Professor David Brooksbank, Welsh Enterprise Institute, Business. School .... the small margins available to them from the competitive tendering process.
WELSH ENTERPRISE INSTITUTE Monograph No 4
Formal/Informal Construction
Contractors
Small Construction Enterprises Technology Diffusion
Consultants
Harmonisation and Lean Construction
CURRENT ISSUES IN SMALL CONSTRUCTION ENTERPRISE DEVELOPMENT Edited by Christopher Miller, Gary Packham and Brychan Thomas Series editor: David Brooksbank
WELSH ENTERPRISE INSTITUTE Monograph
CURRENT ISSUES IN SMALL CONSTRUCTION ENTERPRISE DEVELOPMENT
Edited by Christopher Miller, Gary Packham and Brychan Thomas Series editor: David Brooksbank University of Glamorgan Business School February 2002
WELSH ENTERPRISE INSTITUTE MONOGRAPH
NOTES ON CONTRIBUTORS Professor David Brooksbank, Welsh Enterprise Institute, Business School, University of Glamorgan. Dr. Francis T. Edum-Fotwe, Department of Civil and Building Engineering, Loughborough University. Dr. Derek Miles, Formerly Director, Institute for Applied Development Engineering, Loughborough University. Dr. Christopher J.M. Miller, Welsh Enterprise Institute, Business School, University of Glamorgan. R.S. Mlinga, Department of Construction Economics and Management, University of Cape Town. Professor Richard H. Neale, Head, School of Technology, University of Glamorgan. Dr. Martin O’Farrell, Research Fellow, School of Technology, University of Glamorgan. Professor George Ofori, Department of Building, National University of Singapore. Dr. Gary A. Packham, Welsh Enterprise Institute, Business School, University of Glamorgan. Dr. Brychan C. Thomas, Welsh Enterprise Institute, Business School, University of Glamorgan. Dr. Jill Wells, International Labour Organisation, Switzerland.
CURRENT ISSUES IN SMALL CONSTRUCTION ENTERPRISE DEVELOPMENT Preface
David Brooksbank
Introduction
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Small and Medium sized Companies (SMCs) in Changing Business Environments: Organisational Challenges and Operational Impact
Francis T. Edum-Fotwe
Current Issues in Small Construction Contractor Development
George Ofori
Small and Larger Construction Firm Collaboration in Tanzania
R.S. Mlinga & Jill Wells 59
Use of Local Construction Contractors and Consultants
Richard H. Neale & Derek Miles
81
Harmonisation between Large and Small Firms: A Prerequisite for Lean Construction?
Christopher J.M. Miller, Gary A. Packham & Brychan C. Thomas
99
The Barriers to New Technology Diffusion in the Construction Industry of South Wales
123 Martin O’Farrell & Christopher J.M. Miller
Welsh Enterprise Institute Sefydliad Menter Cymreig
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Monograph Series Editor Professor David Brooksbank Editorial Board Professor David Brooksbank Professor Tony Gear Professor Stephen Hill Dr. Christopher Miller Dr. Gary Packham Dr. David Pickernell Professor Michael Quayle Dr. Brychan Thomas
ISBN: 1-84054-050-8 Current Issues in Small Construction Enterprise Development University of Glamorgan 2002
PREFACE Professor David Brooksbank
The Welsh Enterprise Institute (WEI) is the largest research and development organisation of its type in Wales. Located at the University of Glamorgan Business School, it provides a centre of expertise in the areas of entrepreneurship, innovation and small business management. A significant amount of its research, in both academic and consultancy terms, is focused in these areas. The WEI has more than two dozen members of staff specialising in fields as diverse as strategy, regional development, economics, marketing, management of change, corporate entrepreneurship, construction management, purchasing and logistics, decision-making and environmental management. With an emphasis on Enterprise within the Welsh National Development Strategy, the Entrepreneurship Action Plan for Wales and the Future Skills Wales report, the aim of the Institute is to provide a focus for a positive, encouraging and supportive entrepreneurial environment within the University and society at large. This monograph is the fourth in a new series of works bringing focus to some of our contemporary research themes. It presents a coherent and in-depth analysis of some key issues concerning small construction enterprises (SCEs) and contains much that is useful to practitioners and academic readers. The importance of SCEs to economies is well recognised and this collection presents an empirical and up-to-date view that is timely and significant to current debate. The papers draw on research from around the World and it would seem that the importance of this work is common place across the globe. In addition, something that is good to see, are contributions from wellestablished and emerging academics in the field of construction management.
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The editorial team welcomes views from all quarters concerning the research undertaken and reported at the Institute and we urge those interested readers to contact us.
INTRODUCTION This monograph is a collection of papers concerning ‘Current Issues in Small Construction Enterprise Development’ which have been published at international conferences or written as working papers. The first paper examines the role played by Small Construction Enterprises (SCEs) in facilitating the operational effectiveness of the larger construction organisations, and their strategic contribution to the sector’s economic and productive activities. The paper considers some of the changes that are influencing the industry as a whole, as a background to a wider discussion of the challenges SCEs will have to confront and address to sustain their current role in the sector. These include recent developments in communications and information technology that will have significant impact on the management of the production processes in construction. It discusses the implications of these evolving technologies and highlights the likely changes to both construction organisations and construction processes over the next decade. According to the second paper realising the difficulties faced by their local construction enterprises, especially the small ones, most developing countries have adopted policies and programmes to improve the performance of these organisations. The literature makes it clear that the development of such entities is vital to the upgrading of the construction industries. This is required since such organisations undertake the physical site activity that is the longest, most expensive and most complex part of the development process. Different developing countries have adopted different policies and measures. These policies and measures have also changed over time. This paper reviews approaches to small contractor development in the poorer countries since many of these nations became independent in
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the 1960s. It highlights the difficulties encountered. It also outlines the lessons learnt and how these have been applied on subsequent programmes. It is shown that there have been almost no successful programmes. The paper proposes some suggestions for appropriate policy directions and measures by relevant organisations and individuals. The third paper reports that the construction industry in developing countries comprises a regulated formal sector and an unregulated informal sector. While the formal sector is made up of registered small, medium and large construction firms, the informal sector comprises unregistered small construction firms. This paper discusses the relationship between the small formal and informal construction firms, and between the small construction firms (formal and informal) with large and medium construction firms in Tanzania, based on information gathered from structured interviews with both registered and unregistered contractors undertaken in 1999/2000. It is shown that there is a symbiotic relationship between the two groups of contractors, with registered contractors providing an important source of work and income for the unregistered contractors and the latter being an important supplier of labour for the former. Despite this, the informal construction sector is generally ignored and receives little support from the government. It is argued that policies to develop the construction industries of developing countries should address the needs of the informal sector as well as the formal sector. A classification system of informal contractors is proposed to form the basis of formulating programmes for the development of the informal construction sector. The fourth paper reports that road maintenance requires the analysis and solution of a diversity of road deterioration problems, over quite substantial distances, through a varied geological and social landscape. It is argued that local consultants and contractors have the potential to be more effective and efficient than government organisations and foreign firms. If carefully encouraged, local firms would be better suited to finding technical solutions appropriate to local skills and 4
resources, and to manage the work within local commercial, social, and political constraints. This would depend largely upon creating enterprising, problem-solving management cultures, in which management practices are carefully aligned with the local commercial, social, and political environment. Road maintenance would form a basis from which firms could progress to undertake a wider range of work. Suggested action plans include: encouraging the creation and management of a stable market, within which enterprises can flourish; sensitive management of the necessary organisational changes, especially the transfer of staff from government agencies to the local enterprises; formulation of effective forms of contract; and support for a program of training and consultancy, preferably based on local institutions. It is maintained in the fifth paper that partnering can arguably reduce ex post transaction costs within the construction process. These costs primarily arise due to a lack of harmonisation between contracting parties. Historically, this relationship has been transactional in nature, with both parties seeking to secure value added at minimal cost. Despite this fact, evidence suggests that mutual co-operation that can supersede a traditional cost led approach offers new hope for prosperity in the construction industry. This paper offers preliminary research highlighting that the competent implementation of strategic partnerships based upon trust can only reduce transaction costs if the small subcontracting firm is fully integrated into the process. It is argued that harmonisation between large and small firms can be a prerequisite for lean construction. The paper concludes that traditional approaches and new practices will, if they continue to facilitate contractor opportunism, encourage small subcontracting firms to seek alternative markets instead of enabling mutual co-operation to reduce the transaction costs of all stakeholders involved in the construction process.
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The last paper considers the barriers to new technology diffusion in the construction industry of South Wales. It seems that the industry continues to view price as the main concern and the development of new products in the traditional sense cannot work in the construction industry. There does not seem to be any benefit to either subcontractor or contractor to use new products, and margins often erode the possibility of specified products being adopted. If practicable, it may be wise for funding providers to seek ways of developing the market potential of products developed through research. The survival of new products in the construction industry seems to be problematic due to the nature of the procurement process. From this small study, it seems that subcontracting firms are failing to embrace new products due to the small margins available to them from the competitive tendering process.
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SMALL AND MEDIUM SIZED COMPANIES (SMCs) IN CHANGING BUSINESS ENVIRONMENTS: ORGANISATIONAL CHALLENGES AND OPERATIONAL IMPACT Francis T. Edum-Fotwe Introduction The construction industry has a large number of small and medium companies operating in contracting, consultancy and other service oriented areas within a local, regional and/or national level. These enterprises exist and contribute to the activities of the industry in their own right by delivering orders placed by construction clients. In addition, they play a key role in sustaining the larger ones. Several large construction companies increasingly rely on a management contracting approach for delivering the requirements of the client. This often involves withholding project management and in some cases, design management skills within the larger construction companies, while the operative skills and other specialist functions are outsourced to SMCs. The ability of a large contractor to perform to demands of cost, time, and quality is therefore influenced in a direct way by the performance of the SMCs it employs. In a growing globalised economy characterised by volatility and intense competition, the organisations that continue to be successful are the ones that learn to adapt their systems of working to dynamic change. This requires speed as well as quality, and can be addressed through greater organisation flexibility and responsiveness. Achieving such speed and quality often require construction companies to deploy relevant technologies and the implementation of socio-cultural systems that complement the demands on modern enterprises. For large construction companies, the cost implications of deploying such systems and technologies form a small component of their overheads. This is not the case for SMCs. 7
The paper first examines the role played by SMCs in facilitating the operational effectiveness of the larger construction organisations, and their strategic contribution to the sector’s economic and productive activities. It then considers some of the changes that are influencing the industry as a whole, as a background to a wider discussion of the challenges SMCs will have to confront and address if they are to sustain their current role in the sector and manage their operations and businesses in a climate of continuous change. These include recent developments in communications and information technology that will have significant impact on the management of the production processes in construction. It discusses the implications of these evolving technologies and highlights the likely changes to both construction organisations and construction processes over the next decade. Background As an industry, construction in every country consists of a large number of small and medium companies (SMCs). These companies generally operate at a local and/or a national level as contracting, consulting, regulatory, or allied services organisations. The list below provides examples of the areas of specialisation for construction SMCs. Example areas of specialisation by construction SMCs • Architectural designers • Labour-only contractors • Civil designers • Manufacturers • Cost consultant • Material suppliers • Demolition contractor • Mechanical designers • Electrical designers • Plant / equipment suppliers • Facilities management • Project management • Financial institution • Regulation accreditation firms • General contractor • Safety/ Quality consultant • General Designers • Small works contractor • Insurance agency • Specialist contractors • Structural designers • Specialist designers 8
The construction industry plays a key strategic role in every economy, the significance of which stems from its size, accounting for a GDP contribution that is estimated between 8-14% (OECD, 1998). This GDP contribution could be much higher if the hidden economy, of which construction usually boasts a substantial proportion, is taken into account (Flemming, 1988). The primary production activity within the construction industry brings together several parties who act in concert for the realisation of the clients' requirements. These parties range from very large companies, in some cases, to the very small enterprises. The construction industry in the UK, for example is predominated by a large number of small companies, and this has been the case for a very long time. Hillebrandt and Cannon (1990) reported that in spite of many changes that had affected the industry from the early 1970's, this structure of the industry had remained largely unaltered. Table 1 presents the structural distribution of companies by size that make the construction industry within Britain from the late 1980s following the work of Hillebrandt and Cannon (1990). Table 1 Size distribution of construction companies in Britain Year 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
% SMCs 99.86 99.86 99.87 99.87 99.89 99.90 99.91 99.91 99.90 99.88 99.87
% Large Companies 0.14 0.14 0.13 0.13 0.11 0.10 0.09 0.09 0.10 0.12 0.13
Source:Digest of data for the construction industry 1998 9
This shows that over the period from 1987 through 1997 there was little change in the structural distribution of the British construction industry, with over 99.8 % of the companies still classified as SMCs. The structural distribution of companies by size for construction has continued into the 21st century. This situation is not only characteristic of Britain but bears similarities with the construction industry in many countries. The economic rational for the industry's structure has often been attributed to the nature of the work and the distribution of demand. The work is highly diversified by type, size, function, form and method of production, and materials used. Production activity in construction equally requires the services of many different trades and specialists. Since it is uneconomical for any one contractor to retain all the trades and specialisations of the industry, construction companies tend to undertake only part of the full range of operations required. Work of a specialist nature and work not undertaken by a company, are assigned to other companies of a relatively smaller size in a sub-contract arrangement. A major development emerging from this sub-contract arrangement is that several of the larger contractors in recent times have tended to employ a management contracting approach for delivering the requirements of the client. This involves withholding project management and design management skills within the larger construction companies, while the small and medium contractors (SMCs) retain the operative skills. The ability of a large contractor to perform to demands of cost, time, and quality is therefore influenced in a direct way by the performance of the SMCs it employs. In addition, the relative and absolute cost advantages often associated with large-scale operations and establishments in the manufacturing industry are of little importance in construction. In addition, capital requirement for entry into the industry is generally low along with a low working capital requirement for running projects. Although construction projects can be large relative to the size of a company, and financed over long periods of time, the financial requirements are usually met by regular progress payments from clients, and trade 10
credits from the industry's suppliers. These contributing factors enable construction companies and particularly SMCs to undertake projects that are much larger than their capital base. SMCs in Perspective A working definition of SMCs adopted in this paper is the European Commission’s employment criterion for small and medium enterprise (European Commission, 1998). This describes a small and medium firm as any business that employs less than 250 people and has an annual turnover not exceeding £28 million. The categorisation of SMCs in this paper covers three identifiable groups, namely micro, small and medium companies. The micro companies comprise all the enterprises with less than 10 employees. The small and medium companies are ones that have 10-50 and 51-250 employees, respectively. This will therefore, include all Trades enterprises that undertake labour sub-contracts and the majority of specialist contractors and consultancy companies that operate in construction. Each SMC has a relatively small share of the total market and cannot affect it in isolation. However, as a sector within the industry SMCs play a very important role both in the operational activities of the construction process and the general business within the construction industry. In very many cases they work in a subcontractor role with the larger construction organisations to undertake the client's project. Obtaining business by this means is often driven by a close relationship between the SMC and the large organisation. In addition, SMCs undertake work in their own right, whereby they go through other motions of marketing so as to win orders. SMCs have traditionally operated at the local or regional level and in special cases at a national level. Their geographical scope of operation implied that SMCs in the past have had to concern themselves only with economic circumstances of their local/regional or perhaps national level. There is however evidence that the business environment of these organisations, which previously was characterised by a relatively stable market, is changing (Cosh and 11
Hughes, 1996; Thorpe et al., 1998). So, construction firms will need to re-think the solutions they offer and in what business processes, rather than what products or services are being supplied. This is essential because the evidence points to a future business in construction that will be largely location independent, not only in a geographic sense (Nutt and McDermott, 2000). SMCs strengths and weaknesses It is well known that small businesses are not ‘scaled-down versions’ of large businesses. While most SMCs are labour-intensive, their larger counterparts tend to be more capital intensive. With the use of the labour-only subcontract arrangement many countries provide a fitting example of the difference between these two types of companies. The distinguishing characteristics between SMCs and their larger counterparts present both strengths and demerits for the smaller companies. Strengths There are a number of reasons that account for the strength of SMCs.
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By their very nature, SMCs do not take up substantial workload for any one company. This means that the companies are relatively less tied up in work-in-progress. SMCs tend to work in only one market segment at a time (Henkes and Mourer, 1990). This ensures that they avoid over-extending themselves beyond their business capacity. SMCs are more flexible due to the transferable skills that apply within the industry. A small concreting company operating in housing can readily move into light-commercial construction. SMCs generally have little overhead. This allows them to undertake the same work for less as compared to the large ones.
Due to above factors, there are certain categories and scales of project that the large companies cannot undertake at a cost-effective price, but which the SMCs can. SMCs therefore present possible options for reducing the cost of construction to the client. Weaknesses Hillebrandt (1988) described SMCs and construction companies in general as comprising businesses that in very many cases are family owned, and financed primarily by equity. Although this situation has now altered considerably in the 1990s for the larger counterparts, it still is prevalent for the SMCs. The over-dependence on equity as the sole source of capital often limits the volume of business activity any one SMC can take on at any one particular time. This limited business capacity affects the volume of capital SMCs can raise and thus, perpetuates the cycle of low activity. Strategic importance of SMCs The relevance of SMCs in the construction industry of every country is briefly discussed below under the following areas of impact on the economy, national economic role, employment, skill base generation, and local presence. National economic regulator The construction industry is often employed as a regulator by governments to stoke or dampen economic activity. The larger companies are not flexible enough to adapt to the short-term variations that occur as a result of central government's economic regulation. This is often absorbed by the more flexible SMCs. As a consequence of this, SMCs tend to experience more company formations and bankruptcies (DETR, 1998). Employment Figure 1 shows the distribution of employment by size of firm within construction. It indicates the high proportion contributed by SMCs to 13
the sector’s employment generation, accounting for over half-a-million jobs.
Employment generation in construction SM Cs
Larger companies
1200
Nu m b e r ('000)
1000 800 600 400 200 0 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
Figure 1 Distribution of construction job creation by size of company (Digest of data for construction industry 1998) Skill base generation SMCs also contribute in the area of skills development. For many of the trades and crafts, SMCs provide a useful starting point for their career. Often the larger organisations require some previous experience for their employees. This experience is usually gained with SMCs.
Impact of SMCs on construction delivery Construction executives of large organisations have in the past primarily concerned themselves with the company's internal activities. Today however, this concept of their role is changing because the external environment that affects their internal organisations presents a more complex nature. The need to pay greater attention to organisations that operate in their external environment such as SMCs becomes quite obvious. The ability of a large contractor to perform to demands of cost, time, and quality is often influenced in a direct way by the performance of the SMCs it employs. The economic significance of SMCs to large contractors makes it imperative that research attention should be focused on their business practices, not only to ensure greater productivity for the SMC, but also to address the overall competitiveness of industry and enhance the potential for customer satisfaction. The domination by numbers of SMCs in the industry has already been outlined in earlier sections of the paper. Figure 2 presents the proportions of the industry's market share between the SMCs and their larger counterparts. Although by proportion the larger organisations undertake about a third of the industry's output, the workload per company is much more significant compared with that of the SMCs. Notwithstanding the fact that on an individual organisation basis, large companies dominate the industry in terms of turnover, SMCs have a major role in the industry. Increasingly, several of the larger contractors employing the management contracting approach for delivering the requirements of the client need a vibrant SMC subsector to support their operations. SMCs facilitate their economic activity of their larger counterparts through subcontracting.
Local presence SMCs in general, serve as a stopgap between small clients at the local level who in many cases cannot afford the services of the much larger construction companies. They thus generate local economic activity through their business operations. In this way, they serve as a representation of the industry at the local level. 14
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ones such as employment conditions. On the broader level, the global market for construction is characterised by constant transformation: changes in technology; changes in procurement routes; and changes in finance, are all influencing the industry, its constituent organisations and project operation.
Proportion of industry workload in construction
P e r c e n t a g e o f w o r k lo a d
100 80 60 40 20 0 1987
1988
1989
1990
1991
SM Cs
1992
1993
1994
1995
1996
1997
Large companies
Figure 2 Workload by type of construction company in Britain (Digest of data for the construction industry 1998) For example, the industry in the UK is gradually witnessing a situation whereby project management and design management skills are retained within the larger construction companies, while the operative skills are retained by the SMCs (Cawthra, 1991). Over 80% of turnover for the general contractors, and about half of the total turnover for civil contractors are subcontracted (DETR, 1998). The ability of a large contractor to perform to demands of cost, time, and quality is now more dependent on the performance of the SMCs it employs. Construction Industry in Transition There are several socio-economic factors that have developed over the last decade to give pre-eminence to SMCs in construction. These range from changes in broader issues such as world order to micro 16
The construction industry has always been a keen competition arena due to the ease of entry. Such competition has further been accentuated by greater client demands for improvements in quality, cost reduction and early delivery for the facility or infrastructure that they procure. These competitive dynamics have in recent times resulted in construction organisations seeking new management approaches to remain competitive. Throughout the last two decades of the 20th century, the construction industry in many leading industrial economies built up a formidable capacity to satisfy high levels of client demand. That level of demand no longer exists, as evidenced by the statistics on orders for the industry. However, the large capacity of the industry, which is now in excess of demand has remained well into the 1990's and beyond, further heightening fierce competition that exists in the industry. Because of the intense competition the difference between winning an order and losing it often depends on a contractor's ability to keep efficient levels of overheads and profit margins. In the wake of the 1989 to 1992 recession, this often led to below cost tenders in the UK to keep some companies in business, often with devastating financial consequences, not only for themselves but for all other companies within the industry. To cope with the impact of these business changes the larger construction companies, in particular, have undertaken productivity improvements for their production processes, as well as adopting various structural adjustments of their organisations in order to remain competitive. These adjustments include downsizing, retrenchment to core business, reduced scope of operational activities, and reduced scope of sectors covered. At the close of the 20th century, these adjustments had resulted in a major re-orientation of business scope for a number of large construction companies that have been household 17
attempted a speed up of the manual processes. Many systems developed were directed at the operational level and found use in secondary activities, such as word processing and bookkeeping, to support the management of construction companies and projects. The second generation of IT developed for the construction industry evolved during the late 1970s and continued through the late 1980s. The primary aim for most of the developments in this era was to have the IT function aligned with, or supporting the functions of a construction company. The development of various application systems to tackle time-consuming or iterative operations took place within this period.
names in the UK, including J. Wimpey plc, J. Laing plc and Tarmac Ltd. For these structural adjustments to be effective the larger companies within construction not only have to rely on outsourcing various periphery functions, they equally need to be able to achieve the same levels of productivity for the functions they outsource. In addition to the internal forces driving change within construction, there is also the external imperative that impacts on the industry's activities. These include technological developments such as digitisation of all construction information, electronic commerce, and communication. These technologies have in the 1990s, and since then, come together to give SMCs the capability to undertake business to the scale and in the same manner as their larger counterparts. Equally these technologies are making remote working possible, a constraint that has always ensured that geographically dispersed activities of the construction process does not lend itself to manufacturing style management.
