Current Recession Impacts on the Construction Industry - Dissertation Example

?Current Recession Impacts on the Construction Industry Faculty Table of Contents Introduction 3 Research Background 3 Research Aim and Objectives 5 Research Methods 6 Research Scope 7 Research Limitations 7 Structure of the Remaining Paper 7 Initial Literature Review 9 Construction Industry: An Overview 9 Recession and its Impact on Constructions Sector 13 Methodology 15 Research Design 15 Research Philosophy 15 Research Methods 16 Data Collection Method 16 Data Analysis 17 Ethical Consideration 17 Initial Reference List 18 Introduction The recession of 2008 had one of the hardest hits on various economies. Different business sectors had devastating impact of this recession. Recession drastically reduced the profitability, number of customers and the flow of funds within an economy. There were many job cuts, reduction in wages and salaries and the opportunities was reduced. This resulted in reduction of the average disposable income. The overall negative implications were on the demands of products and goods. The economic cycle was disturbed. One of the most affected sectors by this recession was constructions and engineering sector. Globally the construction industry was at its peak in 2008, when the recession hit it. At this time, the demands of houses and infrastructure were increasing and there was consistent flow of funds within the sector. The demands of housing and new infrastructures and the flow of funds within the construction sector changed (Barrell and Kirby). The reduction in the expected flow of funds and unavailability of the predicted clients reduced the profitability and chances of survival for may construction companies across the world (Property Wire). Research Background According Jakovljevic the construction industry has a worth of nearly $5 trillion globally in terms of total output. This sector is one of the sectors providing highest employment. As per the estimation, there are nearly 100 million people employed in this sector at various levels of jobs. At the same time, contribution of the construction sector to the Global GDP is nearly 10%. This figure is considerably higher than the estimated annual spending in 2008. According to Zeiss (2008) the US$ 2.3 Trillion was the estimated spending of the Global Construction Industry. Global construction industry reached to the peak before recession. PropertyWire (2009) argues that the recession of 2008 was the hardest hit on this sector in last 60 years. Construction industry as such operates in highly complex business environment. The business environment is characterised by high regulations, coordination of various authorities, departments and skill sets, impact of the changing climatic and weather conditions on the construction process, lagging productivity or other issues linked with workforce (Bosch and Phillips). The recession at one hand reduced the disposable income of the consumers by salary cuts and loss of jobs; on the other hand, this reduced the funds flow in the construction sector. All the intermediaries like equipment suppliers of the construction sector, transport companies, intermediaries and others have experienced the repercussions of the recession. The business environment of the construction sector became more pessimistic. However by the mid of 2009, the impact of recession was reduced and industry started being optimistic again. This was revealed in a global survey conducted by KPMG that by the end of 2009, the Global construction industry started expecting positive growth. This was an important survey that covered more than two-third construction companies of the globe and from the 30 different countries. The study reported that the majority of the construction companies were having positive growth or consistent business performance. However it was evident in the study that the companies working on the long term projects have minor impact of recession as compared to the companies who were expecting returns at the shorter duration (Molly). The recession resulted in reducing the funds available for the completion of the projects, lowered the margins of profit and led to the situation where survival was the priority. Research Aim and Objectives The research aim of this study is to identify the impact of current recession on the construction industry. The research objectives to reach the aim of the study are: To study the recent recession and compare it with the previous economic downturns. To identify the factors of recession contributing to the complications of the construction industry. To evaluate various economic indicators and financial factors in order to understand the post recession impacts on the construction industry in the UK. Research Questions How the recent recession was different from the economic downturns of the past? In which aspect the construction industry got affected with the recent recession? How the value chain of the construction industry is affected by the recession? What are the factors of recession affecting major stakeholders i.e. investors, customers, workers in construction sector? How communication played role in maintaining the coordination during the crisis resulted by recession? How value chain of construction sector got influenced during the and after the recession? What have been the patterns of funds flow in the UK construction industry? Research Methods The research methods for the study will be based on triangulation approach. Researcher will be adopting different sources of data including primary and