on projects
• Professionalism and individual excellence
• Alignment of stakeholder motivations
• Innovation (from many basic sources, eg. R&D)
• Leadership, not just management
• Corporate strategies for competitiveness:
– niche-finding and niche-making
Considerations of Theory
Elements which can be considered in developing
theory of construction industry…
• Design process
– Applying best existing (technologies, materials, …);
– Interdependence and uncertainty among design team
… effective communication, co-ordination, management
– Compliance with statutes and codes
– Critical need for professionalism.
• Procurement process
– Effective communication of requirements
– Price determination by bidders – evaluation; bidding
– Risk allocation … to stimulate bidding by the best; to 66
protect the vulnerable(?)
Considerations of Theory ..2
– Scheduling, monitoring, control
– Managing production process
– Supply chain management
– Compliance with statutes and codes
– Dispute management
– Feedforward and feedback
– Importance of professionalism.
– Compliance with regulations
– Close out process … lessons learned … benchmarking
on project, corporate, industry basis.
– Discontinuity in involvement of design and construction
• Ofori, G. (1990) Aspects of the Economics and
Management of the Construction Industry.
Singapore University Press, Singapore.
End of Lecture