CONSTRUCTION MANAGEMENT
INDUSTRY STRUCTURE
HAS NO MAJOR IMPACT ON SINGAPORE’S CONSTRUCTION PRODUCTIVITY by Dr Low Sui Pheng, Professor, Department of Building, and Director, Centre for Project Management and ConstrucƟon Law, NaƟonal University of Singapore This arƟcle examines whether fragmentaƟon in Singapore’s construcƟon industry is one of the root causes for its relaƟvely lower producƟvity, measured in terms of value added per worker, as compared to the producƟvity in the construcƟon industry, in advanced countries. In relaƟon to construcƟon market structures, this study also examines the leadership provided by large Įrms in enhancing the performance of the industry, and recommends suitable measures to address construcƟon producƟvity issues associated with industry structures.
Dr Low Sui Pheng
Based on a recent comparaƟve study of the construcƟon industry in Singapore and in four advanced countries (namely Australia, Japan, UK and USA), conducted by the author for the Building and ConstrucƟon Authority (BCA), the observaƟon is that Singapore’s industry structure is not signiĮcantly diīerent from those of advanced countries. Compared to these countries, the extent of fragmentaƟon in Singapore is actually less pronounced. Hence, fragmentaƟon does not appear to be a key factor for the relaƟvely lower value-added producƟvity in Singapore. INTRODUCTION ProducƟvity issues have always been one of the key concerns of Singapore, in the quest to move the country away from low-cost, labour-intensive industries to high value-adding, knowledge-creaƟon acƟviƟes. ProducƟvity in the construcƟon industry is especially challenging, given the uniqueness and complexiƟes of building projects, around which the industry structure has evolved over Ɵme to become what it is today. Issues relaƟng to the fragmentaƟon of the construcƟon industry have also been observed, wherein: • Diīerent projects take place in diīerent sub-categories (eg residenƟal versus commercial buildings), with different stakeholders that are supported by a transient workforce. • Design and construcƟon have tradiƟonally been separated in the industry. • The industry structure reŇects extensive subcontracting and mulƟ-layer subcontracƟng pracƟces, supported by a large number of small Įrms. The study observes that the construcƟon industry structure in Singapore is not unique. In terms of Įrm proĮle and subcontracƟng pracƟces, it is similar to those of
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THE SINGAPORE ENGINEER September 2017
advanced countries with high construcƟon producƟvity. Hence, fragmentaƟon does not seem to be the cause of relaƟvely lower value-added producƟvity in Singapore.
COMPARISONS OF CONSTRUCTION INDUSTRY STRUCTURES Firm size and employment The construcƟon industry structure of Singapore is no diīerent from those exisƟng in Australia, Japan, US and UK. Historically, the number of Įrms in all these Įve countries grew in tandem with growth in the construcƟon industry and there appears to be liƩle or no barriers to entry by new businesses into the industry. Based on oĸcial staƟsƟcs and the largely similar data reporƟng formats for Singapore, US and UK, Table 1 shows that there are more small Įrms than large Įrms in these countries. In the UK, the proporƟon of Įrms with 1-13 employees is parƟcularly large, at 95.56%. A separate analysis showed that the proporƟon of small Įrms in Australia, employing 0-19 persons, was also large, at 97.7%. The high proporƟon of very small Įrms in both UK and Australia could be partly due to the generally higher proporƟon of small housing/residenƟal developments in these countries.
CONSTRUCTION MANAGEMENT
Percentage of Įrms (%)
Percentage of Įrms (%)
Number of employees in Įrm
Singapore
US
UK
Number of employees in Įrm
1-9
54.90
77.68
95.56
1-13
10-49
34.20
18.97
3.79
14-59
50-99
6.70
1.99
0.37
60-114
100-499
3.50
1.11
0.24
115-599
500 persons & over
0.40
0.20
0.04
600 persons & over
(Note: the percentages may not sum up to 100%, because of rounding oī) Table 1: Comparison of the relaƟve proporƟons of the diīerent categories of construcƟon Įrms (determined on the basis of the number of employees), within the respecƟve construcƟon industries in Singapore, US and UK.
