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The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – December 2001, Volume 25. Number 2

SD: A SCHEMATIC DESIGN ESTIMATING SYSTEM Amir Tavakoli, Ph.D., P.E., F.ASCE and David E. Glaser, P.E.

ABSTRACT

A schematic design estimating system (SD) for light industrial & low-rise commercial office buildings is presented. SD is based on a twelve-division building system approach with “call-up” menus for each system.

SD produces accurate

preliminary, conceptual, design-development, as bid, contract, & as bought construction cost estimates.

Key Words Construction Cost Estimating, Conceptual Estimating, Schematic Design Estimating

INTRODUCTION There is a tendency of human nature to underestimate difficulties. This results in our underestimating the time it takes to complete a project as well as its final cost. Our optimism leads us to overlook many of the difficulties that may happen; as we tend to provide only for those items we know are necessary. To compensate for this trait of human nature the estimator should include every item that can be foreseen including a reasonable amount for contingencies.

When preparing estimates, especially

preliminary or budget estimates, where less than complete information is usually available a good procedure to follow is to include a reasonable cost figure for each item that is likely to be in the final project. When estimates are divided into a number of small parts, errors usually tend to compensate each other. The quantities and costs of some items will be too large; on other items the reverse will be true. When the costs of all items are totaled, the errors tend to balance giving a total with considerable precision. When dividing an estimate into many parts care must be taken that none of the parts are omitted.


Experience and skill are needed to be able to divide a construction project into its many parts. This is especially true for preliminary or conceptual estimates where the information available is usually less than sufficient to know all the items and quantities that will makeup the final project.

The usual alternative is to make preliminary

estimates using general square foot costs.

This method provides a very rough

approximation of the potential cost of a project. Unless the estimator is fully aware of the source and makeup of the square foot cost data there is little chance that the resulting estimate will include the costs which make the project unique to the owner’s needs. If there is not a square foot cost available, for a building exactly like the one being estimated, it is likely that the estimator will proceed by estimating the major cost systems that dominate the project's final cost. To be able to estimate the major cost centers at the preliminary or conceptual stage of the project is very cumbersome and time consuming. The usual method is for the estimator to design each of the major cost centers and then estimate its cost. This can be wasteful especially if following the design and costing of a system it is found that the budget will not allow its use. What is needed is a suitable design system that can assist the estimator by doing much of the mechanical design and cost calculations associated with the conceptual design. The purpose of this article is to present a schematic design estimating system (SD) which will minimize the time necessary to cost the major components associated with the unique requirements of an estimate. SD provides a systematic procedure for estimating the construction costs of light industrial and commercial buildings. SD was created using dBASE, a database management system, and is based on the authors' sixty years of construction and estimating experience. SD’s divisions are based on the cost sections of R.S. Means "Square Foot Estimating" by Billy J. Cox and F. William Horsley. The cost data used in SD is based on experience and knowledge of the current Cleveland, Ohio market and when necessary has been augmented by specific cost data from R. S. Means "Building Cost Data". SD follows a twelve-division building system approach with "call-up" menus for each division. A complete estimate can be obtained by using only those divisions that best describe the total scope of work. On screen questions and instant pricing allow alternate solutions to be explored allowing the best solution to be incorporated in the


estimate. SD is usable for a wide range of estimates, from preliminary to final, but is best at producing accurate preliminary and budget estimates. SD will provide a systematic procedure for estimating the construction costs of light industrial buildings and low-rise commercial office buildings. SD will organize the CSI 16 division system into 12 systems with "call-up" menus for each system. The estimate for each system will be accomplished using a "check list" prompting system with sub-system unit pricing for alternate methods or materials.

As each division's

estimate is completed its results will be reflected in an "overall" estimate template. With this system/sub-system approach “what if� questions can be handled very early in the estimating process. SD is flexible so as to produce acceptable results for preliminary, conceptual, design development, as bid, contract, and as bought estimates.

SD will tract the

variances of each of a projects successive stages as they develop and as each trade is contracted or completed. PRECISION OF ESTIMATES The accuracy of an estimate relates directly to the estimator's clear understanding of the project's scope of work.

In the early stages of a project this

understanding depends on the estimator' ability to communicate with the owner and the design team and to relate this input to the estimator's past experience with similar projects. As the project's design documents progress in detail the precision of the estimate is dependent on the estimator's skill to translate the available information into an accurate model of the qualities and costs that best anticipates the project's final scope of work and thereby its final cost. The controlling factor at this stage is again the accuracy and appropriateness of the cost data and the skill of the estimator. Both factors are controlled by the similarity of the project being estimated to the type of projects from which the cost data is based and for which the estimator has experience estimating. As the design documents are finalized, the final controlling factor, to the estimate's accuracy, is the minuteness to which the estimate can be subdivided. As estimating errors tend to compensate, the final precision of an estimate is helped by subdividing each system of the estimate into its sub-systems. The ability to do this


depends on the skill of the estimator and his/her understanding of the construction methods needed to construct the project. The amount of accuracy that can be expected in an estimate depends on many factors. The most important include: •

The accuracy and source of the cost information

The completeness of the design information

The quality of the materials to be used

The time available to prepare the estimate The time available is as important in determining the accuracy of an estimate as

is the cost data, quality level, or design completeness. Sufficient time to complete an estimate is always in short supply. Whether it be a preliminary estimate or a detailed final estimate for bidding, there is rarely adequate time available for the estimator to be sure that all cost factors have been considered. When preparing an estimate for bidding, the estimator must understand the project from beginning to end; he must be able to picture every aspect which will effect the cost of the project.

The estimate must be well organized; it should follow a system or

procedure which will assure the estimator that all cost items of the project will be analyzed. One method is to organize the take off using the familiar CSI 16 division format.

Another method is to reorganize the 16 divisions in to approximately 12

systems that closely reflect the actual way a building is put together.

Which ever

method is used its use must be consistent to avoid the errors of omission that can creep into unorganized estimates. Time is a factor which effects the estimator's effort to check and recheck the estimate for accuracy and completeness. A preliminary or conceptual estimate does not usually warrant the same amount of time or accuracy that is required for a bidding estimate. Only minutes or hours may be available for the production of an estimate. More likely time is not as much of a factor in determining the accuracy of an estimate as is the quality of the available design data.

This scarceness of time or information

dictated that time referenced indexes, cost capacity factors, parameter costs, or component ratio methods be used singularly or in some combination to arrive at a budget estimate. Despite that these estimating methods can save time and can be


used even if little information is available, they still have the problem of accuracy. It would be desirable to have a method of estimating which is both quick and more accurate for the information available. It would be desirable to be able to estimate quickly those items which make the project unique, particularly the project's most expensive items. If this could be accomplished quickly without the need to design each system, it would produce a more accurate estimate as well as allowing the estimator the freedom to explore design alternates both to save costs and to improve the project. It is aim of this paper to present such a system (to ease the user through the complex task of combining the many different parts of a construction project and not necessary to know every detail of the project to produce an accurate estimate). The estimator need only know the key building's dimensions, quantities, and quality level of the materials. While it is possible to establish general guidelines for estimating, it cannot be assumed that a tool, such as this estimating system, can substitute for the inexperience of an estimator. It is the hope that this system can be a useful tool which can assist an estimator of any skill level to prepare more accurate estimates and to help control the total estimating procedure. PRE-PACKAGED COST ESTIMATING PROGRAMS There are many pre-packaged cost-estimating programs for personal computers. Three or four programs are popular with the largest companies, but no program is dominant among the small or medium sized contractors.

The programs which are

popular with the large contractors are conceived by the small and medium contractors as too costly, too time consuming to set up initially and to keep up to date. Many cost-estimating programs are aimed at one specific construction discipline, such as electrical or residential construction, or they tend to be very general requiring the user to define almost all aspects of the program’s parameters. Another trend is the integration of the cost-estimating program with larger computerized system.

These

systems usually include the contractor's accounting software or CAD system.

An

example is the Timberline package which can be interfaced with Primavera, a scheduling program, R.S. Means cost data program and AutoCAD for automatic takeoff while designing.


It is the authors’ observation that programs aimed at a specific trade or type of construction appear to be used at a greater rate than general type programs. This is especially true for the mechanical, electrical, and sitework fields.

These programs

usually provide a well-developed cost database, an estimating program which needs little user changes and one or more takeoff assisting techniques. The techniques may include digitizer boards, mouse or count and length probe. With these takeoff aids and software tailored to a specific use group the time required for any estimate is shortened. Most of the available cost-estimating programs are shell or general estimating programs which require the user to create his/her own database and or develop all or part of the estimate format.

This allows the program to be adapted to most any

estimating use and also tends to keep their original purchase price lower than the programs aimed at a specific market. The shell program usually allows the user to define its numbering system. Other programs provide extensive databases with the original program and offer periodic updates to these databases. These programs also are most limiting as to user defined numbering systems. .

Most cost-estimating programs have the following aspects in common: •

Menu driven

Can access a database

Accept material quantity input

Calculate quantities

Calculate costs

Store results

Sort the results

Print reports

Where the programs differ is in how the data is input, in what logic is needed for input, in what order the information is input and in how flexible the program is in adjusting the order of input. Most programs are interactive asking question requiring an answer before proceeding to the next question. Some programs require batch input. This requires the estimator to have all data collected and collated before the program can function.

The success of any program is based on its ability to be flexible in

allowing its user to:


Access the database

Change or update the database

Access separate parts of the estimate

Change separate parts of the database or estimate

Prepare usable reports.

SCOPE OF SD SD is intended to be used by owners and developers who desire quick but reliable preliminary or conceptual estimates for their potential projects. The program is also intended for use by a small to medium sized general contractor / design-builder / construction manager who may subcontract all or most of the total project. SD is a general estimating program which will provide acceptable cost estimates for a wide range of industrial and commercial projects.

SD will have the ability to access a

database of cost information, and SD will then apply the cost data selected to the quantity information entered by the estimator or computed by SD. SD will complete the cost extension and then store the data in an estimate data file, sort the file, display and/or print the various report or summaries of the estimate file as required by the user. The flexibility of SD to adapt its cost data base to many different users and/or building types will allow the SD's potential users to include construction managers, project managers estimators, owners, or anyone who may need a cost control or cost management system. SD is constructed to provide accurate estimates for the following building types: •

Light Industrial Buildings (Single User) - warehouse or plant with a one or two story office

Commercial/Industrial Building (Multi User) - Shell Building for multi use office, warehouse or plant

Low rise Office Buildings (Single User) - 3 story or less office building with completed interior finishes

Low rise Office Buildings (Multi User) - 3 story or less shell office building with completed core of common tenant areas

Tenant Finishes - The interior finishes for low-rise office buildings.


SD will produce accurate estimates for the following levels of a project’s development: 1) Preliminary or Conceptual Estimate •

With minimal or no drawings or specifications

Based on estimator’s understanding of the project's size, type of building and scope of work

2) Pre-Contract Estimate •

Drawings may still be in development stage

Estimate used to define projects scope of work

Look at various alternate design solutions

3) Bidding or Final Estimate •

Drawings and specifications available

Analyses of subcontractors’ and suppliers’ bids

4) Contract Estimate •

Scope of work as defined by drawings, specifications, and contract agreement

Serves as basis for progress billings

5) As Bought Estimate •

Tracks the variance between the contract estimate and what has been bought, subcontracted, or completed

6) As Built Estimate •

Final for record estimate

Tracks the variance between the contract estimate and the as built/final estimate

Computes unit costs

SD’s features & characteristics are as follows: •

Is best when used for preliminary or conceptual estimating

Uses load sheets that can/should be filled out before entering data into the program


Requires the input of descriptors, such as area of building, floors, type of walls, roof, etc.

Produces printout of resulting estimate

Input is by system rather than by CSI division. Produces a variety of output reports from the input data

SD’s input is interactive; each division is self-contained providing design cost data on screen, as each item of the project is entered, as well as providing printouts of input data and resulting estimate by division.

SD allows the estimator to use only those divisions which are needed for his/her estimate. This allows the estimator to update an estimate one division at a time.

SD allows "what if" design on screen. Each screen input is computed to reveal the quantity totals and resulting cost before proceeding to the next input screen. This instant feedback allows the estimator to see the cost effect of each design decision and to experiment

with "what if" design

decisions. •

SD requires more knowledge of the proposed building to obtain an accurate estimate. SD requires the estimator to input actual quantities for many of the input items.

SD overcomes this requirement, for quantity input, by

recommending a predetermined quantity of many input items based on code requirements or industry averages. •

SD is designed only for small to medium industrial and commercial steel buildings to be constructed in the greater Cleveland, Ohio area.

SD allows for many choices of design.

SD actually designs the steel

structure based on the estimator’s input of building use, soil conditions and bay size. SD allows many choices of HVAC equipment and systems.

SD STRUCTURE SD is written in dBASE. SD consists of 14 modules: project information, 12 systems (sitework, foundations, concrete, structural, exterior walls, weather protection,


doors & windows, interior finishes, equipment & miscellaneous, mechanical, electrical, general conditions), and reports. The project information module allows the estimator to input the following data: project name, job number, job location, estimator's name, estimate type (preliminary, budget, final, revision, etc.), building type (industrial, office, interior finishes), total project area, total office area, number of floors, total site area, site parking. The 12 systems modules can be used separately, to obtain an estimate for that system, or in any combination, to obtain an estimate for a total building or a part of a building.

SD includes a separate cost database for each of the modules.

The

databases are easily updated. SD has the ability to check current results and to print reports. Each of the twelve system modules consists of a series of input screens. Each screen asks for input which can be filled in or passed over as the estimator chooses. Sometimes the screen will suggest an input quantity; such as in plumbing where the number of toilet fixtures required by the Ohio Building Code is provided. Before the estimator leaves each screen estimator’s selections are priced and the resulting cost estimate is shown.

This instant feedback allows the estimator to do "what if"

comparisons of various different ideas to see how each idea can impact the cost of project. Only when the user has selected the most acceptable input does the user proceed to the next input screen. When the final input screen, of each system input module, has been completed the user has several options; to review his/her input; to redo his/her input; and/or to print out a record of estimator’s input and its resulting estimated cost. The user also has the option to save his/her results, to re-input the module or to proceed to a different module. To assist the estimators in learning SD & becoming familiar with the required input data, take off summary sheets for 12 systems modules are developed and shown in Appendix.

To illustrate the system input modules, the next section is a brief

discussion of foundation and structural modules.


FOUNDATION MODULE The foundation input module (Fig. 1) asks for the information needed to design the project's footers; What is the project's soil capacity? 3.5 kips per square foot. If the estimator does not answer this question SD assumes 3.0 K/SF. Number of interior footers? 15 footers. Column Loading for these footers? 85.0 kips per footer. SD then suggests a footer size 5.4 feet square and a total volume of concrete of 30.0 cubic yards. Number of exterior column footers? 28. Number of corner column footers? 4. The user is not asked to input any loadings for these footers because SD assumed loads based on the user’s previous input for the interior footers. SD again suggests a footer size for the exterior and corner columns and provides the total cubic yards of concrete needed for each type of footer and their accumulated total. There are several options available; one is to use the "redo" option to try a totally different set of inputs; or, use the "more loading" option to add a new set of loading conditions to what the user has already entered (this can be repeated as often as necessary to fully describe the project); or, the user can proceed to the next screen. The next screen "Spread Footer Pricing" (Fig. 1) prices the previous screen's input. Note that the pricing is not just for the volume of concrete required, but also for the excavation, rebars, and anchor bolts needed. Note also that the pricing is broken into sub categories of material, labor, equipment, and subcontract costs; as well as providing price totals and unit costs. If the estimator is satisfied with the results, he/she can proceed to the next input screen; otherwise he/she can escape and start again. The "Trench Footer Input" (Fig. 1) screen allows the estimator to choose between pricing grade beams or trench footers. Then it asks for input of the total length and load per foot for the external and internal footers as well as asking if there are any footer drains? Once the user has answered these questions SD suggests both external and internal footer sizes and their resulting volume of concrete. Satisfied with SD's suggestions the user proceeds to the next screen to see the cost impact of the trench


footer input. Note that SD has included the cost of the perimeter insulation required by the Energy Code for Northern Ohio.


The final input screen, "Miscellaneous Input" (Fig. 1), asks the questions needed to price the column piers, concrete walls, dock leveler pits, and exterior wall water proofing. SD can then save and print the foundation input (Fig. 2) and the total cost of the foundation system in three different forms; by activity; by subtrade; and by CSI code format (Fig. 3).

STRUCTURAL MODULE The structural module (Fig. 4) requests the information needed to size and price the project's plant roof structure and mezzanines; What is area of the Plant Roof Structure? 42,500 square feet. Actually SD has already inserted this answer (Total building area 55,000 sq. ft. less Office area 12,500 sq. ft.). The estimator can accept SD’s suggestion or change it. What is the plant roof structure's Beam Span? 40 feet. What is its Joist Span? 42 feet. How long is the Plant Perimeter? 825 feet. How long are the Bearing Walls? 400 feet. Here SD will size and price eave beams for that portion of the plant structure that is not wall bearing. What is the Plant Clear Height? 18 feet. What is the Structure Type for the plant roof? 1 - Roof structure composed of steel beams, bar joists and metal deck. The estimator then does the same type of input for a 1000 square foot mezzanine. Note that SD does not provide a mezzanine area; SD’s default area is zero. After the estimator has input the mezzanine's bay size, clear height, structural type, and design live load SD displays on the input screen the following results; Roof Structure Mezzanine Structure

Unit Weight; 5.15 Lbs/SF Cost; $148,653 Unit Weight; 9.954 Lbs/SF Cost; $6,006

Before leaving this input screen the estimator can input any number of different combinations of bay size; bearing and non bearing walls; and structure types to see how each would impact the final project cost. Only when the estimator has input his/her best solution does the estimator need to proceed to the next input screen. The next


screen (Fig. 5) asks similar questions as the previous screen but this time of the office roof structure. This screen also allows the estimator to enter his/her estimate for what the miscellaneous metals will cost. Since the estimator is pricing a one story building this is all the input needed for SD to provide a complete structural estimate. If the estimator were pricing a multi story building, SD would have additionally asked for the second floor area, bay size, and structure type before proceeding to its automatic pricing phase. Again, only when the estimator has chosen his/her best solution for this screen's questions does he/she need to proceed to the next screen. SD can then save and print the structural input (Fig. 5) and the resulting estimated cost of the estimator’s selected structural system (Fig. 6).

First by structural system (plant, office, mezzanine,

miscellaneous steel) broken down by component costs (structural steel, bar joist, deck, as well as the tonnage for each). Secondly, the resulting estimate is presented by CSI activity code (05100 - structural steel, 05200 - steel joists, 05300 - metal deck, 05500 misc. metals) which is subdivided by erection (subcontractor) and material costs.

REPORT MODULE The report module allows the estimator to: (1) print project information report (Fig. 7); (2) print report by major cost divisions (Fig. 8); (3) print report by CSI cost sections (Fig. 9); (4) print report by cost input modules (Fig. 10); and (5) print change order / purchase order tracking reports (Figs. 11 & 12).

The report by major cost

divisions is a one-page recap of the project presenting the totals for each of the eleven input modules plus the general conditions module markups. The report by CSI cost sections is a four-page recap of the total project organized by the sixteen CSI divisions and their respective CSI sections codes. The report by cost input modules is a fourpage recap of each system module's results.


CONCLUSIONS & RECOMMENDATIONS The major benefit of SD is in providing its users with an easy to use system that will produce accurate and comprehensive construction cost estimates for light industrial and commercial buildings. SD accomplishes this by presenting a twelve module cost input system with instant cost feedback. A complete cost estimate is obtained by using only those system modules that best model the total scope of work. By using on screen questions and instant pricing SD allows alternate solutions to be explored and analyzed. This permits the user to incorporate only the best set of solutions into the final cost estimate. SD's flexibility lets the user update and revise earlier estimates producing usable results for the conceptual, preliminary, design development, pre bid, as bid, as bought, and construction phases of a project.

SD's potential users include construction


managers, project mangers, estimators, owners, or anyone who may need to obtain quick and accurate cost estimates for whatever stage a project may be at. It is recommended to increase the scope of SD to include a wider range of building types, architectural and structural systems, more and varied mechanical and electrical choices, and to allow its use in a wide range of geographic areas. All this can be accomplished producing a system with a wider appeal and possibly wider use. However, we would like to propose that SD would be more appealing and used more often if it were even faster or easier to use. That is, produce the same level of results but quicker with fewer questions. This could be accomplished by asking those dozen or so questions that best control the final cost of a project. This, we believe, can be accomplished by the statistical analysis of the final cost of many construction projects to determine which of the final costs are most predictable and which are not. If the cost of a building's foundation system varies little between one building type and another or within a building type then why ask any questions concerning the buildings foundation system? By knowing which systems can be accurately predicted, with a minimum of input, we can then spend most of our time asking those questions which best define the systems that make one building different from the rest. The simpler the system the more likely it will be used.

Amir Tavakoli, Ph.D., P.E., F.ASCE is a Project Manager at The Austin Company. Formerly, he was the Vice President of Operations at Choice Construction Co., Inc. and Assistant Professor of Civil Engineering and Head of Construction Engineering & Management Program at Case Western Reserve University. He is listed in Who’s Who in Science & Engineering and Who’s Who in Finance & Industry. David E. Glaser, P.E. is the President of Professional Estimators & Inspectors. He has more than 40 years experience in the construction industry as Estimator, Inspector, Project Manager, Design-Builder, Construction Manager, General Contractor, Consultant, Structural Engineer, and Lecturer.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – December 2001, Volume 25. Number 2

FACTORS INFLUENCING GROUP DYNAMICS IN BUILDING PROCUREMENT TEAMS IN SOUTH AFRICA: A PILOT STUDY P.A. Bowen, K.S. Cattell, R.G. Pearl, P.J. Edwards and K.A. Hall

ABSTRACT This paper reports on findings emanating from a national structured interview pilot survey into the factors which influence group dynamics associated with building procurement systems in South Africa and their relationship with the attainment of client objectives. Whilst specific to South Africa, the results are considered pertinent to a wider audience. The findings show that professional consultants can always seek ways to improve their communication with clients; and that clients should give more attention to providing feedback and project de-briefing. The definition of role responsibilities within procurement teams should be improved. Clients goals are most comprehensively understood within the conventional procurement system, but little understanding exists of the need for project teams to adopt these goals as part of the process of building team cohesion. The development of a participative decision-making environment with project teams is seen as important, but the intrusion of group tension may impact adversely on team effectiveness.