The introduction of IT and communications technology within construction to improve the management of such information resources has progressed through three phases. The first phase lasted up to the late 1970s. This entailed use of IT to achieve efficiency and cost savings in the processing of information. Improvements in this phase did not alter the way in which the information was organised but rather 18
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Portable computer PDA
4500 No. of sources (inclusive of web sources - million)
The impact of IT on the operations of the construction industry is still evolving, but its present status and future trend can be appreciated from Figure 3, which presents growth patterns for mobile computing and information availability. The effective management of information resources within construction impacts both the success of projects and overall performance of individual construction companies. The impact of IT to SMCs is more poignant because computerisation of construction operations and processes, until recently used to be the domain of the larger companies.
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Number of units in use (million)
Construction IT-Revolution
Growth in information sources available to corporate decision-makers
Growth in mobile computing
30 25 20 15 10 5 0 1997
1998
1999
4000 3500 3000 2500 2000 1500 1000 500 0 1995
1996
1997
1998
1999
2000
2000
Figure 3 Growth in IT revolution 19
2001
The main achievement of this phase was isolated automation of tasks in the design and construction process. These included stand-alone systems for project planning, estimating, and accounting and financial reporting. According to Emery (1990), many of the strategic benefits from IT systems in this period proved to be less sustainable than originally predicted. Many construction organisations emerged from this era with large IT cost structures and doubtful opinions of IT by senior management (Cross et al., 1997; Violino, 1997). The third generation of IT dates from the early 1990s, and is still evolving. This is addressing the integration of the stand-alone systems developed in the second phase, in order to maximise the use of IT as a strategic resource for construction. It also focuses on the use of IT as a communication medium capable of establishing and maintaining favourable supply chain relationships. The developments for construction have almost exclusively taken advantage of innovations achieved in other domains, and as such have moved at a pace behind IT leaders. Productivity benefits of IT to construction The main benefit of change, brought about by IT, are speed and virtual proximity. These are two critical elements essential for achieving success in managing construction projects. Large volumes of data can be processed faster, and distributed to disperse geographical locations much quicker (Miah et al., 1998). This creates a virtual proximity for distant geographical locations. These benefits have been widely shared by both industry and general society because of the falling cost for computers, an explosion in software development, and cheaper telecommunication costs. Hardware and software revolution While construction computing was once the domain of large, wellcapitalised construction firms, the diminishing cost of personal computers has put computing power within the reach of even the smallest contractors. At the same time, rapidly developing hardware performance, coupled with the development of ROM storage drives, 20
modems, scanners, and back up devices have added much needed functionality to personal computing. The evolution of connectivity hardware such as servers, network cards, modems and routers have linked computers together providing a forum for community collaboration. The construction software industry has matured as well. The rapid development of the Internet has also levelled the software playing field through the use of simple "open architectures" like TCP/ IP and HTML (Hypertext mark-up language). For example, the newest versions of CAD programs AutoCAD, and Micro-station include features that allow multiple users to post, view, redline and collaborate through the use of an Internet based web browser. Lower cost of communication High telecommunication tariffs have long been a major stumbling block for exploiting technologies that rely on electronic communication (ESPRIT, 1997). However, the implementation of the package of telecommunication liberalisation measures is already leading to lower prices and to more flexible pricing schemes. The WTO Agreement on Basic Telecommunication will contribute directly to the emergence of a global marketplace in electronic commerce. Similarly, recent international agreements to eliminate tariff (ITA) and non tariff barriers should rapidly bring down the cost of key Information Technology products, encourage the take up of electronic commerce and reinforce competitiveness. Globalisation Globalisation is the consequence of political and economic developments in the latter part of the twentieth century, whereby world-wide resources are employed to increase the gap between costs and turnover. This has in recent times been facilitated by the availability of technology and regulatory frameworks put in place by the WTO. The effect of globalisation is increased competition, as markets open up to world-wide competition. The globalisation phenomenon within construction is aptly presented by Siehler et al. (2000) in their evaluation of the growth status of European construction contractors. 21
IT Changing Construction? Current developments in IT for construction have progressed along four main lines, standardisation (examples include the use of EDI and bar coding), visualisation (comprising CAD, VR, and Augmented Reality), communication (including video/data conferencing, Intranets), and integration (employing infobases and project specific databases). The impact of these developments is leading to a new agenda for the construction industry. New organisational relationships In recent years, both academia and industry practitioners have suggested that the way companies organise themselves, do business, and undertake projects is inherently flawed (Cross et al., 1997). As a result, traditional models of hierarchy, standardised procedures, functions, responsibility centres and performance measures for both the construction companies and projects have all come under scrutiny. So nothing short of organisational transformation has been advocated. Contemporary corporate activity such as downsizing, out-sourcing, delayering, and re-engineering have found frequent use in the management of both the company and projects within construction. The resulting lean organisations have to rely on greater collaboration to achieve project and corporate goals, and have given rise to a growing trend in partnering. This affects the length of the communication chain for both project and company, as several parties become privy to decision-making, which hitherto had been the sole responsibility of one organisation. Internet technology The Internet has a huge potential as it relates to construction. This is an industry that continually moves information back and forth between offices and remote job sites. Given the simplicity of web browsers, and a new generation of Internet ready software, many corporations are now using the Internet to publish and transfer information within a 22
company or to members of a project team. This includes access to a wide range of construction documents, including drawings, specifications, requests for information, budgets and meeting minutes (Vanier et al., 1995). Currently, several construction and design firms are using Intranets to form project specific web sites (ENR, 1996). These new information technologies may help construction and design firms re-engineer the way they communicate on increasingly complex projects. The use of project specific web sites can be employed to save time and shipping costs as well as improving communication between isolated members of the project team (Novitiski, 1997). Authoring tools like Java or Active X provide potential for creating custom web centred applications that are geared specifically towards the clients' needs (Thompson, 1997). E-commerce and e-trading Electronic commerce is about doing business electronically. It is based on the electronic processing and transmission of data, including text, sound and video. It encompasses many diverse activities including electronic trading of goods and services, on-line delivery of digital content, electronic fund transfers, electronic share trading, collaborative design and engineering, on-line sourcing, public procurement, direct consumer marketing and after-sales service. It involves both products (e.g., technical goods such as material components in construction) and services (e.g. information services, financial and legal services); traditional activities (e.g. healthcare, education) and new activities (e.g. virtual malls). It is estimated that electronic commerce revenues on the Internet may increase to ECU200 billion world-wide by the year 2000 (Council for Economic Cooperation, 1997). This revolutionary growth will lead to profound structural changes in construction. Electronic commerce is not a new phenomenon. But there is now accelerated expansion and radical changes, driven by the exponential growth of the Internet (Faucheux, 1997). This involves transactions on a global scale between an everincreasing number of participants, corporate and individual, known and unknown, on global open networks such as the Internet (Hardwick 23
and Bolton, 1997). Electronic commerce, of course, is not limited to the Internet. It includes a wide number of applications in the narrowband (videotex), broadcast (tele shopping), and off-line environment (catalogue sales on CD-ROM), as well as proprietary corporate networks (banking). Also, the Internet is generating many innovative hybrid forms of electronic commerce - combining, for example, digital television infomercials with Internet response mechanisms (for immediate ordering), CD-ROM catalogues with Internet connections (for content or price updates), and commercial Web sites with local CD-ROM extensions (for memory-intensive multimedia demonstrations). Construction in a Digital World According to Negroponte, we are rapidly moving from a world dominated by atoms to one dominated by bytes (Negroponte, 1995). In the past design and construction relied on paper based documents to exchange information. Developments in information technology are changing the way that construction teams generate, store, transmit, and co-ordinate information (Basu, 1996). Over the past decade, many design firms have moved toward digital production of construction documents (bytes). Today, most design and engineering work is completed using computer aided design (CAD) software, and this is slowly replacing traditional paper based construction drawings. Traditional text based documents are taking on a digital form as well. Specifications, transmittal letters, memorandums, and other text based construction documents are increasingly produced using word processing software or spreadsheet programs. Video conferencing Rapidly developing video conferencing tools are also changing the way construction projects are run. Virtual conferencing tools like CUSeeMe, Microsoft's Net Meeting and Netscape's Collabra are now being bundled with standard computer software packages, and these tools will enable project teams to collaborate, redline drawings and solve problems without having to travel to the job site. These 24
advancements will help reduce travel costs and improve project communications. Infobases Increasingly, construction manufacturers are using the Internet to publish information regarding their product lines. Traditional paper based brochures, catalogues, and specifications were cumbersome to use, take up room, and information goes out of date quickly. Digital catalogues are now being posted to a manufacturer’s web site where specifications and pricing can be updated regularly. Currently, several web sites provide access to manufacturers’ data including, FM Link, Construction Net, Canadian Engineering Network, Building On Line and others. There are other projects under development to ensure effective exploitation of these technologies for the engineering sector. For example, the GENIAL project under the Global Engineering Network Initiative is an ESPRIT programme aimed at developing Intelligent Access Libraries to meet the particular needs of the engineering sector within the EU (Radeke, 1997). Web monitoring of works progress The use of still images in j-peg format posted to the web or project intranet, to visibly show progress of construction works on site is fairly common. This is often used as a means of communicating progress to head office and the client as well as other project stakeholders. The use of such still images provide only post-hoc monitoring benefits in addition to the historical records that it serves. The development of real-time video image capture is currently opening up avenues for the introduction of remote-supervision of site works. The technology is currently available in a less developed form within the transport sector for monitoring traffic. Its full development will have the potential of impacting on the role of the site manager with regard to numbers and skills to be deployed.
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Construction Futurology According to Soderberg (1996) the future of the construction process presents three major scenarios for working within the industry; from the design, production, and the property management perspectives. While these scenarios incorporate various applications of IT and communications technology, they still present the industry from a functional perspective. According to Mowshowwitz (1997) and XianZhong and Kaye (1997), there is ample evidence that the future of industry will not be driven by this functional approach. Business of construction Electronic commerce is an emerging market. In this fast moving and highly fluid environment, we are seeing the development of a wide array of innovative virtual businesses, markets and trading communities. Companies are now routinely outsourcing over the Internet functions such as order fulfilment to specialist firms. Materials suppliers and distributors are “going virtual”, outsourcing the physical warehousing and movement of goods to logistics specialists. Buyers, sellers and intermediaries are forming industryspecific Internet markets in such diverse fields as real estate and construction equipment. Similarly, global construction and engineering industries, such as automobile, computers and aerospace, are actively integrating their supply chains through the Internet. New functions are now being created. Innovative virtual middlemen are providing value-added services - such as brokering, search and referral- to businesses and consumers. Construction forecast These emerging trends will result in an industry with organisations that may have little direct semblance to the present state of construction. The industry will witness some winners and losers as it goes through this structural change. Traditional professional disciplines that give rise to the industry's functional oriented structure will be replaced by 26
more flexible systems, in which knowledge and capability will be widely available through global infobases. This will give rise to the loss of some job functions, and naturally result in the creation of new ones. Although the traditional functions will still be relevant, individuals will have to combine capabilities beyond the boundaries of existing professions and become what the British Computer Society has termed hybrid managers. Many lower-level management and clerical positions will be displaced, as work designs, work flow, reporting systems, accounting and control mechanisms are automated through the availability of IT. Equally, many construction organisations will have to do business in different ways from today. New forms of individual to individual commerce are appearing. Forecast Impact on Construction The above futures presented on how competitive forces and IT are impacting on construction now and into the future will influence the sector’s activities at three levels, and this is given brief attention in the succeeding sections. Company level The availability of current technology will enable both individuals and construction companies to form virtual organisations. This will help to overcome the problems of physical interaction between the various parties of the construction project, and facilitate the requirements of speed and virtual proximity. The management of projects and organisations will experience more electronic and less paper-based information particularly in the areas of specifications and regulatory instruments. There will be a move towards smaller organisational units, virtual teamwork, and a growth in tele working. In such virtual environments, team members will seldom share a common workplace, and in some cases may rarely see each other.
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Project level
SMCs coping into the construction futurology
The prevailing market forces and recent developing trends are placing new demands on the management of projects within construction. The effect is a growing awareness regarding quality, productivity, which are pushing for fundamental changes in the way projects are managed. These demands are reflected in developments such as partnering, total construction (ECI, 1994) and electronic management of project documentation (Polaine, 1997). The main issue that will be addressed at this level is greater integration of the construction process. Such integration will address various issues including the electronic distribution of all project documentation to allow instant access to information, and the networking of project teams.
While these advances are changing the way that construction companies work, there are still some concerns regarding the wide scale implementation of information technologies. Some prominent issues include usability, legal issues, and training requirements. SMCs will need to position themselves to address the changes inherent in the widespread deployment of such technologies as well as coping with the aspects of intensifying competition.
Site operation level Future developments in areas such as speech recognition and wearable computers may also help streamline the usability issue. Faster processors in low-cost computers and advances in programming techniques have made automatic speech recognition (ASR) a major focus of software developers. Currently, products like Dragon Systems allow users to dictate correspondence to their computers, and in the near future construction users may become less dependent on the keyboard as an input device. Similarly, low cost user-friendly wearable computers are now becoming available. The co-ordination of projects from remote offices will incorporate more real-time visual links. Also, electronic archiving for progress reporting at the site will find increasing application within construction. Preliminary developments in this direction have been achieved by Gaugh et al. (1997), with the development of the Vision Digital Library. The use of global-nets such as GENIAL for access to material specifications and construction detailing both at the design and construction phase will significantly impact the process and culture of construction.
Part of the appeal of the World Wide Web has been the user friendliness of the web browser. Because these browsers use a simple point-and-click interface, users can be trained in their use in a matter of minutes. Similarly, e-mail systems, the modern equivalent of the telegram, also provide users with a simple method of exchanging information and electronic files. In essence, the best IT tools are like FAX machines: products that are simple to use, require little training, and can be put to work immediately. The cost of adopting these technologies by SMCs is no longer prohibitive. However, there are attitude changes in many SMCs that will need to be given attention if the full benefits of these technologies can be harnessed to the advantage of SMCs in construction. Generally, the contract process dictates that information will be processed in linear fashion between legally responsible parties. As such, a typical document might flow from vendor to subcontractor, from subcontractor to general contractor, from general contractor to architect, from architect to engineer and back again. Evolving IT applications like the project specific web site, streamline information transfer by placing information at a central hub where all parties can access it. Unfortunately, this transfer circumvents the traditional chain of command, and many contractors have concerns regarding contractual liability and professional property issues. It is essential for all SMCs to adopt appropriate training programmes to ensure that the work force stays abreast of the rapid evolution of the
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electronic age. Naturally, SMCs in the UK will achieve this by being accredited for Investors in People. However, it is essential that such accreditation is undertaken to bolster a change in worker attitude and culture akin to the demands imposed by safety regulations. While other industries have embraced the use of information technologies with dramatic production improvements, the construction industry has been slow to exploit the new developments in information technology. With an under-educated work force and low operating margins, construction firms have been reluctant to make major investments in IT. At the same time, the tidal wave of electronic change has created a paralysing situation where construction users are waiting to get a clearer understanding of the paybacks associated with their information technology investments. Recent research shows that training accounts for 55% of the total ownership investment in a business desktop computer (Park, 1997). Given the trend toward faster project schedules, global collaboration, many sophisticated contractors are now implementing some of the technologies discussed herein. Increasingly, architects, engineers, and contractors will have to make a substantial investment in employee training to realise the productivity improvements that are inherent in IT. Conclusion The future of construction will be influenced significantly by evolving trends in the global economic arena. Large companies in the industry will be able to withstand the pressures of competition and demand for improvement and greater productivity by harnessing the potential that SMCs have. This paper has raised a number of issues regarding the role that is played by the small and medium construction sector within the industry. While their part in the delivery of the client's requirement is by and large a secondary one, the ability of the larger companies that take a front row in the process will increasingly be dependent on the SMCs. This makes SMCs strategically relevant to any developments for driving up improvements in client satisfaction for the industry. Effective co-operation between the larger companies and the SMCs 30
should help to foster improvements and hence greater client satisfaction. Current market shifts and globalisations are driving construction in new directions. The increased competition resulting from such open markets is being accentuated by client demands for more effective use of their limited resources. Technology can hold the key to achieving the level of efficiency required in such evolving construction business environments. The impact of technology is bringing about a new shape to the way construction utilises and manages the information resources that are employed in its processes. The nature of the industry's processes both at the project and corporate level will be driven by these emerging information and communications technologies. This will influence not only technology aspects of construction, but also alter the present functional structures within which the industry operates. In particular, the evolution of the Internet will facilitate the establishment of electronic commerce in the construction industry. Electronic commerce offers enormous opportunities for the construction industry. It will have considerable impact on the structure and operations of the labour market. Construction will need to adapt to exploit these opportunities, expand existing businesses and launch new ones. Training and education for these new skills will be needed. The organisations that can adopt and capitalise on these changes will emerge as leaders in the global market for construction. References Basu, A. (1996) Impact of Information Technology on Construction Project Management. Transactions: American Association of Cost Engineers. Cawthra, D.E.W. (1991) The European construction industry in the 1990s. In: ECI, Construction in Europe, Report No. C/001/0.
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ESPRIT (1997) A European initiative in electronic commerce. Communication to the European Parliament, the Council, the Economic and Social Committee and the Committee of the Regions, COM(97)157, Available: http://www.cordis.lu/esprit/src/ecomcom.htm. European Commission (1998) Activities in favour of SMEs and the craft sector, EC, Belgium.
Miah, T., Carter, C., Thorpe, A., Baldwin, A. and Ashby, S. (1998) Wearable computers: applications of BT's mobile video system for the construction industry. BT Technology Journal, 17(1). Mowshowwitz, A. (1997) Virtual organisation. Communications of the ACM, 40(9), pp. 30-37. Negroponte, N. (1995) Being Digital, NY: Harcourt Brace.
Faucheux, C. (1997) How the virtual organisation is transforming management science. Communications of the ACM, 40(9), pp. 50-55.
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Novitiski, B.J. (1997) New Net-Flavors: Technology Growing Faster than Vocabulary. AEC Systems Magazine. Summer 1997. 33
OECD (1998) Trends in OECD countries’ international competitiveness: the influence of emerging market economies. Economics Department Working Papers, No. 195, available: http://www.oecd.org/eco/eco. Park, A. (1997) New Machines Stirring Office PC Market. Raleigh News and Observer, September 22, 1997. Polaine, I. (1997) PAFEC EDM site manager: reducing the document burden for construction site offices. Information Management and Technology, 30(5), pp. 233-235. Radeke, E. (1997) GENIAL - Turning engineering knowledge into an accessible corporate asset. In: Gausemeier, J., ed Proceedings, International Symposium on Global Engineering Networking, Part II, April 22-24, 1997, Antwerp, Belgium, pp. 95-104.
Vanier, D. and Turk, Z. (1995) Internet opportunities for distributed construction information. International Council for Building and Construction, Working group W78, Information Technology in Construction. Available: http://delphi.kstr.lth.se/80/w78/html. Violino, B. (1997) ROI- the most intangible benefits of technology are emerging as the most important of all. News in Review, CMP Media Inc., 30 June 1997. Available: http://techweb.cmp.com/iw/637/37iucov.htm. Xian-Zhong, M.X. and Kaye, G.R. (1997) Beyond automation and control: manufacturing information systems from a strategic perspective. International Journal of Information Management, 17(6), pp. 437-449.
Siehler, B.A., Neale, R.H. and Mustapha, F. (2000) European contractors towards achieving global player status. Construction Information Quarterly, CIOB, 2(4), pp. 1-6. Soderberg, J. (1996) How can IT affect the construction process. In: Langford, D.A. and Retik, A., eds. The Organisation and Management of Construction: Shaping Theory and Practice, Volume 3, London: Spon, pp. 217-225. Thompson, J. (1997) Intranet project archival. Construction Business Review, 5(5). Thorpe, A., Edum-Fotwe, F.T. and Mead, S. (1998) Managing construction projects within emerging information-driven business environments. In: Fahlsted, K. (eds.), Construction and the Environment, Proceedings of the CIB World Congress, 7-12 June 1998, Gavle, Sweden, pp. 1901-1910.
