Civil Engineering Reference
In-Depth Information
Figure 7.6
Economies of scale in the construction sector
LAC
1
represents the average cost of production for a firm able to exploit economies of
scale, such as a manufacturer. In comparison, LAC
2
is the average cost of production for
a contractor unable to take full advantage of economies of scale, due to the unique
nature of each unit of output.
LAC
2
LAC
1
0
Q
1
Q
2
Output (Q)
To sum up, the general rule seems to be that economies of scale, of any kind,
have a limited role in construction. In fact, Patricia Hillebrandt consistently
emphasised in each edition of her textbook that 'many construction firms are
actually on a long-run
increasing
cost curve' (Hillebrandt, 1974: 121; 1985: 116 and
2000: 121). She attributes the problem to the localised nature of small traditional
construction firms. For example, a firm needing to dig ditches might hire workers
on a job basis. For jobs requiring up to ten workers, it simply hires the workers and
gives them each a shovel to dig ditches. However, for jobs requiring ten or more
workers, the firm may feel it is also necessary to hire an overseer to co-ordinate
the ditch-digging effort. Thus, perhaps, constant returns to scale remain until ten
workers are employed, then decreasing returns to scale set in. As the layers of
supervision grow, the costs of communication grow more than proportionately;
hence, the average cost per unit of output will start to increase. In the terms used
in
Figure 7.5
, firms can run quite quickly into diseconomies of scale as they grow in
size if they are not careful.
According to Hillebrandt, these diseconomies occur very soon in construction
for two main reasons. First, most firms can only substantially increase their turnover
by extending their catchment area, which in turn increases costs of transport
and supervision. Second, there is the indivisible nature of entrepreneurial ability
that causes the decision-making process to clog up as firms increase their scale of
operations. This second argument is well rehearsed in the traditional business
literature: many analysts have observed a crisis point in a firm's growth when
it becomes too big for the directors of the firms to continue to exercise effective
personal control yet too small to afford to recruit extra expertise. The precise point
that this occurs depends on the management calibre of the existing directors.