Key Words Group dynamics, leadership, roles, responsibilities, procurement, team, building

INTRODUCTION Given that the choice of procurement system determines the composition of the procurement team, it follows that it will also influence the group dynamics within the team. Earlier research by Bowen et al. (1997) suggested the need to investigate in greater detail the nature of the group dynamics in procurement teams in South Africa, and the extent to which this affects the attainment of the client’s objectives of time, cost and quality. The research reported in this paper aims to shed light on this.

The paper comprises a literature review, and the reporting and analysis of survey results. The literature review focusses on areas of group dynamics considered by the


authors to be most relevant to the procurement team context and is presented in four sub-sections. The first concerns groups in general and the concept of groups as systems. The second focusses on roles and leadership. The third concentrates on communication and decision-making, and the fourth on group cohesion.

GROUPS Common to virtually all of the many definitions of a group are the following three elements: (i) a group consists of two or more individuals who are aware of their existence as a group; (ii) these individuals have a common objective; and (iii) they interact in collectively striving to achieve this objective. Only once the third element is present, do we have what Brilhart (1978) refers to as “groupness” - i.e. what emerges from the interaction between individuals, that would otherwise not emerge out of a collection of individuals. An extension of this concept is that “groupness” exists as long as group members interact, regardless of the identity of the individuals. This is of particular relevance to the procurement team as a group. Once a project has been commissioned and the team assembled, the group exists and continues to do so as long as it pursues its intended purpose, even if key players, e.g. the designers, client representative or construction manager, change identity. “Groupness” implies that the group develops an identity separate from that of its members and that this influences individual members’ behaviour or performance (Ellis and Fisher, 1994).

GROUPS AS SYSTEMS It is appropriate to describe groups as systems (Ellis and Fisher, 1994; Mabry and Barnes, 1980; Penland and Fine, 1974). Systems can be defined as “interrelated and interdependent sets of component parts” (Ellis and Fisher, 1994:6), or human systems can be defined as “groups of people [who interact] for a common purpose” (Mabry and Barnes, 1980:18).

The “openness” of a system refers to whether or not it takes in and processes new information (Ellis and Fisher, 1994:10). Groups are typically open systems, in that they relate to the external environment in terms of inputs, which are processed to produce outputs. Inputs, processes and outputs are variable elements of group systems (Ellis


and Fisher, 1994:14-16). Inputs, or “entry elements”, are those that exist or occur when the group is formed and include: people; skills; attitudes; information; resources; and purpose. “Process elements” are influences on the group that result from its activities and encompass: communication; cohesiveness; norms governing work and participation; decision-making procedures; and leadership. “Output elements” include both what the group tangibly produces as well as less tangible outcomes such as: personal satisfaction; acquisition of skills by members; quality of decision-making; and cohesiveness.

We tend to think of the procurement team as a group of individuals comprising the architect, the quantity surveyor, the structural engineer, the electrical engineer, and so on. This principal group might appear to include only four or five members, but it is important to recognise that each of these individuals represent sub-groups, i.e, the members of the architectural, quantity surveying and engineering practices that are involved on a particular project. While it may appear that the smaller, more prominent principal group of individual practice representatives does not have a highly structured hierarchy, this is unlikely to be the case in the sub-groups they represent.

It is important to consider the multi-disciplinary nature of the procurement team and the effect that this has on group processes and goals. Compared with uni-disciplinary teams, where the likelihood is that individuals’ goals will be similar, the goals of individual members of multi-disciplinary teams are likely to be varied. Each member’s goal might, in isolation, be apparently compatible with the common team goal, but the mechanisms of conflict and competition, which are typically part of reconciling individual goals relative to one another, clearly compromise the group’s effectiveness (Wallace, 1987). In addition to this problem of goal ambiguity, multi-disciplinary teams also suffer from problems of role ambiguity, which we discuss in more detail below. Differences between multi- and uni-disciplinary teams can also be seen in their approaches to problem solving. Multi-disciplinary teams typically consider a wider range of alternatives, although it is not clear how much of this is attributable to the resolution of the abovementioned goal and role ambiguity problems (Wallace, 1987). Cherns and Bryant (1984) refer to the temporary management structures of projects, claiming that the


endemic characteristics of construction projects make the formation of a project team difficult. Luck and Newcombe (1996) extend the work of Cherns and Bryant (1984), asserting that teambuilding should be considered an ideal and that the integration of the project organisation is a more realistic aim.

ROLES AND LEADERSHIP

Roles and role differentiation “Functional” relationships exist between group members (Ellis and Fisher, 1994:8). These are actions that define the relationships between members. Functions, or roles, can be expressed generically using terms such as: “information giver”; “coordinator”; “questioner”; “energiser”; “respondent”; “enabler”, etc. (Benne and Sheats, 1948; Wallace, 1987), and exist regardless of which individuals perform them.

The assignment of roles to various individuals, or the different expectations associated with various roles or individuals, is referred to as “role differentiation” (Brown, 1995). In the context of groups, roles are the activities and actions of its members. Ellis and Fisher (1994:114) define a role generically as “a set of communicative behaviours performed by an individual...”, but add that in the group situation these behaviours are “performed in the light of the expectations that other members hold towards those behaviours”. Such expectations derive from the functional needs of the group in terms of the fulfilment of its purpose, thus the fact that the group needs a leader is more important than who the leader is, or whether leadership vests in one individual or rotates between individuals (Penland and Fine, 1974). Leadership is an example of a formal role, but many informal roles develop, especially in small groups (Mabry and Barnes, 1980). We use the term develop here because, as their name implies, informal roles are not clearly defined at the outset, nor are they necessarily attached to specific group functions -- they emerge spontaneously and “evolve through association and interaction between members of a group...” (Mabry and Barnes, 1980:125). Examples of informal roles include: the “opinion leader”, an individual who is consistently at the forefront of contributing informed ideas on matters relevant to the group’s purpose; or


the “liaison” role which is played by individuals who build and maintain informal channels of communication that serve to enhance group performance (Mabry and Barnes, 1980:125).

Depending on the size of the group and the nature of its purpose, a wide variety of formal and informal roles might be observed. Benne and Sheats (1948) suggest that these can be classified as: “task roles”; “group building and maintenance roles”; and “individual roles” (Ellis and Fisher, 1994:122-124).

Task roles are directly related to the attainment of the group’s objective and may be applicable to the sub-groups within practices or organisations, as well as to the principal group of representatives of those organisations. The concept of “high performance teams” , introduced by McCann and Margerison (1989), is particularly relevant to the procurement team. In high performance teams members play roles for which they are especially suited, e.g. architects design, draftspersons draft, etc. Both Benne and Sheats (1948) and McCann and Margerison (1989) classify task roles into types, the former tending to be more generic and the latter tending to be more focussed on high performance teams.

The related descriptors: “initiator-contributor”; “innovator”; ”information seeker”; “information giver”; and “adviser” refer to individuals who input creative and new ideas, or gather, assimilate, clarify and feed important and relevant information into the group.

Group synergy, focus and momentum are assisted by individuals who play the roles of: “opinion seeker” (an individual who elicits group members’ opinions about proposed directions or strategies); “coordinator“ and “linker” (individuals who reconcile conceptual with factual information and facilitate the coordination and integration of all group functions); “orienter” (an individual who keeps the group focussed on its purpose); “energiser” (an individual who motivates the group and stimulates action); “organiser” and “developer” (individuals who plan well, put plans into practice and gets things done).


Group output is facilitated, and the quality thereof ensured, by individuals who play the roles of: ”procedural technician” (an individual who handles administrative and procedural tasks); “producer” (an individual who does the repetitive work in the group, e.g. the production of drawings, bills of quantities, specifications, etc.); “evaluator-critic” and “inspector” (individuals who critique group information against standards and ensure quality).

The general administration of the group’s work is handled by individuals who play the roles of: “recorder” (an individual responsible for minute taking and record keeping); and “maintainer” (an individual who supports the infrastructure of the group).

It is clear from the above that a considerable array of creative, managerial, administrative and facilitatory roles are played by various individuals in the task aspect of the group’s work. Given such a diverse set of roles, it is obviously possible that an individual could be required to play more than one role, or that his or her role changes over the life of the group. This is referred to as role ambiguity (Wallace, 1987). In a procurement team context, this means that a team member might not fully appreciate his or her role or position in the team (Wallace, 1987). For example, the role of the project manager may change from leader to enabler as the project progresses.

Facilitatory roles, which we have mentioned in the context of task roles, do not only relate directly to tasks, but also affect group cohesion. Group building and maintenance roles are informal roles that arise out of interpersonal relations. They are selfexplanatory and apply across both the principal and sub-groups of the procurement team. Benne and Sheats (1948) list these as: “encourager”; harmoniser”; “compromiser”; “gatekeeper and expediter”; “group observer”; and “follower”.

Individual roles are intrinsic to group members and are motivated by individual needs, rather than the existence of a common group goal (Benne and Sheats, 1948). The “aggressor” seeks to enhance his or her own status by attacking and criticising other


group members; the uncooperative “blocker” tends to oppose suggestions and actions of other group members; the “recognition seeker” tends to draw attention to previous accomplishments in order to advance his or her status in the group; the “self-confessor” tends to offer irrelevant emotional and attitudinal personal information; the “playboy” tends to play the non-serious joker; the “dominator” is a ‘know-all’ inclined towards verbosity and tends to monopolise group interaction; the “help seeker” is intrinsically insecure and seeks sympathy and support when assigned tasks; and the “specialinterest pleader” constantly attempts to introduce his or her own special private agenda into that of the group.

Leadership, power, and status The leadership of a group, whether devolved or vested in an individual, is clearly one of the most important roles. In this section we discuss leadership along with the closely related issues of power and status.

French and Raven (1968) identify five bases of power: “reward”; “coercive”; “legitimate”; “referent”; and “expert”. Power is a function of an individual’s perception of whether or not “a power base is within the capability of another person” (Mabry and Barnes, 1980:155). Effective leaders attempt to assure influence by using available power bases. For example they might: reward those who support their position with praise or special attention and favours; coerce influence by refusing favours, relegating individuals to undesirable positions, or denying them the opportunity to speak; exercise their legitimate rights, such as the right to dismiss an employee; or they might use their expert knowledge to gain influence. Leaders might also rely on referent power to achieve influence, meaning that they might exploit the fact that other individuals see them as role models and wish to be identified with or mimic them (Mabry and Barnes, 1980:156).

Researchers have studied leadership from three main perspectives, namely the extent to which leadership is a function of: personal traits; style; or situations (Ellis and Fisher, 1994; Brown, 1995; Mabry and Barnes, 1980; Penland and Fine, 1974).


The trait approach to understanding leadership assumes that individuals become leaders because they have special qualities, and indeed, research has produced evidence to suggest that the following personal characteristics can be linked to leadership: “dependability”, “intelligence”, “self-confidence”, “verbal facility” (Stodgill, 1948; Ellis and Fisher, 1994:182), “enthusiasm or dynamism”, “originality”, “responsibility”, “critical thinking ability”, “creativity” (Ellis and Fisher, 1994:182); “scholarship”, “activity and social participation”, “socio-economic status”, “sociability”, “persistence”, “initiative”, “knowing how to get things done”, “insight into situations”, “cooperativeness”, “popularity”, and “adaptability” (Stodgill, 1948). However, problems with the trait approach include its inability to explain why an individual with a given set of traits will not necessarily emerge as the leader of every group to which he or she belongs, nor why he or she will not necessarily maintain the leadership position over the life of a given group (Ellis and Fisher, 1994). These and other perceived problems with the trait approach have led to its demise and the search for other lenses through which to study leadership (Ellis and Fisher, 1994; Brown, 1995; Mabry and Barnes, 1980).

The emphasis in the “styles” approach is on the behaviour of leaders in their relationships with followers. Styles can be classified as: democratic (or participatory); autocratic (or supervisory); or laissez-faire (Ellis and Fisher, 1994; Brown, 1995; Mabry and Barnes, 1980). The laissez-faire style of leadership hardly warrants explanation, but essentially represents a “hands-off” approach. The difficulty of defining it and the apparent anomaly of defining leadership in terms of non-leadership have tended to diminish its importance as an area of research (Ellis and Fisher, 1994). Democratic leaders are concerned with the social aspects of the group process, and tend to facilitate interpersonal relationships and promote group cohesion, while autocratic leaders are concerned with the task or production aspects, and tend to neglect the social aspects (Ellis and Fisher, 1994; Mabry and Barnes, 1980). To suggest that all leaders are either completely democratic or autocratic would be to oversimplify reality. In all likelihood, an individual’s leadership style will lie somewhere between these poles, or fluctuate between the two as the situation demands (Ellis and Fisher, 1994). This


latter phenomenon, coupled with the realisation that the trait and styles approaches have their limitations, has influenced the direction of leadership research towards a focus on the situation, rather than the individual. Situational research has identified the following examinable variables: the combination of the leader’s personality traits; “the nature of the group’s task”; “the physical setting”; and the “size of the group” (Ellis and Fisher, 1994:184). There would appear to be some relevance here to the procurement team context, in that it would make more sense to study leadership of the procurement team in terms of different projects, than in terms of the individual’s traits or leadership style — given the variety of project types and sizes, team sizes and formally defined functional roles connected with the various procurement system options. Table 1 represents a summary of the main points about leadership that emerged from a recent study of group dynamics in building procurement teams undertaken by Traut (1998). Traut (1998) selected and surveyed the members of three project teams involved in two different (primary) procurement systems: traditional (one conventional architect-led and one project managed); and design-build. A theme running through the leaders’ perceptions of the effectiveness of their own leadership, was that they tended to regard it as important to involve team members in decision-making and to encourage group interaction. This is a reflection of their tendency to adopt a democratic style of leadership. It is interesting to note that this choice of style varied according to the situation and that at times they felt an autocratic style was necessary, confirming Ellis and Fisher’s (1994) suggestion that this occurs. It is interesting to note that team members did not always agree with the leaders’ own assessments of the effectiveness of their leadership. Observations that the style was “too democratic” imply that team members do not always want to be involved in team interaction or decision-making, or that a democratically negotiated outcome was perceived by some as less popular than what the leader could have been expected to decide. It is also noteworthy that, in the case of the conventional traditional system, all group members described the leadership style as democratic, with the exception of the quantity surveyor, who felt that it was laissez-faire because the architect was not close enough to the action on site.


A further point of interest was that the traditional (conventional) procurement path was the only one on which problems were reported. The main problem (notably in the opinion of the quantity surveyor and contractor alone), was the lack of contractor involvement in the design of the building. This is not surprising given the numerous references thereto in the literature (Latham, 1995; Masterman, 1992). At first glance this does not appear to be a leadership problem, but on closer inspection, it represents a conflict between the architect and contractor over the issue of what constitutes “buildability”. Given the subordinate position of the contractor in the procurement team hierarchy, coupled with his self-perceived (probably correctly) superiority regarding building assembly, this type of conflict is inevitable in the traditional system. This is clearly a case where the leadership role ought to have been assumed by the contractor, but could not be, because of his late addition to the structure of the procurement team and it is precisely this problem that the design-build system seeks to overcome.

Table 1. Leadership in procurement teams: South African case studies Traditional

Design and build

Conventional

Project managed

architect

client’s in-house project manager

in-house procurement manager (a qualified QS)

Leader’s opinion of leadership

· well-equipped to lead ·encouraged group interaction ·involved team in decisionmaking

·democratic and autocratic as the situation demanded

·democratic and autocratic as the situation demanded ·encouraged interaction and motivated team ·employed a group interaction approach to problem solving

Team’s assessment of leadership

·democratic style (except QS who felt it was laissezfaire because the architect was not on site frequently enough)

· too democratic · encouraged participation of all members

·democratic and autocratic as required ·initial dependency on leader, but gradually team confidence grew and this led to consensus decisionmaking ·leader skilled in persuasion

Problems/ Lessons

·QS and contractor felt design was impractical, this led to many changes ·Contractor felt he should have been involved in the design and QS endorsed this

·project manager and team had worked together before and this was perceived as a great advantage by all

·leader stressed the importance of understanding human behaviour

Leader


Source: adapted from Traut, (1998:35-43)

Leaders are assumed to have power, influence and status. However, although related, these concepts do not necessarily refer to the same thing, nor are they necessarily intrinsic to leadership. Power and influence, note Ellis and Fisher (1994:178), are really quite different concepts, because it is not necessary to have power to exert influence and vice versa. One can differentiate between “structural power”, as occurs when an individual holds a position that confers the right to exercise certain defined powers, and “personal power”, which relates to personal characteristics that others value (Ellis and Fisher, 1994:178; Mabry and Barnes, 1980:154). However, personal power can also relate to “resource dependency”, as occurs when an individual has power over others simply because he or she controls a resource (Ellis and Fisher, 1994:178). Power implies bold, even aggressive control, but influence implies persuasion, and ironically is more powerful than power — to the extent that most leaders typically rely on persuasion rather than raw power as a means of assuring the group’s purpose (Ellis and Fisher, 1994; Mabry and Barnes, 1980). It is important to understand that influence is something that the receiver decides to accept and that this decision is determined by the situation, rather than by the attempts of a particular individual to exert influence. Thus, a leader might be influential in one situation and not in another (Mabry and Barnes, 1980). A typical example of this in procurement teams is the likelihood that the quantity surveyor would be more influential than the architect in the financial management of a project, but the reverse would apply to design decisions (Moxley, 1993). As the size and complexity of construction projects increases, so does the potential for influence to emerge in this way from a great variety of specialist individuals. This can obviously have the effect of diminishing the perceived power of the architect if he or she is the designated team leader, and has increasingly led to the appointment of overarching project managers (Latham, 1995).

We have dealt, albeit briefly, with the subjects of power and influence. In our discussion of structure and hierarchy above, we noted that individuals occupy positions in the hierarchy according to function or rank. Exploring this further, it is clear that positions can be defined in terms of the amount of responsibility that incumbents carry and the


level of reward they receive. Status is generally measured in terms of these two factors -- the higher the level of responsibility and reward, the higher the status of the individual. Status, however, is not simply something that attaches to position, it can be ascribed (e.g. monarchs, judges, professors) or achieved (e.g. human rights activists, political martyrs) (Mabry and Barnes, 1980). Brown (1995:56) notes that status implies “consensual prestige”, or the favourable evaluation of an individual by other members of the group. This applies equally to ascribed and achieved status. It follows that from an external perspective a position might be regarded as being of high status, but that from an internal perspective the incumbent’s status depends on how he or she is regarded by subordinates.

COMMUNICATION AND DECISION-MAKING Communication In this paper we adopt the view that “communication is...the process of interaction between individuals in which meaning is created and shared” (Bowen, 1993:137).

Thayer’s (1979) systemic approach to the conceptualisation of human communication suggests that communication occurs at four levels: intrapersonal (communication of the individual within him- or herself); interpersonal (communication between two or more individuals); the enterprise (the internal structure and functioning of multi-person human organisations); enterprise/environment (communication between human organisations and the environment in which they exist). Communication technologies transcend and impact upon all of these levels (Bowen, 1993).

One approach to understanding the nature of communication is to view it from the following perspectives: mechanistic; psychological; interactional; and pragmatic (Fisher, 1978).

The mechanistic perspective suggests that communication begins with a source who encodes a message which is conveyed via a channel to the receiver who decodes it and provides feedback. While being conveyed, the message is subject to noise, or


interference that corrupts it. This perspective holds that barriers to communication derive from the individual’s limited capacity to process information received from multiple sources, rather than from the individual’s lack of cognitive capacity for encoding or decoding messages. A further feature of this perspective is that gatekeepers (Lewin, 1951) or intermediaries exist on the channel between sender and receiver, and who receive and retransmit messages, often filtering out information and altering the intended meaning thereof. Exploring the aspect of channels further, we find that these connect sender and receiver nodes to form communication networks (Mabry and Barnes, 1980). The importance of communication networks, which might be formal or informal (Ellis and Fisher, 1994), extends beyond their structural dimension, because they influence group interaction by “setting norms for the form and content” thereof (Mabry and Barnes, 1980:132). For example, one would tend to adopt different styles and modes of communication when interacting with superiors or subordinates in an organisational hierarchy. The mechanistic perspective of human communication can be seen to regard the message as a function of the location of the message at a specific point along the process of communication. Its attractiveness lies in its simplicity and its emphasis on the physical components of communication (Bowen, 1993).

The psychological perspective of communication is an extension of the mechanistic perspective which focusses on the individual in the source/receiver role and examines the internal cognitive and affective make-up of the communication agent (Fisher, 1978). Individuals receive and produce stimuli, and in-between, filter them according to attitudes, beliefs, cognitions and prejudices. The psychological perspective thus examines intrapersonal communication, or the internal reception and processing of informational stimuli and the observable responses to these.

The interactional perspective can be described as a humanistic reaction to the mechanistic and psychological perspectives of communication (Bowen, 1993). A cornerstone of this perspective is the view that the self should be separated into the entities of “I” and “me”, the former being capable of performing behaviours, and the latter referring to the other aspects of self such as social norms, attitudes and values


and behavioural tendencies. In an internal process, the “I” entity is programmed by the “me”, which makes human behaviour more predictable, provided that the observer understands the norms, values and attitudes of the subject. Within this perspective, the communicator develops humanistic potential only through social interaction. What appears as the individuality of the communicator is in reality a role that he or she has adopted according to how the “me” entity perceives the “I” and vice versa (Fisher, 1978). Orientation is an important concept related to role-taking, involving the understanding that communicators orientate to themselves, other parties and objects of orientation such as events or topics of conversation. It follows that the greater the congruity between two communicators of one another’s perceptions of: self; social norms attitudes and values; and the object of orientation, the better the communication between them (Bowen, 1993).