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CURRENT ISSUES IN SMALL CONSTRUCTION CONTRACTOR DEVELOPMENT George Ofori
Importance of, and problems faced by Contractors Importance Works on the improvement of the construction industries of developing countries usually devote considerable attention to the improvement of the performance of contractors (Kirmani, 1988). The literature highlights the importance of contractors in the overall development process of buildings and items of infrastructure (UNCHS, 1996). It is argued that as they translate the blueprints prepared by other members of the design and construction teams into the physical facility in operations which are potentially dangerous to their workers and the community, they require a wide range of skills, including the technical, managerial and social. It is also important to improve the capacity and capability of the contractors’ firms as they determine the overall ability of the construction industries to meet the developmental needs of the nations. Moreover, the contractor’s work has implications for the quality, durability and value of the completed item. This has implications for the efficacy of national savings. The development of small contractors is considered to be important as these organisations can provide the framework for the upgrading of the industry as a whole. Problems The previous works identify a large number of problems and poor prospects facing contractors in developing countries, especially the smaller ones. These problems include (ILO, 1987; Ofori, 1991): • resource constraints, especially, poor access to finance 36
37
• • • • •
poor corporate management and lack of commitment to construction poor corporate prospects owing to small size and competitive market poor operating environment including bureaucratic contract award and administration procedures weak or non-existent institutions to provide support to, and seek the welfare of the firms lack of support from the governments.
It is reasonable to note that the small contractors face more severe problems than their larger counterparts in each of the areas highlighted above. Previous Works on Small Contractor Development Most of the previous works on the development of contractors in developing countries concentrate on the small contractors (Ofori, 1999). The authors invariably highlight the problems facing these companies including those outlined above, and discuss how such companies can be assisted to improve their performance by upgrading their operations, and thereby, enhance their prospects for growth (ILO, 1987; Ofori, 1996). The authors agree that the process of contractor development is extensive and must include a wide range of initiatives targeted at: the enterprises themselves; the employees and proprietors of these companies; the resources which these companies require; the rest of the construction industry, such as the designers; and the operating environment of the contractors. Some examples of these works are now presented. Proposals for Action by Governments Many of the proposals made by writers for developing the local construction firms in the poorer countries are addressed to governments (see, for example, Andrews et al., 1972). Hodgson and 38
Gwagwa (1997) outline the following components of the programme adopted by the government of South Africa to develop small and medium-sized (or “emerging”) contractors in South Africa: reform of the public-sector procurement policies and arrangements; a national emerging contractor development programme; wider strategies for developing the construction industry including training, contractor accreditation, programme monitoring and evaluation; co-ordination of programmes implemented by the industry itself and non-governmental organisations, and their integration into those of the government; and institution building. The United Nations Centre for Transnational Corporations (UNCTC) (1989) notes that a comprehensive approach to the development of the construction industry would include: establishment of a government office responsible for studying and promoting the industry; initiation of training programmes; establishment of suitable, applicable and workable building codes and standards; institution of legal reforms to improve the efficiency of the industry; encouragement of local material manufacturers and suppliers; formulation of specific programmes designed to increase technical co-operation and local firms; and a flexible approach to the funding of construction projects. The guidelines for contractor development in developing countries offered by the International Labour Office (ILO) (1987) encompasses a wide range of policies and programmes for the construction industry and its operating environment. These include the following: a. To improve access to work: planning and formulating public-sector demand based on a rolling programme, and packaging projects in sizes which local firms can undertake; applying contractor pre-qualification and categorisation procedures to ensure fairness and objectivity; encouraging subcontracting; improving tendering procedures and simplifying tender documents; and disbanding government departments’ and agencies’ direct labour organisations after assessing their efficiency. 39
b. To improve the business environment: relaxing performance bonds (which are seldom called); providing loan guarantee schemes; offering mobilisation allowances to selected contractors; providing information and training to contractors on how to use banks’ services; improving contractors’ access to materials, tools and equipment; improving payment procedures; and reducing the limit of the retention fund. c. To offer training and advisory services: developing appropriate forms and contents of training schemes (including location and time); and motivating contractors on the value of training programmes. Proposals for Action by Industry Apart from the government, other organisations can play an effective role in the development of construction firms. These include contractors, other construction practitioners, professional institutions, trade associations and international organisations. The Singapore Contractors’ Association Ltd. (SCAL) (1997) has the following future strategy for improving the performance, not only of its members, which are large companies, but also, that of other local contractors, including smaller firms: a. To inform, upgrade and educate its members through seminars, workshops and courses for their personnel. b. To initiate and promote the application of the latest technologies and methods though joint research and development (R&D) and technology transfer. c. To boost productivity and efficiency of contractors through standardisation and value-added methods of construction. d. To ensure and improve on-site safety and security through training, consultancy and enforcement. e. To promote the importance of quality to contractors. 40
f. To facilitate and act as a catalyst for networking opportunities. g. To foster closer relationships with professional bodies in construction. h. To promote greater interaction and feedback between the construction industry and the authorities. Unfortunately, as discussed below, the potential contribution of construction industries in programmes for developing contractors has not been realised in any country. Contractor Development Programmes This section considers contractor development programmes, which have been implemented in some countries. Historical Developments A survey of the literature on the development of small and mediumsized local contractors shows that there have been significant changes in broad approaches over time. The early measures were indirect (Ofori, 1991). The local contractors were advised to take initiatives to help themselves. For example, firms were urged to merge in order to create units of more viable sizes, which are able to acquire a significant asset base. This would assist them to compete effectively for more sizeable and technically demanding projects, which would have better prospects of survival and growth. Enterprises in related businesses such as suppliers of materials and the financial institutions were also admonished to help the contractors by offering them credits. The indirect approach failed to improve the situation, and the contractors’ problems appeared to worsen over time. Ofori (1991, 1999) suggests that the main reason for this lack of appreciable success was that the root causes of the contractors’ problems were not tackled. 41
Moreover, the approach did not fully consider the nature of the construction business; the needs of the companies; and the way in which enterprises in other sectors, such as banks, perceive the construction industry and contractors (UNCHS, 1996). Thus, more deliberate efforts have been made to develop contractors in the developing countries.
and rehabilitation programmes funded important programme is the ILO’s Business programme which has been developing countries including Ghana South Africa.
by the World Bank. Another Improve Your Construction implemented in a number of (Miles and Ward, 1991) and
Formation of State-owned Organisations For nearly three decades, the development of contractors has been a planned, actively implemented and managed process in many developing countries. However, the problems of local contractors persist, and in some countries, have worsened (UNCHS, 1996). There are several possible reasons for this. First, the measures that have been applied have been ineffective or inappropriate. Second, the task of improving the performance of local contractors is complex and difficult (UNCHS, 1996). Most of the contractor development programmes that have been implemented so far are government-led. They have taken various forms in different countries. Other organisations that have played a role in this effort are international lending and aid agencies; nongovernmental organisations; individual large construction companies; local financial institutions; and educational, training and research centres. Among the key players is the World Bank; Kirmani (1988) reviews the World Bank’s programmes for supporting the development of construction companies. One set of these packages involved the financing of schemes which provided hire-purchase equipment for local contractors but these schemes were not effective because they did not adequately address the problems affecting the contractor’s costs and returns (Kirmani, 1988). Another programme involved the financing of training packages for local contractors and workers at various levels, which were attached to projects funded by the Bank. However, these were also ineffective because they focused mainly on formal training, whereas it is difficult to provide such training to contractors who are usually directly involved in operations on site. Addo-Abedi and Hammond (1997) discuss the series of programmes for developing local contractors in Ghana linked to road development 42
In the early years after their independence, the governments of many developing countries were directly involved in major areas (“the commanding heights”) of their national economies. There were two main reasons for this. First, the private sector was weak and lacked the necessary resources and expertise to perform in the significant way required contributing to national socio-economic development. Second, many of the governments had interventionist policies based on ideology. One of the sectors in which the state in the developing countries actively participated was the construction industry. Most countries formed a single large organisation, whereas others, such as Tanzania, set up a number of corporate entities. The firms had different terms of operations and levels of autonomy. The governments of the developing countries had two main objectives for setting up the state-owned construction companies. First, these firms were intended to undertake large and technically complex projects and compete with the foreign-owned companies dominating the large and complex project segments of the industries, and were suspected of influencing the prices. Second, the firms were established to lead the industry, for example, by demonstrating the use of modern technology and managerial systems and methods to local firms, hence upgrading the local industry. Thus, the formation of such large stateowned contractors’ organisations is relevant to the development of small contractors. Many of the developing countries that formed national construction organisations intended them to be profit making. They were expected to undertake both public and private projects within the country, and 43
eventually (in the not too distant future) work abroad. Some of these state-owned organisations have realised major achievements. Generally, they have undertaken some of the major construction projects in their respective countries, and some were successful abroad. Ghana’s State Construction Corporation undertook some projects in the neighbouring countries, and worked as far afield as Angola. The best examples of internationally successful stateowned construction organisations are from China. The largest and best known is the China State Engineering Corporation, which is among the larger international contractors, by turnover and number of employees. Chinese firms are a force to be reckoned with in the construction industries of South East Asian countries. Despite the examples of success which were highlighted above, on the whole, the state-owned corporations failed to live up to the expectations of their governments with regard to their corporate performance, the volume and quality of work undertaken, their technical capacity, and their managerial capability and effectiveness (Andrews, 1976). This is due to the large number of political, administrative and financial constraints which they faced (Ofori, 1991). Most of the state-owned construction organisations have been, or are being, privatised. In terms of small contractor development, the potential of the state-owned firms was not utilised. Potential Role of Foreign Firms During the initial stages of their development, developing countries have to import some construction capacity owing to their pressing and varied developmental needs. Significant proportions of these needs are projects, which are large or technically sophisticated. The local firms are ill equipped to undertake such projects (Drewer, 1980). Many authors and governments expected that the transfer of technology by foreign companies undertaking these projects in developing countries to their local counterparts would lead to the upgrading of local contractors in the host-countries (Andrews et al., 1972). Small contractors would benefit as these transferred technologies were 44
diffused throughout the industry. For example, the UNCTC (1989) noted that the transnational corporations could help construction firms in developing countries to improve their contracting capabilities. They can transfer technology, and help to improve the skills of local construction workers. Indeed, Moavenzadeh and Hagopian (1984) place foreign firms at the centre of the process of development of a nation’s construction industry. However, authors generally suggest, as the UNCTC (1989) did, that a fundamental issue should be to encourage the use of local companies and other inputs wherever possible. This is because of the possible adverse effects of the operations of foreign construction firms in developing countries. For example, local contractors lose the chance to build up experience, expertise and track record on significantly large projects (Ofori, 1996; Haavaldsen, 1999). Hillebrandt (1999) notes that the local firms lose self-confidence. Construction technology transfer is widely supported by governments and public-sector clients in developing countries (Abbott, 1985; Carrillo, 1994). However, it faces several problems. First, international construction firms are often unwilling to nurture potential competitors in their local counterparts (Goulet, 1977), especially since contractors from developing countries such as Brazil, China and India feature strongly in the world market (Strassman and Wells, 1988). Second, it is pertinent to note that technology transfer is not without its costs (Ofori, 1999). Construction technology transferors may face extra costs and project delays. Moreover, the process of transferring the technology must be managed, adding to the tasks of the transferor on the project. Third, the uniqueness of construction projects makes it difficult for local personnel who receive training to utilise the acquired knowledge. This also poses obstacles to both local and foreign firms as they seek to learn from experience in the transfer of technology. The Asian Productivity Organisation (1983) suggests that local construction industries should be enabled to benefit from the operations of international construction enterprises. In Tanzania, the 45
National Construction Council (1993) proposes a possible way in which skills could be transferred from foreign to local companies. Under the “Management Contracting” approach to the development of local contractors, a large project would be awarded to a foreign company. This firm would then subcontract all the works to local contractors and manage their operations on the project. The foreign contractor would also be responsible for cost, time and quality on the project. The performance of the local firms would be monitored to identify shortfalls, and training or advisory services would be offered in line with the requirements of the transferee. Experience has shown that the transfer of expertise from foreign to local contractors and its diffusion to other, smaller firms does not just happen. Thus, many governments have taken measures to achieve it (Ofori, 1994). The foreign companies have also adopted appropriate business practices. Abbott (1985) and Rashid (1993) highlight the use of technology transfer as a marketing and business tool by major international contractors. Protection of Local Industries Many developing countries have introduced restrictions on the operations of international firms to protect their “infant” construction industries from these firms. These measures are intended to limit the adverse effects of the operations of foreign firms on their local counterparts. In addition, foreign companies are allowed to undertake certain projects that are beyond the capability of local companies, the latter are able to benefit from their operations (Ofori, 1999). The first example of protectionist measures for local construction firms is the attempt to increase their competitiveness for projects. This often takes the form of the offer, to local firms, of tendering preferences on some public projects. Such preferences are intended to enable the local companies to build up their track records and resources. Some international funding and aid agencies give similar preferences on projects for which they provide finance. The World Bank (1995: 50) 46
offers “a margin of 7.5 per cent to domestic contractors” of developing countries when projects are awarded after international competitive bidding. The protectionist measures take various forms, and vary in explicitness and subtlety. Davis, Belfield and Everest (1988) highlight regulations introduced in some countries to protect local construction enterprises. The UNCTC (1989: 39) notes that among host-country government requirements, in Mexico, government projects must be awarded only to local firms. In Brazil, foreign engineers are subject to higher rates of income tax than their local counterparts. Two thirds of engineers must be nationals. Keow (1990) outlines measures adopted in South-East Asian countries to protect their construction industries, including: limits on foreign-owned equity; compulsory joint ventures; bidding preferences for local contractors; limitation of some professions to locals; and restrictions on the number of foreigners who may be employed. Owing to competition among countries for direct foreign investment, several developing countries are liberalising their regulations on the operations of foreign firms. Thus, the number of restrictive policies is rapidly declining. Not all countries have adopted protectionist measures, and others have removed what had existed. The government of Singapore is in the latter category, and apart from a preferential margin scheme which was withdrawn in 1988, has refused to accept calls for Singapore contractors to be protected. Experience suggests that restrictive barriers, in themselves, are unlikely to be useful in directly developing the local construction industries (Chow, 1990). It appears to be more important that the measures are tailored to the special requirements and circumstances of local enterprises. The local firms must also be in a position to effectively take advantage of the resulting opportunities. For example, the UNCTC (1989) observes that the requirement for mandatory joint ventures or subcontracting is often abused. Foreign firms usually find ways around them, and make few contributions to local partners’ capability and expertise. Some authors point out that 47
protective barriers may not be easy to lift when they have served their purpose (Chow, 1990). Direct Assistance to Contractors Programmes have been implemented in many developing countries to provide direct assistance to local construction firms, especially the small ones. Some of these programmes are now considered (see also, Ofori, 1999).
difficulty that the financing support schemes faced was a high proportion of defaults and business failures of beneficiaries caused by poor management. Thus, the ILO (1987) suggests that construction firms that are to be provided with funding support should be carefully chosen on the basis of size, track record and commitment to construction. To limit defaults, loan applications should be assessed, and tenders screened for their financial viability. Loan servicing and collection should also be well organised. Training
Finance Cash flow problems are potentially the most serious that a contractor may face owing to the need for these firms to pre-finance projects in most countries. Small firms are even worse off in these regards. Efforts to address contractors’ financial problems have taken different forms. In some countries, such as Singapore, governments have simply become better clients, for example, by rationalising their certification and approval procedures to reduce delays in payments to contractors. The provision of advance payments to contractors by clients, as is common in Thailand, can help ease the financial problems of the former. However, this is rare in developing countries, and where it used to be ‘normal’ practice, it has been discontinued owing to bad experiences from some contractors. Some governments have established financial institutions to assist contractors. An example is the Bank for Housing and Construction in Ghana, set up in 1973. The bank offered pre-financing loans to contractors, and hire-purchase schemes for acquisition of plant and equipment. Whereas this assistance programme was helpful to firms of all sizes, this and most of the other schemes for providing financial assistance to contractors have been unsuccessful (UNCHS, 1996). The agencies and financial institutions have had to offer additional support services to ensure that the beneficiaries can meet their repayment obligations (Ofori, 1991). This management-intensive need limits the number of firms, which can be supported at any time. The main 48
The proprietors of small local construction firms in developing countries often lack the basic technical and managerial skills essential for the effective running and development of the firms, considering their rather difficult operating environments. Thus, training is an important aspect of their development. The training needs of distinct parts of the construction industry, and hence suitable approaches to resolving them, may be very different. The ILO (1987) suggests that, in order to be effective, the approach to training should be as follows: assess training needs; assess existing institutions and facilities; develop or adapt training materials; train advisers and/or trainers; offer training; and review the training programme to assess its benefits and ensure its relevance. The authors propose different approaches to the training of contractors. Miles and Neale (1997) present five broad types: content-led; organisation-led; qualification-led; learning-led; and institution building. Two main small-contractor training models are used in several African countries including Ghana, Lesotho and Tanzania. The first model has the following elements: (i) classroom training is given to a number of candidates of each contractor; (ii) on-the-job training is provided on projects to the trainees; (iii) trial contracts are awarded to the trainee-contractors; (iv) contracts are awarded to the trained contractors; and (v) the performance of the trainee-contractors is monitored, and advisory services provided. The second training model has the following components: (i) contractors are identified and their 49
capacities and capabilities determined; (ii) piece work contracts are awarded to the contractors based on their ability; (iii) the contractors’ performance is monitored to identify their weaknesses; and (iv) training or technical advice is provided to the firms in accordance with their needs. The training offered to small contractors supported under development programmes usually covers both technical and managerial aspects of construction. For example, in Tanzania, the six-month training programme was on the following topics: site organisation and management; labour relations; planning of work and resources; construction methods; estimating and cost control; equipment selection, operation and maintenance; quality control; construction contracts; procurement and distribution; and introduction to new technologies including computer applications. Comprehensive Contractor Support Some developing countries have implemented comprehensive small contractor development programmes aimed mainly at attending to the vital needs of small contractors. These have been administered by central organisations. The ILO (1987) gives examples of contractorsupport agencies: the National Construction Company of Kenya (established in 1967), the Botswana Enterprises Development Unit of Botswana, and the Swazi Enterprises Development Corporation of Swaziland. These provided contractors’ needs in the integrated set of assistance initiatives now discussed.
submit a realistic tender; or the agency tenders for, or is offered a number of projects to allocate to contractors. 3. Training and Advice: training is provided to contractors on key topics such as tendering, contract scheduling and administration, site supervision and general and financial management. They are also given managerial and technical advice. 4. Resources: contractors are supplied with key material resources and equipment which are either procured in bulk by the agency, or obtained by the companies from suppliers at special prices and under favourable terms arranged by the agencies. Plant and equipment may also be lent or offered on hire-purchase terms to contractors. The agencies which administered contractor-support programmes faced several problems (UNCHS, 1996). For example, the number of contractors they could support at any time was limited. Moreover, they were seldom carefully selected. The contractors became over-reliant on the support provided by the agencies. Moreover, the contractorbeneficiaries were not committed to the objectives of the agencies. Defaults in repayment of pre-financing loans and bad debts were common (Talukhaba, 1998). Developing an appropriate training programme for small contractors has been difficult. Many proprietors of small construction firms are, at best, semi-literate. Moreover, as they have heavy responsibilities within their companies and on their projects; thus, they have little time to devote to training. Some Recent Programmes
1. Finance: project-related finance is offered to construction companies from a revolving fund provided by the government, in some cases, with the assistance of an international lending or aid organisation(s). 2. Projects: contractors are provided mainly for public-sector projects. The contractor may tender for the project, and the agency would guarantee its performance; the agency may help the contractor to
The current local contractor development programme in Botswana may be described (Ngowi and Ofori, 2001). The Minister of Works, Communications and Transport has formulated the following series of schemes for this purpose: • reservation of a proportion of jobs to such firms; • a price preference for local contractors on some projects;
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• • • • •
exemption of small construction firms from the requirement to provide performance bonds; an on-going restructuring of the public-sector performance system; the institution of a forum at which business people can express their problems and needs to senior government officials; establishment of a Construction Industry Trust Fund; and setting up of a Citizen Contractors Fund.
However, while local firms ask for more support including protection from the operations of foreign firms to give them more job opportunities, the government laments the lack of results from its previous support. The Ministry outlined “client dissatisfactions”: cost overruns; delays in construction and poor quality of work (Ngowi and Ofori, 2000). It acknowledges the persisting problems of local construction organizations and practitioners: lack of skilled personnel; lack of capacity in materials and equipment; and unfair competition from foreign construction firms. UNCHS (1996) notes that lessons from earlier contractor development programmes have been used to develop more suitable ones. One example is the Soweto Contractor Development Programme of South Africa, described by Watermeyer (1995). Under this programme, a “development team” (supporting a number of construction projects), which may be part of a large contractor or consultants’ firm, is appointed by the client on a fee basis. Trainee-contractors are categorised into “levels” by considering factors, which indicate their developmental needs. According to the needs of the particular contractor under the support programme, the development team: (a) advises, trains and assists contractors; (b) procures, supplies, issues and delivers materials to the construction sites; (c) arranges payment to the contractor; and/or (d) arranges for specialist work to be carried out. Some forms of these assistance schemes are now outlined.