secondary sources to get the complete picture of the impact of recession on the construction industry. Research Scope The research scope of this study will be limited to the UK construction sector. The study will evaluate various economic indicators of the before and after recession. These indicators will help in a comparative analysis and developing a holistic picture of the impact of recession on the construction industry. Research Limitations There will be some limitations to the study. The data required for the study are very specific in nature. There will be restrictions of time, financial resources and availability of data. However, researcher will be adopting cost effective measures for collecting data and will use the reliable sources of data. Proper planning and efficient use of resources will help the researcher dealing with the research limitations. Structure of the Remaining Paper The paper will be divided in five main sections of introduction, literature review, research design and methodology, findings and analysis and conclusion. The introduction section will give the overview of the paper. It will consist of research aims and objectives, research questions, limitations and different aspects of the research. This will be followed by the literature review section. Various studies on the impact of recession and the construction sector will be discussed and analysed with respect to the research aim of this study. This will help developing a conceptual framework for the study. Research design and methodology section will be developed on the basis of the research aims and objectives and the findings of the literature review section. The research methodology section will be presentation of research findings and analysis. The data will be presented with the help of figures and diagrams. This section will be followed by the last chapter that will be a presentation of conclusion. Initial Literature Review Construction Industry: An Overview According to Bosch & Philips (2002) the construction industry is one of the most active areas of the modern economics. The last three decades experienced tremendous transformations at various aspects of social, economic and technological environment of human societies (Engemann and Howard; Elsby, Hoblin and Aysegul). The revolution of information technology and development of various tools and technologies have given new dimensions to the way industries were performing in the past (Gluklick). Construction industry has a highly regulated environment. The barriers to the entry for small projects are comparatively not evident however for the large project the competition and barriers to entry are high. Industry is highly fragmented. There are different construction requirements from small studio apartment to the luxury apartments, simple households to complex chemical industries, roads, buildings, hotels, hospitals and other infrastructure projects (Gluklick; J Harmon). Maintenance of the infrastructures is one more area where construction industry operates. The value of projects varies with respect to the location, consumer type, nature of the project and socio-economic environment of the company (Underhilla). This is one of the most labour intensive sectors. There are various risks on the functioning of the construction sectors that leads to complex business conditions and conflict. One of the instruments that help dealing with the risks of the built environment is the construction contracts. According to Rooke et al construction contracts are meant for sharing the risks of the construction industry by the major parties involved. These are the clients and the contractors. Usually in the construction sector, large projects are designed and conceptualised. The investors for these projects provide funds and the contractors work on the design and help in developing the project. The value chain of the construction sector is complex and consists of various components from the investors, developers, contractors, engineers, suppliers, customers and many more. The public and private organisations collaborate to develop a holistic approach for construction sector and reduce the risk. It is complex to maintain the design, construction and maintenance activities throughout the construction process and requires expertise and research before starting any project. Rooke et al focus on the training and development requirements of the projects, safety and security of the people employed, communication and technologies, regulatory environment and other factors to be important factors of the construction sector. There are other factors such as the accounting principles, financial strategies, finance and investments that affect the construction projects. In the construction sector like the other sectors, companies are consistently working towards cost reduction and quality improvements. The other area of focus is minimising the time required for the completion of a successful project that meets all the regulatory requirements and specifications. The economic cycle experiences various fluctuations that impact the markets. In the turbulent phases, demands for construction projects and services fluctuate. In the low demand period, the cost of products and services are adversely affected. This has an impact on the value chain consisting of partners, suppliers, buyers, brokers and others. The value of goods and services sold in the construction sector is usually high. This is the probable reason that the affordability gets affected. Bosch & Philips argue that the construction products like