The pragmatic perspective of communication is a departure from the interactional perspective’s focus on internalised role-taking that focusses on the ongoing behavioural sequences within the philosophical and methodical environment (Fisher, 1978) of general systems theory and information theory. Information theory sees the function of information as that of energising the social system to ensure its survival. Consistent with the principle of openness, information is exchanged between sub-systems, systems and suprasystems (Bowen, 1993). The underlying tenets of this perspective include the social system (within which communication takes place), behaviour (whereby the individual acts as a sub-system of the social system), sequential interaction patterns (the grouping of communicational sequences into recognisable patterns), and content and relationship dimensions (Fisher, 1978). This last tenet reflects the principle that two kinds of information exist in every communicative act — information relating to content (the data aspect), and relationship (guidelines necessary for the interpretation of the data). In the pragmatic perspective, communicative acts occur in a continuos chain of events and, hence, the sequence of the events becomes important (Hawes, 1973). This perspective seeks to identify interaction patterns which occur over time as the communication system moves between phases. The action patterns, phases and cycles of communication are contained within the parameters of the social system, which


Birdwhistell (1959) argues cannot be distinguished from the communication system. Meaning within this perspective of communication is thus not a product of any individual, but is an inherent creation of the participative individuals only through interaction with other individuals. As such, it is a product of, and is processed by, the social system as a whole (Bowen, 1993).

Decision-making

Ellis and Fisher (1994:141), in suggesting that “a group reaches a decision when its members achieve consensus on a proposal, assume that all group members are naturally, or formally, part of the whole decision-making process. This, however, is not always applicable to the procurement team. A consulting electrical engineer, for example, would not normally participate in decision-making about the financial feasibility of the project, but his or her contributions would be expected and valued in certain of the decisions made by the principal group. At the level of the principal group, the architect as principal agent (assuming the traditional procurement system) has certain powers which he or she is under no obligation to share with other members of the team — for example, the decision as to whether or not the quality of workmanship is acceptable — but may choose to do so because of the leadership style he or she has adopted. However, at the level of the designer subgroup within this architect’s practice, decision-making might well revolve around the achievement of consensus.

Various researchers and authors have sought to explain why decision-making support systems are relatively underused in the building and construction industries. Reasons include: communication problems (Rajab, 1981); the lack of management expertise (Fryer, 1985); and the special economic characteristics of the industries (Hillebrandt, 1974). Skitmore (1986) has noted that many of the difficulties in objective decisionmaking appear to stem from the construction process itself. The number of variables involved (Park, 1966) and the uncertain environment (Cusack, 1981) result in a dearth of reliable data for managerial decision-making. The combination of time available for decision-making and the lack of suitable information appear to be a major factor in the


adoption of formal decision systems (Skitmore, 1986).

GROUP COHESION Cohesion In a construction project procurement system group members interact with one another in pursuit of a common goal, which implies that they are interdependent. This state of interdependence is referred to as “group cohesion” (Mabry and Barnes, 1980:180). The degree of cohesiveness in a group is influenced, among other factors, by: how attracted to the group its members are (Mabry and Barnes, 1980), or members’ “sense of belonging” (Ellis and Fisher, 1994:13); the extent to which the group is subject to external threats; and the duration of members’ participation (Mabry and Barnes, 1980). It has been found that cohesiveness and productivity are positively correlated, albeit with some exceptions and only up to a point (Ellis and Fisher, 1994). This is of particular relevance to the process of construction procurement, if we compare the potential for group cohesiveness to develop in the traditional and design-and-build procurement systems. In the former we find a typically adversarial relationship between the discrete groups of the design team and the contractor, where in the latter they form part of the same group. Smith and Wilkins (1996:32), reporting on case study research involving two projects where variants of the design and build system were used, stress the importance of “good team relationships” and the involvement of the client representative and contractor to the attainment of project success. Indeed, this is a recurring theme in the recent literature (see, for example, Latham, 1995; Walker, 1995; and Moxley, 1993).

According to Turner (1997), the traditional procurement system has generally failed to produce design team cohesion because of the fact that each team member has a separate contract with the client.

Common Objective Mabry and Barnes (1980:17) define group objectives as “members’ shared perceptions of what their joint actions should accomplish” and stress the importance of the common objective in binding group members together and keeping group action focussed on


desired outcomes. In the same vein, Penland and Fine (1974:53) contend that group goals, whether “well-defined and explicitly understood” or abstract and generalised” are the “primary factors in the emergence of a group spirit” - with obvious implications for group cohesion. A problem found in procurement teams is that they typically have the common objective of satisfying the requirements of the client’s brief, but each individual team member also has objectives that sometimes conflict with the main objective. For example, the architect’s goal of aesthetic optimisation could be in conflict with client’s objective of capital cost minimisation (Wallace, 1987). Walker (1995) stresses the importance of clear client definition of and communication of goals, and of aligning the goals of all team members with the client’s goal.

THE SURVEY This section of the paper reports on findings emanating from a national structured interview survey into the group dynamics associated with building procurement systems in South Africa and the relationship between group dynamics and the attainment of client objectives. This method of data collection was selected because it was envisaged that it would yield quality data covering a broad spectrum of national opinion. Interviews were held with a sample of clients and general contractors, as well as with senior representatives of registered firms of architects, quantity surveyors, engineers and project managers. Questions sought to establish the procurement group formation (team selection) process, the roles and responsibilities of group members, and the group dynamics existing within groups associated with different building procurement systems.

Interviews were arranged telephonically with partners / directors of firms and practices in the Western Cape, Gauteng and KwaZulu-Natal provinces of South Africa. Organisations were selected using the membership directories of the South African Property Owners' Association, the South African Institute of Architects, the Association of South African Quantity Surveyors, the Institute of Consulting Engineers, the Institute of Project Managers, and the Master Builders' Associations. A total of 150 interviews were conducted, comprising 22 clients, 28 architects, 27 quantity surveyors, 25


engineers, 23 project managers and 25 general contractors.

The majority of client respondents (77%) described themselves as being experienced in property development, with 82% claiming to have a continuous involvement in property development and at least 10 years experience. Average annual turnover varied considerably, but 91% of client participants reported an annual turnover in excess of ZAR 10m (ÂŁ1.00 = ZAR 10.00). The majority of respondent clients thus represent organisations wielding considerable financial influence in the property development market in South Africa, and having a frequent, if not continuous, involvement in property development. The client group thus exhibited reasonable homogeneity, but it should be noted that the views of small, one-off clients are almost certainly under-represented in this survey as the data collection method would have limited their ability to participate. The majority of clients (68%) reported developing mainly for speculative purposes, with the commercial sector being the focus of attention of most client participants (77%).

At least two thirds of all interviewees in the remaining participating groups also described themselves as being experienced, with the majority of interviewees reporting in excess of 10 years experience. As with the client group, the commercial and industrial sectors proved to be the main sectors of activity for all of these groups, with the exception of the engineers; where the industrial and engineering sectors featured most prominently.

Survey results The presentation of the survey results is given in three parts. The first section deals with procurement group formation, the second section documents interviewees’ opinions regarding the definition of roles and responsibilities of team members, and the third section discusses group dynamics associated with procurement teams constituted under different building procurement systems in South Africa. For the purposes of this study, various procurement systems have been grouped together into three generic forms, namely: conventional (traditional, negotiated, cost-plus); design and build (design and build, package deal, turnkey, develop and construct); and management-orientated


(management contracting, construction management, design and manage). The results are discussed question by question and compare the participating groups' opinions about each issue. The data emanating from the survey are intended to indicate general trends and patterns of opinion only, thus rendering inappropriate the need for statistical rigour and numerical precision. In presenting the analysis of the questionnaire data, percentage

figures

have

been

rounded

to

the

nearest

per

cent.

Procurement group formation

The purpose of these questions was to determine the basis upon which clients appoint consultants to the procurement team. These questions were limited to client and architect interviewees as historically in South Africa they have most often been involved in the appointment of procurement team members.

Question 1: How important are personal characteristics / attributes in procurement team selection? (Answer choice: important, unimportant) (Client and architect participants only)

To explore the influence of team member characteristics on the selection of the procurement team, interviewees were provided with a list of personal characteristics / attributes and asked to comment on their importance in the selection process. More specifically, the list of characteristics comprised: technical competence; participative nature; self assurance; people-orientation; teamwork; and initiative.

Clients and architects strongly agree that all the listed factors are important in the selection process, with one exception. Approximately one quarter of both clients and architects consider the self assurance of the person to be relatively unimportant, placing far greater emphasis on technical competence, initiative and teamwork. These findings support the arguments of Latham (1995), Walker (1995) and Moxley, 1993), that the quality of individuals and their ability to work together as a team are crucial to the attainment of project success.


Table 2. The importance of team members’ personal characteristics / attributes in procurement team selection Important

Unimportant

Client

Architect

Client

Architect

(%)

(%)

(%)

(%)

Technical competence

100

96.2

0

3.8

Participation

100

100

0

0

Self assurance

72.7

76.9

27.3

23.1

People-orientation

86.4

92.3

13.6

7.7

Teamwork

95.5

100

4.5

0

Initiative

100

100

0

0

Other

100

100

0

0

Question 2: How do you rate the quality of the communication between yourself and other procurement team members? (Answer choice: good, satisfactory, poor) (Client and architect participants only)

Architects reported better quality interpersonal communication with other consultants, than do the clients. In the case of communication with consulting engineers, approximately one third of clients claim to enjoy, at best, satisfactory communication with this group of consultants. Quantity surveyors fared little better, with a quarter of client interviewees reporting only satisfactory communication with these professionals.

This trend is reversed in the case of interpersonal communication between clients and architects. However, in this instance, more client than architect interviewees reported better quality communication existing between themselves. The quality of communication between project managers and clients and architects is noteworthy. Less than half of the architect participants rate such communication as good, an opinion not shared by the clients themselves.


Table 3. Architect and client rating of communication between themselves and the procurement team members Good

Satisfactory

Poor

Client

Architect

Client

Architect

Client

Architect

(%)

(%)

(%)

(%)

(%)

(%)

Architect

91

81

9

19

0

0

Quantity surveyor

76

96

23

4

0

0

Project manager

90

48

10

33

0

19

Consultant engineer

68

100

27

0

5

0

Main contractor

82

73

18

23

0

4

End-user

86

58

9

31

5

11

Other

100

100

0

0

0

0

Question 3: Does a positive relationship exist between the cohesiveness of the procurement team and the successfulness of the project? (Client and architect participants only)

The purpose of this question was to determine client and architect awareness of the ‘human’ dimension of building procurement teams; that the success of a project is often a function of ‘softer’ issues rather than technical and functional competence. Interestingly, in support of Ellis and Fisher’s (1994) postulation in this regard, the architect interviewees were unanimous in their assertion that group cohesion has a positive (influencing) impact on project success. The client participants were less adamant regarding the strength of this relationship, with nearly one fifth disagreeing or being unsure. This suggests that clients may tend to place greater emphasis on the functions of project groups than on the group as a group.

Question 4: At the completion of projects is formal debriefing undertaken to


establish whether or not the consultants have performed satisfactorily? (Answer choice: always, sometimes, never) (Client and architect participants only)

The importance of effective feedback in the interpersonal communication process for the attainment of shared meaning has been stressed by various authors (see, for example, Fisher, 1978). Debriefing of consultants is reportedly conducted at most only occasionally by both the client and architect participants. None of the architects claimed to always perform debriefing and nearly half of them stated that this activity was never undertaken. The clients differed somewhat, with a third claiming to always perform debriefing at project completion and two thirds stating that this was sometimes done. Given the emphasis in the literature on the importance to project success of team cohesion (see Ellis and Fisher (1994); Latham (1995); Walker (1995); and Moxley, (1993)) and of facilitating this by providing feedback to consultants during as well as on completion of the project (HMSO, 1995), this finding indicates that greater attention should be paid to debriefing at all levels in the South African construction industry.

Definition of Roles and Responsibilities of Procurement Team Members

The purpose of this section of the questionnaire was to explore the extent to which the roles and responsibilities of procurement team members are defined at the outset of a project, the relationship between procurement group formation and role definition, the method(s) by which members’ roles and responsibilities are defined, and the extent of role ambiguity associated with different procurement systems.

Question 5: To what extent, under the listed procurement systems, are your roles and responsibilities clearly defined at the outset of the project? (Answer choice: always, frequently, occasionally, seldom, never) (All participants)

The extent to which procurement team members’ roles and responsibilities within the team are clearly defined at project inception has the potential to directly influence the


quality of the services rendered by team members and the attainment of client objectives. The purpose of this question was to establish the extent to which respondent groups consider their roles and responsibilities to be defined at the outset of the a project (see Table 4). Respondents were given the choice of five possible alternatives in responding to this question, ranging from 'always' to 'never'. For reasons of practicality, only the responses relating to 'always' and 'frequently' are given here in combined form. The column 'All' refers to the combined response of all groups.

Table 4. Extent to which team members’ roles and responsibilities are clearly defined at the outset of the project Procurement method

Assessment of participants (always or frequently) regarding the extent to which team members’ roles and responsibilities are clearly defined at project inception All

Clients

Architects

Quantity surveyors

Engineers

Project managers

Contractors

Conventional

69

67

73

85

60

48

79

Design and build

41

71

19

30

30

43

57

Managementorientated

41

53

20

28

38

48

58

All groups see role and responsibility definition within the conventional procurement system to be more extensive than is the case with the other two forms of procurement. Whilst the respondents generally rated the design and build and managementorientated systems equally in this regard, responses varied among participating groups. More specifically, clients consider role definition to be most clear within the design and build method of procurement, an opinion contested by the architects, quantity surveyors, engineers and project managers. Contractors shared the opinion of the other groups regarding role definition in the conventional system, but appear to be less confident about the level of role definition occurring in design and build and management-orientated systems. There is clearly a need for role definition to be more fully explained in the procurement system literature.


Project managers were largely negative about all three procurement systems for this question. This response is alarming, but may be explained by the fact that they see themselves as responsible for clarifying role definition at an early stage in the project.

Question 6: If roles and responsibilities are seldom (sometimes or never) defined at the outset of the project, do they become clear during the project? (All participants) This question sought to establish whether or not roles and responsibilities become clear as the project proceeds in instances where such definition was not explicit at the outset of the project. As can be seen from Table 5, respondents are generally in agreement that this most often occurs within the conventional procurement system. The architect respondents are emphatic in this regard. While most groups exhibited at least a positive response to the proposition that role definition improves during the course of a project, quantity surveyors (as a group) responded negatively for the design and build option. This response may have arisen out of a lack of direct experience in this procurement alternative, or from a perception that quantity surveyors would be less involved and hence unable to comment on changes in role definition. The project managers’ positive responses confirm the point made above about their responsibility for defining team member roles and responsibilities. Other than the project managers, all groups were again less sure about the progressive clarification of roles and responsibilities in alternative procurement systems (design and build, and management-oriented). Again the conclusion may be that literature is deficient in this regard. Table 5.Extent to which team members’ roles and responsibilities become clear during the project

Procurement method

Assessment of participants (always or frequently) regarding the extent to which team members’ roles and responsibilities become clear during the project All

Clients

Architects

Engineers

(%) 100

Quantity surveyors (%) 61

Conventional

(%) 80

(%) 69

Design and build

62

64

Contractors

(%) 81

Project managers (%) 83

68

40

57

79

64

(%) 77


Managementorientated

62

64

72

52

55

79

53

Question 7: In different procurement systems, does the manner in which the procurement team is selected directly influence the roles and responsibilities of team members? (Answer choice: yes, no) (All participants)

The results, given in Table 6, indicate that the process of procurement team selection does have considerable influence over team member roles and responsibilities. Table 6.Perceived extent to which the manner in which the procurement team is selected directly influences the roles and responsibilities of team members

Procurement method

Conventional Design and build Managementorientated

Assessment of participants (yes) regarding the extent to which the manner in which the procurement team is selected directly influences the roles and responsibilities of team members All Clients Architects Quantity Engineers Project Contractors surveyors managers (%) (%) (%) (%) (%) (%) (%) 68 57 92 56 56 83 63 71 59 76 58 91 81 64 73

65

76

58

78

86

78

Opinion between participating groups is more equivocal, with architects asserting that procurement team selection within conventional procurement systems most directly influences the roles and responsibilities of team members. In contrast, engineers point to the strongest relationship occurring in the design and build system, whilst contractors claim that this occurs most directly within management-orientated methods. The remaining groups do not appear to see procurement team selection within any one procurement method as more influential on roles and responsibilities than another. The strength of the architects’ choice may be explained by their greater leadership role in conventional procurement systems. For contractors, involvement in managementoriented procurement systems will give them a greater say in defining roles and


responsibilities. The response by engineers is harder to explain, but if their exposure to design and build procurement has been mostly limited to engineering-based projects, then it is likely that they would have encountered fewer participants on each project, and hence the role definition would have been simpler.

Question 8: By what method does role definition usually occur in the following procurement systems (one option per procurement system)? (Option choices: individual/authoritative decision; group participative decision; common usage; other) (All participants) None of the groups availed themselves of the ‘other’ option, so this response is omitted from Table 7. Table 7 Method by which role definition usually occurs in different procurement systems Method of role definition associated with different procurement systems

Assessment of participants regarding the methods by which team member role definition usually occurs on projects Clients

Architects

Quantity surveyors

Engineers

Project managers

Contractors

(%)

(%)

(%)

(%)

(%)

(%)

Conventional: Individual / authoritative decision

35

42

27

16

48

29

Group participative decision

25

12

19

40

17

14

Common usage

40

46

54

44

35

57

Design and build: Individual / authoritative decision

47

32

42

50

29

31

Group participative decision

53

27

46

32

38

31

Common usage

0

41

12

18

33

38

Management-orientated: Individual / authoritative decision

19

30

25

52

35

25

Group participative decision

81

35

50

39

50

50

Common usage

0

35

25

9

15

25

Client interviewees were of the opinion that, in most instances, the roles and responsibilities of team members where the conventional procurement system is used are dictated by common usage; in other words, it is left largely to individual team members to decide on their own roles and responsibilities. This finding supports that of the earlier question that roles evolve as the project progresses. Clients report that the


next most frequent method of role definition associated with this method of procurement is an individual / authoritative decision; usually taken by either the client or the architect. The group participative approach is the least common method. According to the client participants, the group participation approach is the most prevalent method of role definition for design and build and management-orientated procurement systems. Within the conventional procurement method, the ‘common usage’ method of role definition is claimed by all participating groups, with the exception of the project managers, to be the most prevalent method by which team member role definition usually occurs on projects. Opinion within groups is not always unequivocal; for example, the architects, appear divided between the individual / authoritative decisionmaking method and common usage, possibly because their familiarity with this procurement system does not allow them to distinguish between authoritative decisionmaking and common usage. Insofar as role definition within the design and build method of procurement is concerned, little consensus appears to exist between participating groups. More specifically, clients, quantity surveyors and project managers report that role definition invariably occurs as a result of a group participative decision. In contrast, architects and contractors report common usage as the method most often employed, whilst engineers claim that role definition most often results from individual / authoritative decisionmaking. Opinions relating to role definition in management-orientated procurement systems are equally diverse, with groups expressing dissimilar views. Opinion within groups also appears to vary considerably. Interestingly, the clients are the most unequivocal of any group, with the great majority reporting role definition by group participative decisionmaking.

Question 9: Does role ambiguity influence the effectiveness of the procurement team in satisfying client objectives? (Answer choice: yes, no) (All participants)

Role ambiguity does negatively influence the effectiveness of the procurement team in


satisfying clients’ objectives. This view was held by at least 75% of interviewees from each participating group, with 83% of clients attesting to the impact of role ambiguity on the attainment of their objectives. This finding has clear implications for the briefing role adopted by the procurement team leader.

Question 10: How would you rate the extent of team member role ambiguity associated with the various procurement systems? (Answer choice: high, low) (All participants)

Having established interviewees’ opinions regarding the relationship between role ambiguity and procurement team effectiveness, this question sought to explore the perceived extent of role ambiguity of team members generally associated with each of the three procurement systems. For the sake of brevity, only the responses associated with ‘high’ are given here. Table 8 Perceived extent of team member role ambiguity associated with different procurement systems Procurement Assessment of participants (high) regarding the extent of team members’ role method ambiguity associated with different procurement systems All

Clients

Architects

Quantity surveyors

Engineers

Project managers

Contractors

(%)

(%)

(%)

(%)

(%)

(%)

(%)

Conventional

17

35

5

8

10

24

22

Design and build

45

25

67

61

61

35

23

Managementorientated

40

31

60

50

26

25

48

Clearly, all interviewees report the presence of role ambiguity to some degree, irrespective of the procurement system used. The conventional procurement system is associated with the least amount of team member role ambiguity. This general view is held by all participating groups, with the exception of the clients. Clients see the conventional system as inherently possessing the most role ambiguity.

Group Dynamics Associated with Building Procurement Systems

The following section documents interviewee responses to questions relating to the


group dynamics associated with project teams constituted under different procurement systems. Questions dealt with team member understanding of client goals, team group cohesion, group characteristics of teams constituted under different procurement methods, decision-making, leadership, group tension, and the ability of different procurement team structures to attain client objectives with respect to time, cost and quality.