Development Team Approach: Experienced and qualified “Construction Facilitators” assist contractors with administration and management of their contracts, offer technical training, supply materials and arrange specialist contractors. Contractor Team Approach: Individuals who assume responsibility for a trade (such as bricklayer, carpenter or plumber) or aspect of the work (such as excavation) are formed into a construction team. Each team member operates as a subcontractor and receives market-rate remuneration. Overall, site management is performed by another company with the appropriate skills. Managing Contractor Approach: An experienced contractor signs a contract with the client to administer, manage, finance, train and supply materials and equipment to small firms which it engages as subcontractors. Mentorship Approach: Experienced and qualified persons are appointed on a fee basis to ensure that emerging contractors acquire necessary skills to win tenders in the open market; improve their management and business skills; and acquire and develop systems to manage projects competently. The nature of the development support programme described above is such that clients have the key role. Thus, only governmental client agencies can be expected to show any interest in it. Market-based programmes in which enlightened major private-sector clients participate with an understanding of the commercial Market-based programmes in which enlightened major private-sector clients participate with an understanding of the commercial merits of having competent local contractors should be devised. The offering of incentives by the government to participating clients could facilitate such programmes. The role of the construction industry itself is also important. For example, experience in Singapore shows what a well-organised
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umbrella group of contractors can achieve (Ofori, 1999). For example, the Singapore Contractors’ Association Ltd. (SCAL) does not just lobby government on matters concerning the welfare of its own members, but also, undertakes many activities to help its members and the rest of the industry to upgrade. It organises conferences, seminars and short courses on new and topical issues relevant to construction. In a bid to promote enhanced quality, efficiency and productivity, SCAL set up a registration scheme for labour subcontractors – in Singapore, these are the small contractors. Finally, it has established a construction safety consultancy. Conclusion Developing countries have a pressing need to improve the performance of their local construction firms, especially the small ones. Experience has shown that this is a formidable task. There are many lessons from previous contractor development programmes. It is important for a contractor development programme to offer small contractors not only the opportunity to grow, but also, the chance to mature. Therefore, such a programme should enable the beneficiaries to develop: commercial skills; managerial and administrative skills; credibility in commercial circles; and experience in pricing complete contracts while accepting increasingly greater risk and contractual responsibility. The programme should be structured in such a way as to offer beneficiary contractors that have different proficiencies, aspirations, business acumen and size of businesses, the opportunity to enter and leave the programme at various stages. It is important that the contractors being supported show an understanding of, and commitment to, the objectives of the support programme. The firms, especially the small ones, should want to upgrade their operations, improve their performance and grow. Associations of contractors should not only help to educate their members in these regards, but should also consider introducing selfhelp schemes for their members. 54
References Abbott, P.G. (1985) Technology Transfer in the Construction Industry. The Economist Intelligence Unit, London. Addo-Abedi, F.Y. and Hammond, A.K. (1997) Improving local contracting capacity in the road sector in Ghana. Proceedings, First International Conference on Construction Industry Development, Singapore, 9-11 December, Vol. 1, pp. 86-91. Andrews, J., Hatchett, M., Hillebrandt, P.M., Jaafar, A.J., Kaplinsky, S. and Oorthuys, H. (1972) Construction in Overseas Development: A framework for research and action. University College London Environmental Research Group, London. Andrews, J. (1976) The State Construction Corporation. An Unpublished Report for the Minister of Overseas Development (United Kingdom). Asian Productivity Organisation (1983) The Construction Industry in Asia: A survey. Tokyo. Carillo, P. (1994) Technology transfer: A survey of international construction companies. Construction Management and Economics, 12, 45-51. Chow, K.F. (1990) The Construction Agenda. Construction Industry Development Board, Singapore. Davis, Belfield and Everest (eds.) (1988) Spon's International Cost Handbook. Spon, London. Drewer, S. (1980) Construction and development: A new perspective. Habitat International, Vol. 5, 3/4, pp. 395-428.
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Goulet, D. (1977) The Uncertain Promise: Value conflicts in technology transfer. IDOC and Overseas Development Council, New York.
Miles, D.W.J. and Ward, J. (1991) Small-Scale Construction Enterprises in Ghana: Practices, problems and needs. International Labour Office, Geneva. CIP/1.
Haavaldsen, T. (1999) Some preconditions for improved conditions of quality construction in Uganda. Proceedings of the Second Meeting of CIB TG29: Contractor Development, Kampala, Uganda, 25-26 June, pp. 101-104.
Moavenzadeh, F. and Hagopian, F. (1984) The construction industry and economic growth. Asian National Development, June/July, pp. 5660.
Hillebrandt, P.M. (1999) Problems of larger local contractors: Causes and possible remedies. Proceedings of the Second Meeting of CIB TG29: Contractor Development, Kampala, Uganda, 25-26 June, pp. 25-33. Hodgson, S. and Gwagwa, N. (1997) Meeting the challenges of emerging contractor development in South Africa. Proceedings, First International Conference on Construction Industry Development, Singapore, 9-11 December, Vol. 1, pp. 174-181. International Labour Office (1987) Guidelines for the Development of Small-Scale Construction Enterprises. Geneva. Keow, Y.M. (1990) The Step Towards Internationalization for Singapore Construction Industry: The potential Asean market. Unpublished B.Sc. Dissertation, National University of Singapore. Kirmani, S. (1988) The Construction Industry in Development: Issues and options. World Bank Discussion Paper. World Bank, Washington, D.C. Miles, D.W.J. and Neale, R.H. (1997) Patterns in diversity: An international training systems typology. Proceedings, First International Conference on Construction Industry Development, Singapore, 9-11 December, Vol. 2, pp. 142-152.
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National Construction Council (1993) Assistance to the Local Construction Industry: Draft proposals for the development of the local construction industry in Tanzania. Dar es Salaam. Ngowi, A. and Ofori, G. (2001) 2nd conference on the construction industry in developing countries. Sustainable Building, Vol. 1, No. 1, p. 20. Ofori, G. (1991) Improving the performance of contractors in developing countries: A review of programmes and approaches. Construction Management and Economics, 9, 19-38. Ofori, G. (1996) International contractors and structural changes in host-country construction industries: Case of Singapore. Engineering, Construction and Architectural Management, Vol. 3, No. 4, pp. 271288. Ofori, G. (1999) Construction contractor development: New directions. Proceedings of the Second Meeting of CIB TG29: Contractor Development, Kampala, Uganda, 25-26 June, pp. 147-160. Rashid, A.A. (1993) The trend towards globalisation in business: lessons for contractors in developing countries. Habitat International, Vol. 17, No. 3, pp. 115-124. Singapore Contractors’ Association Ltd. (1997) Contractors’ Association Ltd. Yearbook 1997. Singapore.
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Sridharan, G. (1995) Cultural influences on joint venture performance: A study of the Singapore MRT project. Unpublished Ph.D. Thesis, University of London.
SMALL AND LARGER CONSTRUCTION FIRM COLLABORATION IN TANZANIA R.S. Mlinga and Jill Wells
Strassman, P.A. and Wells, J. (eds) (1988a) The Global Construction Industry. Unwin Hyman, London. Talukhaba, A. (1998) A postmortem of the National Construction Corporation (NCC) Kenya. Proceedings, First Meeting of the CIB Task Group 29: Construction in Developing Countries. Arusha, Tanzania, 21-23 September, pp. 55-61. United Nations Centre for Human Settlements (1996) Policies and Measures for Small-Contractor Development in the Construction Industry. HS/375/95E, Nairobi. United Nations Centre for Transnational Corporations (1989) Transnational Corporations in the Construction and Design Engineering Industry. United Nations, New York. Watermeyer, R.B. (1995) Labour-based construction and development of emerging contractors in South Africa. Paper presented at the Regional Seminar on Labour-based Roadworks, University of Witwatersrand, Johannesburg, 16-20 January. World Bank (1995) Guidelines: Procurement under IBRD Loans and IDA Credits. Washington D.C.
Background The informal construction sector has grown in size and importance in many developing countries in recent years. While small, unregistered construction enterprises were previously involved in the building, maintenance and repair of individual residential houses, they are now increasingly becoming involved in the construction of complex and larger commercial buildings (Wells, 1999). At the same time, due to unpredictable workloads in the construction industry and high costs involved in keeping labour idle, formal registered enterprises are resorting to subcontracting to the informal sector (Wells, 1999). The nature of links between the formal and informal parts of the construction industry in Tanzania are discussed in this paper, and the relationship between formal contractors on the one hand and informal contractors, materials and equipment suppliers on the other are concentrated on. The discussion is based on the findings of a study carried out in 1999/2000 involving interviews with 230 formal and 405 informal contractors in four urban centres, Dar-es-Salaam, Arusha, Mwanza and Dodoma. There are three sections in the paper. Section one briefly discusses the informal sector concept with respect to the construction industry in general and Tanzania in particular. General aspects of collaboration between the formal and informal sectors are discussed and the research issues are defined. Section two presents the findings of the study on the collaboration between formal and informal contractors in Tanzania. The last section suggests what could be done by governments of
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developing countries to promote the development of the informal construction sector.
informal construction industry some or all of the regulations are not adhered to.
The Informal Sector within the Construction Industry
A problem arising from this definition is that governments attempt to regulate a number of different aspects of construction activity. There are regulations that apply to enterprises (for example, rules requiring them to register, pay taxes etc.); regulations relating to the terms and conditions for the employment of labour (labour laws); and yet others (building and planning regulations) that relate to the activity and the product. Some types of regulation may be adhered to and some not. This means that in practice there may be no clear-cut division between formal and informal sectors in the construction industry. When discussing and attempting to define the informal sector it is therefore important to make clear what is the object of analysis (the enterprise, the worker, or the product) and which aspect of informality (or nonadherence to the rules) is regarded as of primary importance.
A number of definitions describe the construction industry (see, for example, Hillebrandt, 1988; GOT, 1991; Hong, 1992; Harvey and Ashworth, 1993; Hindle, 1997). It is clear from these that the construction industry encompasses all spheres of human life. In fact, Gruneberg (1997:45) states that "it produces and maintains the built environment". An important role is played by the construction industry in socioeconomic development. The impact of the construction industry has been divided by Ofori (1990) into "direct contribution, indirect contribution and backward linkages". It contributes directly to output and employment through construction activity. Indirectly it facilitates the growth of other sectors like agriculture, manufacturing and services by constructing the physical facilities they require for production and distribution of goods and services. The industry also has great potential for generating further employment, through it's backward linkages, with other industries like those involved with the production and distribution of building materials and equipment and in the provision of financial services to the industry. However, the contribution of the construction industry through backward linkages is influenced by the extent to which the industry uses its local resources. This contribution is greatly reduced in situations where most of building materials, equipment etc. and other services are imported (UNCHS, 1981). The construction industry can be subdivided into "building" and "civil engineering" according to UNCHS (1961:1). It is also often divided into "formal" and "informal" sectors. The major difference between the formal and the informal part is the extent to which government regulations are observed. Consequently the formal construction industry is one in which all the government regulations with regard to construction (licensing, registration etc) are adhered to, whereas in the 60
The first meeting of the CIB Task Group 29 (construction in developing countries) agreed that the informal construction sector (in the context of developing countries) comprises of "unregistered and unprotected individuals and small enterprises that supply labour and contribute in various other ways to the output of the construction sector". The enterprise (which may be a single individual) according to this definition is seen as the primary object of analysis. There are two criteria for demarcation between formal and informal - whether or not the enterprise/individual is registered and whether or not individuals working in the sector enjoy some degree of social protection (e.g. through the observance of minimum wages, health and safety regulations etc). The current work has adopted this definition. Unfortunately the separate criterion of social protection has been ignored. Few workers enjoy any form of social protection in Tanzania, even if they work for enterprises that are registered. It appears that those working for unregistered enterprises are even less likely to be ‘protected’. This paper is therefore concerned with the enterprise and that the single 61
criterion for inclusion of an enterprise in the informal sector is the fact that it is not registered. Construction contractors in Tanzania are supposed to register with the Contractors Registration Board (CRB). The CRB is a statutory organisation established by Act of Parliament No. 17 of 1997 and charged with the responsibility of registering/regulating activities and conduct of contractors in Tanzania (GOT, 1997). Presently the CRB classifies and registers contractors into seven classes under five categories: Civil works, Building, Mechanical, Electrical and Specialist Contractors. Informal contractors operate without being registered with the CRB and therefore without a business license. Previously a contractor could obtain a business license before being registered, but the newly established CRB, has streamlined the registration procedure to allow only those contractors with the requisite experience and resources to obtain business licenses (Mugasa, 1999; CRB, 2000). The CRB however allows unregistered contractors (informal contractors) to carry out construction works whose value does not exceed Tshs. one million (equivalent to US$ 1250). They argue that any contractor able to carry out projects exceeding the set limit is capable of registering (Muhegi, 2000). Linkages between the Formal/Informal Sectors General literature on the informal sector recognises that numerous and complex links exists between the informal and formal sectors (Dewar and Watson, 1991; Thomas, 1995; United Nations, 1996). Linkages may be distinguished into "economic" and "social/political" (Thomas (1995:56), and into “technological, consumption and credit financing” links (United Nations, 1996). Links that are social/political are indirect and institutional in nature. They depend largely on how the two parties accept each other and to what extent they will use their influences to pressurize the government to take legal action against one another (Thomas, 1995). Since it is, the informal sector, which operates outside the legal system, this will 62
actually reflect how the informal sector is accepted by the formal sector. For example, in Tanzania formal contractors, have been calling for government to take legal action against unregistered contractors who are claimed to unfairly compete with registered contractors through non-payment of fees, taxes, non-adherence to labour and safety regulations, etc. Situations also exist where the relationship is not antagonistic, and formal contractors use the informal contractors as a potential pool of construction workforce (Mlinga, 1999). Direct transactions are involved within economic linkages between the two sectors and are distinguished into "backward" and "forward" linkages. (Thomas, 1995). Backward linkages involve trading of goods produced in the formal sector by the informal sector, so that the informal traders act as a link between formal producers and customers. Forward linkages involve the production of goods and services in the informal sector for use in the formal sector. The transfer of technology and skills are involved within technological linkages between the two sectors. This takes place mainly as a result of movement of skilled workers and other exchanges of knowledge. A typical example of technological linkage is that of employees in the formal sector forming informal sector enterprises, on part time or permanent terms, using skills gained in the formal sector. Direct links are involved in consumption linkages between the informal sector with final consumers who are in the formal sector. Final consumers may be households whose income depends fully on the formal sector or government holdings (United Nations, 1996). Lastly, credit financing linkages refer to the transfer of funds from the formal sector for investment and development in the informal sector. This is a special form of backward linkages and only in this case it is the finance that originates from the formal sector and not the goods as discussed previously. Credit financing linkages manifest themselves when people use the income obtained in the formal sector to set up informal sector enterprises. Situations, arise where persons involved in 63
the informal sector accumulate enough capital to start a formal business (United Nations, 1996). It appears that strong forward linkages exist within construction, with informal sector enterprises producing building materials for use by contractors in the formal sector. Formal sector contractors also appear to obtain their labour from the informal sector through subcontracting arrangements. This arises due to the inability of large firms to employ a permanent labour force due to lack of a continuous workload. Importance of the interaction between the formal and informal construction sector is supported by the UNCHS (1991). They argue for the strengthening of direct links between formal and informal sectors, so that the latter would be able to produce the much needed construction materials and components and undertake subcontracts for the former. Both formal and informal contractors appear to stand to gain from the linkages that are established through subcontracting. For the informal contractors, subcontracting offers an important source of jobs. Companies can also acquire both technical and managerial skills, particularly when involved in large and complex projects. Subcontracting offers larger formal sector companies an opportunity to lower their overhead costs and increase flexibility (UNCHS 1996). Consequently subcontracting is widely practiced in construction. This is apparent even in developed countries, where in recent years there has been an increase in ‘labour only subcontracting’ (Wells 1998). A central issue is to ascertain the extent to which informal sector construction enterprises in Tanzania supply labour to formal sector enterprises, through subcontracting. A supplementary issue is to establish whether formal sector construction enterprises buy materials and hire equipment from informal sector suppliers. It is also important to know if informal contractors work directly for private customers and if so, the nature of the work that they do and the benefits to the formal sector. It is argued by King (1974) that if the 64
informal sector is supplying low cost goods and services (e.g. housing) directly to a final consumer employed in the formal sector, then the low cost of goods and services they obtain from the informal sector indirectly benefits the formal sector employers by enabling them to pay low wages to their workers. It is also important to address the issue of competition between formal and informal contractors in order to understand the relationship between them. Competition can be divided into two broad areas: for inputs and for markets (clients). Inputs relate to raw materials, labour and capital (Thomas, 1995:60). Competition for raw materials is not considered likely to be very important in the construction industry since in most cases informal contractors do not provide materials for the work. Also, competition for labour is very limited, particularly because of the saturated labour market in the formal sector. There is a positive flow of labour from the formal sector to the informal sector in most countries (Malyamkono and Bagachwa, 1990; Bagachwa and Naho, 1994; Tripp, 1997). Also, negligible competition for capital is apparent. By definition informal sector enterprises lack access to credit and capital and are therefore unable to invest in plant and equipment. Most of the formal financial institutions according to Sethuraman (1997) are reluctant to advance loans to informal sector enterprises, forcing them to start business with little capital obtained from their own savings supplemented by borrowings from friends and relatives. Competition for markets is related to the prices of goods and services provided by both sectors and there is very much antagonism between informal and formal enterprises. Formal sector traders in many countries have been known to protest against the presence of informal traders, who they say are able to offer cheap goods and services because they do not pay licensing fees and taxes, rent office premises, etc. Likewise for construction this is leading to the increased use of informal contractors in housing projects, particularly by private clients who cannot afford the expensive formal contractors.
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The last issue here is to assess the basis of the competitiveness of informal sector contractors in Tanzania - whether they are able to undercut the formal sector firms, for example because they do not pay fees or for some other reason (e.g. because they are willing to accept lower wages, because they are more productive or because they do poorer quality work). Or whether they are working in a different part of the market or supplying a different kind of service from the formal contractors. Contractor’s Survey Findings 405 informal (unregistered) contractors, 165 small registered contractors and 55 medium and large registered contractors were interviewed for this study. Stratified random sampling was used to select registered contractors for interview. A population of registered contractors was obtained from the CRB, and stratified according to size and location with a random sample selected from each category. Informal contractors were identified and interviewed at work on construction sites, care being taken to include sites that were large and small, public and private. The following summarises the survey findings. Profile of unregistered contractors Of the informal enterprises interviewed three quarters were under sole ownership and one quarter were partnerships. Most operated with 2 to 5 skilled employees and the same number of unskilled, all working on a part-time basis and did not own any plant or machinery. About one half of the contractors had never undertaken a project above Tshs. 1 million (the limit for operating without a license) and around 75 per cent had not undertaken a project above Tshs. 5 million. Annual turnover was generally less than Tshs. 5 million. These enterprises undertook work for private house owners, generally building or repairing a part of a house on a labour only basis. Around 50 per cent also sometimes worked for other contractors and this work was always on a labour-only basis. The main activities carried out included 66
excavation, concreting, steel fixing, masonry and carpentry works. Few however, about 12 per cent, undertook full contracts involving the supply of materials and labour for a complete house to private clients. Around 40-50 of unregistered enterprises (10-12% of the total), however, were found to be significantly more substantial, with turnover above Tshs. 10 million per annum and individual projects over Tshs. 5 million (5 per cent of the cases over Tshs. 20 million). Additionally, 13 per cent of these enterprises owned a pick-up truck, 14 per cent a welding machine and a block making machine and 5 per cent a concrete mixer. Informal contractors encountered a number of problems, irrespective of the client they worked for, namely delayed payments, late delivery of materials and poor quality of materials supplied by the clients. Despite the problems faced, the contractors indicated that working for private clients and small contractors helped to provide a continuous workload and improved financial position, while working for large and medium contractors, in addition, it helped them to gain skills. Profile of registered contractors The profile of small registered contractors was not that different from the above. A majority of those interviewed were registered as building (as opposed to civil) contractors in class VI or VII. A typical small registered contractor might have 2 to 5 skilled and 5 to 10 unskilled workers. The majority (about 97 per cent) used subcontract labour when necessary (particularly plumbers, electricians and tilers) to supplement their own labour. Most worked for public and private clients. For private clients the majority worked on a labour-only basis and/or on a full contract. Only a minority (17 per cent) worked on a labour-only basis. Around half of the interviewed contractors worked as labour-only subcontractors for medium and large contractors. Average annual turnover, mostly generated from government and public sector clients, was around Tshs 300 million, with 6 and 5 per 67
cent reporting a turnover of less than Tshs. 50 million and above Tshs. 500 million, respectively. Similar problems to informal contractors were faced by small registered contractors when working for private clients. Problems included delayed payments, poor quality and late delivery of materials as well as postponement of execution of agreed works. Among the 16 per cent who had never worked for private clients the fear of nonpayment by the clients and long execution period for the projects were the major reasons given for not seeking jobs from this source. Contractors cited continued workload, gaining skills and improvement of their cash flows as benefits gained from working with both private clients and large and medium contractors. Large contractors fell under classes I, II and III of CRB’s register, while medium contractors fell under classes IV and V. Both categories of contractors worked for both public and private clients. The value of projects executed occupied two extreme ends, with 89 percent of contractors executing projects with values below Tshs. 100 million and 31 per cent executing projects with values above Tshs. 1,000 million. Most of the projects with values below Tshs. 100 million belonged to private clients. Average annual turnover reported was Tshs. 2 billion, with 18 per cent falling below Tshs. 500 million and 29 per cent falling above Tshs. 2 billion. The contractors’ survey revealed the existence of many small value jobs in the private sector compared to few large value jobs in the government and public sector. Around 93 per cent of the interviewed medium and large registered contractors confirmed that they subcontracted work to small registered contractors. Similarly, 82 per cent subcontracted to unregistered contractors. Nearly all major building activities were sublet on a labour-only basis. The types of work that were subcontracted most frequently included unskilled labour, plumbing, electrical, masonry, steel fixing, tiles fixing, carpentry, painting and land surveying. Firms subcontracted to supplement the labour and skills available within the company, while keeping their labour force to a minimum. 68
Subcontracting labour brought benefits in so far as the smaller contractors acted as a buffer against a fluctuating workload, allowing the company to obtain additional expertise while relieving it of training costs. Established links between formal and informal contractors From the above it can be concluded that there are strong links between formal and informal contractors in terms of labour supply, with large and medium sized formal contractors subcontracting to both small formal contractors and to informal contractors, whereas small formal contractors subcontract to informal contractors. Linkages were also apparent between formal and informal enterprises in terms of building materials and equipment. Around 87 per cent of the small contractors and 82 per cent of the large and medium contractors indicated that they sometimes obtained their building materials from informal building materials suppliers. The main materials purchased from the informal sector were aggregates, followed by timber and timber products and concrete blocks and precast concrete products. Reasons given for procuring materials from informal suppliers were to supplement contractors’ own sources and availability of materials when required. On occasions small registered contractors also hired concrete mixers and vibrators, tipper trucks and light duty vehicles from informal equipment suppliers, due to the lower rates charged. Medium and large contractors did not often hire equipment from the informal sector because the basis for qualifying as a contractor in the higher groups was the possession of basic equipment like concrete mixers, vibrators, tipper trucks and pickups. Established links of collaboration between the formal contractors and informal contractors, material suppliers and equipment suppliers can be summarised as Figure 1. 69
LARGE AND MEDIUM FORMAL CONTRACTORS
SMALL FORMAL CONTRACTORS
INFORMAL CONTRACTORS
INFORMAL MATERIALS SUPPLIERS
Small construction firms
INFORMAL EQUIPMENT
SUPPLIERS
It has also been revealed that there is considerable overlap in terms of both size and activities between informal and formal enterprises in the construction sector in Tanzania. Some of the construction companies who were registered had small turnover, little or no equipment and worked mainly as labour contractors, while some of the unregistered contractors owned their equipment and undertook full contracts (labour and materials) with a higher turnover. For example, as discussed previously, about 5 per cent of the unregistered contractors executed projects with values exceeding Tshs. 20 million which was almost half of the maximum value of a project which could be undertaken by contractors registered in Class VII. To allow for this situation, it has been attempted to classify Tanzanian contractors on the basis of their size and their informality using a classification system and framework for contractors development proposed by Milne (1994) (see Figure 2).