infrastructure, buildings, apartments, house and others are non-storable or transportable. They further explain that the places of manufacturing and consumption of construction industry output are the same. These products are tangible and durable. Therefore it can be inferred that construction sector shares the properties of both the product and service markets. “Although construction products are durable, they are neither easily stored nor easily transported. A non-storable, non-transportable durable good is especially sensitive to the business cycle. Unwanted buildings cannot be shipped elsewhere where demand is still vibrant. Furthermore, buildings and roads are difficult to stockpile in anticipation of future demand. Thus, the nature of the product prevents it from smoothing out the peaks and valleys of demand. As outdoor work, construction is also subject to seasonal swings, which add to the turbulence of the industry. Since construction provides geographically specific products, uneven development by region (Bosch & Philips, 1)” In the construction sector value chain, the procurement strategy is very important. There should be proper flow of construction materials in order to continue uninterrupted constructions. However, in order to reduce the warehouse management costs and wastage, companies keep the low level of desired material and place the order for site as per the requirements. One more aspect gaining acceptance is the environmental sustainability of the projects. Companies are getting aware of the green concept of construction in which they are trying to reduce the wastes, reuse and recycle the products and using the material that can have lower implications on the environment such as power saving electrical fittings (Gluklick). Companies are accountable for the long term implications of the projects on the environment. Construction sector employs various skilled, semi-skilled and unskilled professionals. The job requirements vary with the nature of job. There are requirements for engineers, architects, plumbers, labourers, management experts, financial and accounting experts, lawyers, human resource and industrial relations experts and many others in large projects. The construction companies depending on the nature of project require using different tools, technologies and materials. Companies use forecasting and operations management techniques to estimate the future requirements for labour, material and resources and adopt those strategies that can help in optimisation of resources. The complexities of the work increases with the complexities of the nature of different work requirements, professionals and their occupational standards. Communication plays very important role in order to maintain the required level of coordination. Gluklick argued various reasons of conflicts and disputes in the construction sector. One of the most common factors is the payment related disputes. Construction companies often receive requests for additional work or modifications in the original instructions. These can have cost implications on the overall budget. The timeliness of the project also gets affected. The vulnerabilities of financial disputes increase in magnitude during the period of recession. According to Gluklick (1) some of the reasons leading to disputes are the “errors, contradictions, ambiguities, omissions in the plans or specifications”. Recession and its Impact on Constructions Sector In the recent past, all the major economies stabilised after the impact of the great depression. These countries adopted various majors. However the sustainability of this recovery has been questioned by the academicians and experts. The banks and financial sector experienced huge losses and the real estate boom is over. The soaring prices of the real estate are getting down due to unavailability of the buyers. The banks at UK and US have adopted credit constraints in order to reduce the risks ("Is the Economic Recovery"). According to the Sassen, the housing sector has faced the critical economic conditions in the developed economies. The housing sector has played important role in the construction, real estate and traditional banking sector (Sassen). “While the UK has run deficits for a considerable period, the size of the deficit was rising steeply even before the financial crisis of 2008. Since then, the deficit has increased due to: the recession which followed the crisis; major rises in Government spending designed to alleviate the effects of the crisis; rising levels of welfare costs due to growing unemployment; and falls in tax revenue due to the widening gap between Government spending and receipts. While economic growth (which the OBR estimates to be 1.2% this year and 2.3% in 2011) will alleviate the cyclical element due to the recession, the emphasis now is on dealing with the underlying structural deficit.” (CSR, CIC Summary) Figure 1 UK Budget Deficits The CSR report indicated the problems of the construction sector. In the year 2009, the sector faced the drop of 12% in the total output. This was the highest in last 35 years of the UK Construction industry. However the 2010 came with some relief when the drop rate reduced to three percent from the 12% of 2009. Methodology Research Design The research design of the study will be based quantitative and qualitative data collection methods. The quantitative data will be collected from the structured questionnaire. The qualitative data will be collected on the basis of qualitative interview with some of the professionals from the industry. This will