Question 11: Are the goals of the client clearly understood by procurement team members at the outset of the project? (Answer choice: yes, no) (All participants)

The results are depicted in Table 9. The overall perception of all participants is that client goals are comprehensively understood within all procurement systems. Differences between groups and between systems are not significant. Table 9 Perceived extent to which client goals are clearly understood by procurement team members at the outset of the project Procurement Assessment of participants (yes) regarding the extent to which client goals are method clearly understood by team members at project inception All

Clients

Architects

Quantity surveyors

Engineers

Project managers

Contractors

(%)

(%)

(%)

(%)

(%)

(%)

(%)

Conventional

81

75

100

69

88

82

73

Design and build

76

87

75

72

67

85

73

Managementorientated

77

81

80

75

77

85

65

Question 12: Does the procurement team as a whole adopt the client’s goals as their own? (Answer choices: always, sometimes, never) (All participants)

It would seem reasonable to expect team members, having gained an understanding of client goals, to adopt these goals as their own for the duration of the project. In other words, the prima facie expectation here is that, having ‘adopted’ the client’s goals, team


members will strive for their achievement. This question sought to test the perception of whether or not team members within different procurement systems differ in the extent to which they adopt client goals as their own. The results are given in Table 10. Table 10. Perceived extent to which the procurement team adopts the client’s goals as their own Procurement Assessment of participants (always) regarding the extent to which the method procurement team adopts the client’s goals as their own All

Clients

Architects

Quantity surveyors

Engineers

Project managers

Contractors

(%)

(%)

(%)

(%)

(%)

(%)

(%)

Conventional

52

43

82

40

64

30

46

Design and build

46

53

52

35

52

52

36

Managementorientated

51

39

57

33

58

71

48

In general, the results indicate that adoption of client goals by team members is not as widespread as it perhaps should be, given the importance ascribed to this in the literature (see Penland and Fine, 1974) and the relationship between the group’s adoption of a common objective and group cohesiveness. This finding generally accords with Turner’s (1997) contention that design team cohesion is uncommon. Clients believe that adoption of their goals by the procurement team occurs most frequently within the design and build system, which supports the similar findings of Smith and Wilkins (1996). Of the professional advisors, quantity surveyors appear to be the group most sceptical regarding the extent of goal adoption, irrespective of the procurement system used. Participating architects and project managers hold dissimilar opinions in respect of goal adoption in different procurement systems, with architects reporting considerably greater extent of client goal adoption by the procurement team in the conventional procurement system. The project managers report procurement team adoption of client goals to be greatest within the management-orientated method.

Contractors hold broadly similar views to quantity surveyors, viewing procurement team adoption of client goals as not widespread, irrespective of procurement method used.

One explanation for this seemingly weak adoption of clients’ project goals may lie in the


“professional” ambiguity inherent in most consultants’ roles. The notion of providing “independent advice” is still a strong element in construction industry professions, and these may be a perception of potential conflict between maintaining independence and adopting clients goals. The neutral “umpire” image portrayed by the quantity surveying profession supports this notion of role conflict. Such an image may be more myth than reality, but it would explain a reluctance to “get close to the client” by fully embracing the project objectives. Clearly, building professionals lack a clear understanding about the meaning and implications of adopting clients’ project objectives.

Question 13: In each of the procurement systems, to what extent is positive group cohesion stimulated? (Answer choices: strongly, moderately, poorly) (All participants)

One would expect positive group cohesion to impact favourably on procurement team performance in the attainment of client objectives (see Ellis and Fisher, 1994). Hence, the degree to which positive group cohesion is stimulated within teams formed under the various procurement systems is of importance. Interviewees’ responses in this regard are given in Table 11. Table 11. Perceived extent to which positive group cohesion is stimulated Procurement Assessment of participants (strongly) regarding the extent to which positive group method cohesion is stimulated in different procurement systems All

Clients

Architects

Quantity surveyors

Engineers

Project managers

Contractors

(%)

(%)

(%)

(%)

(%)

(%)

(%)

Conventional

55

52

82

44

56

44

50

Design and build

40

41

24

33

41

62

41

Managementorientated

48

56

33

42

70

67

26

In general, albeit by a small majority, participants view the conventional system as being the method most likely to strongly impact positively on group cohesion. Architects clearly favour the conventional method as having the most positive impact on group cohesion, an opinion not shared by clients, engineers and project managers; who


favour management-orientated systems in this regard. Quantity surveyors again appear to be the most sceptical of the participating groups. Of greater interest is the seeming lack of confidence displayed generally by various groups in the cohesion-stimulating attributes of the various procurement methods.

Question 14: In each of the procurement systems, to what extent is negative group cohesion stimulated? (Answer choices: strongly, moderately, poorly) (All participants)

Responses to this question are given in Table 12. Table 12 Perceived extent to which negative group cohesion is stimulated Procurement Assessment of participants (strongly) regarding the extent to which negative method group cohesion is stimulated in different procurement systems All

Clients

Architects

Quantity surveyors

Engineers

Project managers

Contractors

(%)

(%)

(%)

(%)

(%)

(%)

(%)

Conventional

12

26

0

4

8

17

17

Design and build

15

7

14

23

14

14

13

Managementorientated

10

6

7

23

0

5

18

A minority of all participating groups consider negative group cohesion to be strongly stimulated within procurement teams formed under the different procurement systems. Given the adversarial conflict associated with conventional systems, these findings are surprising, except for the responses of clients. Nearly a quarter of clients associate strong negative group cohesion stimulation with the conventional method of procurement. Quantity surveyors and architects generally disagree with this contention, with nearly a quarter of the former group associating such a characteristic with the design and build and management-orientated methods.

Question 15: Please rank the procurement systems in terms of their inherent ability to promote the listed characteristics (All participants)


Participant groups were asked to rank the three different procurement systems in terms of their inherent ability to promote one or more of the attributes listed in Table 13, where 1 denoted the highest ranking and 3 the lowest ranking. Thus, for each attribute, each of the participating groups ranked the three procurement systems. Duplication indicates a shared ranking (e.g., 1, 1, 3). For the attribute of promoting group cohesion, clients, architects and quantity surveyors ranked the conventional system of procurement the highest; an opinion not shared by project managers and contractors, who saw the conventional system as the least likely to promote group cohesion. Opinion regarding the ability of procurement systems to promote goal direction is split amongst participating groups. More specifically, clients, quantity surveyors and project managers favour the management-orientated method in this regard, whilst architects, engineers and contractors prefer the conventional method. Insofar as goal achievement is concerned, architects, quantity surveyors, engineers and contractors hold the view that the conventional method is best able to achieve this. Clients and project managers again favour the management-orientated method in this regard. The change in opinion evidenced by the quantity surveyors is noteworthy. None of the participating groups, with the exception of the clients, see the design and build method as the most likely procurement system to promote natural trust. The remaining groups are divided in their opinion between the conventional method and the management-orientated system as being best able to do this. All groups with the exception of the clients (who favour the design and build method) see the managementorientated method as the one most able to provide an environment for effective conflict management. Most participating groups (clients, engineers, project managers and contractors) see the potential for team member power struggles and inter-member competition to be highest in the conventional system. This view is not shared by architects and quantity surveyors, who rank the management-orientated method highest in this regard. Insofar as the facilitation of problem solving is concerned, all groups except the architects (who prefer the conventional method) rank the management-orientated method highest. This pattern of opinion is repeated in relation to the communication effectiveness of the different


procurement systems. Table 13 Ranking of procurement systems in terms of their inherent ability to promote group characteristics Assessment of participants (ranking) regarding procurement systems in terms of their inherent ability to promote group characteristics

Architects

Quantity surveyors

Engineers

Project Managers

Contracto rs

Totals

3

1

3

2

1

2

3

2

3

1

3

2

1

3

1

2

1 1

1 2

1 2

3

1

1

3

2

2

3

1

1

3

2

3

2

1

1

2

3

1 0

1 6

1 0

3

1

2

1

3

2

1

2

3

2

3

1

3

2

1

3

2

1

1 3

1 3

1 0

Conflict management

3

1

2

2

3

1

3

2

1

2

3

1

2

3

1

3

2

1

1 5

1 4

7

Member power struggle / competition

1

3

2

2

3

1

3

2

1

1

2

2

1

2

2

1

3

2

9

1 5

1 0

Problem solving

3

2

1

1

3

2

3

2

1

2

3

1

3

2

1

3

2

1

1 5

1 4

7

1 3

7

Characteristics

Clients

Group cohesion

1

1

Goal direction

2

Natural trust

Communication effectiveness

3

2

1

1

3

2

3

1

1

2

3

1

3

2

1

3

2

1

1 5

Goal achievement

2

2

1

1

3

2

1

3

2

1

3

2

3

2

1

1

2

3

9

1 5

1 1

Mutual support

3

1

1

1

3

2

1

2

3

2

3

1

3

2

1

3

1

2

1 3

1 2

1 1

Positive leadership style

3

2

1

1

3

2

2

3

1

2

3

1

3

2

1

3

2

1

1 4

1 5

7

Total

2 4

1 8

1 5

1 2

3 0

1 8

2 0

2 2

1 7

1 7

2 9

1 3

1 7

2 1

1 1

2 4

1 9

1 7

1 3 4

1 3 9

9 2

Ranking

3

2

1

1

3

2

2

3

1

2

3

1

3

2

1

3

2

1

2

3

1

The majority of participating groups rank the conventional method highest it terms of its inherent ability to provide mutual support for team members. The managementorientated method is ranked second overall, followed by the design and build system. All participating groups, with the exception of the architects who favour the conventional method, think that the management-orientated method is most able to facilitate a positive leadership style.


When the overall scores are considered, architect respondents stand out against the other groups. For them, the conventional system most promotes all the listed group characteristics. For all other groups, management-oriented procurement systems best achieve this. Almost certainly this is because architects are familiar with the conventional procurement system and their leadership role within it. As shown in Question 5, their perception of their role definition is far less in the alternative procurement systems. There is clearly a need for architects to become more informed about alternative systems of procurement. Question 16: Which of the following decision-making approaches most characterise the procurement system (one option per procurement system)? (All participants) Given the importance of effective decision-making in the attainment of client objectives, this question sought to determine which of a number of attributes most characterise different procurement systems. For each of the three procurement methods, participants were requested to choose one decision-making approach they most closely associated with each type of procurement system. The responses are summarised in Table 14. Table 14. Perceived extent to which listed decision-making approaches characterise procurement systems Assessment of participants regarding the extent to which listed decision-making Procurement method approaches most characterise each procurement systems All

Clients

Architect s

Quantity surveyors

Engineers

Project managers

Contractors

(%)

(%)

(%)

(%)

(%)

(%)

(%)

Democratic decisionmaking: Conventional

37

33

60

46

42

8

26

Design and build

46

56

47

44

35

38

57

Management-orientated

40

63

5

54

17

57

48

Autocratic decisionmaking: Conventional

52

62

16

42

50

87

61

Design and build

39

44

47

32

57

29

30

Management-orientated

33

0

79

33

48

24

13

Consensual decisionmaking: Conventional

11

5

24

12

8

5

13

Design and build

15

0

6

24

8

33

13

Management-orientated

26

37

16

13

35

19

39


Insofar as conventional systems are concerned, all participants, with the exception of the architects and quantity surveyors, associate autocratic decision-making with this form of building procurement. Quantity surveyor opinion is largely split between democratic decision-making and autocratic decision-making, whilst the majority of architects see decision-making under this form of procurement to be democratic. Clearly, a perception ‘gap’ exists between architects and the other members of the procurement team in this regard.

Question 17: In each of the procurement systems, does the procurement team leader usually undertake the listed leadership activities? (All participants)

Effective leadership of the procurement team, irrespective of procurement method, is important if client satisfaction with the resultant building project is to be achieved. Duties of the leader would typically consist of, inter alia, the promotion of a collaborative climate for the team, the establishment of good channels of communication, diffusion of interteam member conflict, the promotion of group support, the setting of goals, and the fostering of motivation (see Ellis and Fisher (1994) and Mabry and Barnes (1980). The ‘yes’ responses to the survey question are given in Table 15.

Participants generally share the opinion that team leaders, albeit to different degrees, promote a collaborative climate and develop good channels of communication irrespective of procurement method. These findings support those derived from Traut’s (1998) South African case studies. The facilitation of participative management in the conventional system of procurement is seen by participating quantity surveyors, project managers and contractors as being only marginally achieved, a view held by nearly half of the architects and engineers in respect of the design and build method. Clearly, the creation of a participative environment in certain procurement systems is in need of attention by team leaders.


Table 15 Perceived extent to which procurement team leaders undertake leadership activities in the various procurement systems Leadership Assessment of participants (yes) regarding the extent to which procurement team leaders activities usually undertake the leadership activities for the alternative procurement systems Clients

Architects

Quantity surveyors

Engineers

Project Managers

Contractors

C

D

M

C

D

M

C

D

M

C

D

M

C

D

M

C

D

M

Promotes a collaborative climate

8 6

8 1

8 8

1 0 0

7 8

8 2

7 9

8 2

8 3

9 2

8 6

9 1

7 1

8 0

1 0 0

6 3

8 2

7 8

Develops good channels of communication

8 9

9 3

8 7

9 6

6 7

8 8

7 6

8 2

8 3

8 8

6 8

9 6

8 6

7 1

1 0 0

8 3

9 1

8 3

Facilitates participative management

6 3

5 3

8 7

8 9

4 7

7 5

5 2

7 3

9 6

6 8

5 0

6 5

4 3

7 0

8 5

5 0

8 6

8 3

Engages in successful conflict management

6 0

6 3

8 8

8 3

5 9

8 1

6 1

5 5

8 7

7 6

7 7

9 1

6 2

7 0

9 0

6 3

7 7

8 7

Promotes group support

8 6

7 5

8 8

1 0 0

7 8

7 5

6 4

5 7

6 8

7 2

6 4

9 1

5 7

8 5

9 5

5 8

8 2

7 8

Facilitates goal setting

9 1

9 3

9 3

9 6

8 8

8 8

6 3

7 6

9 1

7 2

6 8

9 5

5 0

7 6

8 6

7 9

9 1

9 1

Promotes team member motivation

7 1

6 9

6 9

9 6

7 2

7 1

5 6

6 8

7 4

6 8

5 5

7 8

5 5

6 0

9 5

5 8

9 1

7 0

Many quantity surveyors see leadership in resolving conflict to be less than optimal in the design and build method of procurement. Similarly, they see room for improvement in the promotion of team member motivation under the conventional method, a sentiment shared by project managers and contractors. Architects clearly favour the conventional method, being very positive about the provision of leadership under this system. Interestingly, a significant proportion of participating quantity surveyors and project managers share a concern for the lack of goal setting under the conventional system. Facilitation or provision of all of these attributes by team leaders does not appear to be associated with any one procurement system than another.

Question 18: In each of the procurement systems, to what extent does group tension adversely affect the functional effectiveness of the procurement team? (Answer choices: always, sometimes, never) (All participants)


The results for the ‘always’ responses are depicted in Table 16. Table 16 Perceived extent to which group tension adversely affects procurement team functional effectiveness Procurement Assessment of participants (always) regarding the extent to which group tension method affects the functional effectiveness of the procurement team All

Clients

Architects

Quantity surveyors

Engineers

Project managers

Contractors

(%)

(%)

(%)

(%)

(%)

(%)

(%)

Conventional

21

16

16

38

8

22

29

Design and build

27

13

30

35

26

29

27

Managementorientated

28

27

30

39

25

10

35

The overall impression of participating groups is that, in general, group tension has little adverse affect on procurement team functional effectiveness in all three procurement systems. Of all groups, quantity surveyors are the least sanguine about this.

CONCLUSIONS This paper has reported on the findings of a South African national interview pilot survey of the opinions project team participants hold about the group dynamics associated with building procurement systems in South Africa, and the perceived relationship between group dynamics and the attainment of client objectives. The paper dealt with the procurement group formation (team selection) process, the roles and responsibilities of group members, and the group dynamics existing within groups associated with different building procurement systems. Emphasis is placed by clients and architects in the selection process on the technical competence, initiative and teamwork attributes of potential procurement team members. The self assurance of members, whilst considered important, is seen as being of lesser importance. Architects report better quality interpersonal communication with the other consultants than do the clients. Communication between clients and engineers and between clients and quantity surveyors is viewed by clients as satisfactory at best. This should be cause for concern for these professionals. Debriefing of consultants is reported to be


conducted at most only occasionally by both the client and architect interviewees. Given the importance to project success of team cohesion, and of facilitating this by providing feedback to consultants during as well as on completion of the project, this finding indicates that there is room for improvement among South African clients. Client and architect participants acknowledge the ‘human’ dimension of building procurement teams; that the success of a project is often a function of ‘softer’ issues rather than technical and functional competence. Room for improvement exists for the definition of roles and responsibilities at project inception. Project managers are particularly negative regarding the extent of such role definition. It is reported to be more extensive, both at project inception and during the currency of the project, in the conventional procurement system. The general consensus of opinion is that the process of group member selection has a considerable influence over team member roles and responsibilities. Within the conventional procurement method, the ‘common usage’ method of role definition is claimed by most participating groups to be the most prevalent method by which team member role definition usually occurs on projects. Little consensus exists regarding methods of role definition in the design and build and management-orientated procurement systems. Role ambiguity negatively influences the effectiveness of the procurement team in satisfying client objectives. This finding has clear implications for the briefing role adopted by the procurement team leader. Whilst role ambiguity is reported to be present in all three generic procurement systems, the conventional system is associated with the least amount of team member role ambiguity. A general perception is that client goals are most comprehensively understood within the conventional system of procurement, but the findings indicate that (within all three procurement systems) the adoption of client goals by team members is not as widespread as it might be. This finding accords with the finding of previous research that design team cohesion is uncommon. A lack of confidence exists in the cohesion-stimulating attributes of the various procurement systems. Clients associate strong negative cohesion stimulation with the conventional method of procurement. Power struggles and inter-member competition are deemed to be highest in the conventional method. The architects rank the conventional


system as the one most inherently able to promote desirable group characteristics. Clients display a clear preference for the management-orientated procurement system to achieve this. Decision-making in the conventional procurement system is seen as autocratic by all groups except the architects. A perception ’gap’ exists between architects and the other members of the procurement team in this regard. Participants generally share the opinion that team leaders, albeit to different degrees, promote a collaborative climate and develop good channels of communication irrespective of procurement method. These findings support those of previous research. The facilitation of participative management in the conventional system of procurement is seen by a number of participants as being less than effective, a view held by many of the architects and engineers in respect of the design and build method. Clearly, the creation of a participative environment in procurement systems is in need of attention by team leaders. The overall impression of participating groups is that occasionally group tension adversely affects procurement team functional effectiveness in all three procurement systems. However, the general consensus of opinion is that adverse effects of group tension occur the least frequently in the conventional procurement system. The findings of this pilot survey indicate that little is understood about the group dynamics associated with building procurement teams in South Africa. Further research needs to be undertaken in this area; with particular emphasis on the effective management of groups for the attainment of client objectives.

ACKNOWLEDGEMENTS The authors wish to acknowledge, with thanks, the financial support of the Foundation for Research Development (F.R.D.) and the Centre for Science Development (C.S.D). In addition, thanks are also extended to Lara Zandee for her work on the data coding and BMDP programming. This paper extends the procurement systems research being undertaken at the University of Cape Town.


REFERENCES Ahmad, I.U. and Sein, M.K. (1997), Construction project teams for TQM: a factorelement impact model, Construction Management and Economics, 15, pp. 457467. Benne, K.D. and Sheats, P. (1948), Functional roles of group members, Journal of Social Issues, 4, pp. 41-49, cited in D.G. Ellis and B.A. Fisher, (1994), Small Group Decision Making: Communication and the Group Process, 4th Ed., McGraw-Hill: New York. Birdwhistell, R.L. (1959), Contribution of linguistic-kinesic studies to the understanding of schizophrenia, in Schizophrenia: An Integrated Approach, A. Auerback (ed.). The Ronald Press Company: New York, pp. 99-123. Bonder, C.S. (1979), Changing the future of operations research, Operations Research, 27, March-April, pp. 209-224. Bowen, P.A. (1993), A Communications-based Approach to Price Modelling and Price Forecasting in the Design Phase of the Traditional Building Procurement Process in South Africa. Unpublished PhD thesis, University of Port Elizabeth. Bowen, P.A., Hindle, R.D. and Pearl, R.G. (1997), The effectiveness of building procurement systems in the attainment of client objectives, in Proceedings of CIB W92 - Procurement conference “Procurement - a key to innovation”, Université de Montréal, 20-23 May, Davidson, C.H. and Abdel Meguid, T.A. (eds.), CIB Publication 217, pp. 39-49. rd Brilhart, J.K. (1978), Effective Group Discussion, 3 Ed. Brown: Dubuque, cited in D.G. Ellis and B.A. Fisher, (1994), Small Group Decision Making: Communication and the Group Process. 4th Ed., McGraw-Hill: New York. Brown, R. (1995), Group Processes: Dynamics within and between Groups. Blackwell: Oxford. Campbell, A.C. (1968), Selectivity in problem solving, American Journal of Psychology, 81, pp. 543-550, cited in W.A. Wallace (1987), The Influence of Design Team Communication Content Upon the Architectural Decision Making Process in the Pre Contract Design Stages. Unpublished PhD thesis, Department of Building, Heriot-Watt University. Cherns, A.B. and Bryant, D.T. (1984) Studying the client’s role in construction management. Construction Management and Economics, Vol.2, pp.177-184. Cusack, M.M. (1981), Time Cost Models: Their Use in Decision-Making in the Construction Industry with particular reference to the use of the MicroComputer. Unpublished PhD Thesis, University of Bath. Ellis, D. G. and Fisher, B.A. (1994), Small Group Decision Making: Communication and the Group Process. 4th Ed., McGraw-Hill: New York. Fisher, B.A. (1978), Perspectives on Human Communication. Macmillan: New York.