Key to arrows: Strong link Weak link
Figure 1 Mode of collaboration between the formal and informal construction sector in Tanzania
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71
Conceptual boundary formal/informal
Establish ed large
Labour er/
CLASS VI
(value between 50 and 100
Emergi ng i f
CLASS VII
Establish ed i f l
(value up to 50 million
INFORMAL CONTRACTORS FORMAL CONTRACTORS SMALL CONSTRUCTION FIRMS
Figure 2 Proposed Framework for Contractors Classification 72
CLASS I, II & III
Emergi ng ll
CLASS IV & V
Establishe d small t t
(value above 400 million
This group could be considered to operate illegally as they have the necessary capability to register
(value between 100 and 400
Establish ed
At the interface of informal and formal contractors, there are ‘established informal contractors’ and ‘small emerging contractors’. Established informal contractors are taken to mean those informal contractors who possess the minimum requirements (in terms of capital and equipment) to register a company at entry level but choose not to do so. The emerging small contractors are registered contractors who have just started business as registered contractors and have few resources. Small construction firms consist of emerging and established informal and small contractors. While there is collaboration between formal and informal contractors in Tanzania, there is also competition for markets. Usually informal contractors work on a labour-only basis on small contracts in the building sector, mainly house construction and repair, whereas formal contractors work for the public sector (mainly infrastructure) and on larger private building projects. Competition for jobs in the public sector is intense and formal (registered) contractors that fail to obtain work ‘down-size’ and undertake small house repair jobs that might be considered the preserve of informal contractors. ‘Established informal contractors’ will sometimes undertake jobs big enough to be carried out by contractors registered in formal Classes VI and VII. Although this group of informal contractors had the resources and the capability to establish formal construction companies, they chose to operate illegally. A common reason given is that they can operate perfectly well without a license and without being registered with the contractors’ registration board since they operated only in the private sector, which does not necessarily insist on using registered contractors. The promotion of collaboration through possible Government intervention in Tanzania The view has been expressed by several authors that collaboration between the formal and informal sector is necessary for the proper development of the construction industries in developing countries like Tanzania. Bjorklof et. al. (1992), for example, call for the teaming up 73
of the formal and informal sectors to address the housing problem in Tanzanian cities. Similarly, a call for combining the basic skills and community acceptance of the informal sector with the financial muscle and technical know-how of the formal sector was made by Nyembe (1994) when speaking of South African housing problems (see also Mlinga, 1998; Ngare, 1998; Wells, 1998). From the above discussion, it can be seen that collaboration amongst formal contractors, and between formal and informal contractors is taking place in Tanzania. It could be argued, however, that such collaboration should be promoted and strengthened to allow both sectors, particularly the informal sector, to achieve its full potential and maximum contribution to the national economy. Currently in Tanzania the informal sector operators in the manufacturing and trade industries receive support from the government (GOT, 1996; GOT, 1999). In the construction industry no similar efforts have been taken (Msita, 1999). Programmes to develop contractors in Tanzania have focused on registered ones (Kaduma and Msita, 1999; Materu, 1999; Materu, 2000). To promote collaboration between the formal and informal construction sectors, the government of Tanzania should aim to create an enabling environment for the informal construction sector to operate by setting up a system that promotes the sector’s activities and protects the right of those involved. A possibility which is posed for consideration in this paper is to establish a parallel registration system for labour only contractors operating in limited geographic locations, at district level for example. This could involve the introduction of up to four categories of labouronly contractors. The smallest category is an artisan practicing own skills without employing workers, almost equivalent to street traders or hawkers. Business licenses are currently issued by District Councils. The largest category is a well established informal contractor capable of employing several workers and carrying out several projects at a 74
time with maximum value of individual projects being half the maximum value for contractors registered in Class VII. The proposed registration of labour-only contractors would be able to capture most contractors currently classified as informal, and would make it possible to design programmes to develop the informal construction sector. Conclusions This paper has uncovered the nature of collaboration between the formal and informal construction sectors in Tanzania. There are many links that could be investigated, and the paper addresses only the aspects of labour subcontracting and supply of building materials and equipment. The findings should form a valuable input to researchers wishing to identify the links between the formal and informal construction industry in other countries. In this paper the facts presented are important to create awareness on the significance of the informal sector. It is on the basis of such research findings that meaningful development programmes can be developed for the construction industry. The proposed labour only subcontractors classification system is an important step towards developing and improving the performance of the informal construction sector. References Bagachwa, M.S.D. and Naho, A. (1994) A review of recent developments in the second economy in Tanzania, AERC Special Paper 16, African Economic Research Consortium, Nairobi. Bjorklof, S., Klingberg, T., Muhegi, B. and Temba, A. (1992) Birches don’t grow in Serengeti – An evaluation of development policy and Nordic support to the construction sector in Tanzania – 1990-1995, SIDA, Stockholm. 75
Contractors Registration Board (CRB) (2000) Procedures and criteria for registration of contractors 2nd Edition, Dar-es-Salaam.
Hong, R. (1992) Risk Management in Construction Cost and Inflation, Unpublished Ph.D Thesis, University of Reading, Reading.
Dewar, D. and Watson, V. (1991) Urban planning and the informal sector, in Whyte and Rogerson (eds) (1991): pp.181-195. Government of Tanzania (GOT) (1991) National Construction Industry Development Strategy, Ministry of Works, Dar-es-Salaam, Tanzania.
Kaduma, I. and Msita, K.I.M.M. (1999) Towards a construction industry development strategy: Establishment of a Construction Industry Trust Fund, Paper presented in Contractors Registration Board Annual Workshop on Registration, Regulation and Development of Contractors in Tanzania, 18th – 19th March 1999, Karimjee Hall, Dar-es-Salaam, Tanzania.
Government of Tanzania (GOT) (1996) Sustainable Industrial Development Policy – SIDP (1996-2020), Ministry of Industries and Trade, Dar-es-Salaam.
King, K. (1974) Kenya's informal machine makers: a study of small scale industry in Kenya's emergent artisan society, World Development, 2 (April/May), 9-28 cited in Thomas (1995:59).
Government of Tanzania (GOT) (1997) Contractors Registration Act No. 17 of 1997, (Dar es Salaam: Government Press).
Lee, S. (1997) Singapore list of subcontractors (SLOTS), Proceedings of the First International Conference on Construction Industry Development 9-11 Dec. 1997, Raffles City Convention Centre, Singapore, Vo. 1, pp.355-360.
Government of Tanzania (GOT) (1999) Draft framework of Small and Medium Enterprises Policy, Dar es Salaam Tanzania. Grunerberg, S.L. (1997) Construction economics: an introduction, Macmillan Press Ltd., London. Harvey, R.C. and Ashworth, A. (1993) The Construction Industry of Great Britain, Buttherworth – Heinemann Ltd, Oxford. Hillebrandt, P.M. (1988) Analysis of the British Construction Industry, The MacMillan Press Ltd, London. Hindle, R.D. (1997) What are we referring to when we speak of a construction industry? Defining construction, Proceedings of the First International Conference on Construction Industry Development 9-11Dec. (1997) Raffles City Convention Centre, Singapore, pp.158-164. 76
Malyamkono, T.L. and Bagachwa, M.S.D. (1990) The Second Economy of Tanzania, (Nairobi: Heinemann Kenya). Materu, S.N. (1999) Training of Contractors in Tanzania, Paper presented in Contractors Registration Board Annual Workshop on Registration, Regulation and Development of Contractors in Tanzania, 18th – 19th March 1999, Karimjee Hall, Dar-es-Salaam, Tanzania. Materu, S.N. (2000) Towards sustainable local contracting capacity – CRB approach, Proceedings of the 2nd International Conference of CIB Task Group 29 (TG29) on Construction in Developing Countries, Gaborone Botswana, pp.316-327. Milne, J.C. (1994) Guidelines for emerging contractor development, Development Bank of South Africa, Pretoria. 77
Mlinga, R.S. (1998) Significance and development of the informal construction sector in Tanzania, First meeting of CIB Group 29: Construction in Developing Countries, 21-23 Sept. 1998, AICC, Arusha, Tanzania. Mugasa, J.M. (1999) Criteria for Registration of Building and Civil Works Contractors, Paper presented in Contractors Registration Board Annual Workshop on registration, Regulation and Development of th th Contractors in Tanzania, 18 – 19 March (1999) Karimjee Hall, Dar-es-Salaam, Tanzania. Muhegi, B.C. (2000) Implementation status of the 1999 annual workshops recommendations, Proceedings to Contractors Registration Board Annual Workshops, 2000, Towards attainment of a sustainable contracting capacity in Tanzania, Dar-es-Salaam, pp.1-7. Ngare, J.M. (1998) Problems facing the informal construction sector in Kenya, CIB Group 29 Meeting: Construction in Developing Countries, AICC, Arusha, Tanzania. Nyembe, L. (1994) COCOSA - A single powerful voice for contruction, South African Construction World, Vol. 13, No. 3, April 1994, pp.28-33. Ofori, G. (1990) The construction industry: Aspects of its economics and management, Singapore University Press, Singapore.
Tripp, A.M. (1997) Changing the rules: The politics of liberalization and the urban informal economy in Tanzania, University of California Press Ltd., London. United Nations (1996) Informal sector development in Africa, United Nations Sales Section, New York. United Nations Centre for Human Settlements (UNCHS) (1981) Development of the Indigenous Construction Sector: Report of the Ad hoc Expert Group on the Development of Indigenous Construction Sector, Nairobi. United Nations Centre for Human Settlements (UNCHS) (1991) Technology in Human Settlements: Role of Construction, Nairobi. United Nations Centre for Human Settlements (UNCHS) (1996) Policies and measures for small contractor development in the construction industry, Nairobi. Wells, J. (1998) The informal sector and the construction industry, First meeting of CIB Group 29: Construction in Developing Countries, 21-23 Sept. 1998, AICC, Arusha, Tanzania. Wells, J. (1999) Best practices project: Role of the informal sector of the construction industries in developing countries, CIB Task Group 29 on Developing Countries.
Sethuraman, S.V. (1997) Urban poverty and the informal sector: A critical assessment of current strategies, Retrieved on 7th June 2000 from the website http://www.ilo.org/public/english/employment/strat/poldev/papers/199 8/urbpover.htm
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USE OF LOCAL CONSTRUCTION CONTRACTORS AND CONSULTANTS Richard H. Neale and Derek Miles
This paper is based on one of nine "resource papers" which formed the basis of a series of six minister-level seminars in Africa during the summer of 1989, as part of the "Sub-Saharan Africa Transport Program - The Road Maintenance Initiative". It was included in the volume "Building capacity for policy reform, Volume 2. Readings and case studies". (The World Bank, Washington DC, USA. September 1991, pp 123-130. ISBN 0-8213-1860-8.) The paper was commissioned by the Economic Development Institute of The World Bank and the Economic Commission for Africa, and their permission to reproduce it in this volume is gratefully acknowledged. The title of the paper refers to "local" rather than "small and medium sized" contractors and consultants. In practice, these terms are synonymous in most of Africa, where - with the exception of South Africa - large indigenous firms are rare. This was shown by a comprehensive study by Edmonds and Miles (1984), The World Bank (1988a) and in many subsequent studies. Despite the passage of some 12 years since the paper was written, it is still relevant today. This may be academically pleasing for the authors, but does reflect a lack of progress in the development of local construction industries in Africa. For readers wishing to explore the issues further, the proceedings of the following conference are recommended:
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1st International Conference on Construction Industry Development: Building the Future Together, University of Singapore, 9-11 December 1997. A paper presented to this conference develops some of the themes of the original, World Bank paper. Miles, D W and Neale, R H, 1997. Patterns in Diversity: an international training typology. Pages 142-152. Introduction In most countries the design and supervision of road maintenance is implemented by government ministries or by foreign consulting firms. Site construction work however is accomplished directly by government employees or foreign contractors. An increase in the use of local contractors and consultants may result in more effective road maintenance and to more general national economic and social benefits. It is unlikely that the simple act of transferring work from ministries to local firms - from the public to the private sector - will have a magical effect. The practical problems remain the same, although some of the effects may be enhanced or diminished by the transfer from one sector to another. The essential difference is, therefore, one of management. As a broad generalisation, local, private companies have simpler objectives than public sector organisations; they have a sharper and more immediate motivation, and are able to operate much more flexibly. These characteristics make them better suited to problem solving; they will be better at "doing more with less" (Willoughby, 1981). Local firms are generally not sufficiently developed in size, numbers or substance to have a significant effect, and so require an effective program of assistance. Since the objective is to foster the development of enterprising, flexible, problem-solving firms, it is axiomatic that any 82
program of assistance must be directed towards self-development rather than subsidy and protection. That is, the emphasis of the assistance programme should be to reward successful enterprises while providing them with a minimum level of protection against risk. There are four elements to be considered in developing a strategy for increased use of local firms: • • • •
The technical aspects of road maintenance, and the managerial implications The potential benefits of the use of local firms The problems and impediments to implementation: analysis of the difficulties which must be overcome The action plans: recommendations for investigations and initiatives for sustainable development, of local firms
Technical aspects of Road Maintenance and Managerial Implications Public road maintenance has to be managed so as to provide an efficient public service. In the case of private firms it has also to be managed to produce commercial results. The geometry of roads makes construction work difficult to manage. A long, thin road site stretched over the countryside is much more difficult to control than a compact building site. Communication and supervision are more difficult, transport of people and materials becomes a key factor, and it is likely that the site will traverse a variety of terrain and ground conditions, and perhaps climatic variations. The social topography will also vary - pastoral, rural, village, urban. Generally, maintenance work is more difficult to manage than new construction. New construction works are designed to fairly consistent codes of practice, and much of the work can be standardised, planned and organised in advance. When roads deteriorate, they do so for a 83
variety of reasons, and in a variety of ways. Therefore, the general sequence of maintenance work is: investigate, diagnose, remove any deterioration, and return to original standard (or perhaps a revised standard). Thus, compared to new construction maintenance work requires diagnostic skills, and a relatively broad range of construction skills. The scope for standardised solutions and forward planning diminishes. Normal maintenance has few technical difficulties. In the case of gravel roads, this involves such activities as periodic re-grading, ditching, clearing culverts and so on. Over time this has to be extended to include repair of potholes and minor repairs to structures and culverts; and in badly neglected cases, to substantial renovation with some reconstruction. Paved roads are more durable, prolonging the period before they begin to show signs that maintenance is required. Thereafter, a maintenance pattern similar to that for unpaved roads develops, but the solutions are more technically complex, often requiring substantial items of equipment and non-local materials and more difficult managerial tasks. In developing countries, which have chronic shortages of many of the basic requirements of road maintenance, these problems may become acute. Technically, local firms who are familiar with this environment should be more efficient than foreign firms - their managers speak the local language, know the local customs, and understand the topography and climate. Also, they will be less constrained in their working practices than government agencies. Routine maintenance should cause them few technical problems, and they should be well placed to mobilise local resources. Restoration of badly deteriorated roads presents more of a challenge, and should present good opportunities for local consultants to use their skills and local knowledge to produce effective solutions within the capabilities of local contractors.
standards. Because the technical problems of maintenance demand some on site decisions, these problems are, to some extent, common to whatever organisation does the work. The response of most government agencies has been to codify their requirements quite tightly and explicitly, imposing a system of standardisation upon designers and constructors, which may in practice not be appropriate or economic. This follows the practices commonly used in developed countries, but in Sub-Saharan African countries this may mean that available resources are concentrated in the maintenance of some roads to high standards, and doing nothing at all for others. When formulating a road maintenance strategy in circumstances where resources are severely limited, it may be that uniform national standards have to be one of the casualties of compromise. Similar problems arise in the supervision of contractors on maintenance work. It is difficult to specify the work in a way that allows for design flexibility, difficult to measure it and equally difficult for the contractor to price it. These problems can be overcome, but it will be difficult to write contract documents that will provide the client with a sound basis for controlling the work, and yet be readily comprehensible to contractors. Potential benefits from the use of local firms Three quite distinct factors must be considered: • • •
the transfer of work from government ministries and agencies to private firms - "the efficiency factor" the replacement of foreign firms by local ones "the national development factor" changing designs and construction methods to suit local needs, skills and resources - "the employment and economic growth factor"
Such strategies are, however, difficult to supervise. When design decisions are devolved, it is difficult to maintain national performance 84
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The National Development Factor The Efficiency Factor It is generally recognised that the administration of road management in developing countries by government ministries and agencies could be considerably improved. There are many reasons for this, but as a generalisation government road agencies are over-staffed, provide little real incentive for their staff to perform well, work to rigid rules, and ignore or resist local needs and representation, rather than respond to them. It can be argued that the fundamental structure of such organisations is inappropriate. Usually conceived and structured along the lines of similar organisations in developed countries, they may lack the institutional characteristics essential to achieve good results in developing countries: flexibility of approach, a positive and innovative problem-solving management culture, and incentives to do more with less. By contrast, the private firm has simple objectives (survival, profit, growth), recognises the need to motivate its staff to perform well (and has the means and flexibility to do it), and - being market orientated is used to responding to local needs, provided that response is commercially profitable. It is likely that local contractors and consultants could do a better job than government organisations using directly employed labour. Flexibility of action, and the ability to respond to problems, may well produce better results than inflexible governmental organisations trying to satisfy a diversity of influences. In short, the private firm is motivated to succeed, and therefore is likely to find imaginative ways of overcoming obstacles to success, whereas the governmental organisation may be principally concerned with the application of standard procedures, to avoid taking risks and making mistakes.
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The arguments for replacing foreign firms with local ones are more clear-cut, and less controversial. First, it is a simple matter of national professional and industrial growth. Strengthening the professions is one of the key factors in increasing the use of local contractors and consultants. Professionally qualified people are a very scarce resource in Africa. Governments and aid agencies devote much time, effort and money to education. and training programs to relieve this shortage. Unless those who benefit from such programs find stimulating and challenging work at home, they will either perform ineffectively or find work abroad, leaving their countries more dependent on foreign expertise. Secondly, and equally important, local firms are likely to be more effective technically - effectiveness being judged on the basis of producing solutions to road maintenance problems with a minimum consumption of scarce resources such as plant and equipment, imported materials, and skills possessed only by a small minority. By contrast, foreign firms may be constrained to apply standard solutions, designing and building to codes of practice chosen principally because their technical staff are familiar with them, although in actual practice in the field they may be technically inappropriate. The Employment and Economic Growth Factor The main thrust of this argument is the prodigious capacity of construction work to create low-skilled employment. The International Labour Office has been one of the leading organisations in promoting this approach to construction, through the implementation of labour-based road construction projects, and by producing appropriate literature (Edmonds and Miles, 1984; Allal and Edmonds, 1977).