consist of open ended questions. The qualitative data will be analysed using SPSS software. The qualitative data will be analysed with a thematic approach. The findings will be presented in the form of tables and figures. Secondary research will allow collecting statistical and other information on the recession and its impact on the constructions industry. The approach of this study is based on triangulation method. Research Philosophy This is an epistemological study within the micro and macro context of the construction industry business environment which seeks to study how social realities of the recession have impacted the construction industry in the recent past. Research Methods Research method is based on the triangulation approach. This particular study is Data Triangulation study. The qualitative and quantitative data is collected from the primary and secondary sources to strengthen the overall credibility of the findings. This is the more appropriate method in understanding complex issues where various actors and variables are available. Data Collection Method The primary data will be collected from the respondents in two forms. The first is survey, in which various respondents from the constructions industry will participate. These respondents will be from different functional areas and roles. The questionnaire will consist of general questions leading to specific questions on the impact of the recession on the construction industry. The interview respondents will be the expert professional with thorough knowledge of the industry. The questions will seek to explore their experiences and views on the recent recession. The secondary data will be collected from the secondary sources like online journals, industry reports, credible news sources and many others. This will be a desk research on various aspects of the study. Data Analysis The data will be analysed using appropriate statistical tools and data analysis methods. The quantitative data will be analysed using SPSS software. The qualitative data will be analysed using thematic analysis and judgemental ability of the researcher. The data collected from the secondary sources will be analysed using appropriate tools and techniques. Ethical Consideration The respondents will be informed about the research objectives and purposes. The participation will be voluntary participation. The information will be presented without displaying name and identity of the respondents. Thus the anonymity will be maintained. Respondents will have right to withdraw from the participation at any point of time. Initial Reference List Barrell, Ray, and Simon Kirby. "Prospects for the UK Economy." National Institute Economic Review (2008): 43+. Questia. Web. 26 Feb. 2011. Bosch, Gerhard, and Peter Philips, eds. Building Chaos: An International Comparison of Deregulation in the Construction Industry. London: Routledge, 2002.Questia. Web. 26 Feb. 2011. Global construction industry optimistic about 2010 but report warns recession impact yet to come (November, 2009) Property Wire, online available at http://www.propertywire.com/news/europe/construction-companies-are-positive-200911203690.html (3.3.2011) Molly, C., The Spending Review – 20th, October 2010 Web. 26 Feb. 2011 Elsby, Michael W. L., Bart Hobijn, and Aysegul Sahin. "The Labor Market in the Great Recession." Brookings Papers on Economic Activity (2010): 1+. Questia. Web. 26 Feb. 2011. Engemann, Kristie M., and Howard J. Wall. "The Effects of Recessions across Demographic Groups." Review - Federal Reserve Bank of St. Louis 92.1 (2010): 1+. Questia. Web. 26 Feb. 2011. Gluklick, Edward. "Why Every Construction Project Needs a Drb." Dispute Resolution Journal Aug.-Oct. 2002: 21+. Questia. Web. 26 Feb. 2011. "Is the Economic Recovery Sustainable in the Us and Europe?." World Economic Prospects Spring 2010: 9+. Questia. Web. 26 Feb. 2011. J Harmon, Kathleen M. "Construction Conflicts and Dispute Review Boards: Attitudes and Opinions of Construction Industry Members." Dispute Resolution JournalNov.-Jan. 2003: 66+. Questia. Web. 26 Feb. 2011. Jakovljevic, PJ., in The Global Construction Industry: Challenges, Outlook, and Market Trends, February 2010, Web. 28 Feb.2011 http://www.technologyevaluation.com/research/newsletters/the-global-construction-industry-challenges-outlook-and-market-trends-1521-1/ "Managing Dispute Resolution Options in the Construction Industry." Dispute Resolution Journal May-July 2007: 23+. Questia. Web. 26 Feb. 2011. Mitchell, James. "Where Are We Now? the UK Recession and Nowcasting GDP Growth Using Statistical Models." National Institute Economic Review (2009): 60+.Questia. Web. 26 Feb. 2011. Rooke, John, et al. "Models and Metaphors: Complexity Theory and Through-life Management in the Built Environment." Architectural Engineering and Design Management 4.1 (2008): 47+. Questia. Web. 26 Feb. 2011. Sassen, Saskia. "Mortgage Capital and Its Particularities: A New Frontier for Global Finance." Journal of International Affairs 62.1 (2008): 187+. Questia. Web. 26 Feb. 2011. Underhill, Elsa. "6 Australia." Building Chaos: An International Comparison of Deregulation in the Construction Industry. Ed. Gerhard Bosch andPeter Philips. London: Routledge, 2002. 114-134. Questia. Web. 26 Feb. 2011. Wyatt, Ian D., and Kathryn J. Byun. "The U.S. Economy to 2018: From Recession to Recovery." Monthly Labor Review 132.11 (2009): 11+. Questia. Web. 26 Feb. 2011. Zeiss, G., What Does 3-D Mean for Utilities? 1st June 2008 Web.28 Feb 2011 < http://tdworld.com/substations/global_construction_facing_challenges/> Read More