Franks, J. (1984), Building Procurement Systems- a guide to building project management. CIOB: Ascot. French, J.R.P. and Raven, B. (1968), The bases of social power, in Group Dynamics: rd Research and Theory, 3 Ed., D. Cartwright and A. Zander (eds.), pp. 259-269. Harper & Row: New York, cited in E.A. Mabry, and R.E. Barnes (1980), The Dynamics of Small Group Communication. Prentice Hall: Englewood Cliffs. Fryer, B.G. (1985), The Practice of Construction Management. Collins: London. Hawes, L.C. (1973), Elements of a model for communication processes, Quarterly Journal of Speech, 59, pp. 11-21. Hillebrandt, P.M. (1974), Economic Theory and the Construction Industry. Macmillan: London. HMSO (1995), Construction Procurement by Government: An Efficiency Unit Scrutiny, HMSO: London. Lansley, P. (1983), Case Studies of the Constraints to the Application of Construction Management Research. Report, Department of Construction Management, University of Reading, Reading, May. Latham, M. (1995), Constructing the Team, Joint Review of Procurement and Contractual Arrangements in the United Kingdom Construction Industry: Final Report. HMSO: London. Lewin, K. (1951), Field Theory in Social Science. Harper and Row: New York. Luck, R.A.C. and Newcombe, R. (1996) The case for the integration of project participants’ activities within a construction project environment, in CIB W65 International Conference on The Organisation and Management of Construction proceedings (Ed. D.A. Langford and A. Retik), Glasgow, Vol.2, pp. 458-470. Mabry, E. A. and Barnes, R.E. (1980), The Dynamics of Small Group Communication. Prentice Hall: Englewood Cliffs. Masterman, J.W.E. (1992), An Introduction to Building Procurement Systems. E & FN Spon: London. McCann, D. and Margerison, C. (1989), High performance teams, Training and Development Journal, 43, pp.52-60, cited in D.G. Ellis and B.A. Fisher, (1994), th Small Group Decision Making: Communication and the Group Process. 4 Ed., McGraw-Hill: New York. Moxley, R. (1993), Building Management by Professionals. Butterworth Architecture: Oxford. Park, W.R. (1966), The Strategy of Contracting for Profit. Prentice Hall: Englewood Cliffs. Penland, P.R. and Fine, S. F. (1974), Group Dynamics and Individual Development. Marcel Dekker: New York. Rajab, Z.T.S. (1981), An Investigation into the Nature and Extent of Corporate Planning in Construction Companies. Unpublished M.Sc. Dissertation, Department of


Building, Heriot-Watt University, Edinburgh. Robey, D. (1994), Designing Organisations. 4th Ed., Irwin: Homewood, cited in I.U. Ahmad, and M.K. Sein (1997), Construction project teams for TQM: a factorelement impact model, Construction Management and Economics, 15, pp. 457467. Shaw, M. (1976), Group Dynamics: The Psychology of Small Group Behaviour, 2nd Ed. McGraw-Hill: New York. Skitmore, R.M. (1986), A Model of the Construction Project Selection and Bidding Decision. Unpublished PhD Thesis, Department of Civil Engineering, University of Salford, Salford. Smith, A. and Wilkins, B. (1996), Team relationships and related critical factors in the successful procurement of health care facilities, Journal of Construction Procurement, 2, 1, pp. 30-40. Stodgill, R.M. (1948), Personal factors associated with leadership: A survey of the literature, Journal of Psychology, 25, pp. 35-71, cited in E.A. Mabry and R.E. Barnes (1980), The Dynamics of Small Group Communication. Prentice Hall: Englewood Cliffs. Thayer, L. (1979), Communication: sine qua non of the behavioural sciences, in Interdisciplinary Approaches to Human Communication, R.W. Budd and B.D. Ruben (eds.), Hayden Book Company: New Jersey, pp. 7-31. Traut, M. (1998), Small Group Dynamics in Building Procurement Teams: A Comparison Between the Group Dynamics Associated with Teams in Different Building Procurement Systems. Unpublished undergraduate dissertation, Department of Construction Management and Quantity Surveying, Peninsula Technikon, Cape Town. nd Turner, A. (1997), Building Procurement. 2 Ed. Macmillan: London. Walker, D. (1995), The influence of client and project team relationships upon construction time performance, Journal of Construction Procurement, 1, 1, pp. 4-20 Wallace, W.A. (1987), The Influence of Design Team Communication Content Upon the Architectural Decision Making Process in the Pre Contract Design Stages. Unpublished PhD thesis, Department of Building, Heriot-Watt University. Wong, C. (1978), Bidding Strategy in the Building Industry. Unpublished M.Sc. dissertation, Brunel University, Uxbridge. Wundram, E.C. (1997), Design-Build - a successful procurement option, (keynote papers from proceedings of CIB W92 - Procurement conference “Procurement a key to innovation”, Université de Montréal, 20-23 May), Davidson, C.H. (ed.), CIB Publication 217, pp. 47-52.


P.A. Bowen, K.S. Cattell, and K.A. Hall - Department of Construction Economics and Management, University of Cape Town R.G. Pearl

-

Department of Property Development and Construction Economics,

University of Natal, South Africa P.J. Edwards - Department of Building and Construction Economics, Royal Melbourne Institute of Technology, Australia


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – December 2001, Volume 25. Number 2

Fiscal and Economic Impact of Housing Development Matt Syal, Ph.D., AIC, CPC and Andrew Seidel

ABSTRACT This research investigated the Fiscal and the Economic impact of new housing development on Michigan communities by taking into account how new housing increases costs to a community and at the same time, provides benefits. It was conducted by applying economic impact and fiscal impact models to two case study communities in Michigan. The Local Economic Impact of Home Building Model developed by the National Association of Home Builders (NAHB) was utilized to determine the economic impact of residential development. The ONETOWN model, developed for the South East Michigan Council of Governments (SEMCOG) by Rutgers University Center for Urban Policy Research (CUPR), was utilized to determine the fiscal and other related impacts of two different types of development scenarios. The results from application of the NAHB’s model demonstrate that there are positive economic impacts resulting from residential development. In addition, the fiscal impact of housing development was also found to be positive in 3 of the 4 applications of the SEMCOG model. Key Words Housing Development, Fiscal Impact, Economic Impact, Land Development, NAHB Model, ONETOWN Model

OVERVIEW Issues related to new housing development are generally focused on the issue of equity. Equity issues related to residential development can be divided up into many categories including, available farmland, open space, biological resources, economic impact, fiscal impact, housing needs, community needs, industry needs, and race and other forms of discrimination. With so many qualitative and quantitative factors to consider, the issue of housing development, many times, is decided on the


basis of the cost-benefit aspects for the municipalities.

A number of local

governments in Michigan have been active in this regard in recent years and have made efforts to explore the cost-benefit aspects. This research investigated the Fiscal and the Economic impacts of new housing development on Michigan communities by taking into account how new housing increases costs to a community, and at the same time, provides benefits. Fiscal impact refers to the cost vs. revenue impact of housing development on municipalities’ treasuries, whereas, Economic impact refers to the short-term and long-term impacts of housing development on local economies, i.e., number of jobs, local income, and local taxes and government revenue (Seidel et al. 1998). This study was conducted by applying both economic impact and fiscal impact models to two case study communities in Michigan. The Local Economic Impact of Home Building Model developed by the National Association of Home Builders (NAHB) (Emrath et al. 1997) was utilized to determine the economic impact of residential development. This model utilizes three phases to calculate the economic impact of a housing development: the economic impact of the initial construction activities, the ripple effect of the construction dollars in the local economy, and the ongoing annual impact of new home occupant’s spending. The ONETOWN model, developed for the South East Michigan Council of Governments (SEMCOG) by Rutgers University Center for Urban Policy Research (CUPR), was utilized to determine the fiscal and other related impacts of two different types of development scenarios (SEMCOG 1997). Historically, the majority of research related to fiscal impact of new residential development has created negative perceptions. Research focused on topics such as cost of community services (AFT 1993), infrastructure cost (Priedeman et al. 1996), and farmland preservation (Bidwell et al. 1996) has focused on one side of the residential development impacts. Such studies, in many instances, have led to the prevailing perception that new residential development is a burden on municipalities. Fragmented municipalities make land use decisions at the local level. Planning and zoning boards are comprised of local residents. The impact of land planning

decisions

affects

a

community's 1

economic,

social,

and

natural


environments. Residential housing comprises the majority of new development in most communities, and consequently is related to the majority of land planning decisions. The perceptions of the residents and the government leaders towards the financial impact of the new developments on the municipal treasury affect a large number of these decisions. Although substantial efforts have been directed toward identifying the impact of new development, especially residential urban sprawl, there is a significant lack of information pertaining to the financial impact of residential developments.

As a result, conflicting opinions prevail between the various

professions involved.

Michigan’s population is on the rise again after leveling off in the eighties. The Michigan Society of Planning Official’s Trend Future Report (MSPO 1997) identified that the number of Michigan households is increasing faster than the population. This is due to a number of factors such as longer life expectancy, more single persons living alone, high divorce rates, and new family formations. Also, a strong economy fuels

population

growth

through

employment

opportunity.

This

phenomenon coupled with an outward migration of Michigan residents from the cities to the suburbs has led to a continued demand for new housing. It is estimated that by the year 2020, over a million new residents will be added to Michigan's present population of around 9.5 million. With such a large population increase projected for Michigan, many communities will experience residential development and growth.

The purpose of this research is to examine the fiscal and economic impacts of residential development.

The objective is to provide a tool for developers and

municipalities alike to analyze the economic and fiscal impacts of new housing development on a specific community.

The research work is based on the

hypothesis that: (1) the economic impact of residential development should be considered along with the fiscal impact, (2) the fiscal impact of residential development is not always negative, and (3) the combined (fiscal and economic) impact of a residential development is almost always substantially positive.

2


FISCAL AND ECONOMIC IMPACT MODELS There are two existing models that are designed to capture the economic and fiscal impacts of residential development. Each model was examined and applied to the case study communities. The National Association of Home Builders (NAHB) developed a model to measure the local economic impact of building a home within the boundaries of a particular market area (Emrath, et al. 1997). The other model was developed for the Southeast Michigan Council of Governments by Rutgers University's Center for Urban Policy Research (SEMCOG 1997).

This model

provides a fiscal impact analysis and also illustrates the differences in resource consumption and costs of two different types of development scenarios.

The

following sections describe main features of each of the models.

NAHB's Local Impact of Homebuilding Model (Emrath et al. 1997): The NAHB model determines the local economic impacts of construction and development activity for a specific development in a particular metropolitan statistical area (MSA). This model is designed to calculate the one-time construction impacts as well as the ongoing impacts that recur annually. It provides quantifiable results that link new residential development with commercial and other forms of development therefore illustrating the overall economic effects of residential growth. Additionally this model is useful for determining the economic impacts of new housing development in the year of construction and the subsequent years of economic activity. Such economic activity is not traditionally computed in fiscal impact studies.

SEMCOG's ONETOWN Model (SEMCOG 1997) The South East Michigan Council of Governments (SEMCOG) is a regional planning association for South East Michigan. The "ONETOWN" model, developed by SEMCOG and Rutgers University's Center for Urban Policy Research (CUPR), compares the fiscal impact of one type of development with another as an alternative. Resource consumption and costs are examined for land, infrastructure costs, development costs, and public service costs for the two development scenarios.

3


The primary reason for utilizing this model for this study is because it quantifies the fiscal impact of residential growth. The fiscal impact of residential development is the difference, either positive or negative, between the added revenues contributed to a community by new housing development and the added costs of the services consumed by new housing and its occupants. Fiscal impact studies are those that determine cost-revenue impact. Table 1 illustrates the model methodology in terms of costs and benefits. Table 1: Summary of Local Economic Impact Model Functions (Source: Emrath, et al., 1997) Costs Benefits One-time, Construction-Year Streets, water supply systems, Jobs created in construction Impacts sanitary and storm sewer and complementary industries; systems and other government revenue from infrastructure needed at local income, sales, and other approximately the same time taxes, building permits, impact the unit is built. and other fees; additional spur to economic activity as income earned in construction is spent. Ongoing Impacts that Recur Ongoing services to new Continuing revenue collected Year After Year home residents, including from real estate taxes; local public elementary and income and government secondary education. revenue generated by the spending of new home occupants.

The spreadsheet based "ONETOWN" model utilizes several data entry spreadsheets followed by one spreadsheet dedicated to the model calculations and finally a spreadsheet to display the results.

The seven data entry spreadsheets

require data on population, housing, employment, land use, zoning, developable acreage, infrastructure costs, public service costs, and revenue sources. The result spreadsheet titled "Tables" provides a fiscal impact comparison of the two types of development scenarios.

APPLICATION OF THE MODELS This section presents the data collection, assumptions, and implementation of the NAHB model and the SEMCOG model for the two Michigan case study communities.

The two selected Michigan case study communities, identified as

Township A and Township B, have experienced growth in recent years at a greater 4


rate then the State average.

Both models required extensive economic,

demographic, and land planning data from municipalities, developers, builders, state government departments, and others.

Data Collection for the NAHB Model The majority of data for the NAHB model was required from the private sector, builders, developers, engineering firms, and sub-contractors. The data requirements are divided into two categories: general market conditions and single-family construction. If the case study developments had contained multi-family housing, then a third category called multi-family construction would have been necessary. NAHB developed an input requirement guide that describes generic data requirements for any community in the United States. The following categories of data were collected with the help of questionnaires, interviews, and from available public records. Details of the data collection are not presented here due to space limitations but readers are encouraged to refer to Seidel et al. (1998). a. General Market Conditions: This section requires the proportion of tax revenue from the various land uses in the townships. This data should be readily available from the local assessor's office and should be organized by real and personal property. The model also required information about local personal and/or business income taxes. b. Single Family Construction: This section requires data from the private sector. This data is not easily or readily available. It is essential to have access to historical construction cost data from builders/developers involved with the case study communities. The following data was collected: •

Number of single family units

Average cost for new single family units (base year of analysis)

Raw land costs per unit defined above (base year of analysis)

Average fees per unit paid locally or to the county or state during the total life cycle of the project.

Average property tax per dollar of market value.

5


Data Collection for the SEMCOG Model The SEMCOG model (SEMCOG 1997) allows the user to perform multiple "what if " scenarios. Projections can be made based on different population density scenarios, different population projections, or different housing types. As noted in earlier section, the ONETOWN model contains seven data entry spreadsheets. The data entry spreadsheets are titled PopHoJob, County, Finance, Trend, Compact, RegFacts, and LocFacts. The data was collected for five of the seven data entry spreadsheet. Since the SEMCOG model was specifically developed for Michigan and its various local communities, the default values for RegFacts (Regional Factors) and LocFacts (Local Factors) spreadsheets were found to be acceptable. Examples of the seven data entry sheets are provided in the User's Manual along with detailed descriptions. Details of the data collection are not presented here due to space limitations but readers are encouraged to refer to Seidel et al. (1998). a. Population, Housing, and Jobs Spreadsheet (PopHoJob):

The PopHoJob

spreadsheets require data on Area, Households, Housing Units, and Employment at Place for the case study townships. Additionally, the investigator must choose a base year of analysis and a future year of projection. 1997 and 2020 were chosen for this research. b. County Spreadsheet: The County Spreadsheets require employment sector data for selected employment categories. Most of the data in this category was found from The Michigan Jobs Commission (MJC 1997) database. c. Finance Spreadsheet: The Finance spreadsheet is the most straightforward of all the data entry spreadsheets. All the data required by this spreadsheet is available from the local municipalities Annual Local Unit Fiscal Report for Counties, Cities, Villages, and Townships for the base year of analysis. Most municipalities submit this form to the State annually. d. & e. Trend and Compact Spreadsheets: The Trend and Compact Spreadsheets are the data entry spreadsheets that form the basis for the comparisons between the two types of development scenarios. These spreadsheets require the Percent of Dwelling Units, Dwelling Units per Acre, and Average New Sales/Rent price for both near existing development and Peripheral areas. 6


CASE STUDY RESULTS The primary findings of the study were centered on three points: (1) The Economic Impact of Development should be considered along with the Fiscal Impact, (2) The Fiscal Impact of Development is not always negative, and (3) The combined (fiscal and economic) impact of residential development is almost always substantially positive. The NAHB model is designed to calculate the economic impact of a specific residential development in its local market area. The model results demonstrate that there are positive economic impacts resulting from residential development. The positive economic impacts not only occur as a result of the initial years of construction activity (phase I & II), but also continue to recur annually in terms of the new home occupants spending (phase III) (Emrath et al 1998). The SEMCOG model is a fiscal impact model designed to quantify the fiscal impact of residential development for two different types of development scenarios. The researchers were primarily interested in determining the fiscal impact of overall residential development.

Since the model was designed to compare the two

scenarios, it was decided to apply the fiscal analysis for both types of developments. The results of the application of the ONETOWN model demonstrate that, contrary to prevailing beliefs, residential development does not always result in a negative fiscal impact. As demonstrated later, three of the four applications of the model in this study resulted in a positive fiscal impact. Economic Impact of Home Building The NAHB model quantifies the economic impact of a housing development on a particular market area. Calculations are conduced in three phases. Phase I calculates the impact of the construction activity. Phase II calculates the ripple effect as wages and profits resulting from the construction period are spent by local workers and business on local goods and services. Phase III determines the ongoing annual impact resulting from the new home occupant’s spending.

NAHB’s Housing

Economics Department applied the data, supplied by the investigators, to the model. Township A and Township B case study developments resulted in 10.3 and 14.6 million dollars respectively in economic impact in the initial years of construction 7


activity (phases I & II). This is in addition to the 0.88 and 1.6 millions dollars of local government revenue.

Seidel et al. (1998) provides detailed tables for the local

income and jobs by industry and local government general revenue by type for phases I, II, & III of the Township A and B case study developments. A summary of the model results is provided in Tables 2 A-D.

Table 2A: Township A Total One Year Impact – Sum of Phase I and Phase II (NAHB Model) Local Income Local Business Local Wages and Local Taxes Owners’ Income Salaries $10,303,000 $2,734,000 $7,569,000 $882,000

Local Supported 227

Jobs

Table 2B: Township A Phase III Ongoing Annual Effect that Occurs When New Homes are Occupied (NAHB Model) Local Income Local Business Local Wages and Local Taxes Local Jobs Owners' Income Salaries Supported $2,254,000 $388,000 $1,865,000 $400,000 62

Table 2C: Township B Total One Year Impact – Sum of Phase I and Phase II (NAHB Model) Local Income Local Business Local Wages and Local Taxes Owners’ Income Salaries $14,609,000 $3,821,000 $10,788,000 $1,600,000

Local Supported 314

Jobs

Table 2D: Township B Phase III Ongoing Annual Effect that Occurs When New Homes are Occupied (NAHB Model) Local Income Local Business Local Wages and Local Taxes Local Jobs Owners’ Income Salaries Supported $3,588,000 $599,000 $2,989,000 $876,000 96

While property taxes are often thought of as the primary direct form of municipal revenue resulting from residential development, local units of governments also receive a share of single business tax revenue, sales tax revenue, income tax revenue, transfer tax revenue, and gas tax revenue generated during residential construction and beyond. Some municipalities may have a personal income tax as well.

Simply examining the government revenue resulting directly from property

taxes fails to illustrate the true economic effect. Fiscal impact is only a portion of the economic impact of a development. The economic impact is equal to the sum of the 8


local government revenue, local wages and salaries earned, and local business owners’ income. The local wages and salaries resulting from the initial construction activity of the case study developments were more than ten times the local government revenue. The wages, salaries, and business owners’ income will result in additional government revenue, indirectly, in the form of commercial property taxes and business income taxes.

Additionally, a portion of the wages, salaries, and

business owners’ income will continue to re-circulate in the local economy as it is spent and re-spent.

It is this economic effect, which must be considered when

examining the impact of a proposed residential development.

The Fiscal Impact of Housing Development Many of the research studies in this field have led to the prevailing perception that new residential development is a burden on municipalities. The findings of this study are contrary to the prevailing beliefs. The direct fiscal impact of residential development is not always negative. As explained later in this section, three of the four applications of the ONETOWN model for this study resulted in a positive fiscal impact. The fiscal impact of housing development varies from municipality to municipality depending on the individual characteristics of each. For example, a particular municipality may be operating a water treatment facility near capacity, the impact of just a few more households on the existing system may exhaust its capacity, forcing the municipality to expand its facility.

On the other hand a

municipality may be operating a water treatment facility at only a fraction of its capacity, therefore the addition of households will help to lessen the financial burden of the existing infrastructure on current residents. These examples are intended to illustrate the point that dramatic fiscal differences exist between municipalities, therefore generalizing the fiscal impact of a particular development is very difficult. The current condition of a municipality’s infrastructure is not the only factor that influences the fiscal impact of a residential development. The fiscal impact of residential development is determined by many municipal characteristics, such as local land area, population, household characteristics, rate of growth, distribution of 9


housing units, distribution of land uses, employment at place, and the levels of State and Federal aid. All of these variables can be estimated and projected at any given time to the best of researchers’ abilities, although just a few years down the road, new information may dramatically affect results reached today. The point is that municipalities are ever changing entities, continuously shaped and reshaped by social, economic, political, and environmental factors.

Such dynamics further

substantiate the argument that it is very difficult to generalize the fiscal impact of a particular type of development as either positive or negative. Despite the dynamic characteristics of any given municipality, the researchers set out to project the fiscal impact of residential growth on two case study Michigan municipalities. The ONETOWN model (SEMCOG 1997) was utilized to determine the fiscal and other related impacts of two different types of development scenarios. This model provided two services, the first is a fiscal impact analysis and the second is a comparison of two different types of growth scenarios, compact and trend development. This study is primarily focused on fiscal impact aspect of the model, which is summarized in Tables 3 A & B.