For example, in the 3rd Quarter of 2014, the UK Oĸce for NaƟonal StaƟsƟcs reported the following Įgures for Įrms operaƟng under the ‘Main Trades’: 18.5% (commercial buildings), 47.5% (residenƟal buildings) and 34.0% (civil engineering). AddiƟonally, among the signiĮcant 47.5% of Įrms in the residenƟal buildings sector, there were many small Įrms. CollecƟvely, these results showed that the percepƟbly high proporƟon of small Įrms in Singapore is actually lower than the proporƟons of small Įrms in US, UK and Australia. In fact, in percentage terms, there are generally more small Įrms in US, UK and Australia, than in Singapore.
40.1 39.2 37
ProporƟon of subcontracƟng The larger number of small Įrms as well as the larger proporƟon of employment in these small Įrms appear to point to the signiĮcant pracƟce of subcontracƟng in all these Įve countries. Of these countries, only Australia, Japan and Singapore publish staƟsƟcs relaƟng to subcontracƟng pracƟces in the construcƟon industry. In both Australia and Japan, these staƟsƟcs are presented, based on the income derived from subcontracƟng. In Singapore, staƟsƟcs relaƟng to subcontracƟng pracƟce are presented, based on the amount of subcontract work done by others, and expressed as a raƟo of construcƟon turnover. From Figure 1, it can be seen that subcontracƟng pracƟces are extensive in Australia (40%), Japan (37%) and Singapore (39%) and we can extend the conclusion to the UK and US, as well, even though no subcontracƟng staƟsƟcs are available from these two countries. The subcontracƟng pracƟce seems to be underpinned and supported by the large number of small Įrms in the Įve countries, which further reinforced the observaƟon that Singapore’s construcƟon industry structure is similar to those of advanced countries.
SUBCONTRACTING PRACTICES To beƩer understand why subcontracƟng is extensively pracƟsed locally and its eīect on producƟvity, in-depth interviews were conducted with 11 main contractors and Įve subcontractors, in Singapore. The interviews revealed that main contractors turned to subcontracƟng pracƟces to counter market uncertainƟes and reduce business risks, and when they do not have the necessary experƟse to do a job. 40
THE SINGAPORE ENGINEER September 2017
AUSTRALIA
JAPAN
SINGAPORE
Figure 1: Extent of subcontracƟng in Australia, Japan and Singapore.
As subcontractors are specialists and are more proĮcient in their own trades, compared to general main contractors, subcontracƟng can help raise producƟvity if the main contractor has good project management to deal with both the large numbers as well as mulƟple-layers of subcontractors. This study further reviewed the extant literature on studies related to mulƟ-layer subcontracƟng in various countries. The literature review showed that subcontracƟng is acƟvely and extensively pracƟsed worldwide for pragmaƟc reasons, related to economics and eĸciency. There is no diīerence between the mulƟ-layer subcontracƟng pracƟces in Singapore and those in other advanced countries, as summarised in Table 2. Further in-depth interviews conducted with foreign main contractors operaƟng in Singapore also suggested that there is no diīerence between the mulƟ-layer subcontracƟng pracƟces in Singapore and those in the home countries of the interviewees (a majority of them were from Japan). There might be a relaƟonship between the size of a project and mulƟ-layer subcontracƟng pracƟces. For instance, more complicated and larger building projects would involve more layers of subcontracƟng. However, the extent of this relaƟonship should be viewed on a
CONSTRUCTION MANAGEMENT
Countries
SubcontracƟng layers
Sources
Singapore
2-4
Interviews with 30 local/foreign main/subcontractors in Singapore
Hong Kong
4
Lo, 2000; Tam, 2001; Yik and Lai, 2008; Tam et al, 2011
Japan
3-5
Hippoh, 1983; Hasegawa, 1988; Levy, 1990; van Kooij, 1991; Yau, 1991; Reeves, 2002; An and Tsunemi, 2011; MLIT, 2015
South Korea
3-5
Yun, 2010
United Kingdom
ш3
Oyegoke et al, 2012; DBIS, 2013
United States
5-6
ArdiƟ and ChoƟbhongs, 2005; Warrick, 2006; Beck, 2012; Smith and Brand, 2010
European countries
Typically starts with 3
Houwerzijl and Peters, 2008
Table 2: Summary of subcontracƟng layers in diīerent countries.
case-by-case basis. In addiƟon, there is a relaƟonship between the types of trades in the construcƟon industry and mulƟ-layer subcontracƟng pracƟces. Again, this relaƟonship seems to vary and should also be viewed on a case-by-case basis. All the main contractors interviewed were of the view that mulƟ-layer subcontracƟng cannot be eliminated completely in the construcƟon industry. The interviewees seemed to have accepted mulƟ-layer subcontracƟng as part and parcel of work pracƟces in the industry. Nonetheless, while the interviewees were generally of the view that mulƟ-layer subcontracƟng cannot be eliminated completely, they remain open to opportuniƟes to reduce the number of layers, on a case-by-case basis. This is especially so, if they noƟce that too many layers of subcontractors are hampering work progress and aīecting quality standards in their projects.