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In summary the potential benefits for using local contractors and consultants are likely to be: • • •
Political: a clear commitment to national development, promoting economic growth, professional development and employment, and reducing dependency on imported goods and services; Economic: the economic benefits stemming from the above political commitment, and the inherent benefits that accrue from a better road system; and, Cultural: stimulation of education and training, and the development of professions and professional institutions.
Problems to be overcome The main problems to be addressed in the promotion of local contractors and consultants are: • • • •
Creation of the market: an "enterprise culture" cannot be driven, it must be stimulated by market forces Control: it is difficult to simultaneously promote initiative and maintain control, particularly with respect to construction quality and cost Effects of organisational change: staff may be compelled to undertake tasks for which they are not qualified; and the reality of local business practices Time-scale: where there is little existing local capacity, the time required to see the results of policies which encourage more use of local firms may be significant
Creation of the Market It is clear from the various studies that have been done on the state of local contracting and consultancy capacity that it is generally very weak and fragmented (World Bank, 1988; Edmonds and Miles, 1984). This is an indication that the market for construction design and 88
contracting services does not provide a suitable commercial environment within which local firms can flourish. Some possible reasons for this, and the effects on the proposed use of local firms, are discussed below. Political philosophy and structure. In many countries, after years of central planning and governmental dominance of the economy, an "enterprise culture" may not exist. Therefore, one of the most important factors in the creation of a domestic contracting and consultancy capacity is a stable market, otherwise too much would have to be done to create an environment which encourages people to become entrepreneurs. This may imply that some substantial change is required in the basic philosophy of government investment in infrastructure. Aid donor policies. Aid tied to the use of goods and services from the donor country is common, and often has the effect of limiting the market for local firms to that of suppliers of local services as subcontractors. Furthermore, the requirement that plant and equipment has to be acquired from the donor country creates a severe problem of maintenance. Countries in receipt of aid from several countries acquire such a diversity of machines that training their mechanics to be proficient in repairing all of them, and holding sufficient spare parts, becomes quite impossible. Similar problems arise if the aid agency insists on international tendering for equipment. This process is in complete contrast to the management practices of major international contractors, who rank standardisation very highly in their list of procurement criteria. Clients' requirements. Technically complex or large-scale projects are generally not suitable for design and construction by small under-capitalised local firms. Usually, the technology is too advanced, or the scope too wide, or the risk too great given their experience and skills.
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Form of contract and contract documents. The form of contract is often derived from those used in international contracts, or in developed countries. Usually, this requires a level of commercial sophistication, risk-taking, and contract administration that most local firms cannot meet. The contracts are usually heavily weighted in favour of the client, usually the government. Uncertain payments. It is common for Sub-Saharan African governments to manage cash-flow crises by delaying payments to consultants and suppliers. This can be disastrous for small, fragile businesses. Contractors find it difficult to obtain credit, and suffer severe operating problems if they do not have a regular and adequate cash-flow. This situation offers a significant comparative advantage to strongly-capitalised multinational construction enterprises (Lemunge, 1980).
construction work. A contractual system that has simple requirements, simply stated, and capable of simple measurement, is a better foundation for control than a legally complex document employing sophisticated concepts and measurement systems. Much work remains to be done on this problem. Consultants, who design and supervise, have traditionally been separated from "contractors", who construct what the consultant has designed. Many construction clients throughout the world are moving away from this traditional form of three-cornered client-designercontractor adversarial relationship. Control will be more easily exercised if road maintenance contracts are structured in such a way that encourages client, designer, and constructor to work together towards a common purpose. Effects of Organisational Change
Fluctuating workload. In most Sub-Saharan African countries the funds allocated for road maintenance will fluctuate from year-to-year, sometimes quite widely. Control In any project there are three elements to be controlled: quality, cost and time. To control these elements, project managers need information, knowledge, skills, authority, technical and management systems and resources. Generally, in Sub-Saharan Africa, there are shortages of all these except, perhaps, authority. One result is that local professionals feel disadvantaged in comparison to their foreign counterparts, and so lack the confidence to build their own businesses and compete on equal terms. A further factor that undermines confidence is that information and knowledge acquired from developed countries is much more highly prized than that which relates to local conditions. Thus a strong initiative is required to “localise" education, training and professional development. Good systems for drafting contract documents, contract administration, and the control of payments are crucial to effective control of maintenance and 90
It is likely that greater reliance on local contractors and consultants will require expansion of existing firms under the new stimulus; inducement mechanisms to encourage the transfer of government staff to existing firms; and inducements for complete units of government staff to create firms. The staff of government organisations that might become redundant as a result of contraction of government activities may be classified as follows: •
•
•
Potential design consultants: these will be the more technically able designers, those with some flair and confidence in their own ability; and also those who have good relationships with appropriate people in the private sector Potential contractors: the more enterprising of those members of staff who have been involved in the supervision of construction, who have good contacts in both client and contractor organisations, and who will be prepared to move with them Younger people: who have no especial skills or experience, but who will be reasonably adaptable anyway 91
•
•
People in neither of these three groups: but who would be useful members of staff of a much reduced road agency whose purpose was constrained to overall road transport planning, and the employment and control of design and supervision consultants Others: whose skills and attitudes would not make them easy to fit into any of these new positions
Assuming that the organisational changes were managed effectively, with realistic inducements, there should be only real problems with the last class of employees. Thus the magnitude of the problems under this heading will be directly related to the numbers of people in this last class. A careful study must be done of the way in which local firms really operate, within their own commercial and social structure. Generally, individuals will have strong social and cultural identities, motivations and obligations within social systems that have developed over centuries. These may be principally those of family-hood, tribe, and a complexity of other influences. Business practices are likely to be more strongly related to the parameters of these systems than to Western micro-economic theory. Perhaps, if all the determinants were clearly understood, the theory would still apply. It is necessary, therefore, to conduct serious researches to identify and understand these parameters. Development strategies such as "the introduction of modern management practices" must be viewed with some concern. What is needed is a careful study of existing management practices - which may work reasonably well if the economic context could be improved - and then to work with local people to develop them. Obviously, a relatively large number of firms will be more difficult to control than a few larger ones, so this is another crucial issue. Time-scale
indicates that most government organisations are overstaffed and that their equipment is under-used. Thus a policy of transferring work from the government organisations to local, private, firms would have the effect of moving the work from a sector of the economy that has surplus capacity to one with inadequate capacity. It is likely that a well-managed programme for the development of local firms will increase the capacity of this sector - supported, of course, by more general development programs that stimulate the expansion in numbers of educated and skilled people. However, this natural growth will have a very long time-scale, so more immediate action will have to be taken to transfer significant numbers of government staff to the newly emerging private companies, or to form sections of the organisation into new, private firms. Thus, to achieve results in a reasonable time, it will be necessary for the program to incorporate a large component for accelerating organisational change through intermediary institutions of various kinds. This problem reflects the growing concern of many officials working for development agencies: the timescale of many projects is far too short. The working environment for many projects in the Sub-Saharan African Region are such that projects take time to mobilise and mature, and this period would be usually much longer than the two or three years that is usually allowed. Action Plans The purpose of these action plans is to suggest, in broad terms, what investigations and development programs will be necessary for the effective development of local design and construction firms. The prime concern of such programs will be to foster the development of organisations which have determined, enterprising, and problem-solving management cultures. Logically, this must begin with the development of the market.
It has been shown that local consulting and contracting capacity in Africa is, generally, weak (The World Bank, 1988a; Edmonds and Miles, 1984). The Road Deterioration Study (World Bank, 1988b) 92
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Market Development Work must be made available to firms in a form that they can do without undue strain, within an acceptable level of risk, and within the knowledge, information, skills and resources available to them. This has technical implications, requiring a move towards smaller projects (or the subdivision of large ones), based on local technology, and using appropriate construction techniques. Unless and until the market for road maintenance becomes stable, with a sufficient and foreseeable annual demand, it would not be prudent for firms to concentrate solely on maintenance work. For most firms some diversification into related forms of construction activity will be necessary, so any developmental programme must take a broader view. Maintenance work should be seen only as a good basis for new firms to establish themselves and existing firms to develop. External support for the programme should seek to stimulate enterprise, rather than providing protection. The introduction of stabilising measures that would provide an assurance that an adequate number of projects would be available regularly over a substantial period of time, with timely payments, can help reduce risks. Given the difficulties that local firms face in getting finance and credit, some form of assistance will be necessary. This need not be in the form of subsidies, grants, or soft loans, but simply a system of making finance and credit easier to obtain. Typical financial and other constraints faced by small-scale contractors seeking to establish themselves in the construction market, as well as experience in measures to overcome them, are discussed in the ILO publication "Guidelines for the development of small-scale construction enterprises" (ILO, 1987). One of the main problems is that construction is perceived (generally correctly) by most commercial banks as a high-risk business. Routine road maintenance contracts should offer a lower-risk entrepreneurial 94
opportunity than new construction, since the work content and hence the cost is more predictable. It is in the interest of clients to ensure that financial risks are minimised by committing themselves to prompt and regular payments. Careful thought needs to be given to devising equitable methods of calculating payments due and ensuring that maintenance contracts are let only when there is a reasonable guarantee that funds will be available to honour payment applications promptly. Measures to Secure Effective Control Where road maintenance is executed on a force account basis, control structures are largely internal to the public sector organisation, which is responsible for setting the task and carrying it out. When private consultants and contractors are brought in the situation becomes more complex. The potential for an improved and more economical service will only be achieved if simple but effective control procedures are in place. This implies both the development of appropriate forms of contract and training of supervisory staff such as clerks-of-works and inspectors. A programme of research and development into appropriate contract forms is crucial. The World Bank has been particularly active in this area, emphasising fair contract procedures and its willingness to encourage “slicing and packaging" of larger projects so that small and medium-sized firms can undertake the work (World Bank, 1986). Road maintenance is intrinsically different from new construction, and further innovation is necessary to formulate a system of contract administration, which sets objectives that are easy to perceive and results that can be easily measured. Facilitating Organisational Change The development of local consultants and contractors should lead to a reduction in the size of government organisations. 95
One of the difficulties is the transition period, and this may have a fairly long time scale. There are two distinct elements: the "efficiency factor" indicating a transfer of emphasis from government to private firms; and the "national development factor" indicating the substitution of foreign firms by local ones. It may be impractical to work on both of these aspects at the same time, in which case a decision on priorities will have to be made.
• •
Devising and running effective and practical training programmes; and Establishing a focal point for professional development
Concluding remarks
The need to study the social and cultural dimensions of development programs has become widely accepted. In a program aimed at mobilising local contractors and consultants, this element will be vital. It will be necessary to discover the principal motivators of consultants and contractors, what risks they are prepared to take, and how they attract, motivate and control their staff. Equally careful and thorough studies will have to be done to design schemes for the transfer of staff from the government to the private sector.
This paper has given a broad review of factors that will be important if road maintenance is to be transferred from government organisations to local - usually small or medium-sized - private consulting and construction firms. No specific strategic, "blue-print" has been proposed because there is a clear need for more information before this can be done. Technical studies will be necessary to quantify such variables as the potential size of the market and the numbers of professional and skilled people available. Social studies will be necessary in order to ensure that development assistance is designed to provide realistic and acceptable results.
Institution Building
References
In a programme aimed at finding local solutions to local problems, local institutions obviously can take a major part. Experience has shown that successful institutional change depends on a concerted action by those involved, in the industry - clients, consultants, and contractors. Governments also have a major part to play. As the predominant clients of the industry, governments can take a strong position to promote the emergence of capable and well-motivated domestic construction businesses and consulting firms.
Allal, A. and Edmonds, G.A. (1977) Manual on the planning of labour-intensive road construction. ILO, Geneva.
The contribution of local institutions would include: • •
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Research and development projects on appropriate methods of design and construction, leading to more realistic design and better control Providing information, advice, and skills through consultancy
Edmonds, G.A. and Miles, D.W.J. (1984) Foundations for change: aspects of the construction industry in developing countries. Intermediate Technology Publications, London (on behalf of the International Labour Organisation) Harral, Clell G. (1986) The road deterioration problem in developing countries: organisation and management of road maintenance. Paper submitted to the US Transportation Research Board Annual Meeting. (Available from the World Bank) ILO. The Rainmaker. A booklet published by ILO, Geneva. International Labour Office, (1987) Guidelines for the development of small-scale construction enterprises. Geneva. 97
Lemunge, N. (1980) Report of the workshop on financial constraints on the development of small contractors in Eastern and Southern African countries. Report of an ILO seminar held at Kitwe, Zambia, August 11-15, 1980. Jerry M. Silverman, (1984) Technical assistance and aid agency staff: alternative techniques for greater effectiveness. World Bank Technical Paper No. 28, Washington D.C. Willoughby, Christopher R. (1981) Infrastructure: doing more with less. Finance and Development Division, The World Bank. World Bank, (1984) The construction industry: issues and strategies in developing countries. Washington, D.C. World Bank, (1988a) Development of consulting capacity in Africa. Various papers used in seminars. World Bank (1988b) Road deterioration in developing countries: causes and remedies. A World Bank Policy Study, Washington DC. World Bank, (1988c) Sub-Saharan African Transport Program, Road Maintenance Initiative, Project Brief. Washington, DC.
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HARMONISATION BETWEEN LARGE AND SMALL FIRMS: A PREREQUISITE FOR LEAN CONSTRUCTION? Christopher J.M. Miller, Gary A. Packham and Brychan C. Thomas
The Need for Harmonisation between Large and Small Construction Firms The construction industry has been heavily criticised for its adversarial nature, the take up of new technologies and issues relating to the management process (Construction Task Force, 1998; Latham Report, 1994). Historically, large construction firms have been able to negate the effects of economic recession and declining profits by initiating strategies of retrenchment and disinvestment. This in turn has arguably led to the proliferation of small subcontracting firms. Barlow (1996) observed that management and decision making in the construction industry can be characterised by high problem interdependency but also high independence in methods, organisations and people (Crichton, 1996). Groups of individuals carry out construction projects within temporary multi-organisations and are disbanded following work completion (Cherns and Bryant, 1984; Winch, 1989). Participants can spend considerable time adjusting to project working practices of others (Luck, 1996) due to the temporary nature of projects, which suggests that optimisation of personality mix is a key feature for successful project management. In partnering this factor may be more critical due to non-confrontational partnering aspirations and emphasis on collaboration. Personality appears to be most prominent when people can choose how they can act (Pervin, 1993; Furnham, 1992). A situation where work is undertaken in empowered environments is likely to require closer attention to the balance of personalities (Barlow, 1996). 99
The co-existence of small subcontracting firms and retrenchment strategies suggest that large and small construction firms are interdependent. In other words it is argued that both parties secure project success and customer satisfaction through the process of mutual co-operation and harmonisation as a prerequisite for lean construction. The fact that large and small firms are fundamentally different however, implies that harmonisation between the contractor and subcontractor cannot be construed as being automatic. Instead, it is contended that the differences that exist are detrimental to the effective management of a construction project and the process of value added (Cox and Townsend, 1998). According to Wright (2000) “lean construction is a concept espoused by the Lean Construction Institute of Idaho”. Further to this Beck (Wright, 2000) has reported that the implementation of lean construction consists of the following steps: • Defining what is valuable to the client • Planning a sequence of activities required to deliver the defined values • Achieving an efficient flow of work • Performing work only where it is needed to advance these values • Seek perfection through continuous application of the preceding steps. The ultimate goal is to avoid “muda” (Japanese terminology for the waste of energy, money, talent and time). The acceptance of lean construction relates to the fact that owners want projects delivered more efficiently. Small subcontracting firms differ from large construction firms in terms of size, management style, structure and organisational governance. In fact, it is submitted that the differences between large and small firms are so pronounced that it is insufficient to view these distinct forms as one homogeneous grouping for the purposes of comparative analysis (Penrose, 1995). Furthermore, Wynarczyk et al 100
(1993) maintains that the concepts of uncertainty, innovation and evolution effectively distinguish the small firm from its larger counterpart. Uncertainty provides that small construction firms can generally be viewed as being price takers (O’Farrell and Hitchens, 1988). In this sense, it is purported that small construction firms can rarely offer products or services above the prevailing market price and as a result are more susceptible to socio-economic fluctuations. Conversely, it is argued that the entrepreneurial nature of the small firm enables it to respond quickly to change and adopt innovative techniques whereas, large traditional firms are consistently being cited as cumbersome, inflexible and diffident to change (Lefebvre et al, 1997). Nevertheless, it is interesting to note that whilst large firms are beginning to embrace Intrapreneurship as a vehicle for creativity and flexibility, small firms are often unable or unwilling to operationalise new concepts and practices due to the preferences of the owner manager or the lack of relevant resources (O’ Farrell and Hitchens, 1988). Finally, small and large firms are different in terms of evolution and change. Large firms have comprehensive administrative structures, asset bases and formalised management practices that afford them relative stability whilst the volatility of the small firm sector provides that smaller ventures often experience transformational change but discontinuous evolution. Thus, as firms grow, many changes occur which influence the structure of the organisation and the style and role of management (O’Farrell and Hitchens, 1988). It is surprising that despite the fact that there is a need for greater harmony between the interdependent parties of the construction process, most studies fail to account for, or even attempt to comprehend the key differences that exist between the contractor and the subcontractor. For example, research by Saad and Jones (1998) has recognised that small firms should have a larger part to play in the process of construction as they account for 80% of contract expenditure. The failure to acknowledge the existence of fundamental differences between contractors and small subcontracting firms can therefore constrain any efforts to improve strategic fit or embrace the principles of lean construction. It could also be argued that the small 101
subcontracting firm derives little benefit from traditional subcontracting arrangements (Bresnen and Marshall, 2000). Instead, it is suggested that the transactional nature of the construction industry enables larger contractors to take advantage of superior networks and strategic knowledge to reduce operational costs at the expense of the small firm. A process that leads to mistrust and a general unwillingness to adopt new technologies or processes (Miller et al, 2000). A plethora of literature exists highlighting the need for the construction industry, as a whole, to adopt new value adding practices. The universal adoption of innovative practices however, is deemed to be problematic (Hall, 1995). In fact, it is contended that many small subcontracting firms cannot visualise how such practices are of additional benefit to existing methods of construction. Moreover, it is argued that the considerable distance that exists between the client and the subcontractor ensures that the small subcontracting firm is unlikely to derive benefit from the provision of quality work. It has already been submitted that numerous problems faced by the construction arena can be minimised through mutual co-operation (Saad and Jones, 1998). Harmonisation however, essentially depends upon the extent to which both large contractors and small specialist firms can enjoy favourable benefits. Furthermore, it is contended that harmony cannot exist in an industry that is considered hostile and one of little trust. Consequently, for harmony to exist it is imperative for large contracting firms and small subcontractors to mutually assist in the development of universally accepted practices that not only generate sustainable profit margins but also add value throughout the construction process. The Lean Construction Process Small subcontracting firms have a variety of subcontracting arrangements that they can enter into with larger contractors but despite contractual flexibility all these approaches can bring problems as well as opportunities (Bresnen and Marshall, 2000). Currently the 102
United Kingdom construction industry places very little emphasis on the development of the subcontracting sector. This neglect seems to support the supposition that small firms are merely a product of the fragmentation of the industry caused by significant shifts in demand (Morton and Jagger, 1995). Consequently, it can be argued that they struggle to retain any notion of individuality. In other words, the small subcontracting firm is construed as a component part of the construction process rather than an independent decision making firm (Miller et al, 2000). The idiosyncratic nature of the construction industry demands that parties that possess a wide range of different skills and expertise carry out work (Gann, 1996). Contractors will normally aim to maintain contact with a variety of different specialists and offer intermittent employment, matching the skills of the specialist to those required for the successful completion of a construction project (Winch, 1998). Thus it is maintained that interdependency helps to lower the costs of all parties involved within the construction process (Brochner, 1990). Despite the opportunities for the creation of small specialist firms, it is contended that many small subcontracting firms are failing to experience the benefits of entrepreneurship due to the adversarial nature of the construction industry. The construction process, according to Howell and Ballard (1996), is considered to be nearer to the manufacturer’s production development process than the factory development process. Howell and Ballard (1999a) have also postulated that design and construction need to be closely linked and lean construction requires the concurrent design of product and process. Koskella (1992) has described conventional production as a conversion process involving inputs converting to outputs. Koskella and Huovila (1997) have proposed three processes: • The conversion process • The flow process, and • The value generation process Additionally, Howell and Ballard (1998) have argued that flow and value models are central to the lean construction process. Here the 103
flow of information and materials will assist in waste reduction and value will come from negotiation of customer ends and means. Howell and Ballard (1998) also maintain that construction projects vary from slow to quick, uncertain and complex. In a study by Johansen (1996) it was found that projects were all in the later category and evidence suggested that for medium size projects this was an applicable description. Koskela (1992) relates that the conversion model of construction is based on sequential activities. Within this there are separate responsibilities for activities relying on each group responsibility for own objectives with commitment being met to satisfy project management (Howell and Ballard, 1999b). With commitment front driven control involves validation and reflection to isolate problems when there is non-achievement. Johansen (1996) has observed that this causes problems in uncertain environments. A fundamental difference between lean construction and the conventional model of project optimisation on an individual activity basis is one of increasing speed and cost reduction of each activity to provide a significant project outcome. A reliable flow of work (throughput) according to Howell and Ballard (1999b) is more critical than individual activity speed or individual activity cost. In fact, it is contended that lean construction is different since it: • Has clear delivery process objectives • Performance is maximised at the project level • Product and process designed concurrently • Production control applied throughout the project life Howell and Ballard (1999b) also believe that primary concerns of lean production are unnoticed in contemporary construction practice. It is also contended by Johansen and Greenwood (1999) that production control and developments from lean construction research are important and for dynamic construction under lean principles. Howell and Ballard (1998) report that it is necessary to “develop standard procedures for planning and managing the design and installation of unique facilities”. 104
The Lean Construction Process - A Transactional Perspective Conflict within the construction process is as prevalent today as it was at the time of the Simon Report (1944). The procurement systems and the contractual and legal framework adopted by most participants are often criticised as being confrontational and adversarial. Competitive tendering which aims to reduce costs can also result in this situation being further compounded. The result of such actions is dispute and conflict, usually revolving around financial self-interest between the various stakeholders within the process (Cox and Townsend, 1998). Contractors remain in business through the continuation of contractual arrangements with a variety of clients and projects. In this sense, it is submitted that the contractor possesses the necessary expertise and knowledge to bring together a wide range of specialists to meet the needs of the client. Furthermore, it is argued that the contractor enters into separate contracts with both the client and specialist subcontractors in order to fulfil the client’s remit. Thus, it is contended that the margin between the price quoted to the client and the actual cost of subcontracting represents the contractor’s reward for the effective organisation and co-ordination of the construction process (Casson, 1987). In terms of manufacturing a product, a firm can either organise from within or alternatively work through contractual arrangements with other parties. The producer utilises price as a means to strategically decide upon what activities should be outsourced and what operations should be organised internally (Lingard et al, 1998). Hence, transaction cost theory purports that costs arise from the process of economic organisation regardless of whether the costs are associated with external or internal co-ordination. Moreover, it is argued that if internalisation costs exceed prevailing market prices then rational firms will choose to outsource certain activities in order to minimise these costs (Miller et al, 2000).