Table 3A: Fiscal Impact Township A (ONETOWN Model) Distribution Dwelling Added Added of Housing Units / Acre Revenue Costs Units s Type-1 Type-1

Scenario I

Added Revenu e Type2

Added Cost Type-2

Projected Fiscal Impact Type-2

TYPE-1 TYPE-2

TYPE-1 TYPE-2

70%N 90%N

SFD 2.5 SFA 6.0 MF 8.0 MH 6.0

2.5 6.0 8.0 6.0

$670,403

$412,02 7

$258,376

$651,97 9

$401,02 0

$250,959

SFD 2.5 SFA 6.0 MF 8.0 MH 6.0

3.0 7.0 10 8.0

$670,403

$412,02 7

$258,376

$636,68 1

$401,02 0

$235,661

30%P 10%P Scenario II

Projected Fiscal Impact Type-1

70%N 90%N 30%P 10%P

10


Table 3B: Fiscal Impact Township B (ONETOWN Model) Distribution Dwelling Added Added of Housing Units / Acre Revenue Costs Units s Type-1 Type-1

Scenario I

Added Revenu e Type2

Added Cost Type-2

Projected Fiscal Impact Type-2

TYPE-1 TYPE-2

TYPE-1 TYPE-2

70%N 90%N

SFD 2.1 SFA 2.5 MF 4.0 MH 4.0

2.1 2.5 4.0 4.0

$479,375

$473,65 7

$5,718

$446,34 6

$468,280

($21,934)

SFD 3.0 SFA 4.0 MF 10.0 MH 6.0

2.1

$479,375

$473,65 7

$5,718

$438,99 0

$468,280

($29,290)

30%P 10%P Scenario II

Projecte d Fiscal Impact Type-1

70%N 90%N 30%P 10%P

2.5 4.0 4.0

Key Type-1 Development (trend) Type-2 Development (compact) 70% of Housing Development Near Existing Development 30% of Housing Development in Peripheral Areas Acre Single Family Detached Housing Single Family Attached Housing Multi-Family Housing Manufactured (Mobile) Homes

Type-1 Type-2 70%N 30%P Ac. SFD SFA MF MH

The fiscal impact of residential development is not always negative. Both the trend and compact development scenarios for the Township-A case study resulted in a positive fiscal impact of over $200,000. The trend development scenario for the Township B case study resulted in a positive fiscal impact of $5,718. Under the compact development scenario a negative fiscal impact of $21,934 was found for Township B. The density of the dwelling units per acre factor was slightly increased under scenario II. This is reflected in the dwelling units / acre column, in the scenario II 11


rows of each table. An increase of the density of the dwelling units per acre factor resulted in a slightly less positive fiscal impact for the case study developments, although substantial land savings can be realized.

SUMMARY AND CONCLUSIONS Determining the economic, fiscal and other related impacts of residential development is essential to proper land use and land planning in Michigan. With over a million new residents projected for Michigan in next 20 years, many municipalities will have the opportunity to grow. This research is intended to analyze the financial impact of residential development so communities can prepare for and take advantage of the new opportunities created by the projected growth.

It is essential to consider the full economic impact of a residential development as opposed to simply the fiscal impact. The direct fiscal portion of the economic impact of residential development is only a fraction of the overall economic effect. It is this economic effect that results in hundreds of jobs and millions of dollars recirculated in the local economy. The fiscal impact of residential development varies dramatically from municipality to municipality.

In some cases, residential

development may result in a negative fiscal impact but when the whole economic effect is examined, including the substantial recurring annual economic impact of the new home occupants’ spending, then the negative fiscal impact is offset through positive economic gains and indirect local government revenue. Contrary to prevailing beliefs, the fiscal impact of residential development is not always negative.

As demonstrated in Tables 3A and 3B, three of the four

applications of the ONETOWN model resulted in positive fiscal impacts of residential development.

It is impossible to generalize the fiscal impact of any type of

development to all Michigan municipalities due to the dramatic differences found from community to community. Based on the full economic impact, it can be summarized that residential developments contribute substantially and indefinitely to local economies.

12


ACKNOWLEDGEMENTS The authors would like to acknowledge the funding and other support provided by the Housing Education and Research Center (HERC) at Michigan State University, Michigan Association of Home Builders, and NAHB's Housing Economics Department.

REFERENCE American Farmland Trust (AFT), Is Farmland Protection a Community Investment?, How to Do a Cost of Community Services Study, Northampton, MA, 1993.

Bidwell, Dennis, P., Westphal, J, Ph.D., Wunsch, J., Berton, V., Forging New Protections: Purchasing Development Rights to Save Farmland, American Farmland Trust, Northampton, MA, 1996.

Emrath, Paul, Local Economic Impact of Home Building, Housing Economics, National Association of Home Builders, Washington, DC, 1997.

Michigan Jobs Commission (MJC), www. mjc. state.mi.us, Historic and Projected Population Projections, Lansing, MI, 1997.

Michigan Society of Planning Officials (MSPO), Demographic Trends in Michigan, Lansing, MI, 1997.

Priedeman Crane, Laura, M. M. Manion, K.F. Spieker, A Cost of Community Services Study of Scio Township, Potawatomi Land Trust, Ann Arbor, MI, 1996.

Seidel, A., Syal., M., Norgaard, K., and Solomon, D. (1998).

The Fiscal and

Economic Impact of Housing Development on Michigan Communities, Housing Education and Research Center report, Michigan State University, MI.

13


South East Michigan Council of Governments (SEMCOG), Fiscal Impacts of Alternative Land Development, The Cost of Current Development Versus Compact Growth, Users Manual for the Onetown Model, Rutgers University Center for Urban Policy Research (CUPR), New Brunswick, NJ, 1997.

Dr. Matt Syal serves as a professor and the graduate program director in the Construction Management Program at Michigan State University. He also serves as the research director of the Housing Education and Research Center, a partnership between Michigan State University and the housing industry in Michigan. Dr. Syal received his Ph.D. in Construction Engineering and Management from Penn State University. Prior to joining academic world in 1988, he served as a Vice President and Senior Project Manager for a general contracting firm in the Boston area. Dr Syal has published extensively in his interest areas that include, Construction Project Management, Computer-Integrated Construction Management, International Project Management, and Management aspects of Housing Industry. He was recognized as the National Outstanding Housing Educator of the Year for 1999 by the National Association of Homebuilders. He is a recipient of the Fulbright fellowship to conduct research on Urban Housing in South Asia during 2000-01. Mr. Andrew Seidel received his M.S. degree in Building Construction Management in 1999 from Michigan State University. He is presently working as a senior manager for a company that provides software support and technology-based services to homebuilding and construction industry.

14


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – December 2001, Volume 25. Number 2

Municipal Government Financial Impact on Residential Housing: A Case Study of Single Family Detached Housing. James D. Kennedy Jr. Ph. D.

ABSTRACT Providing affordable housing is a major problem in the United States. Literature appears to support that zoning, impact fees, administrative process and fees, and excessive building codes, have a negative impact on affordable housing. This research focuses on four development issues, which fall within the control of municipal governments and investigates capital improvements, which become municipal property.

The research

concludes that regulatory fees may add 5% to 6% and capital expenditures add another 5% to 7% to the cost of housing.

The research suggests that the development

community accepts only 1.5% of those municipal fees as justified and accepts 4.96% of the capital improvements as reasonable. The research identifies impact fees as: the most reliable research topic, has the most significant impact on housing costs, and reveals that they may retard the number of housing starts per year.

Key Words Local government, zoning, impact fees, building codes

INTRODUCTION Providing affordable housing is a major problem in the United States (Koebel, 1993). The literature supports that municipal fees and municipal regulations have negative impact on affordable housing (Altshuler and Gomez-Ibanez, 1993).

This research

investigates which municipal fees and regulations, which effect housing costs: administration fee, impact fees, zoning interpretations, building codes, other costs. The research further investigates the capital improvements by the development community deeded to the municipality. This research will investigate which municipal fee(s) justify further research and can withstand scientific scrutiny.


This researcher acknowledges the large range in economic values associated with the cost of housing. There is a wide variation between regions within the United States when you analyze land prices, construction costs, and municipal fees and regulations. The variation in land and construction costs is largely due to geographic locations and conditions which affect the supply of land, sources of materials, labor supply, and climates, which effect the construction design (Black, 1990). These variations support the limitation and stratification of this research project. The literature supports the use of case studies since they tend to allow a more accurate analysis of complex characteristics of a population. The housing industry is a complex subject. The use of a case study is further strengthened by the fact that municipal authority is empowered by the state and the variability in the statutes influence municipal impact on housing (Yin, 1989, Seidel, 1978). Literature does support that the proportionality of land to house cost is relevantly consistent across the country (NAHB, 1995; Snyder and Stegman, 1986). This research will not be comparing economic totals of municipal fees because of the external variables (housing prices and land costs), but will measure the ratio effect of municipal fees and capital contributions to housing and the effect on growth rates. The results of this research is not expected to be used to predict future relationships, but should provide insight to the cost of municipal government to housing costs.

It should identify the problems of measuring municipal controls that effect

housing. It will identify the area that appears to be the most reliable to investigate and appears to have a significant impact (Skidmore, 1998, Brueckner, 1990).

This research is restricted to a single subdivision in Cary, North Carolina. The selection of Cary, North Carolina satisfies an enquiry by the local development community (consisting of landowners, developers, builders, and subcontractors dealing within the residential industry). The development community and professional organizations in North Carolina have concerns over the rising costs of municipal fees and increased regulation in Wake and Durham-Orange Counties.

Wake County, which includes

Raleigh and the surrounding cities, has experienced a 42.6% (4.74% annually) increase in population from 1990 to 1998 (US Census, 2000). The characteristics of the town of


Cary, which is adjacent to Raleigh, is considered representative of other like high growth municipalities on the peripheral of high growth metropolitan areas within the United States.

Impact fees Delaney, C. J. (1987) states that impact fees, exactions, and development fees are interchangeable terms. Delaney defines impact fees as “required expenditures imposed on private development in order to obtain regulatory approval to start development. Most legislation dictates that the assessment must be used in support of infrastructure and other social services that are a result of the proposed new development”. The method of paying these fees can be in the form of financial payment to the local government coffers, or in-kind exactions. In-kind exactions may be quite varied, but the developer is required to give some value to the municipality in the form of land donation or capital improvement to the municipality’s infrastructure. The value of the donation or work is considered as payment of the impact fee, in-lieu-of the financial payment (taxes). Rarely is a dedication published, but is negotiated with municipal staff. There is empirical evidence that impact fees increase the cost of housing and impact affordable housing (Snyder and Stegman 1986). Since the cost of housing is a major concern to our society, this research will provide an investigation of local municipalities’ decision to impose impact fees, which is a common practice to limit growth. This research will reveal that municipal officials recognize the inequalities and inefficiencies of using impact fees, yet they continue to use them, since impact fees have the least political resistance (Altshuler and Gomez-Ibanez, 1993). Bergman’s (1974a), research of how industry and municipalities (users of research) use scientific findings quotes “that 50% of users of the research intentionally ignore valid information if it does not fit the prevailing political climate”. Prior studies acknowledge that impact fees affect low income and affordable housing in a negative manner. Research suggests that municipalities could eliminate one of the negative effects by simply exempting low-income housing projects from having to pay impact fees. The question is whether it is politically acceptable for them to do so. The scientific community identifies the social groups, the next generation and the elderly as


being affected the most by impact fees. The next generation is often referred to as “first- and second-time” homebuyers (Blaesser et al, 1990). The next generation is affected by the increase in housing cost, which limits the ability to qualify for housing. The elderly, when desiring to sell their property, may be economically forced to delay the sale as a result of impact fees and increased housing costs (Altshuler and GomezIbanez, 1993). The literature reports that impact fees impact growth and the cost of housing (Altshuler and Gomez-Ibanez, 1993). Skidmore (1998) reports that impact fees retard housing starts by 27%.

Brueckner (1990) reports that impact fees is a regressive form of

financing municipal growth and should only be used in a limited and restricted manner. Brueckner supports property taxes and user fees as primary sources for municipal funding. Delaney (1987) reports when a population increases by 3% per year, as it did in Florida in the 1980s, the region is classified as fast-growth.

Excessive zoning interpretation Excessive zoning interpretation is the second area of focus on local municipal actions that effect housing costs. This involves municipal staff’s decisions during the approval process. A major issue that can affect housing costs is the interpretation of the existing zoning and municipal regulations on a given subdivision.

Municipal administrators’

interpretations of the zoning regulations (ordinances) when evaluating a proposed development often result in the economic loss of property, reducing the number of buildable lots allowed by regulations. This can result in a substantial loss of revenue to a developer and directly affects the cost that must be passed on to the approved number of housing units in the subdivision. It may also cause the developer to select another piece of property on the periphery of the city (Snyder and Stegman, 1986). The results will be revealed in the following Data and Results section.

Administrative Fees The third area of investigation will be, administrative fees. Most municipalities publish their administrative fees and therefore they become easily identifiable by the development community.

The development community accepts most administrative


fees as being reasonable to regulate land development and house construction. These administrative fees cover the actual cost for municipalities to administer and regulate new construction within the municipality’s jurisdiction. They include a) plan review of subdivision tract maps, grading plans, house drawings, and capital improvement drawings; b) building permits for construction of the development phases and house construction

phases;

and

c)

inspections

of

land

development

(infrastructure) and house construction (Seidel, 1978).

construction

The purpose of these

administrative fees is to assure that the housing project meets all governmental regulations prior to starting work and to assure compliance during construction.

In

general, those in the development community consider these acceptable and reasonable if applied properly. An administrative fee is perceived as a minimal cost assessed by municipalities and fees most often included in the A/E permit process (Seidel, 1978).

Excessive building codes and other excessive cost issues Excessive building codes and other excessive costs is the fourth focus of this research. The municipal issues under investigation will be costs imposed on the development community, as a result of municipal ordinances and practices by municipal staff. The development community defines the term excessive building codes as those that require certain construction materials and techniques to be employed, as a result of municipal regulation that exceeds those of national regulations (Seidel, 1978). The increases in construction and development costs not only include labor and material, but also include the interpretation of building inspectors and the number of inspections required to properly regulate the quality of construction. The development community defines the term other excessive costs to include:

Excessive plan review time to

process applications, increased engineering cost due to multiple submittals, performance bonds, time delays for approval, and financial impacts dealing with the cost of money during the development process as well as financing the cost of capital improvements (Seidel, 1978). The results of the case study will be revealed in the Data and Results section.

Muth and Wetzler (1968) report that building codes have a


positive, but relatively low, impact on housing cost and by the findings of FHA, the requirements within the national code(s) is less restrictive than local codes.

Municipal Policies The preceding issues under investigation often are a result of municipal policies, which are politically driven or economically driven.

The literature identifies three primary

reasons why communities implement slow-growth and/or no-growth policies:

1) to

provide, improve, or maintain the municipality’s “infrastructure,” such as utilities and roads, both on and off developer’s properties; 2) to provide or maintain “social services” for the community such as schools, fire, police, and health care; 3) to improve the “quality-of-life,” which is exclusionary and involves such items as open space, parks and recreation, and limiting congestion (Delaney, C. J., 1987). The most common methods for cities to accomplish slow-growth/no-growth is through the implementation of: 1) impact fees to cover infrastructure and social service costs; 2) limiting the number of permits; 3) slowing the approval process of plans and permits; or 4) implementing exclusionary zoning. (Kelly, 1993):

Capital Improvements imposed on the Development Community The research will also investigate the cost of construction for capital improvements performed by the development community, which when completed increase municipal infrastructure or assets. This research will segregate these items as off-site capital improvements and on-site capital improvements. Clark and Evens, (1999), define off-site capital improvements as those costs, which the municipality requires the developer to spend on existing municipal infrastructure. The development community may be required to extend or widen roads, or extend municipal sewer, water, storm, and electrical to the proposed new development. The work and improvement is made to other’s property (municipal property) and is outside of the subdivision’s boundaries.

The cost is born by the development community, which

passes it through to the homebuyer.

The development community feels this is an

expense, which the municipal government should perform or at least reimburse the developer’s cost (Snyder and Stegman, 1986).


Clark and Evens, (1999), define on-site capital improvements as the costs of roads, sidewalks, and utility construction within the subdivision’s property. The improvement to the community is performed to municipal regulation and supervision, and upon completion, is deeded to the municipality. The practice of on-site capital improvements being imposed on developers began in the 1920s, and most of the development community feels this practice is an acceptable cost of doing business (Altshuler and Gomez-Ibanez, 1993). The results of this case study will be discussed in more detail in section, Data and Results section.

PURPOSE OF THE RESEARCH The primary purpose of this research can be simply stated as follows: To investigate the effect of a high growth municipal government’s actions on housing costs.

To

investigate which fees and administrative actions affect the cost of housing the most? To investigate optimal methods to best measure municipal fees’ effect on housing costs. The literature is exhaustive on the primary issues of housing and impact fees and can be briefly summarized as follows:

Impact fees do increase housing costs (Nelson,

1988). An impact fee is a form of regressionary of taxation (Blaesser, 1990). Impact fees have a greater influence over first and second-generation homebuyers than higher priced housing (Altshuler and Gomez-Ibanez, 1993). The development growth rate may be measured by the rate of building permits (Skidmore, 1998). Municipality’s which formally impose policies of no-growth or slow-growth negatively influence the number of housing starts (Altshuler and Gomez-Ibanez, 1993). Confounding variables of sales price, sales velocity, square footage, features, amenities, lot sizes, community preference can be statistically nullified through an elaborate multiple regression model, such as the Hedonic Model used by numerous other studies (Skidmore, 1998, Delaney, 1987). Zoning regulations become a form of exclusionary discrimination imposed by municipal governments (Bergman, 1974).

PROBLEM STATEMENT The problem stated is that, municipal fees and municipal approval of housing development effect affordable housing.

Altshuler and Gomez (1993) report that


municipal leaders’ use of impact fees and zoning interpretations raises the cost of housing; impact fees reduce the number of housing starts per year; zoning reduces the number of buildable lots, which increases the cost of housing; the use of impact fees is a form of regressionary taxation; impact fees and zoning interpretations increase the cost of housing to a point where first and second-generation homebuyers may no longer afford housing in their preferred municipality; the homebuyer must then seek housing on the peripheral of the core municipality, which may be of lower value and fewer services, which contributes to the concept of urban sprawl; municipal leaders may impose formal policies to slow-growth or no-growth, which perhaps is a political philosophy to maintain a perceived quality of life; when the housing market moves outward, the municipalities may receive some relief on portions of their infrastructure (sewer and water), that may negatively increase the impact on traffic and social services without the benefit of personal property tax income (Nelson, 1988). This research concludes that impact fees have a greater impact on housing costs than zoning interpretations by municipal staff; administrative fees, excessive building codes and other municipal forced costs. The research does suggest that as the impact fee ratio increases (impacts fees as a ratio of housing cost), the number of housing starts decline. The next section details the focus of this research which is to analyze the effects of impact fees, zoning interpretations, administrative fees, administrative approval process, excessive building codes and other costs for single-family detached (SFD) housing. The study will measure the cost of one subdivision in Cary, North Carolina from 1997 to 1999. A national homebuilder and municipal records provide the data for this research. The study reveals that there may be a relationship between housing starts and the amount of impact fees.

METHODOLOGY This research is a case study performed on a single municipality, which the development community has classified as a slow-growth/controlled-growth municipality. The municipality has selected impact fees as its source of revenue to pay for infrastructure and to limit growth. The municipality has chosen to slow the development


approval process and by adopting administration policies for housing projects which negatively affect zoning, building codes, i.e. A.D.A, and other excessive costs. The data was obtained by a personal interview with a large builder/developer’s (300 units per year in the Raleigh/Durham area). This researcher interviewed the Area President and his Subdivision Manager.

The data source was provided by the subdivision

drawings, municipal published fees, internal company accounting records, and professional opinions of comparing one municipality’s operations to another, in determining excessive costs and interpretations of regulations by municipalities. The research results will be discussed in detail in the following, data section. research should provide insight into the following:

The

1) Provide insight on which local

municipal fees affect residential housing and need to be investigated. Four categories of municipal costs were investigated and two areas of capital improvements were measured. 2) The study allowed the researcher to identify which categories appeared to have the greatest effect on housing. 3)The study identified which municipal costs lent themselves to optimal retrieval of information and validation of the data. 4) The study resulted in establishing the focus of future research. This research discovered the development community’s schedules, record keeping, and interpretations to be so varied that the difficulty to replicate and validate the data of the excluded components would be an unrealistic task.

The study revealed that the

investigation of impact fees to be the most significant factor and proved to be the most replicable and valid component for future research.

DATA AND RESULTS A case study was performed on a municipality (Town of Cary, NC), the development community had, classified as a slow-growth municipality that had selected impact fees as its primary source of revenue to pay for infrastructure, exclusionary zoning, restrictive zoning interpretations, extended approval process, and excessive building codes as municipal policy to limit growth. Appendixes provide the results of the study including: Summary of Total Municipal Fees (1), Builder/Developer Profile (2), Subdivision Profile (3), Summary of Municipal Published Fees (Administration Fees are taken from here and illustrated in appendix 1, Summary) (4), Zoning Interpretations, (5), Impact Fees (6),


Excessive Building Codes (7), Other Detail sheets (8), Graph of Impact Fees-PopulationNo. of Permits (9). Available upon request.

Data Instrument and Participant The data for this research was obtained by personal interview with one of the large regional builder/development firms (“participant”) working in the Raleigh-Durham region of North Carolina. The firm builds approximately 250 to 300 single-family detached homes per year.

This would be classified as a large builder (NAHB, 1994).

The

representatives of the participant builder were the Area President (25 years within the housing industry) and his Subdivision Manager (15 years in the land development industry). These two managers provided the information on the participant profile and information on the subdivision profile. The information was retrieved from company accounting and from the subdivision’s approved plans. The amount of Impact Fees and Administration Fees were calculated by using published municipal fees times the appropriate unit as provided by the participant who obtained from information from the drawings or invoices paid the municipality from internal accounting records (i.e., acreage, square foot of average house, the number of housing units, lineal foot of road). The effects of Zoning Interpretations where provided by the managers analysis that the municipalities staff reduced the number of lots submitted by the participant’s land planners and engineering consultants by 10 lots. These inclusion of these lots met zoning regulations and municipal regulations. The participant’s managers showed this researcher, internal company records, which placed a financial value for overhead and profit for land and house development at $35,000 per unit (regional range $25,00045,000) (Wake County Census, 2000). The data, for excessive building codes and other excessive costs, were provided from internal records. The determination of what was classified as excessive was identified on the basis of the participants professional experience in the industry and dealing with other area municipalities that do not require the participant to perform the “excessive” tasks.

In summary, the following data is from

a combination of 1) public fees applied to a specific subdivisions quantities and average house sizes, 2) internal accounting records, in the form of invoices, financial cost reports, or projected financial projections, and 3) professional opinions and internal


estimates of cost of construction. The following provides the results of the information obtained from this case study.

Subdivision The subdivision was a 118-lot single-family detached subdivision with an average sales price of $214,000, lot price $34,792 and approximately 2,400 sf of heated floor space. The zoning is considered medium density, R10 CU, Residential, 10,000 sf minimum lot size, Conditional Use.