Figure 2: NormalisaƟon based on ConstrucƟon Output/Firm.
In addiƟon, regardless of the number of Ɵers one sees in mulƟ-layer subcontracƟng, it appears that clear, Ɵmely communicaƟons and coordinaƟon are the two most important factors for eīecƟve project management.
the advanced countries, who would negoƟate for higher minimum wages for their members, means higher labour costs in these countries.
FRAGMENTATION AND CONSTRUCTION PRODUCTIVITY The Įndings of a normalisaƟon exercise (Figure 2), using construcƟon output per Įrm as a proxy for fragmentaƟon, showed that the industry structure in Singapore appears to be less fragmented than those in Australia, Japan, UK and US. However, while Singapore’s construcƟon industry structure appears to be less fragmented, Singapore’s construcƟon producƟvity is lower than that in Australia, Japan, UK and US, based on value added producƟvity (VAP) or value added per worker. Previous studies elsewhere have however concluded that VAP is not a reliable indicator, due to its many inherent limitaƟons (Low, 2015). SpeciĮcally, the low wage level in Singapore has resulted in lower VAP, given that remuneraƟon consƟtutes a signiĮcant porƟon of construcƟon value added. The presence of strong labour unions in
Notes: 1. As a proxy, greater ConstrucƟon Output/Firm denotes less fragmentaƟon. 2. ConstrucƟon output/Įrm and labour producƟvity data were derived, based on reference years 2013 and 2011-2013, respecƟvely.
RAISING CONSTRUCTION PRODUCTIVITY The construcƟon industry has a fragmented industry structure due to the unique nature of construcƟon and building works as well as due to the ease with which new businesses can readily enter and exit the market. If properly managed, specialist (mulƟ-layer) subcontracƟng actually serves to support and not undermine construcƟon producƟvity, because of the unique nature of the industry. Hence, granted that the industry structure and mulƟ-layer subcontracƟng pracƟce is here to stay, a three-pronged approach is recommended to address construcƟon producƟvity issues associated with industry structures. The three areas in this approach are: (a) Technology Enhancement (b) Project Management THE SINGAPORE ENGINEER September 2017
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CONSTRUCTION MANAGEMENT
(c) Launching a naƟonal drive for construcƟon research and development (R&D), as a rallying point for the local construcƟon industry, along the lines of that pracƟsed by top Japanese contractors. It is noteworthy that signiĮcant porƟons of this threepronged approach are already in place, to some extent, in Singapore, through the iniƟaƟves of BCA, to promote the adopƟon of Design for Manufacturing and Assembly (DfMA) technologies, lean construcƟon, Building InformaƟon Modelling (BIM) as well as Virtual Design and ConstrucƟon (VDC). These should help to reduce the number of workers on-site as well as wastage, which should then alter the industry structure in Singapore, so as to achieve higher labour producƟvity in construcƟon. It will also help to further enhance communicaƟons and coordinaƟon in project management pracƟces. The study also found that Singapore does not have a consistent core of local contractors to anchor and lead the industry, unlike in Japan where the group of top Japanese contractors (eg Obayashi, Kajima, Shimizu, Taisei and Takenaka) conƟnues to thrive and seems to have provided long-term stability and core leadership in upgrading the Japanese construcƟon industry, in the areas of producƟvity and technology, through their campus-like research insƟtutes as well as their emphasis on reducing wastage through lean thinking. Therefore, by puƫng in place a naƟonal drive for construcƟon R&D, such as the recent establishment of the Built Environment Research & InnovaƟon InsƟtute (BERII) and the Built Environment Technology Centre (BETC), by BCA, resources can be pooled to facilitate more impacƞul R&D acƟviƟes at the naƟonal level, that will help local contractors to level up and strengthen their capabiliƟes through technology licensing, with a long-term view of exporƟng their services overseas. These various iniƟaƟves by BCA, to drive innovaƟon, will transform the construcƟon industry so that it will achieve higher labour producƟvity. REFERENCES An T and Tsunemi W (2011): ‘Towards the sustainable construcƟon labor market in China: facilitaƟng subcontractor’s development’, Proceedings of the 27th Annual ARCOM Conference, 5-7 September 2011, Bristol, UK, pp 663-674. ArdiƟ D and ChoƟbhongs R (2005): ‘Issues in subcontracƟng pracƟce’, Journal of ConstrucƟon Engineering and Management, 131(8):866-876. Beck C (2012): ‘Problems of mulƟ-layer subcontracƟng’, Small Business Chronicles, US (www.smallbusiness.chron.com) (accessed 16th May 2016). DBIS (2013): ‘Supply chain analysis into the construcƟon industry. A report for the ConstrucƟon Industry Strategy’, Department for Business InnovaƟon & Skills (DBIS), UK, BIS Research Paper No 145.
