Introduction to Demand and Supply for Construction
Dr. Yasangika Sandanayake
25th November 2009
Construction Market
Buyers
Clients
Sellers
Construction enterprises Construction clients Users
Commodity
The service required to design and erect, alter, repair or maintain a particular physical facility Newly completed building or part of a building The legal interest in an existing property or part of a property
Users
All these three types of markets are interrelated
Construction Demand by Sectors
Housing
Housing is a basic human requirement. Direct demand Demand for housing determined by:
Need for new housing Changes in user requirements Availability of source of finance for development Demographic factors Economic factors such as inflation rates, cost of construction The real/disposable income Related government policies on housing Environmental factors
Commercial and Industrial Buildings
This covers all industrial buildings, including factories and warehouses and commercial buildings including offices and shops. Demand created by an increase demand for products or the development of new processes that cannot be housed in existing building. Derived demand
Social Type Construction
Social type construction items are financed by either government, social organizations or NGOs, which initiates them on the basis that it would be beneficial if they were available for use by society (For example, roads, bridges, railways, schools, hospitals, water and power supply projects, religious places) It is difficult to predict the demand for this type of construction.
Repair and Maintenance
Demand for this type of construction is affected by Conditions of existing stock Level of obsolescence Users financial situation Funding available Government expenditure Government economic conditions
Characteristics of Demand
Predominantly an investment good Demand is either direct or derived: As a consumable product Eg. Housing and for industrial and commercial buildings Market for each type of demand is different Demand of every client is different Demand for repairs and renovations is a considerable proportion of total demand Standardization / Mass production is difficult Demand is affected by socio-economic policies and environment (Cyclical in nature of demand) Several intermediate agents shape the nature of the clients demand before it reaches the builder
Characteristics of the Product and Factors Affecting Construction Demand
Unique in nature, Not homogeneous Large, indivisible and very expensive, and hence the market has few buyers and sellers Immobile, hence the supply cannot be transferred to an area of high demand, and demand is also relatively location specific Subject to wide range of external (political, sociological, cultural and economic) influences Subject to the actions of the government, which is a major client
Factors Affecting Construction Supply
Products in competitive supply; Amount, Price, Profitability The factors of production Aims and objectives (of firms)
Maximise profits Increase marketability Future strategies - expanding to new geographic area - diversification
Contd.
Technology changes
Increase efficiency; Reduce prices
Government policies
Grant / subsidies; Taxes - BOI concessions; Regulations safety restrictions (planning); Interest rates; Investment policies
External factors that cannot be controlled
War / social unrest; Natural disasters; Political instability
Expectations
Production decision - early stage; Trends judgment; Winning a bid / bids
Characteristics of Supply
Production takes place on site itself Mass production is insignificant in the industry Production process in assembly oriented Vertical disintegration Labour intensive production The role of middleman is predominant Affected by the external environment Productivity is generally low High risk to the producer
Cyclical Nature of Construction Demand
Construction Cycle
Construction activity is subject to fluctuation in levels of demand and, hence, output. The period between two successive peaks or troughs in the total construction volume is referred to as a construction cycle .
Signs During Peak Demand
Increased activity for construction firms Measures for increasing productivity Rise in construction prices Increasing number of construction firms entering into the market Employees being attracted into the sector The performance of the industry may fall due to excessive work over existing capacity Time and cost overruns of projects Government intervention may become necessary for controlling the undesired outcomes, for example inflation
Signs During Depression in Demand
When the economy slacks, construction demand also tends to decline. Due to the fall of demand the construction industry would experience many ill effects. Over capacity of construction firms Redundancy in employment Curtailment of training programs Less efficient firms would be forced to leave the industry (The larger firms may find work in other industries or diversify into other activities) Prices of materials and equipments would fall, which will affect the well being of manufacturers. This may result in reduction of production.