The parcel consisted of 60.15 acres and was developed

between 1997 and 1999 in three phases with an average lot size of 10,800 sf each (Table 1). The municipal fees affecting residential housing were segregated into four fee categories and two capital improvement categories. The results of the investigation are summarized below and details may be viewed in the following tables. Table 1 Subdivision Profile Description Data Zoned: Medium Density: R10 CU Lots: zoned 128, approved 118 units Acres 60.15 Lot size: 10,800 sf Lot price $34,792 House size 2,400 sf House Price $212,500

Administrative Fees: 1) The subdivision approval process cost $735 ($6/unit) and was paid by the engineering consultant and reimbursed by the developer. The detail of the $735, were determined by applying the municipal fees to work performed by the consultant and illustrated in the summary sheet (Appendix 1 and 4). The participant’s managers identified which tasks had to be performed to obtain city approval.

2.

Inspection fees for the development process were $59,295 ($503/unit). 3. Building Permits cost $67,402 ($571/unit). Were calculated the same way as the subdivision approval process. In summary, the total cost of administrative fees was $127,432; or $1,080 per house; .51% (half of a percent) of the house cost (sales price).


Table 2 Administrative Fees Description Platt recording ($735 total subdivision) Inspection Roads Water & Sewer Site Inspections Tap fees Building Inspections Total ($127,432 total subdivision cost)

Dollar per unit $ 6 503

571 $1,080 0.005 of sales

The Administrative Fees are considered by the development community (the participant’s managers) to be acceptable and insignificant The above fees were not easily obtained, due to the participant’s time restraints, lack of detailed accounting, and consolidation of fees paid by their consultants.

As a result of dealing with the

participating firm and the experience of obtaining data from 8 other firms at the beginning of this research project, leaves this researcher with the conclusion that the development community does not track these costs very closely since they are acceptable and only consist of approximately a 0.005 percent of sales. In conclusion, these costs should be excluded from further research because: of reliability and validity problems in retrieving and analyzing the data; their apparent minimal impact on housing; and the perception from the development community that they are acceptable (Altshuler and Gomez-Ibanez, 1993).

Impact Fees: 1) This municipality imposed a form of an open space fee that they identified as Acreage Fees, based on the gross acreage of the subdivision. amounted to $72,180 ($612/unit) at the time of this subdivision.

This

This fee was

established from an invoice for a specified number of lots and applied to the whole subdivision. It should be noted that this fee has been deleted and replaced with a Utility Development Fee. 2. The Parks and Recreation Fee is another impact fee to pay for city amenities and cost $136,172 ($1154/unit). This fee was paid (invoice provided to researcher for verification) at plat map recording on a negotiated basis with the participant and the fee is shown as a per unit basis. 3. The Environment Permit is based on $150 per acre costing $9,023 ($76/unit). This fee was increased in 1999 to


$165/acre or to $84/unit.(see Appendix 1 and 4).

4) The Transportation Fee was

assessed to handle road and traffic impact and cost $37,170 ($315/unit) in 1997. Since FY 1999, the municipality increased this fee by 3.89 times, which would amount to $151,184 ($1228 per house) if built in 1999. 5). The Utility Development Fee replaced the old “Water and Sewer Infrastructure� fee in FY 1999. This subdivision fell under the prior regulations, which were based on $1600 per acre, and amounted to $96,240 ($816/unit). The new requirements are based on the square footage of house. This size of home, which averages 2400 sf, would cost $359,428 ($3,046/unit). It does eliminate the Acreage Fee, which amounted to a reduction of $72,180; therefore, the net increase is $191,008 ($1619 /unit), which is a 113% increase in city impact fees. 6.) The utility connection fees were $122,720 ($1,040/unit), (see table 3). Table 3 Impact Fees in dollars per housing unit and percent of average house sales. Type Fee 1997 1999 Acreage Fees Park & Recreation. Transportation Environmental Sewer (plant) Water (plant) Connection

$ 612 1,154 315 75 357 459 1,040

$ 0 1,154 1,280 84 1,086 1,960 1,040

Total

$4,013 1.9%

$6,604

3.1%

In conclusion, the total impact fees for this 1977 subdivision amounted to $473,505 ($4,013/unit) or 1.89% of housing costs (sales price). With the 1999 increases in impact fees, this same subdivision would cost $772,192 ($6612/unit) or 3.1% of costs, which is not an acceptable range for lower priced housing. This is an increase of 64.8% in municipal impact fees. These figures do not consider the off-site capital improvements for this subdivision, which amounted to $200,000 of construction costs with no profit or operating expenses ($1,695/unit). The development community therefore considers the true impact fees for this municipality to be $5,708/unit or 2.7% of cost. If constructed in 1999, the impact fees would be $8,307/unit or 3.9% of costs.


Capital Improvements:

1)

Off-site capital improvements amounted to $200,000

($1,695 per house or .8% of cost) worth of road and utility construction to meet municipal requirements to obtain approval of the subdivision. As discussed earlier, the development community considers these as impact fees.

2) On-site capital

improvements amounted to $1,244,714 ($10,548/unit or 4.97% of cost). This is the cost of roads, walkways, and utilities constructed and paid for by the developer, then deeded over to the city as the city’s property. This is the largest single category of cost in this study. This particular builder/developer participant firm contends that this should not be considered a municipal fee, but a cost of doing business (Clarke and Evans, 1999). The literature supports this position since the development community has historically paid for this since the 1920s. In support of the literature, the area manager of this participant firm believes the off-site improvement should be considered as a municipal cost and classified as an impact fee imposed on housing (Clarke and Evans, 1999) (see table 4). Table 4 Capital Improvements Off-Site Improvements: Not Acceptable: $200,000 total $1,696 per unit .8% of sales price On-Site Improvements: Accepted since 1920’s: $1,244,714 $10,548 per unit

4.96% of sales price

The cost records from participating firms are too varied in the method of recording, interpretation, and differing construction conditions. The participants are also reluctant to reveal confidential data.

Since this could not be replicated and validated it is

recommended to exclude them from such further research.

Excessive Zoning: Zoning ordinances were not analyzed in this case study. It is reported by the participant firm and confirmed by municipal ordnances, that the Town of Cary does not have any high-density zoning for single-family housing, nor does it have low-income housing.

The participant firm states that the municipality would only

approve developments with low to medium-density zoning.

The zoning issues

measured in this case study dealt with interpretations and requirements imposed by the


municipal staff, which would lower the number of buildable lots, which current zoning regulations should have allowed. The case study includes municipal zoning regulations, which the participant firm identified as additional costs, which were not market driven, but were solely mandated by municipal zoning regulations. The results of this research imply that zoning issues can be significantly driven by municipal staff mandated decisions or market driven lead to subjective results and therefore supports the exclusion of zoning from further research.

In this pilot study, the participant firm

concluded the additional costs to be approximately $410,694 ($3,480/unit or 1.64% of costs): 1) The subdivision did have to go through rezoning. It took approximately 12 months to obtain subdivision approval, which is considered by the participant to be 6 months longer than the typical approval process. This was further confirmed with a telephone interview of a senior project engineer of a local large civil engineering land planner. The costs were obtained from the participant’s internal records of projected earnings per lot and house sales. The seller of the land had to bear the carrying cost of this delay since the developer had the purchase based on final approval. The city required two highway accesses to the property that created an additional design and construction costs of $45,000.

2) Due to the city planners’ interpretations of local

ordinances and changes, which were made to the submitted (preferred) engineering layout of the subdivision. The changes resulted in the loss of 10 buildable lots, strictly as a result of staff interpretations (interview). The participant firm reported this cost as $350,000 in lost net income due to staff requirements on zoning. 3) The city also requires one 2.5” x 8’ tree per house which amounts to $11,800. 4) They require a high curb, which increases the cost of curb construction, which adds $3,894 in additional curb cut permits which are not required by surrounding municipalities.

The discussion provided this papers Municipal Policies discusses the above costs. The results form this case study reflect the position of the developer’s efforts to maximize the number of units on a parcel of land, in an effort to provide lower priced housing. The case illustrates the municipal staff position to limit density and enhance services that benefit the existing public’s interests. These economic and social issues are widely debated (Altshuler and Gomez-Ibanez, 1993).


Table 5 Excessive Zoning The table reflects dollar costs for the whole development and conversion to unit price. Municipal staff’s interpretations reduce the density of mandated zoning ordinances. Loss of 10 lots $350,000 Increased engineering (excess) 45,000 Tree minimums 11,800 Curb cuts 3,894 Total $410,694 $3,481 per unit 1.64% of cost

In summary, the total impact of zoning interpretations and regulations cost $410,694 ($3,480/unit or 1.64% house cost or 10% of lot price). Although the economic costs are a significant number, this category has been recommended to be excluded from future research due to the difficulty of validation from sources of the data and possible various interpretations by the participants.

Due to the nature and competitiveness of the

housing industry, the development community is reluctant to disclose cost data, and the process of their data collection is not consistent industry-wide.

Excessive Building Code: This section addresses the views of the municipalities where they impose building codes that exceed the Regional Building Codes (Seidel, 1978). In this city, they are considered minimal with the requirement of using standard 6” curb design whereas other cities allow a rolled or valley curb configuration. This adds an additional $33 permit fee for curb cuts, $425 increase in construction cost per home based on an average lot width of 75’. It is also felt that the city requires at least one engineering letter per house and a processing fee that amounts to $133 per house. Termite treatment adds $150 per house. Excessive housing inspections add another $200 per house. This city requires approximately double the inspection calls to obtain approval from house inspectors. The city charges $33 per re-inspection. The norm is 6 inspections total and in the Town of Cary, it takes an average of 12 inspections to go through the inspection process (see table 6).

The results were obtained from the

participant’s interview and those of 4 other firms. The participants provided inspection fee records between the subject municipality and 4 other municipalities in the region. Interpretations of building codes are addressed as having increased construction costs


by as much as 8%, when they exceed the United Building Code or the other National standards (Seidel, 1977). Table 6 Excessive Building Codes. Cost per unit of housing. Formed curb vs. rolled 425 + 33 = $ 458 Additional Engineering Letter 133 Excessive Inspection fees (12-15) 200 Termite treatment interpretations 150 Total ($110,038) $941 per unit

Other Excessive Costs:

Obtaining approval from the Town of Cary’s regulatory

departments takes the developer’s consultants (Engineers/Land Planner) an additional 2 to 3 revisions. What used to be completed in 2 to 3 revisions now totals 4 to 6 submittals to obtain approval of the subdivision. The results were obtained from a telephone interview by the researcher with the participants engineering land planner, who designed and obtained the approval of the subdivision from the municipality. The consultant’s manager contends that the municipal staff in Cary causes an increase in design fees of approximately $300 per house from several of the adjacent municipalities. The core municipality, Raleigh, is the best to deal with and least costly from the subdivision approval process in both costs and processing time. The research did not complete the analysis of financing cost of all the municipal costs they impose on the development community. The results for reasons already discussed would be non supportive. This could be an item for further research by others. Other Excessive Costs should be excluded from future research.

There are too many subjective

opinions and inconsistent data to obtain valid information. Consultants would not want to be identified since they deal with these municipal staff on a daily basis and require their cooperation to obtain approval for their clients (Seidel, 1978) (see table 7). Table 7 Other Excessive Cost Excessive Land Planning Design Consulting fees increased by $300 per unit. Increased time to process application adds 60 days to obtain approval. Financing: Capital improvements Impact fees Approval process delays to holding time


In summary, the costs of Excessive Building Codes illustrated in table 5 and the cost classified as, Other Excessive Cost categories illustrated in table 6, amount to a total cost of $146,438 ($1,241/unit) and .58% of the sales price. The data was collected from professionals within industry, therefore the results may vary between firms and are subject to personal opinions. These factors limit the validity and reliability of these categories, which would support the decision to eliminate them in further research of municipal impact on housing.

CONCLUSION In conclusion, table 7 summarizes the impact on housing costs as a result of total municipal fees and all deeded property to municipalities may attribute $23,097 per housing unit (10.9%) or 66.4% of the lot cost. The total without the on-site capital improvements is $12,549 per housing unit (5%) or 36% of the lot costs. Impact fees without off-site and on-site capital improvements should be the focus of further research when determining the cost of housing fees.

Description Administration fees Building Codes & Other Zoning Interpretations Impact Fees Subtotal all municipal fees for a $212,500 price house

Table 7 Summary Dollar / Unit $1,080 1,241 3,461 6,604 $12,386

Off-site capital improvements add.

$14,081

Assuming a lower income house of: Ratio of total fees to lower income raises to:

$115,000 10.8% to 12.2%

% of Sales .5 % .5 % 1.6 % 3.1% 5.8%

6.6%

This research investigated an upper-middle class subdivision in which the 1997 impact fees costs $4,013 per house, 1.9% of the sales price, and 11.5% of the developed lot price. This municipality increased impact fees in FY1999, which resulted in current fees of $6,612 per house, 3.1% of the sales price and 19% of the lot price. The literature concludes that impact fees are typically based on the number of units and not on the price of the home (Nelson, 1988). Therefore if the same costs were applied using the 1997 fees to the cost of a 1st time homebuyer’s price range of $90,000, the cost of fees


would account for 4.5% of the sales price. The participant firm reports that the selection of the target market of $214,000 was significantly influenced by the cost of impact fees. The higher-priced home could accommodate a 2% impact fee but a lower priced home could not absorb a 4.5% fee. Therefore the developer stop building affordable housing in Cary and went to a higher priced market. He moved his lower income units further out from the Raleigh metropolitan area. When analyzing the housing starts versus population versus impact fee rates, the data revealed that the housing starts dropped 27% when the increased fees imposed in FY 1999 were implemented. The results suggest that the increase of impact fees to 3.1% for the $214,000 house market resulted in the development community seeking other municipalities, even for the higher priced market. Figure 1 Comparison of housing starts-population-municipal fees.

No. of Per

2500

10 0 ,00 0 90 ,0 00 80 ,0 00 70 ,0 00 60 ,0 00 50 ,0 00 40 ,0 00 30 ,0 00 20 ,0 00 10 ,0 00 0

P o p u l a t io n $ 4 ,0 1 3 F e e s

2000 1500

$ 6 ,6 0 4 f e e s

1000

P e r m it s

500

* 0

9 2

0

0

9

8 9 1

9

9

7 1

9

9 1

9 1

9

6

5 9

4 1

9

9

9

3 1

1

9

9

2 9

1 9

9 1

9 1

1

9

9

0

0

P o p u la t

T o w n o f C a r y P e r m it & P o p u la t io n

T im e in y e a rs

The results of this case study suggests the focus for future research be restricted to impact fees and their effect on the development rate in core and peripheral municipalities. The study and literature suggests the greatest impact to be on lowerpriced housing (1st and 2nd time buyers). The data for impact fees is reliable and valid, being obtained from archival public records. The data for impact fees for the study was retrieved from the participant firm’s documents on the subdivision, and then applied to published municipal rates.

The personal interview method requires too much

cooperation from the already over worked development community and relies on sketchy accounting records from the participant. The data accumulated from zoning


interpretations could not be readily or easily duplicated. The data requires interpretation from the participant, varied accounting methods, and the reluctance of the participant to share confidential records.

Description

Table 9 Impact Fees affect Housing Starts? Results

Results

As population grew at

10-13% per year

In 1997 implemented

$4,013

(1.9%) in fees

Housing starts:

dropped 5% and

In 1999 fees increased to

$6,604 or

Population reduced to an 8% increase (3.1%)

Housing starts dropped

27% and

In 1997

$4,013 fees for a $115,000 =

In 1997

Industry changed their product to a $212,000 house

Population reduced to an 5% increase. 3.5% of sales price 1.89 % of sales price

Therefore the only reliable and valid category, which lends itself to future scientific scrutiny, would be impact fees. Omitting the other categories of Administration Fees, Excessive Building Codes and Other Excessive Costs, which all appear to be insignificant and acceptable to the development community. Impact fee data is of public record and is archival information (revenue, populations, building permits, and house sales).

REFERENCES

Altshuler, Alan A, and Gomez-Ibanez, Jose A. 1993. Regulation for Revenue: The Political Economy of Land Use Exceptions, Brookings Institute, Washington DC and Lincoln Institutes of Land Policy, Cambridge, Massachusetts. Bergman, Edward M. 1974. A Policy Guide to Evaluation of Policy Related Research on Development Controls and Housing Costs, National Science Foundation, Washington DC.


Black, J. Thomas. October 1990. Explaining Metropolitan Differences in Residential Land Prices. Urban Land. Blaesser, Brian W. and Kentopp.

1990. Impact Fees:

The Second Generation,

Journal of Urban and Contemporary Law, 38 (25) 55-113 and 64-69. Brueckner, Jan K. 1990. Growth Controls and Land Values in, Land Economics, Vol 66, pp 237-248. Clark, Wes and Evans, Jennifer. 1999. Development Impact Fees and the Acquisition of Infrastructure, Journal of Urban Affairs, 21, 281-288. Delaney, Charles J. 1987. The Price Effect of Impact Fees on New Single-Family Housing: An Empirical Study. Unpublished doctoral dissertation, University of Florida, Gainesville, Florida. Kelly, Eric D.

1993.

Managing Community Growth: Policies, Techniques and

Impacts, Praeger, Westport, CT. Koebel, C. Theodore. and Zappettini, Kristina, E. 1993.

Housing Tenure and

Affordability From 1970-1990: Progress, Stasis, or Retreat?

Housing and

Society, 20, 3, 35-46 National Association of Home Builders (NAHB). 1995. Executive Summary, The Future of Home Building, Home Builders Press, Washington, D.C. National Association of Home Builders. 1994. The Truth About Regulations and the Cost of Housing, Home Builders Press, Washington, D.C. Nelson, Arthur C. (Editor) 1988.

Development Impact Fees: Policy, Rationale,

Practice, Theory and Issues. American Planning Association, Planners Press, Washington, D.C. Seidel, Stephen R. 1978. Housing Costs and Government Regulations: Confronting the Regulatory Maze, The Center for Urban Policy Research, New Brunswick, New Jersey.


Skidmore, Mark.

Fall 1998.

Do Development Impact Fees Reduce the Rate of

Residential Development. Growth and Change, 29, 38-39. Snyder, Thomas P. and Stegman, Michael A.

1986.

Paying for Growth: Using

Development Fees to Finance Infrastructure. University of North Carolina Chapel Hill, Urban Land Institute, Washington D.C. Yin, Robert K. 1989. Case Study Research: Design and Methods. Revised Edition, Sage. Newbury Park, CA.

Dr. Kennedy has 30 years of construction experience in commercial, industrial, and residential development. He has had his own general contraction firm and real estate development firm for 21 years. He retired from construction from 1991 to 2001 and entered academia teaching at Purdue University, East Carolina and University of North Florida. He is currently a regional senior project manager for a multi-family low income and historic preservation contractor in Jacksonville, Florida. Dr. Kennedy holds a BS degree in Business (Oregon State University), Masters (Purdue University), and Ph.D. in Construction Management (Heriot-Watt University, UK). His area of research expertise has been residential and commercial development and the effects of municipal governments impact on construction costs.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – December 2001, Volume 25. Number 2

Achieving Positive Media Relationships For The Construction Industry John W. Adcox Jr., Ed.D. CPC

ABSTRACT This article provides an understanding of the media along with suggestions needed for a positive relationship. Today’s electronic environment requires many contractors to work with the media. Establishing a positive media relationship will benefit the construction industry in many ways. Some of the benefits are: positive attitude of the public toward our profession, an understanding of the complex construction world, an opportunity to interest young people, and accurate media coverage of the construction industry.

Key Words Media, News, Reporters

BACKGROUND Media in this article is defined to include radio and television.

Talking with

reporters requires a basic understanding of their working environment.

Most

reporters are “adrenalin junkies” whose daily lives revolve around non-flexible deadlines. News occurring today will not be current or as valuable tomorrow. Living and working in this intense non-stop environment requires the ability to cut to the basic facts on a long story and condense it to a 10 to 30 second time slot. This process of creating a story that would interest the public in such a short time frame creates a reporter who may often appear to be indifferent, rude, deceiving, or cold hearted. In reality, most reporters are no different than any other hard working individual.

Developing a positive relationship with the media should

begin with an understanding of their working environment as noted above and progress to guidelines with suggested rules as noted below.


SUGGESTED GUIDELINES FOR TEACHING A POSTIVE RELATIONSHIP To deal with the media and establish a positive relationship, the following general guidelines are recommended when teaching media relationships. •

Establish a company policy, which provides a clear procedure for dealing with the media.

Take and return calls to the media as quickly as possible.

When taking a reporter’s call it is acceptable to request a return call to their questions. For example, “ Let me check the facts before I respond” or “ I will call back with an answer to your question, what is your deadline?”

Many times reporter’s deadlines are hourly or even quicker in some instances. Don’t be bullied by their deadlines.

Reporters typically will not allow those interviewed to write their story, questions, or review their final draft.

Avoid playing favorites and alienating reporters.

Be aware of follow up questions and attempt to answer those.

MEDIA UNDERSTANDING FOR CONTRACTORS 1) On complex matters or issues, be sure to prepare a fact sheet or news release. 2) If a construction company has a specific message to get to the public the best chance for it being aired requires: •

Identify and project the message or goal

Be sure the message is delivered early and often

Keep statements short, concise, and complete so no editor can modify it

3) Avoid “ off – the – record” comments. In the event it does occur be sure to have a clear understanding that the reporter agrees to the meaning of “ off – the – record”. •

“Off – the – Record “--- reporter can not use the information


Background --- reporters can use the information but can not name the source

Deep Background --- reporters can use the information but must report it on their own authority

4) If there is a concern that the message is not getting across clearly, ask the reporter for feedback; for example, “What did you hear me say, I’m not sure I’m communicating this correctly “. 5) Never over react to a bad news story, very few people will remember the story in a week. 6) Follow the chain of command when protesting incorrect or bad media coverage. Irate phone calls to the general manager or editor will not help the situation. 7) Think about the visual impact of the message and how it can enhance or detract.

Arrange news conferences with telephones, electric outlets for

cameras and good locations when possible.