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Most construction work undertaken can be categorised as being outsourced. In other words, contractual relationships can commonly be observed between the principal stakeholders within the construction process. These stakeholders essentially aim to satisfy their overall objectives whilst minimising cost. In a contractual arrangement, cost manifests itself as either being associated with organising the terms of the contract or as a result of enforcing the contract’s terms and conditions. Within transactional cost economics these costs are described as being either ex ante or ex post, respectively (Coase, 1937; Williamson, 1975; Lingard et al, 1998). In other words, within the construction process, ex ante and ex post costs relate to the differences between what projects should cost and their actual cost to all contracting parties (Miller et al, 2000). Notwithstanding the fact that the construction industry faces continued uncertainty, outsourcing continues to be the favoured form of procurement (Lingard et al, 1998). The historical development of the construction industry has meant that the majority of contractors have chosen to concentrate on core activities instead of integrating peripheral tasks associated with project completion. Hence, the nature of the construction process provides that a number of divisions in labour increase the complexity and management of a construction project. Furthermore, it is maintained that subcontracting allows contractors a degree of freedom and releases them from employment driven contractual liabilities. Consequently, whilst the contractor possesses the power to organise and direct the activities of the subcontractor, the transactional nature of the arrangement enables the contractor to effectively apportion risk. In this sense it can be argued that small subcontracting firms are employees in all but name and associated benefits. Moreover, it is submitted that the contractor and subcontractor should, to all intents and purposes be construed as a quasi firm. Thus, it is contended that whilst the contractor adopts the management role, small subcontracting firms are perceived as subordinates in the decision making process. As a result the small subcontracting firm not only struggles to retain identity but also becomes increasingly divorced from management decisions. 106
The nature of the construction industry provides that the majority of costs arise after a contract has been awarded (Lingard et al, 1998). In fact, it is purported that a distinct lack of information in traditional contractual relationships dramatically increases ex post transactional costs. In this sense, it is maintained that whilst direct costs associated with co-ordination, scheduling, supervision and enforcing contractual terms can be budgeted into total project cost, it is more difficult to estimate indirect costs that arise due to motivational issues, opportunism and conflict. These costs occur principally as a result of the failure to acknowledge that small subcontracting firms are individual decision making entities. Consequently, whilst contractual terms ensure project completion, the contract can rarely provide sufficient motivation to enhance performance. Thus, subcontractors can feel alienated and conflict often arises due to a lack of trust, understanding, communication and respect between the principal contracting parties. Moreover, ex post costs can be further increased as a result of self-interest. It is therefore reasonable to conclude that all parties should be construed as being vital to the construction process and that successful co-operation can only be achieved by establishing closer relationships between all contracted firms. Furthermore, it is argued that harmonisation is primarily dependent upon a clear understanding of how information and mutual cooperation are inextricably linked to reducing transactional costs. The Lean Construction Process - A Strategic Perspective Partnerships, strategic alliances and networks have contributed to economic revitalisation and growth. Many firms, industries and regions throughout the world have formed a variety of different relationships that have produced economic advantage for all concerned (Miller et al, 2000). The benefits that accrue include shared resources, staff and expertise, problem solving and the diffusion of innovation. Such relationships can offer tangible benefits to all involved. The relationships can offer reward in terms of economic performance and increased innovative capacity. 107
Strategic alliances, as the term suggests, involve two or more firms acting as allies within a relationship (Das and Teng, 1998). The elements of uncertainty or “relational risk” (Das and Teng, 1998) are arguably key, to a partnering form of relationship within the construction industry. Table 1 illustrates a simple model of transactional versus relational contracting based on Miles (1997). The polar extremes of the model have been extensively outlined by MacNeil (1994) and in the table a number of the factors of differentiation that highlight these extremes are illustrated. Table 1 Transactional versus Relational Contracting: factors of differentiation that highlight extremes (Miles, 1997) Transactional Limited Limited Monetary Short Short time between Short time of Substance of exchange Can be very complete Entirely binding Two Presentization of the future None expected
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Relational Relation Type Personal involvement Communications Monetary Valuation Duration Agreement Process Agreement and Performance Performance Planning Focus Specificity Nature Participants Number Time sense Expectation of problems
Unlimited Extensive Both Monetary and NonMonetary Long term No finite beginning No end to relationship Structures and Processes of the relationship Limited Tentative Likely to be much greater than two Futurization of the present Normal part of business – to be resolved cooperatively
It is the co-operation between the partners that is paramount to success. In this sense, opportunistic behaviour is minimised and success derived from all parties pursuing mutually beneficial interests. Partner cooperation however, is dependent upon all parties being able to manage an essentially paradoxical situation in which firms are expected to pursue their own business interests whilst simultaneously ensuring that these self interests do not prevent the alliance from functioning effectively (Das and Teng, 1998). Consequently, the key to successful alliances is the necessity to strike a balance between competition and co-operation. A key driver of such initiatives is that of ‘trust’. Trust can manifest itself in many forms within the construction process. To this end it is argued that this issue should not be ignored (Lau, 1999). In fact, it is argued that the cost of transactions can be reduced by reliable information (Casson, 1987), trust (Wood and McDermott, 1999) and mutual advantage. Despite a great body of academic work and practice within the construction industry, advocating that partnering can reduce defects and transactional costs, it is contended that current relationships are not advantageous to all parties within the construction process. Furthermore, it is submitted that regular clients of the industry do not always live up to their own rhetoric but utilise unequal power relationships to ensure that the essence of partnering does not constrain the pursuit of self interest (Green, 1999). It could be suggested therefore that opportunism and environmental uncertainty negate the benefits of partnering (Klein, 1999). Thus, it is conceivable that some operatives within the construction process may continue to opt for transactional relationships in order to satisfy self-interest. It could also be argued that if the principles of partnering and strategic alliances ultimately fail, then ex post costs could remain uncertain due to imperfect information and distrust. Therefore, it is necessary to ensure that the benefits of partnering are diffused throughout the supply chain so that all parties can enjoy reduced transaction costs. For partnering to work it is imperative that all partners make a profit and that all stakeholders are included in the decision making process (Klein, 1999). Moreover, given that lean construction aims to reduce waste 109
whilst simultaneously adding value to the construction process it can be surmised that harmonisation between all contracting parties becomes to all intents and purposes a prerequisite for success. In this sense, it is contended that the ability to adopt a lean construction approach is dependent upon the extent to which large and small contracting firms can form working relationships that effectively reduce transaction costs. Harmonisation as a Prerequisite for Lean Construction The primary purpose of this research was to examine the extent to which lean construction could be constrained by the type of relationships shared by contractors and subcontractors within the construction process. Given that these relationships are unique, a case study approach was undertaken to ascertain how the type of contractual relationship effected the cost of transactions. The research was also interested in examining the perceived benefits that could be accrued by small subcontracting firms in adopting a strategic approach that was conducive to lean construction. The research also aimed to investigate how industry best practice impacts upon the costs incurred and profit margins of the small subcontracting firm. Opinions were sought from three firms in terms of how the parties currently approached the construction process and how these relationships impacted upon performance. Two contractors were chosen that had been involved in a common construction project with a subcontracting firm. In order to reduce the effects of any sectoral variances, the project and all firms were located in the Industrial South Wales region of the United Kingdom. It is argued that a case study approach is the most logical method of analysing complex situations (Aaker et al, 1998). The research used multiple methods to collect data, which were both qualitative and quantitative. Observations and documentation were also utilised to corroborate responses (Tellis, 1997; Aaker et al, 1998). The case study approach followed the etiquette developed by Yin (1994) in order to improve the validity of the research design. Consequently, the 110
research design included a number of key elements such as clear and concise research objectives, a predetermined field procedure and an interview guide (Yin, 1994; Aaker et al, 1998). The study involved multiple visits including four interviews with the owner-management team of all three firms, each lasting approximately 1-½ hours. Pseudonyms for the firms have been adopted for the purposes of confidentiality. With the permission of the participants the interviews were recorded. The interview questionnaire was in accordance with the objectives of the study and was conducted with all three parties. Face-to-face personal interviews were preferred over other data collection methods as they enabled the interviewer to probe and clarify answers. Company documentation, including organisational charts and minutes of management meetings were also collected to corroborate and support data obtained from the interviews. To improve the validity of the research, all parties were provided with a full transcription of their interview. In addition, emphasis was placed on the hermeneutic understanding (Mariussen, Wheelock and Baines, 1997) of the participants – in particular, in clarifying their own conceptualisations of the decisions they generally faced in relation to the construction process (Giddens, 1979; Steyaert, 1997). A Transactional vs. Strategic Approach Contractor (A) operates from a transactional perspective. The firm tenders and bases the decision to employ small subcontracting firms solely upon price. In some instances, previous experience in working with the subcontractor prompts the decision to enter into contractual relations but is still considered secondary to the tender price. Contractor (A) despite its transactional approach, still expected the small subcontracting firm to provide quality work but felt no need to involve the firm in the decision making process. In terms of delivering a satisfactory service, the small subcontracting firm was viewed by the contractor, as a “problem”. The contractor did not view the small firm as an integral part of the construction process. In this sense the 111
contractor did not seem to respect or trust in the capability of the small subcontracting firm. The contractor then went on to say: “Due to time pressure we will often sweep up the dross. We know the animal we get involved in and I will make contingency plans. You know often what people say they will do, and what actually happens, are often very different”. Throughout the interviewing process, it was evident that contractor (A) often faced escalating ex post costs caused by a milieu of contractual problems between contractor and subcontractor. Furthermore, contractor (A) stated that any attempts to introduce lean construction techniques were severely constrained by the unwillingness of the subcontractor to adopt new techniques and processes. Contractor (B) subscribes to the partnering approach to the management of the process. The contractor felt that partnering was a significant development in managing and integrating subcontracting firms into the lean construction process. Contractor (B) believed that the partnering philosophy could dramatically reduce unnecessary transaction costs that derived from conflict and a lack of communication. In fact, contractor (B) suggested that: “Talking to and building relationships with subcontractors is very important when looking to embrace new processes…we always ensure that we communicate why we are doing something a particular way and try and point out any mutual benefits” Consequently, contractor (B) was also committed to preferred lists to ensure quality and service. It was surprising that despite the existence of a preferred list, price continued to be the major selection criterion. Moreover, it was apparent that the small subcontracting firm was still divorced from decision making although every effort was made to keep subcontracting teams informed of management decisions. Both of these approaches are essentially cost led. Whilst the selection criterion is supposedly based upon the reputation of the subcontracting 112
firm wherever possible, it is evident that cost still drives the selection process under both types of relationship. The interesting point in regard to existing theory is that neither approach integrates the small subcontracting firm into either the lean construction or general decision-making process. The subcontractor interviewed had worked with each of the contractors on more than one occasion. The subcontracting firm was happy to discuss both contractors with the researcher. The comments made in regard to contractor (A) were far from complimentary. The subcontractor was adamant that neither his firm nor any other firm that he was in touch with would work for contractor (A) again. In this sense, the commercial manager expressed that the subcontracting element of the construction industry was no longer willing to embrace the “subby bashing” philosophy in order to increase the profitability of the contractor and client. The manager also stated that the unwillingness to subscribe to new techniques such as lean construction were not simply down to an unwillingness to adopt new techniques. Instead, it was argued that the benefits of new practices were poorly diffused throughout the industry and often the firm’s first knowledge of a new technique would be based on the preference or insistence of a contractor. Thus, it was contended that in situations of conflict and mistrust, they were more likely to ‘stick to what they knew’ rather than offer full compliance. Conversely, contractor (B) was viewed as a very fair and honourable firm to work with. The subcontractor agreed with the philosophy of contractor (B), in that competition in terms of selecting the lowest bid was a fair and reasonable strategy to adopt as long as trust and respect were in place. The subcontractor added that often when a “good job came up” he would hope that contractor (B) would win the project. The subcontractor expanded upon the previous comment stating that out of ten contractors in the area it was only willing to work with two, including contractor (B). The subcontracting firm was very happy to compete with four or five alternative subcontractors (through a preferred list) because they were certain that the tender and contractual process operated by contractor (B) was dealt with reasonably and fairly. It is perhaps pertinent to note that these 113
compliments related primarily to the willingness of contractor (B) to financially remunerate the subcontractor within an acceptable time frame. The commercial manager of the subcontracting firm made an interesting point during the interview. He was very happy working with the managing director of contractor (B) but wished that the strategic vision of the firm could be diffused throughout the organisation. The firm was involved in a contractual conflict with a quantity surveyor and found that negotiations were becoming hostile. It was evident that this particular situation would not be settled harmoniously. The subcontractor was concerned that the firm would have to settle for a significant reduction in profitability for the works provided. This was of great concern due to the fact that contracting firm (B) is viewed as a reputable firm. In addition, the manager of the subcontracting firm implied that whilst the firm had made an attempt to embrace the concept of lean construction, they had also resisted, to a lesser degree, the request by contractor (B) to subscribe to lean construction. The primary reason behind this decision was based upon the fact that the subcontractor did not perceive any additional benefit from the adoption of lean construction techniques, especially in terms of resourcing and reward. It is therefore argued that in these cases little consideration was given to the subcontractors’ objectives or constraints. Instead, it can be submitted that subcontractors continue to be treated as simply a tool of the process, ensuring that the contractors short-term objectives are maintained. In other words, the preferred list may assist in the provision of work for the subcontracting firm but arguably acts as a good bargaining tool to ensure that cost and quality is met. It is also contended that the reputation of the subcontracting firm is geared to the reduction of costs of the contractor and client through quality assurance rather than expertise and mutual co-operation. Preliminary research indicates that neither the traditional or partnering approaches to lean construction added value for the small subcontracting firm. Furthermore, it is suggested that disharmony may dramatically increase ex post transaction costs and thus, negate any benefits accrued from the lean construction process. 114
Conclusion – Harmonisation as a Prerequisite of Lean Construction It is argued that success within the construction process is determined by the extent to which the interfaces between inter-dependent subcontractors can be managed (Shirazi et al, 1996). The fact that the construction industry is cost led provides that profit margins are diminutive. Furthermore, it is recognised that the main objective of all parties involved in the process is to maximise value added and minimise cost. This approach can only be construed as being destructive in the long term as the need to minimise transactional costs effectively reduce quality and client satisfaction. It is also maintained that if ‘Dutch Auctions’ continue to dominate specialist selection then it is unlikely that the requirements of the small subcontracting firm will be satisfied. This point is supported by initial evidence from the research. It could therefore be contended that this behaviour is not conducive to harmonisation and long term relationships. Consequently, the existence of dispute and conflict that typifies existing relationships in Industrial South Wales ensures that the diffusion of new techniques such as lean construction is problematic. It is submitted that the degree of harmonisation between the contractor and small sub contracting firms is inextricably linked to client satisfaction. Furthermore, whilst this link is not explicitly acknowledged by the construction industry it is argued that the acquisition of future business by both contractor and subcontractor is dependent upon securing and building an established reputation within the market place. It is evident that the lean construction philosophy is not currently embodied within the industry despite continued attempts by existing literature to encourage construction firms to subscribe to such concepts (Green, 1999). Thus, these concepts cannot currently be construed as all-encompassing solutions to the problems of ex post transactional costs. It could be contended that the interests of all parties, especially small subcontracting firms need to be addressed and that the opportunistic behaviour by clients and contractors needs to be 115
minimised. In fact, it is argued that continued alienation may force subcontractors to enter alternative markets. Furthermore, it is argued that diverse and niche operators could even act as contractors, offering specialism directly to clients. It is therefore imperative for the industry to understand the aspirations and motivations of this sector in order that new concepts also benefit this important sector of the construction industry. Specialists currently account for approximately 80% of the work carried out by the industry, yet the industry fails to attach significant importance to its development. It is therefore maintained that whilst the small firm can assist in significantly reducing the cost of the transaction, this study offers that neither the contractual or strategic approaches to the construction process provides tangible benefits to the small subcontracting firm. Whilst it is evident that the extent of contractor and subcontractor harmonisation affects client/consultant satisfaction it is perhaps pertinent to note that the needs and objectives of the subcontractor are often overlooked. It is therefore argued that future research should attempt to ascertain the extent to which all contractual parties can benefit from mutual co-operation within the construction process. It is contended that despite the apparent interdependence of the principal stakeholders, the transactional nature of the industry ensures that the process of construction remains cost led, adversarial and one of little trust. This environment however, is not conducive to the adoption of collaborative techniques such as lean construction. Consequently, it is submitted that the lack of harmony that currently exists is detrimental to all stakeholders in terms of quality, performance, value added and reputation. Thus, the continuing success of the industry, as a whole, is becoming increasingly dependent upon the effective management, coordination and innovation of the construction process. Furthermore, it is maintained that research must focus upon the extent to which strategic relationships impact upon the reputation and performance of the contractor and small subcontracting firms and more importantly study how approaches can address the needs of the small subcontracting firm. It is also necessary to promote the significant role of the small subcontracting firm within the construction process in 116
terms of reducing transaction costs, improving information flows and the maintenance of quality and client satisfaction. The continuation of this research will not only offer a valuable insight into the activities and motivation of an important and often neglected element of the construction process but also provide evidence of how transactional costs can be further reduced and aspire to the principles of the lean construction philosophy References Aaker, D., Kumar, V. and Day, G. (1998) Marketing Research (6th Edition), London: John Wiley & Sons. Barlow, J. (1996) Partnering, lean production and the high performance workplace, Paper presented at the 4th Annual Conference of the International Group for Lean Construction, Birmingham, August. Bresnen, M. and Marshall, N. (2000) Partnering in construction; A critical review of issues, problems & dilemmas, Construction Management & Economics, Vol. 18 (2) pp 229-237. Brochner, J. (1990) Impacts of information technology on the structure of construction, Construction Management and Economics, Vol. 8 (2), pp 205-218. Casson, M. (1987) The Firm and the Market: Studies on Multinational Enterprise and the Scope of the Firm. Basil Blackwell Ltd. Central Council for Works and Buildings. (1944) The Placing and Management of Building Contracts, HMSO, London. Cherns, A. and Bryant, D. (1984) Studying the client’s role in construction management, Construction Management and Economics, Vol. 2, pp 177-184. 117
Coase, R. (1937) The Nature of the Firm. Economica, 386-405. Cox, A. and Townsend, M. (1998) Strategic Procurement in Construction. Thomas Telford Publishing. Crichton, C. (ed.) (1966) Interdependence and Uncertainty: A study of the building industry, London: Tavistock Institute of Human Relations. Das, T. K. and Teng, B. S. (1998) Between trust and control: Developing confidence in partner co-operation in alliances. Academy of Management. The Academy of Management Review. Vol. 23, (3) pp 491-512. Furnham, A. (1992) Personality at Work, London: Routledge. Gann, D.M. (1996) Construction as a manufacturing process? Similarities and differences between industrialised housing and car production in Japan. Construction Management and Economics, Vol. 14, (5), pp 437-450. Green, S (1999) Partnering: The propaganda of corporatism?. Proceedings of Profitable Partnering in Construction Procurement. Ogunlana, S. (Ed) E & FN Spon. Hall, G. (1995) Surviving and Prospering in the Small Firm Sector. Routledge. Howell, G. and Ballard, G. (1996) Rethinking Project management: Moving beyond “Can-Do”. In: Skitmore, R.M. and Betts, M. (eds) In: Thorpe, A. (ed) Procs 12th Annual ARCOM Conference, September, Sheffield Hallam University: Loughborough: ARCOM 1, pp 330-337. Howell, G. and Ballard, G. (1998) What kind of production is construction? In: Procs. 6th annual conference of the International Group for Lean Construction, Guaranja, Brazil, 13-15 August. 118
Howell, G. and Ballard, G. (1999a) What is lean construction? Papers from the Lean Construction Institute Seminar, Portland, Oregon, 8-9 January. Howell, G. and Ballard, G. (1999b) The design of construction operations, Papers from the Lean Construction Institute Seminar, Portland, Oregon, 8-9 January. Johansen, D.E. (1996) Planning on medium sized construction projects, Unpublished MPhil Thesis, University of Northumbria at Newcastle. Johansen, D.E. and Greenwood, D.J. (1999) Hard, Soft or Lean? Planning on Medium-sized Construction Projects, ARCOM Fifteenth Annual Conference, September 15-17, Volume 2, pp. 385-394. Klein, R. (1999) Partnering comes unstuck. Building. Issue 11. Koskela, L. (1992) Application of the new production philosophy to the construction industry? CIFE Technical Report No. 72, California: Centre for Integrated Facility Engineering, Stanford University. Koskela, L. and Huovila, P. (1997) On foundations of concurrent engineering, In: Procs 1st International Conference on Concurrent Engineering in Construction, London: The Institution of Civil Engineers, pp 22-32. Latham, M. (1994) Constructing the team. HMSO, London. Lau, H. L. (1999) Trust as a human factor in management in general and in construction. Proceedings of Profitable Partnering in Construction Procurement. Ogunlana, S. (Ed) E & FN Spon. Lefebvre, L., Mason, R. and Lefebvre, E. (1997) The Influence prism in SMEs: The power of CEOs’ perception on technology policy and Its organisational Impacts. Management Science.Vol (43) pp 856-878. 119
Lingard, H. Hughes, W. and Chinyio, E. (1998) The impact of contractor selection method on transaction costs: A review. Construction Procurement. Vol. 4 (2). pp 89-102. Luck, R. (1996) Construction project integration strategies, Paper presented at the Salford-Westminster Workshop on Partnering in Construction, 13 May. MacNeil, I.R. (1994) The many futures of contracts, University of Soutern California, Southern California Law Review, Vol. 47:69. Miles, R. (1997) Contracting for Lean Performance: Contracts and the Lean Construction Team, web.bham.ac.uk, pp 1-11. Miller, C., Packham, G. and Williams, T. (2000) Transaction Costs and the Construction Process: Redefining Subcontracting: reducing transaction costs? Journal of the National Institute of Construction Management Research Vol. 15 (1). Morton, R. and Jagger, D. (1995) Design and the Economics of Building. E & FN Spon. O’ Farrell, P. N. and Hitchens, D.M.W.N. (1988). Alternative theories of small firm growth: A critical review. Environment and Planning. Vol.(20), pp 1365-1383. Penrose, E (1959) The Theory of the Growth of the Firm. Oxford University Press.
