The construction of housing, commercial property and infrastructure projects – roads, bridges, tunnels, railways, airports – for both the private and public sectors is one of the biggest industries in the world. It contributes around 10 per cent of world GDP, employs 7 per cent of the global workforce, and consumes around 20 per cent of the world’s energy. It is also a highly fragmented industry with very low profit margins and a high risk of failure for the many firms operating in its complex supply chain. Stephen Gruneberg and Noble Francis present an up-to-date analysis of how construction markets operate, how firms collaborate on projects, and how their business models work. They explore the many distinctive features of the economics of the industry, such as the use of cost-reduction rather than profit-maximizing behaviour, the processes of tendering and procurement, and the often cyclical nature of demand. Particular challenges for the industry, such as the frequency of disputes between firms and the low productivity of the sector, are shown to be the outcomes of a business model that tends to focus on the volatility of demand and managing risk at the expense of improving efficiency. As well as discussing industry-wide issues, the authors also examine how individual projects are costed. The book offers authoritative analysis and expert insight into the economics of a much misunderstood industry and is suitable for a range of courses in business schools and departments of architecture and the built environment. Stephen Gruneberg is an industrial economist specialising in the construction and property sectors, and an Honorary Professor in the Bartlett School of Construction and Project Management, University College London. He has written several books on the economics of the construction sector, most recently Programme Procurement: Lessons from London 2012 (with John Mead). Noble Francis is Economics Director at the Construction Products Association, London. He oversees a team of construction economists and has over 15 years experience producing economic forecasts for the construction industry. He is also an Honorary Professor in the Bartlett School of Construction and Project Management, University College London. The Economics of Construction By Stephen Gruneberg Agenda Publishing Copyright © 2019 Stephen Gruneberg and Noble Francis All rights reserved. ISBN: 978-1-78821-015-7 Contents Preface, vii, 1. Getting to grips with construction industry statistics: construction industry or construction sector?, 1, 2. Economic theory of markets and construction, 15, 3. Running a construction firm, 35, 4. The firm and economies of growth, 61, 5. Productivity and the construction market, 77, 6. The game of construction, 95, 7. The underlying causes of conflict in construction, 109, 8. Construction and cyclicality, 119, 9. Projects, 145, 10. The economics of construction project management, 171, Bibliography, 183, List of figures and tables, 189, Index, 191, CHAPTER 1 GETTING TO GRIPS WITH CONSTRUCTION INDUSTRY STATISTICS: CONSTRUCTION INDUSTRY OR CONSTRUCTION SECTOR? Construction can be seen as an industry concerned with the production of the built environment. As an industry, its inputs cover a large variety of skills and materials. Its output covers many different types of products and services. As a sector of the economy, it includes the assembly of buildings and structures on site, the production of materials and building components and, indeed, the whole supply chain. This includes architects, surveyors, civil and structural engineers, plant and tool hire, construction product manufacturers and distribution. The construction sector is treated as one sector but, in fact, it covers a wide variety of work across many different areas. Construction output covers everything from the building of housing, commercial and industrial properties, education and health facilities to the building of vital infrastructure for water, energy, roads, rail, telecommunications and ports. Whatever an individual or collection of individuals may wish or need to do in the economy or society, they will require construction to have taken place first to be able to do it. People need houses to live in, schools and universities to undertake learning, clinics and hospitals to make or keep us physically fit and comfortable, and offices to work in and shops to buy goods in. Even if we work from home and shop online then we still need the internet infrastructure to have been built. In addition, we need roads to drive on, rail infrastructure for trains to travel on, clean water for drinking and bathing, electricity and gas to power heating and lighting. As the built environment has grown over many years, the current buildings and infrastructure have developed over time, and, as a consequence, the repair, maintenance and improvement of existing buildings and infrastructure is also vital. To