Modern Construction Economics Modern Construction Economics Theory and application Edited by Gerard de Valence This edition published 2011 by Spon Press 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Simultaneously published in the USA and Canada by Spon Press 270 Madison Avenue, New York, NY 10016, USA This edition published in the Taylor & Francis e-Library, 2011. To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk. Spon Press is an imprint of the Taylor & Francis Group, an informa business © 2011 Gerard de Valence The right of Gerard de Valence to be identified as author of the editorial material, and of the authors for their individual chapters has been asserted by him/her in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. 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British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Modern construction economics/[edited by] Gerard de Valence. p. cm. 1. Construction industry. 2. Construction industry—Management. I. De Valence, Gerard. HD9715.A2M56 2011 338.4′7624—dc22 2010017477 ISBN 0-203-92689-7 Master e-book ISBN ISBN13: 978–0–415–39706–3 (hbk) ISBN13: 978–0–203–92689–5 (ebk) Contents List of figures vii List of tables ix List of contributors xi Preface xiii 1 Theory and construction economics 1 GERARD DE VALENCE 2 Developing construction economics as industry economics 14 JAN BRöCHNER 3 Collusion and corruption in the construction sector 29 CHRISTIAN BROCKMANN 4 Competing in construction auctions: a theoretical perspective 63 DEREK S. DREW 5 On theory of production in economics and production management 80 LAURI KOSKELA 6 Competition and barriers to entry in the construction industry 100 GERARD DE VALENCE 7 Comparing construction costs between countries 117 RICK BEST 8 Innovation in construction: a case study of the Australian context 135 KAREN MANLEY AND STEPHEN KAJEWSKI vi Contents 9 Theory testing in building economics research: an experimental approach 154 BEE-LAN OO 10 Market types and construction markets 171 GERARD DE VALENCE 11 The methodology of building economics research 191 GöRAN RUNESON Index 213 Figures 3.1 Contract goods in construction 35 3.2 Market structures on the project market 39 3.3 Pricing mechanisms 42 3.4 Influence of asymmetric information on price 51 3.5 Average total cost, marginal cost, profits and losses 52 3.6 Normally distributed cost of all contractors in a bid 53 3.7 Deadweight loss due to sealed-bid auctions 57 3.8 Incentives for and mechanics of collusion 60 4.1 Systems approach applied to construction bidding 66 5.1 T he contribution of the different assumptions of the economic theory towards the failure to acknowledge waste or value loss 95 6.1 Australian construction industry output and turnover of largest firms 109 8.1 P articipants and potential relationships in the building and construction industry 137 8.2 O verview of firm-level innovation determinants 137 8.3 K ey reason for undertaking innovation, by percentage respondents, Australian construction industry, 2004 144 8.4 K ey obstacle to innovating, by percentage respondents, Australian construction industry, 2004 146 8.5 P rofitability impact of most successful innovation in the past 3 years, by percentage respondents, Australian construction industry, 2004 149 8.6 A verage number of advanced practices adopted, by innovation profitability impact, Australian construction industry, 2004 150 9.1 The independent and dependent variables of this research 157 11.1 A diagrammatic representation of theory testing 197 Tables 3.1 Corruption in industry sectors 30 3.2 Cluster analysis of corruption in selected countries 31 3.3 Sources of uncertainty for buyers in the construction market 34 3.4 Market types 36 3.5 Expectancy values for bids in sealed-bid auctions 44 3.6 Construction investment in Germany, 1994–2006 45 3.7 Price indices for residential buildings in Germany, 1994–2006 45 3.8 Number of firms and employees, 1995–2008 46 3.9 Construction turnover in Bremen, 1995–2001 47 3.10 Supply and demand for buildings in Bremen, 1993–2001 47 3.11 Percentage of construction activities by contractors within a given radius from city center of Bremen 47 3.12 Percentage of identical competitors for bids in Bremen 48 3.13 Payoff matrix for the bagel duopoly 55 4.1 Comparison of construction and car manufacturing 68 4.2 An example comparing the outcome of best bidding strategies for three different auction methods 70 4.3 Example showing that the best strategy in a Vickery auction is for contractors to bid without competition adjustment 73 5.1 The three theories of production 87 5.2 The problematic assumptions of the economic theory of production, their critique and their dysfunctional impacts 94 6.1 Market structures and characteristics 103 6.2 Construction industry firms by market type 112 6.3 Importance of barriers to entry 113 7.1 Quantity weightings for the basket of goods 128 8.1 Key survey data 139 8.2 Adoption rates for advanced practices, by percentage respondents, Australian construction industry, 2004 141 8.3 Business strategies, by percentage of respondents finding them highly important to business success, Australian construction industry, 2004 143