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Hasegawa F (1988): ‘Built by Japan. CompeƟƟve strategies of the Japanese construcƟon industry’, John Wiley & Sons, USA. Hippoh Y (1983): ‘The construcƟon industry in Japan: A survey’, Asian ProducƟvity OrganizaƟon, Tokyo, Japan. Houwerzijl M and Peters S (2008): ‘Liability in subcontracƟng processes in the European construcƟon sector’, European FoundaƟon for the Improvement of Living and Working CondiƟons, Dublin, Ireland. Levy S M (1990): ‘Japanese construcƟon. An American perspecƟve’, Van Nostrand Reinhold, New York, USA. Lo S L L (2000): ‘A study of restricƟng the mulƟ-layers subcontracƟng pracƟce to improve the safety performance of the Hong Kong construcƟon industry’, unpublished Master of Applied Science report, University of Western Sydney and Hong Kong Polytechnic University. Low S P (2015): ‘A review of construcƟon producƟvity indicators in Singapore’, The Singapore Engineer, August 2015, pp 24-30. MLIT (2015): ‘The current situaƟon of the Japanese construcƟon industry’, Slides prepared for the 12th MeeƟng of the Basic Problems SubcommiƩee, Ministry of Land, Infrastructure, Transport and Tourism (MLIT), Tokyo, Japan (in Japanese). Oyegoke A et al (2012): ‘TransformaƟon in the tradiƟonal procurement route in the UK’, Proceedings of the Joint CIB W070, W092 & TG72 InternaƟonal Conference: Delivering Value to the Community, University of Cape Town, South Africa, pp.486-493. Reeves K (2002): ‘ConstrucƟon business systems in Japan: General contractors and subcontractors’, Building Research and InformaƟon, 30(6):413-424. Smith M P and Brand J S (2010): ‘Annual report of the Joint Enforcement Task Force on Employee MisclassiĮcaƟon’, to David A Paterson, Governor of the State of New York, Department of Labor, New York State, US. Tam S S (2001): ‘The eīect of construcƟon contractor’s mulƟ-layer subcontracƟng strategy on project performance: a case study of construcƟon Įrms in Hong Kong’, unpublished DBA dissertaƟon, Hong Kong Polytechnic University. Tam V et al (2011): ‘Impacts of mulƟ-layer chain subcontracƟng on project management performance’, InternaƟonal Journal of Project Management, 29(1):108-116. van Kooij E (1991): ‘Japanese subcontracƟng at a crossroads’, Small Business Economics, 3(2):145-154. Warrick J (2006): ‘MulƟple layers of contractors drive up costs of Katrina cleanup’, The Washington Post, 20th March 2006 (www.washingtonpost.com) (accessed 16th May 2016). Yau H W J (1991): ‘A study of subcontracƟng in the Hong Kong construcƟon industry and its impact on the management of quality’, unpublished MBA dissertaƟon, University of Hong Kong. Yik F W H and Lai J H K (2008): ‘MulƟ-layer subcontracƟng of specialist works in buildings in Hong Kong’, InternaƟonal Journal of Project Management, 26(4):399-407. Yun A (2010): ‘RegulaƟng mulƟ-layer subcontracƟng to improve labour protecƟon’, InternaƟonal InsƟtute for Labour Studies, InternaƟonal Labour OrganizaƟon.