The Structure of the Construction Industry in the UK - Coursework Example

Topic: Explain the structure of the construction industry in the UK. Is the level of concentration in the construction industry high enough to suggest that some markets in the construction industry are oligopolistic? 1. Introduction Construction industry is the sixth largest industry in the United Kingdom in terms of the proportion of the total gross domestic product. The government sector as well as the boards of directors has recognised their ability in delivering infrastructure which is essential for the purpose of delivering enhanced infrastructure required for meeting aspirations of the society as well as providing a high level of productivity for the purpose of competing in the global market. But that also requires a sound technical forefront and managerially efficient dimension which will be aligned with the demands of the customers, innovation reception and determination in providing a time value for money. The introduction of the building economics takes a significant importance in this case which takes into account the operation of the laws of economics like demand, supply, risk, cost, benefit analysis; market (Adamson & Pollington, 2006, p.1). In the field of micro economics, there are different types of markets are available like monopoly, perfect competition, oligopoly, monopolistic competition and so on (Managerial Economics, n.d., p.1.16). In this paper, the main target will be to explain the structure of the construction industry in the UK and then will analyse whether some markets in the construction industry in Britain are oligopolistic in nature or not. First of all a basic idea of the construction industry in a nutshell will be provided in the following segment. 2. Construction industry The construction industry forms a mammoth part of the economy of any country (Ofori, 1993, p. 260) and the important agents and the variables which are connected with this industry are namely building material suppliers providing basic materials, the manufacturers of machineries providing heavy plant equipment like that of cranes and bulldozers, construction of the product component manufacturers, site operatives who are in the task of bringing together the components and materials, the project managers and surveyors who are in the process of initiating and coordinating activity, facility managers managing and maintaining property as well as the providers of complementary goods and services that include demolition, disposal and cleaning up equipments (Myers, 2004, p.1). 3. Structure of the UK construction industry The construction industry in UK possesses a large number of characteristics which stands in the way of shaping the culture of the sector. The character of the construction industry is basically project based structure inculcated with fragmentation as well as work force homogeneity. The nature of the construction industry is labor intensive and low technology based and the people in the industry forms the most essential and expensive resources within the market. One of the integral structures of the UK construction industry is the procurement systems and the sector depends on an environment which is based on a price based regime along with a competitive tendering procurement system. The stress is majorly on the cost structure and there is large constraint in the quality delivery of the end products are degenerating and imparts adverse effects on workforce. There are also constraints seen in the tendering process. Larger stress on minimizing cost leads to decline in the working standards and also threatens the safety of the workforce. Enormous time pressure as well as long working hours leads to the hampering of the well being as well as burnout within construction professionals (Dainty, Green & Barbara, 2007, p.129). One of the important mechanisms playing within the UK construction industry is that of subcontracting and self employment. In this industry, the construction workers are mainly self employed or operate within small scale organizations. Apart from developing new projects, the UK construction industry is also concentrated on the restoration of the existing building blocks and the degree of subcontracting across building sector of the industry is also not constant throughout. Starting from the era of de-unionization of the UK industry in the early 1980s under the Conservative government there has been a sharp increase in the number of subcontracting firms. There has been rise in the self employment arena and it is not confined within a single area but it has been widespread across all the corners of the United Kingdom (Uher, Davenport & LLB, 2010, p. 202). Skill shortage is another area which is highlighted in the UK construction industry (Smyth & Pryke, 2009, p. 225). Estimations revealed that around 360,000 constructions by the year 2004 were required to replace a large number of people going out of this industry. Studies of Mackenzie et al in 2000 stressed on various factors that contributed to the skill shortage which included a drop in the number of young people available for entering the labor market in the construction industry. Therefore there has generated increasing competition towards attracting new employees. The introduction of new technologies also impacts on the requirement of skill. The nature of the industry is cyclical along with fluctuating patterns in employment with the growth of subcontractors and self employment scenario. The most obvious response to the skill shortage