Civil Engineering Reference
In-Depth Information
According to Baumol's (1982) theory of contestable markets, when sunk costs are
low, existing firms in a market have a continual concern that new entry is always
possible. In these circumstances profit levels are constrained (see
Chapter 8
for
details). Contestable markets typify construction firms, as they usually have quite
low fixed costs. Most contractors have no factory - as in effect each site represents
the firm's new work location - and much of the necessary equipment, such as
scaffolding, cranes, skips, toilets, office huts, security stores, floodlights and even
water supplies, is usually hired as and when required.
Table 7.2
Typical construction costs
Type of Cost
Examples
Variable Costs
Labour used on site
Materials used on site
Equipment used on site
Site management
Tendering for future contracts
Fixed Costs
Head office bills for energy, water and rates
Wages for permanent head office staff
Bank interest and leasing costs
A sufficient (normal) level of return to keep
the entrepreneur in the industry
Variable Costs
The difference between total costs and total fixed costs is total variable costs: that
is, total costs - total fixed costs = total variable costs.
Variable costs
are those costs
whose magnitude varies with the rate of production. As a proportion of total costs,
variable costs in construction tend to be much higher than in the manufacturing
industry. One obvious variable cost is wages. The more a firm builds or makes, the
more labour it has to hire and the more wages it has to pay. In fact a limiting factor
to a construction firm's output is often its management: unlike machines, managers
do not have an automatic safety cut-off point when they are operating at full
capacity, and when things start to go wrong on site, costs can quickly spiral. As the
size and number of their projects increases, construction firms need to employ good
site and project managers, and these may well be in short supply. It is, therefore,
difficult to determine when variable costs will rise. The same type of logic applies
to the other main variable cost category - materials. As the demand for materials
increases, they too may well become more expensive to acquire.
In construction, the distinction between fixed and variable costs can be difficult
to make. For example, some firms may regard management salaries as fixed costs. It
depends how the firm is organised. However, the way to avoid a high proportion of
fixed costs is to meet any requirement to increase output by subcontracting and this
is largely what happens in the construction industry across Europe.