Shirazi, B., Langford, D. A. and Rowlinson, S. M. (1996) Organisational structures in the construction industry. Construction Management and Economics, Vol.(14), pp 199-212. Tellis, W. (1997) Introduction to Case Study, The Qualitative Report, 3, 2. The Report of the Construction Task Force (1998) Rethinking Construction (Egan Report). Wynarczyk, P., Watson, R., Storey, D., Short, H. and Keasey, K. (1993) Managerial Labour Markets in Small and Medium sized Enterprises. Routledge. Williamson, O. E. (1975) Markets and Hierarchies. Free Press New York. Winch, G. (1989) The construction firm and the construction project, Construction Management and Economics, Vol. 7, pp 331-344. Winch, G. (1998) The Growth Of Self Employment In British Construction. Construction Management and Economics, Vol. 16 No. 5. Wood, G. and McDermott, P. (1999) Searching for trust in the UK construction industry Proceedings of Profitable Partnering in Construction Procurement. Ogunlana, S. (Ed) E & FN Spon. Wright, G. (2000) Lean construction boosts productivity, Building Design and Construction, Vol. 41, No. 12, pp 29-32.
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Yin, R.K. (1994) Case study research – design and methods, London: Sage Publications, 2nd edition.
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THE BARRIERS TO NEW TECHNOLOGY DIFFUSION IN THE CONSTRUCTION INDUSTRY OF SOUTH WALES Martin O’Farrell and Christopher J.M. Miller
The Construction Industry in Wales Industry in Wales is dominated by the manufacturing and public sectors. These contribute a disproportionate percentage of the region's Gross Domestic Product (GDP) compared with the national average (Pathway to Prosperity 1998). The construction industry accounts for 8.4% of GDP in Wales compared to 7.7% in the UK (DfEE 2000). This figure emphasises the importance of the construction industry to the Welsh economy. Table 1 highlights the continued importance of the construction industry to Wales in terms of the work undertaken by contracting and subcontracting firms, and its contribution to the economy. The value of the work undertaken has increased by 9% since 1995. In fact, between 1970 and 1994 there was a 175% increase in the number of contracting firms within Wales (Harvey and Ashworth, 1998). Table 1 Total Output of Work (Contractors) - Wales Y ear 1995 1996 1997 1998
T o ta l W o r k W a le s (£ m illio n ) 2 ,3 7 7 2 ,3 3 1 2 ,5 3 9 2 ,5 9 1
Source: DETR (1999) 122
123
The importance of the construction industry to Wales is significant in terms of economic growth and employment. The majority of firms employ between 1 and 13 employees (see Figure 1). Many of these firms are working within the repair and maintenance sector of the industry. This shows that the construction industry in Wales is dominated by those firms acting as self-employed operatives, sole traders or small firms. 5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0 1
2 to 3
4 to 7 8 to 13 14 to 24
25 to 34
35 to 59
60 to 79
80 to 114
115 to 300 to 1200+ 299 1199
Size of Firm (by employment)
Figure 1 Total Number of Construction Firms by Number of Employees in Wales 1998 Source: DETR 1999
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The importance of technological advancement The growth and development of new technologies is changing the face of many businesses. Technology is fundamentally altering products, processes and services. Advances in computing, telecommunications, pollution control and the Internet are stimulating the development of new industries and changing the nature of many older ones. In certain sectors customers are becoming more demanding and placing greater emphasis upon the use of new technologies to deliver superior goods and services. Many firms subscribing to this view have attained competitive advantage. It has been acknowledged that the construction industry is one of low growth, low skill and often averse to technological and process improvement especially within small firms (Egan, 1998). The requirements of small firms are very different from those of large firms. Small firms frequently operate and exist for reasons other than the satisfaction of shareholders. The growth and development of small firms for example, is often the result of a “gut feeling” and normally unplanned. The development and integration of the construction industry may be advanced through an understanding of the significant role played by small construction firms (Bresnen and Marshall, 2000). This paper offers preliminary evidence, which suggests that new technologies and processes can be constrained by small firms’ unwillingness to view contemporary initiatives as beneficial to both the industry and to their own competitive advantage. The paper concludes with the view that the introduction of certain new products can assist the sustainability of the worlds resources and, to small firms, market effectiveness. It is suggested that the introduction of certain new products should be driven at governmental level to ensure that sustainability targets are met. Evidence suggests that the cost led nature of the industry may be constraining small firm development.
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Small Construction Firms and Technological Development Dean et al (1998) argue that technological development in industry attracts new entrants. For technological and process development to proceed in the industry, it is necessary to understand the significance of small firms and how technological and process advances are suppressed through the cost led culture of the industry. The construction industry is attempting however, to close entry barriers through legislation and research activity into technological developments. There are however many critics viewing the current advances as being of no benefit to smaller firms within the supply chain (Bresnen and Marshall, 2000). It is likely that many small firms will fail due to the current profit levels obtainable, lack of development and potential economic fluctuations. The industry will benefit from the type of small firm that can change strategic direction quickly, accept change and possess technological know how (Egan, 1998). It is imperative to understand that such firms possess and require very different resources and capabilities in order to survive and succeed in environments that are unstable and uncertain (Dean et al, 1998). The introduction of technologies and processes within small firms has been a significant driver of small business research although the construction industry has often failed to view the process from this perspective. Construction technology can be defined as the combination of construction methods, construction resources, work tasks, and project influences that define the manner of performing a construction operation. Innovation can be defined in many ways depending on the context in which it is used. Within the construction process, it is deemed relevant to define innovation as the first use of a technology within a construction firm. Technologies can be defined as the use of current knowledge in order that goods and services are produced. The definition covers equipment, tools, techniques, materials, systems, processes, information and the goods or services produced, and their use (Ofori, 1994). 126
Tidd et al (1998) argue that a firm’s capability to take up technologies and processes is embedded in its knowledge base. The knowledge and trust base of firms and markets must be understood in terms of change and development. The precise nature of change tends to differ from firm to firm, due to their unique characteristics. Within the construction industry change and development tends to be “pushed down” from the top levels of the supply chain rather than “pulled up” from the small firms who are normally acting as specialists within projects. Major changes in markets, technologies and the degree of competition enforce the need for organisations to change in terms of management and organisational capability. Technological and process change within organisations is the result of many management decisions regarding the purpose of the organisation. Change is usually forced upon organisations via macro-environmental uncertainty. It is therefore not surprising that the introduction of new technologies to small firms is difficult, time consuming and costly. Methodology New processes are being developed within academic institutions and within industry that attempt to assist governmental and world concerns regarding the sustainability of our planet. It is therefore the objective of this preliminary research to ascertain the market potential within the supply chain of the construction industry in South Wales. The new technology is part of a programme of work developed at the University of Glamorgan School in the Technology Building Materials Research Unit. A short telephone interview was arranged with two owner managers of small construction firms and one specialist distributor. The objective of the interview was to assess their perception of the viability of the products’ chances of success in the industry. The interviews were semi structured in order that the views of interviewees could be fully captured. The interviewer had a set number of suggested questions to ask and these were developed as the interview programme progressed. 127
This method allowed flexibility so that the interviewer could elaborate or clarify any answers given. The approach also allowed the interviewer to have more latitude to probe beyond the answers (May, 1993). The technological advancement was explained to the participants and they were asked to comment on the product’s potential in the market and its potential for use. The proposed new technology produces a more durable and environmentally friendly type of cement that can effectively reduce harmful carbon dioxide emissions into the atmosphere. The following proposition was put forward by the researchers to assess the potential viability of the product to three participants in the construction arena. A Potential Product for Competitive Advantage In both developing and industrialised countries Portland cement concrete (hereafter referred to as concrete) is the primary material of choice for large-scale new construction as well as the rehabilitation of old structures (Mehta, 1998). Compositionally, concrete is composed of four ingredients, cement (as a binder), large aggregate (normally 1020mm), fine aggregate (1500kg Raw materials
Cement manufacture
1 Tonne cement
≈1.4 MWh Figure 1 The environmental cement equation 129
The manufacture of 1 tonne of cement involves the heating of over 1500kg of raw materials (usually limestone/chalk and shale) to temperatures in excess of 1400°C. This process alone utilises a tremendous amount of energy. It has been estimated that in 1990 the average energy consumption to produce one tonne of cement was about 1.6MWh (Neville, 1995). However, modern plants are more energy efficient and this figure is now much lower (a figure of 1.4MWh is considered more realistic). As in excess of 1 billion tonnes of cement per annum are produced globally, then this energy demand is extremely significant. Any method for reducing this energy requirement would certainly ease the pressure on the already overstretched global natural resources. Perhaps the immediate concern for the environment is that of CO2 emissions. It has been estimated that for every tonne of cement produced, a similar quantity of CO2 is released into the atmosphere (Mehta, 1998) and is thought to contribute to global warming through the greenhouse effect. If this estimate is correct then using 1998 global production figures about 1.58 billion tonnes of CO2 were released into the atmosphere as a direct consequence cement manufacture. The production of cement entails usage of large amounts of energy and releases vast quantities of CO2 into the atmosphere. With the predicted increase in world population and corresponding increase in construction, these two factors will both increase. An ideal solution would be to cut cement manufacture and thus reduce energy requirements and CO2 emissions. New infrastructure however, is dependent on cement and there is no realistic alternative to cement in the foreseeable future. One method of reducing the impact this increase in cement production will have on the environment is to reduce the cement content in concrete. To achieve this, new materials are currently being identified that when used to partially replace cement can produce concrete that has similar properties to that whose binder is exclusively Portland cement. One group of such materials are pozzolans. 130
Pozzolans Lea (1998) explains that pozzolans are materials that: “Although not cementitious in themselves, contain constituents which will combine with lime at ordinary temperatures in the presence of water to form stable compounds possessing cementing properties.” If these are used correctly, they will enhance the properties of concrete. The classic use of pozzolans is the partial replacement of cement in concrete. In this, a proportion of the cement is replaced by a pozzolan. The pozzolan when present in the hydrating cement will react with the cement powder and mix water to form additional cementing calcium silicate hydrate (C-S-H) compounds. Within reason, the production of greater amounts of C-S-H phase results in a stronger, more durable product. As understanding of this pozzolanic reaction with cement increases, the identification of materials with a pozzolanic potential has also increased and in recent years, much research has been directed towards the identification and investigation of new pozzolanic materials. The number of waste materials that are being identified as suitable for use as a pozzolanic partial cement replacement material is growing rapidly. Many materials that were thought to be solely waste or by-products of already established industrial processes are now being considered, or already have been exploited, for their pozzolanic properties. In addition to identifying new pozzolanic materials, research is ongoing to identify and understand the mechanisms responsible for the pozzolanic reaction. The pozzolanic reaction is essentially similar for most pozzolans. However, due to variations in the chemical and mineralogical compositions of each waste material the effect on concrete is different for each pozzolan. An understanding of the properties of each pozzolan is therefore imperative before stipulating its use as an additional cementing material. 131
Use of pozzolans in cement is currently on the increase and some high profile developments have successfully exploited the technique. For example, the Suez Canal lining utilises Santorin Earth (a volcanic deposit on the island of Santorini, Greece) as a cement replacement material. A more recent project is the second Severn crossing (UK) in which a significant amount of cement used in the concrete was replaced by GGBS (a latently hydraulic waste material that derives from the steel making process). Benefits of utilising Pozzolans There are many strong arguments for the more comprehensive use of pozzolans as partial cement replacement materials in the production of concrete. The main benefits of reducing the cement content in concrete by utilising waste materials as pozzolans can be divided into two themes – environmental and commercial. The environmental benefits derived from reducing the cement content of concrete by replacing it with waste materials are: • • • •
reduced quarrying of raw material reduced energy consumption reduced CO2 emissions out of stream re-use of waste materials that would otherwise be disposed of at landfill
These topics have been covered elsewhere in this paper and will not be repeated here. The environmental benefits notwithstanding, arguably commercial benefits will determine whether the uptake of new construction material technology by industry is successful. Compulsive factors indicate the uptake should be more widespread. The most compelling factor is that of cost. Cement is the most expensive component of concrete at roughly £60/tonne. Waste materials with pozzolanic 132
properties are generally not as expensive. The materials currently being identified are commonly disposed of as landfill. Waste producers are currently paying to dispose of their waste in the form of landfill tax. The replacement of cement with pozzolans would therefore reduce the cost of construction materials. In addition, if the pozzolan is dosed correctly for its specific end use, the final product will generally possess greater strength and enhanced durability. In essence, the use of the waste material will result in a value-added product that is cheaper than the original. As the durability has been increased then time to rehabilitation and repair will also be increased. This lowers the life cycle cost of the construction, as less cement will be required later in the materials life for repair and remedial work. With tightening environmental legislation the correct use of waste materials (or by-products) as partial cement replacement appears to be an ideal remedy to ease the environmental impact of cement manufacture. Not only would the concrete product be more environmentally sympathetic but it also has the potential to be cheaper and more durable than is currently feasible. Results and Discussion Small firms A and B were positive in terms of the product’s potential but were scathing in terms of the industry’s ability to diffuse new technologies. Both respondents were positive in terms of the product and were pleased that the product reduced harmful emissions. Small firm A was interested to learn that cement manufacture was harmful to the environment and was unaware of the high level of carbon dioxide diffused into the atmosphere and commented: “If there is that much of a problem to the environment then we should as an industry be pushing this product through. The only problem I see however is the industry itself because if it costs more you will have to forget it.”
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There does seem to be further issues surrounding the successful diffusion of new technologies within small construction firms. It seems that the current processes adopted by the industry in terms of technology diffusion are not conducive to the small firm (Dean et al, 1998). A typical response was attained from small firm B: “They want us to introduce new things but my staff are on such tight time frames, every minute means money. If they introduce things that they are unsure of it costs them money and with families to feed, they find that it is unacceptable. On top of that, if the job takes longer than it should, I am penalised. So for the small firm we are the losers as always.” This was a typical response obtained from both interviews. Previous research suggests that small firms in the industry view the take up of new technologies and processes to be a burden rather than an opportunity and fail to see any benefit from adoption (Bresnen and Marshall, 2000). It would however seem to be less of a barrier if the cost and performance benefits are made clear in the product’s marketing strategy. Unfortunately, this does not seem to be the case. The interview with the Specialist Building Material Supplier produced results that were negative in terms of the product’s potential in the market. The Branch Manager replied: “The problem you will have will be two-fold. If you get the product specified there is a very good chance that the contractors will decide that it is too expensive and find a product that will do the same type of job. With them, it just comes down to price! The subcontractors will be very similar. I get sick to death of attempting to sell the features and benefits of products. Our job is to convince subcontractors and contractors that innovative new products will benefit them in time, quality or cost. The majority of the time the only selling point that works is cost!” 134
It may be evident that in many circumstances new technologies are not reaching the target audience due to the cost led nature of the industry coupled with the tight time frames expected by clients. Even those products specified by architects and consultants are failing to reach the final product. Such factors are arguably damaging the industry in terms of increasing the transaction costs of the construction process thus reducing the efficiency of projects (Egan, 1998). The failure to incorporate new and exciting technologies also compounds the problem of ensuring that the UK construction industry does not lag behind other countries in Europe and world-wide (Harvey and Ashworth, 1998). Conclusions It seems that the industry continues to view price as the main concern and the development of new products in the traditional sense cannot work in the construction industry. There does not seem to be any benefit to either subcontractor or contractor to use new products and margins often erode the possibility of specified products being adopted. Funding providers continue to develop new products through the provision of resources to the research community. There does seem however to be a diffusion problem within the supply chains. This preliminary research indicates that new and exciting innovations are available to the construction industry but current processes and systems in place are failing to achieve successful diffusion. It is evident that this new and exiting product is of interest to the industry due to its durability and performance. It is also evident that this product can assist in reducing harmful gases released into the atmosphere through the production of cement. It is interesting however that the successful diffusion of such products may be hindered through a small weakness in the construction supply chain. If practicable, it may be wise for funding providers to seek ways of developing the market potential of products developed by the academic community. The survival of new products in the construction industry seems to be problematic due to the nature of the 135
procurement process. From this small study, it seems that subcontracting firms are failing to embrace new products due to the small margins available to them from the competitive tendering process. The question remains as to why research into new products and processes fails to recognise the need for support at the sales end of the supply chain. It does not seem to be worthwhile investing in research if the product fails to reach the desired customer base. It may be worth policy makers considering the possibility of partly funding the manufacture of new innovative products that satisfy environmental needs. If products can reach specialists at affordable prices, it is evident from the preliminary study that they may be successful in the market place. Small firms do not seem to be averse to technological advancement but argue that the price led approach to construction fails to allow for any organisational slack. Small firms maintain that they require additional resources if they are expected to adopt new products. This issue is one that can be solved with little problem as long as clients and contractors allow the diffusion to take place and agree to extended timeframes and potential price increases through delay. References Bresnen, M. and Marshall, N. (2000) Partnering in construction; A critical review of issues, problems and dilemmas, Construction Management & Economics, Vol. 18 (2) pp 229-237. Dean, T. J., Brain, B. L. and Bamford, C. E. (1998) Differences in large and small firm responses to environmental context: Strategic implications from a comparative analysis of business formations, Strategic Management Journal Vol. 119 (8) pp 709-728. DETR (1999) Housing and Construction Statistics 1988-1998, Great Britain, Government Statistical Service. DfEE (2000) Skills for all: Research report from the National Skills Task Force. 136
Egan, J. (1998) Rethinking construction: The report of the Construction Task Force to the Deputy Prime minister John Prescott, on the scope for improving the quality and efficiency of UK construction, Dept of The Environment, Transport and the Regions, London. Harvey, R. C. and Ashworth, A. (1998) The Construction Industry of Great Britain, 2nd Edition, Laxtons: Oxford. Lea, F. M. (1998) Lea’s The chemistry of cement and concrete, 4th Edition, Edited by P. C. Hewlett, Arnold Publishers, 1053 p, ISBN 0340-56589-6. May, T. (1993), Social Research: Issues, Methods and Process, Open University Press: Birmingham. Mehta, P. K. (1998) Role of pozzolanic and cementitious material in sustainable development of the concrete industry. 6th CANMET/ACI, SP 178, International Conference on Fly Ash, Silica Fume, Slag and Natural Pozzolans in Concrete, Bangkok, Thailand, 1, May 31-June 5, pp 1-20. Neville, A. M. (1995) Properties of Concrete. 4th Edition Longman Group Limited, 844p, ISBN 0-582-23070-5. Pathway to Prosperity (1998) A New Economic Agenda for Wales. Welsh Office. Wales. Ofori, G. (1994) Establishing construction economics as an academic discipline, Construction Management and Economics, Vol. 12, pp 295306. Tidd, J., Bessant, J. and Pavitt, K. (1998) Managing Innovation, Integrating Technological, Market and Organisational change. John Wiley & Sons: Chichester. 137