problem has given rise to increase in remuneration which has been deemed as a short term solution to the problem. Being cautious about the skill shortage, the Construction Industry Training Board (CITB) has suggested that, “the industry must look to increase recruitment of ethnic minorities and women if it is to survive and grow’ (Gale, 2006, p. 195). Thus, it can be stated that structure of the UK industry is based on a procurement system which lacks innovation, the market is predominated by small scale subcontractors and self employed individuals with too much pressure on cost management rather than on the quality improvement. Skill shortage is one of the characteristics of the market which has increased the demand for the skilled workers with upward revision of wages of these workers. In this connection based upon the structure, some potential reasons features of the industry can be reflected which will be discussed now. Construction industry is characterized by supply schedules with short term price elasticity of supply lower than the long run price elasticity of supply which has seen great fluctuations in the prices and the suppliers of scarce inputs have the potential to raise the prices in times of demand upturns and face declining prices during the downturns. In UK this phenomenon are found to be low as the firms which dominate the market are infused with skilled labor manual and professional labor enhancing the significance of reputation of these firms. The market is opened with the opportunity of free entry and exit. Specialization generates benefits for the firms but the clients are also guided by low prices charged by the new entrant. But project risks are also attached with the new entrants however the advantages in cost may outweigh this constraint. Innovation is not so encouraged and the competitors pick up existing expertise and techniques employed elsewhere with the notion that the others may pick up the innovative technique in a quick manner and implements them in realizing profits and gaining market share (Myers, 2004, p.128). Now we will discuss whether the construction markets in UK construction industry is oligopolistic or not. 4. Oligopolistic market and the construction industry The oligopolistic market is a market which is infested with a few sellers who are competing with each other in the entire market (Tucker, 2010, p.187). There may also exists a collusive oligopoly where the oligopolistic firms agree in a formal way or an informal way in limiting competition among themselves and they fix quotas, prices or limit product promotion and they also agree not in poaching each other’s market. But in informal contracts there may be an existence of breach of contract and uncertainty (Sloman, 2004, p.264). In UK, Blue Circle accounts for around approximately half of the cement supply to all the building firms in UK. Firms like Rugby and Castle which are vested with the responsibility of the making majority of the remaining cement. Within this market, the individual firms possess significant power in avoiding to become a price taker but they are still subjected to a significant amount of competition in order to know that the market is not entirely under their control. The firms in the oligopolistic market are in the process of setting prices of their product in accordance with the reaction of the competitors and will operate on their own reaction function with the given reaction function of the competitor . The first mover will be gaining a significant proportion of the market with and the first mover advantage in oligopoly is a premium feature of this market. But this generates a dilemma for the firms and they face confusion of whether to cooperate or compete. Uncertainty is also a predominant feature of the oligopolistic market (Myers, 2004, p.122). 5. Conclusion The discussion in the paper highlights the structure of the UK construction industry and examined whether the markets is oligopolistic or not. It has been found that subcontracting is a distinct phenomenon in the construction industry with small firms operating in a random manner. Pressure on cost minimization is immense and quality enhancement is not so much pronounced in the market and there is free entry and exit of competitors in the market without so much emphasis on price making strategies. However there are some companies which are dominating within the industry and kind of a monopoly power is concentrated within the hands of few companies and to some extent some elements of oligopolistic market. References 1. Adamson, D, M & Pollington, T, (2006), Change in the Construction Industry: An Account of the Uk Construction Industry Reform Movement 1993-2003, Taylor & Francis 2. Dainty, A, Green, S & Barbara, B, (2007), People & Culture in Construction:  A Reader, Routledge 3. Gale, A, W, (2006), Managing Diversity and Equality in Construction:  Initiatives and Practice, Taylor & Francis 4. Managerial Economics, (n.d.), Nirali Prakashan 5. Myers, D, (2004), Construction Economics: A New Approach, Taylor & Francis 6. Ofori, G, (1993), Managing Construction Industry Development: Lessons from Singapores Experience, NUS Press 7. Sloman, (2004), Economics For Business, 3/E, Pearson Education India 8. Smyth, H & Pryke, S, (2009), Collaborative Relationships in Construction: Developing Frameworks and Networks, John Wiley & Sons 9. Tucker, I, B, (2010), Survey of Economics, Cengage Learning 10. Uher, T, E & Davenport, P & LLB, (2010), Fundamentals of Building Contract Management 2nd Edition, UNSW Press Read More