RADIO The radio media is great for reaching wide audiences through talk show. If a reporter telephones for an interview, make certain they indicate when the conversation is being recorded for airing. Be sure to ask “ Is this being recorded right now?” or “Please be sure you say when you start taping the conversation”. One golden rule to note is there is no such thing as a dead microphone.

TELEVISION The television media is what the vast majority of people indicate as their primary news source. This is a visual media and pictures are needed to justify the story. Providing pictures will assist in getting a story or message aired. Television reporters love anecdotes and providing something that will be a visual tool to help execute the story will help. This media is the most intense in terms of deadlines, competition, and finite minutes to tell a news story.

Television


reporters must quickly “ turn a story” but don’t let their pressure force a statement that may be regretted later because of lack of thought.

Remember that the

message will be filtered many times prior to airing. “Electronic Moments” are plucked comments created from many minutes of conversation. Plan the message carefully and create quotable quotes that capture the essence of the message.

Note the golden rule again there is no such thing as a dead

microphone.

HOW TO BE INTERVIEWED The first step in any interview is to prepare for it.

Review background data,

obtain the latest facts or information, and try to understand the reporter and their perspective of the story. Be sure to discuss the topic within the organization to synthesize viewpoints and the best approach to clarify the message. If the topic is really critical or controversial consider having the staff do a mock interview. In some situations taping the mock interview will provide insight into the visual appearance and body language. The last step is the actual interview itself. Be truthful and tell it straight. Always be human and if an answer is not known, simply say so.

Don’t embellish or

exaggerate the story. Quote only data and numbers that are accurate. Try to use

simple

abbreviations.

and

straightforward

language,

while

avoiding

jargon

and

Try to exercise control of the interview. Avoid dark sunglasses,

strange clothing or a distracting background during interviews.

Don’t be

surprised if the reporter covers unexpected issues or unanticipated items, and be ready with short, concise answers.

TYPICAL MEDIA SITUATIONS THAT INVOLVE CONTRACTORS WITH SUGGESTED SOLUTIONS Some examples of media situations facing contractors are as follows. ( Listed in priorty order) 1) Accidents on construction sites. Any construction accident, which results in injury or significant visible damage, will be in the headlines. In cases of


death or bodily injury typically an "OSHA" inspector will be on site the same day. 2) Labor disputes on construction sites or company headquarters are fertile headlines for the media to report. 3) Any illegal activity uncovered, such as using illegal aliens on a construction project. 4) Disputes between the owner client and the contractor ranging from shoddy quality work to missed project completion deadlines. These disputes are much more frequent on public work projects such as schools, public buildings, parks, etc. 5) Marketing a construction company or company projects.

In example one above, a procedure should be established indicating who within a company can make statements to the media. Often, the company representative will indicate that a written statement is forthcoming or that company policy prohibits discussion of the accident for investigative reasons. In the event of a death, a clear statement on the accident would typically be expected. Example two becomes newsworthy when the two sides start making inflammatory remarks to the media.

The media will run several days’

coverage if the disagreements continue and statements continue.

A

contractor’s best tool in this instance is short positive comments or no comment at all. Illegal activities of any type will damage a contractor’s reputation and often damages the industry as a whole. Allowing an attorney to answer the media is probably the best solution. In cases of public work projects the media is often used as a method to protect the public entity or individuals. The public sections have expertise dealing with the media and in most circumstances an existing media relationship. Contractors facing this scenio will almost certainly lose reputation and are typically forced to state " no comment" to the media.


Many companies sponsor volunteer activities with the media to promote their companies.

These activities range from working with professional

organizations like the AGC, ABC, NAHB, AIC to Habitat for Humanity work. Such examples provide a good avenue to establish positive relationships with the media.

CONCLUSIONS Working with the media in a positive way makes winners. The high profile nature of the construction industry, from construction accidents to corporate successes, will make media relationships a requirement for every company’s success. The best solution to the media situations is the development of a positive relationship. Teaching

future

construction

managers

a

few

simple

guidelines

and

understanding the media background should prepare those individuals for successful media relationships.

The key points are: •

Have an established procedure on who should talk to the media; what situation dictates specific comments, and a policy on media comments.

Do the homework.

Provide positive answers to questions and make positive comments up front.

Be honest and straightforward. Look at questions from the public point of view and relate to the people.

Have facts straight and present key ideas early in the interview.

Try to give quotable statements.

Give clear examples with colorful language if possible without using in house terms.

When reporters ask several questions try to focus on one main point.

If a reporter interrupts before the question is answered completely, pause and let them finish and the continue answering the question.


If a reporter continues to interrupt, there may be a reason so don’t over talk or run off with the interview.

Always try to be friendly and smile.

If a reporter wants information that can’t be released, simply say “I can’t release that information.”

If reporter asks “ off – the – record “ questions, most of the time it can and will be used.

Don’t be afraid to ask the reporter to repeat the question.

Don’t waste a reporter’s time as they are on a deadline.

If you don’t know an answer to a question, say so, and offer to find out or refer to others.

Never lie to a reporter.

Remember there is no such thing as a dead microphone.

REFERENCES Albarran, A. (1996). Media Economics. Ames, Iowa: Iowa State University Press.

Bell, A. (1991). The Language of News Media. Cambridge, Massachusetts: Basil Blackwell, Ltd.

Chapman, L. (1997), A Media-Smart Marketing Strategy: Developing Story Ideas. Journal of Financial Planning. 10,no.3, 91.

Chesebro, J. & Bertelsen, D. (1996) Analyzing Media. New York: The Guilford Press.

Daniel,c. & Hastings, J. Eds. (2000). Building Successful Relationships between Community Colleges and the Media. San Francisco: Jossey-Bass.

Gozzi, R. (1999). The Power of Metaphor in the Age of Electronic Media. Cresskill, New Jersey: Hampton Press, Inc.


Ladendorff, Marcia, (Sept, 15, 2000). Handouts and discussion from UNF seminar on Media Relationships.

Lemert, J. (1989). Criticizing The Media. Newbury Park, California:

Sage

Publications, Inc.

McLuhan, E. (1998). Electric Language. Toronto: Stoddart Publishing Co. Limited.

Neuzil, M. & Kovarik, W. (1996). Mass Media & Environmental Conflict. Thousand Oaks, California: Sage Publications, Inc.

Orlik, P. (2001). Electronic Media Criticism. Mahwah, New Jersey: Lawrence Eribaum Associates, Inc. Publishers.

Smith, B. (1998). Absolute Talk on the Radio. Media Studies Journal. 12, no. 23, 72.

Sohn, A., Wicks, J., Lacy,S. & Sylvie, G. (1999). Media Management. Mahwah, New Jersey: Lawrence Erlbaum Associates, Publishers.

JOHN W. ADCOX JR., is an associate professor of construction management in the Department of Building Construction at the University of North Florida (UNF). He holds a bachelor and master's degree in industrial education from Mississippi State University and an EdD from the University of Florida in Curriculum and Instruction with a cognate in technical education. Dr. Adcox is a CPC ( no. 086), State of Florida Certified General Contractor and State of Florida Certified Roofing Contractor. His research interests are related to delivering the construction education curriculum at the University level with a focus on estimating.


Over the past 15 years he has authored many articles and presented many papers and currently in the process of writing a University level estimating textbook Dr. Adcox has taught for 28 years construction education from high school building trades to university level construction management courses and served as a department chair and program coordinator for over 10 years. He serves as a construction consultant and was owner, president and CEO of a general contracting business for over for over 30 years.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – December 2001, Volume 25. Number 2

US CONSTRUCTION – AN INDUSTRY PERSPECTIVE Dennis C. Bausman, CPC

ABSTRACT The construction industry has a unique combination of characteristics influencing the delivery of services and the physical product. It is an industry requiring use of the ‘project’ method of delivery to plan, price, organize, and produce a unique facility that generally represents a major long-term investment for an owner who is often acutely involved during production. Though decreasing as a percentage of GDP, the US construction industry is the largest global construction market and one of the largest and most important industries in the US economy. It is often considered a barometer of the nation’s economic health. The USA construction industry is highly competitive and often contractor selection is price-driven in large part because of the difficulty firms have in differentiating their service and/or product. Due to the high risk of production and the competitive nature of the industry, firms often specialize in a particular service and/or product niche resulting in a highly fragmented industry structure. The increasingly competitive environment encourages management to maintain a short-term ‘project-focus’ with organizational resources and efforts directed toward managing project risks and reducing production costs. This has often resulted in contractors reacting to environmental forces, rather than anticipating and proactively positioning their organization to effectively respond to the changing industry environment.

Key Words construction industry, market, financial, economics, and strategy

CHARACTERISTICS OF CONSTRUCTION Many authors and scholars have identified distinctive characteristics of the construction industry and the production method employed to deliver the end


product. Characteristics including the ease of entry and low capital requirements (Cough and Sears, 1994), the practice of competitive tendering for a unique product prior to production (Rwelamila et al., 1997), or the long duration of production (Dalle and Potts, 1999). Others cite the capital goods nature of the product and the forces influencing demand (Male and Stocks, 1991), the use of a ‘temporary’ plant with an uncertain and changing environment for production (Lifson and Shaifer, 1982), or the adhoc cross-functional organization required for delivery of the product (PMI, 1996). While many of these characteristics may be present in other industries, Hillebrandt (1985) submits that the construction industry has four general characteristics that appear in unique combination in the construction industry. They include the physical nature of the product, the method of delivery, the factors determining demand, and the process used to establish price. The final construction product is a unique undertaking for a specific client. It generally represents a major investment for the owner requiring involvement in the production process. The final product is typically large and heavy making centralized production difficult or impossible resulting in geographically dispersed production (Hillebrandt, 1985). The product is produced using “temporary” plants at each project location with actual production often exposed to the ‘elements’ for a large portion of the construction duration. It is labor intensive and during production the workforce is exposed to numerous and changing hazardous conditions. The final product is often technically complex and incorporates a large number of components manufactured in other industries (Dalle and Potts, 1999). The ‘project’ method of delivery is used for production of the end product. The Project Management Institute (PMI) defines a ‘project’ as “a temporary endeavor undertaken to create a unique product or service” (PMI, 1996:4). Stuckenbruck defines a project as “a combination of human and non-human resources pulled together in a temporary organization to achieve a specified purpose” (1981:1). A construction project involves assembling an ad hoc, cross functional group of individuals, from multiple business organizations, who often have differing project


understanding and/or objectives. The organization is assembled specifically for production of a unique final product and disbands upon completion (Lifson and Shaifer, 1982; PMI, 1996). The project method of delivery requires extensive pre-planning and pervasive monitoring and control systems during production. It necessitates frequent communication with multiple individuals and organizations to coordinate production and refine project scope (Lewis, 1997). Hillebrandt (1985) submits that the nature of the product, combined with the delivery method, largely determines the structure of the construction industry. The construction product is generally not a consumable good, but rather a capital good with a long life that represents an investment in facilities or infrastructure (Kavanagh et al., 1978). Demand is heavily influenced by the economic state of the economy and governmental policy (Rwelamila et al., 1997). And fluctuation of demand, coupled with the product’s long life and length of production, has significant implications for the industry (Hillebrandt, 1985). Since each project is unique, price is typically determined in advance specifically for each construction effort. Pricing typically requires cost assembly for a multitude of resources from numerous organizations. Whether by competitive bid, or negotiation, project pricing is often conducted in a highly competitive environment (Gould, 1997).

CONSTRUCTION MARKET The construction industry is one of the largest and most important industries in any national economy and is often considered a barometer of a nation’s economic health (Male and Stocks, 1991). Engineering News Record’s 1998 survey of more than 150 nations worldwide estimated the global construction market in excess of 3.22 trillion US dollars (ENR, 1998). As depicted in Figure 1, the largest market was the US at 20.2% and the six largest national construction markets combined for greater than 60% of the annual construction volume worldwide.


Figure 1 Percentage of Annual Global Construction Volume (ENR 1998)

Other 39%

Brazil 3%

China Germany UK 6% 3% 10%

US 20%

Japan 19%

US Construction Market Economic prosperity is generally associated with a high level of construction spending and conversely, during recessions or an economic slow down construction spending is often depressed (Rwelamila et al., 1997). This relationship between a nation’s economic performance and construction volume was the case during the US recessions of the middle 70’s, early 80’s, and again in 1991. During the 1974/1975 recession the volume of new work in the US declined 1% on an annual basis and in 1991 the decline was 9%. Similarly, in the early 80’s annual growth in new construction volume decreased to approximately 3% after growing by double digits in the late 70’s prior to the recession. The present economic expansion in the US has extended to ten years, the longest in US history (Korman, 2000). During this period the value of new work in current US dollars has increased by 75% from 442 billion in 1990 to 705 billion in 1999 (US Bureau of the Census). With the only exception of the recessions in 74/75 and 90/91 the current value of construction has steadily increased during the past 40 years from 55 billion in 1960 to 705 billion in 1999. However, during this period the annual US construction volume, as a percent of gross domestic product (GDP), has decreased from slightly over 10% of GDP in 1960 to 7.6% in 1999 (see Figure 2).


Figure 2 US Construction Volume as a % of GDP

11.00%

% of GDP

10.00% 9.00% 8.00% 7.00%

19 60 19 63 19 66 19 69 19 72 19 75 19 78 19 81 19 84 19 87 19 90 19 93 19 96 19 99

6.00%

year

US Bureau of the Census

While the general decline of new construction as a percent of GDP has been relatively consistent over the past forty years, as evidenced in Figure 2 there has been a noticeably steep decline during periods of economic recession. This is in large part due to the relationship between public and private work in the US. Private work in the US accounts for approximately 75% (78.2% in 1999) of all new work and during periods of reduced national economic performance private investment is often postponed whereas public expenditures may even be increased to stimulate the economy (Rwelamila et al., 1997). A case in point is the latest recession in 1991 when private construction decreased 13% while public US expenditures increased 2% (US Bureau of the Census). A breakdown of new work from the US Bureau of Census for 1998 is shown in Figure 3. The largest category was residential construction at 294 billion, or fortyfive percent of new work. Almost all (98.5%) of this residential work was for the private sector. The second largest category of work was ‘general building’ at twenty-two percent (22%). The vast majority (81%) of this category was for office, hotels, retail and other commercial work for the private sector with the balance for administrative buildings, prisons, police and fire stations, courthouses, civic centers, and passenger terminals in the public sector. The ‘utilities’ classification, comprising 8% of new work, includes telecommunications, railroads, electric power, gas, and petroleum pipelines. Again, the majority (72%) of this work was for private owners.


Figure 3 Breakdown of New Work in the US (1998)

45%

22% 8%

3%

7%

4%

on se rv . M is c

C

y w H

G

1%

Fa rm

til .

1%

U

6%

H C en .B lg .

5%

In d. Ed u.

R

es .

50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

type of construction

US Bureau of Census:

‘New work’ includes the contractor’s labor, material,

equipment, overhead, and profit, A & E fees, and the owner’s miscellaneous project costs, interest, and taxes paid during construction. Of the total 145 billion spent on new construction for the public sector, more than half (51%) was spent on education and highways (and streets) which combined for 13% of the new work in the US. The two remaining categories of significance are healthcare (HC) expenditures at 3% and industrial construction comprising 5%, of which both are primarily funded by the private sector at 77% and 97% respectively (US Bureau of the Census). The distribution of work over the nine-year period from 1990 to 1998 has been reasonably consistent. The only categories of work exhibiting a noticeably trend are residential construction which increased from a recessionary low of 39.4% of all new work in 1991 to 44.2% in 1998 and industrial construction which decreased from 6.4% of all new work in 1992 to 4.8% in 1998. The other notable trend is an increase in the percentage of private construction from a recessionary low of 72.5% in 1991 to 78.2% of all new work by 1998 (US Bureau of the Census). However, national economic performance and construction statistics and are not necessarily indicative of regional, state, or local performance. A prime example is the state of California during the late 80’s and early 90’s. While the absolute value of national construction decreased 10% from 1989 to 1991 construction in


California fell 50%, and by 1994 when national volume was 17% above its 1989 levels, new work in the state of California was still 48% below its 1989 level (Tulacz, 1994). The summarized national construction data presented also conceals variations and trends in the construction volume of ‘sub-categories’ of work. For example, private sector construction of new hotels and office buildings did not return to 1990 levels of expenditures until 1996 and 1997 respectively while total US construction returned to 1990 levels by 1992, one year after the national economic recession. In addition, private expenditures in electric and gas utilities and public expenditures in education actually increased during the economic slowdown in 1991 (US Bureau of the Census).

Factors Influencing Construction Demand While the most significant impact on new construction work in any locale may be the national, regional, and/or local economic health, a number of other factors influence the level of construction activity (Clough and Sears, 1994). Hillebrandt et al.(1995) purport that in addition to the economy, the other major forces that influence the behavior and performance of the construction industry are governmental policy, social trends, technological changes, and changes brought on by the industry itself. Maloney (1997) classifies the influential external forces as demographic, economic, legal and regulatory, political, social, technology, and the changing customer needs and expectations. Support for these assertions is evidenced in the US market. In 1994 Tulacz noted that several key individuals in the construction industry were concerned that the North American Free Trade Agreement (NAFTA), which relaxed trade barriers between Canada, Mexico, and the US, would lead to a reduction of manufacturing facility construction in the US. It is difficult to isolate the ‘direct’ effect of this change in governmental policy. However, it may not be a coincidence that construction of industrial and manufacturing facilities in 1999 was below 1994 levels while the total current value of ‘all’ new construction in the US increased 36% during this six year period (US Bureau of the Census).


Continued uncertainty over federal funding of healthcare costs limited the scope and development of medical facilities in the 1990’s. During this period, private heath care construction which accounts for 75% of all health care expenditures, essentially remained ‘flat’ (Tulacz, 1995a). Additional forces that can have a national, regional, and/or local impact on construction volume include commodity pricing, currency valuation, (Tulacz, 1995b), federal regulation (Tulacz, 1994), and natural disasters (Krizan, 1995). In 1999 highway and street construction surged 13.1% in part because of increased federal funding created by the passage of TEA 21, a federal funding bill for road improvement raising the level of public expenditures for road work by greater than 40% over 5 years (Krizan et al., 2000). Rwelamila et al.(1997) and Langford and Male (1991) all point to the impact of governmental monetary policy and its resulting influence on the supply of credit for construction expenditures. Small shifts in interest rates can impact development intentions, and often have the greatest impact on residential construction (Chinowsky, 2000). Lending support to this assertion is the 44% reduction in US housing starts when interest rates spiked in the early 80’s. Even the more modest rate increases in early 2000 had the housing industry lowering its expectation of future sales (NAHB, 2000). While there are numerous forces that impact the variability of construction demand, Male and Stocks (1991) argue that most of the variations are experienced in construction sectors and/or locally, rather than at the aggregate level of the industry. The past performance of the US construction industry lends support for this assertion. The frequency and magnitude of the variations exhibited by project type and locale are amplified when compared to the industry as a whole over the past 40 years (US Bureau of the Census).

COMPETITIVE ENVIRONMENT Junnonen classifies the construction industry as a highly competitive, mature industry, with low growth and an expanding level of turbulence (1998). It is an industry where the ‘end product’ is often produced by many separate firms


making it difficult for a contracting entity to differentiate its contribution to the total real estate development process (Yates et al., 1991). These conditions promote keen competition within the industry and encourage contractor selection based heavily upon a firm’s tendered price for the construction product (Weston, 1996).

US Construction Firms The US Bureau of the Census reports there were 1.9 million construction companies in the US as of the turn of the century. Kangari (1987) submits that the large number of contractors in the industry is because of the relative ease of entry. Licensing is not universally required by all states and qualifications for those that do require licensing are generally not considered rigorous. Additionally, the required financial investment is minimal compared to other industries (Clough and Sears, 1994). Others cite dispersed production and method of product delivery as additional primary factors (Male and Stocks, 1991; Kangari, 1987). A testament to the ease of entry is that in 1997, the construction industry had more start-up companies than any other industry in the US (Bureau of the Census). Almost 80% of all contractors in the construction industry are legally organized as sole proprietorship or partnership and 166,000 (9.1%) are owned by minorities or women (US Bureau of the Census). In addition, the vast majority of construction firms are privately held firms. The Construction Financial Managers Association (CFMA) annually conducts a national survey from a population comprising its 6,000 members, Engineering News Record’s listing of contractors with greater than one million in annual revenue, and Dun & Bradstreet’s list of contractors with revenue of greater than twenty-five million. Their survey found 96% of all respondents were privately held companies, 1.7% were public firms, and 2.3% had foreign ownership (CFMA, 1997). Even a majority of the twenty largest construction firms in the US are not publicly traded firms (ENR, 2000).


Market Fragmentation and Niche Focus The US construction market, similar to many construction markets worldwide has no single firm, or small group of companies, with a dominant national market share. The industry is highly fragmented and dominated by a large number of small firms and a small number of large firms (Clough and Sears, 1994, Male and Stocks, 1991). Engineering News Record (ENR) is a construction periodical published by McGraw-Hill that has been covering the US construction industry since 1874. Each year ENR collects data on contract awards and revenue from contractors operating within the US and publishes a “Top 400 Contractor” ranking. This ranking was based upon new contract awards until 1994 when it was shifted to a ranking based upon annual revenue. The contractor rankings developed by ENR provide support for Clough and Sears’ assertion concerning the fragmentation of the US construction market. As shown in Figure 4, in 1999 the largest amount of domestic work performed by any contractor was 0.7% of the 705 billion of new work in the US. The top 20 contractors put-in-place 6.2%, and the top 400 combined for 145 billion, or only 20.6% of all new work. Figure 4 1999 Market Share of the Largest US Contractors

% of US Market

25.0%

20.6%

20.0% 15.0% 10.0% 5.0%

6.2% 0.7%

0.0%

Top 1

Top 20 contractors

Source - ENR 2000

Top 400


Palmer et al. (1995) claims that the construction industry is made up of ‘specialists’ in order to maximize organizational strengths and minimize project risk. Contractors tend to limit their focus to a relatively narrow range of project types (Clough and Sears, 1994; Sommerville, 1995). The US construction market is commonly broken down into a number of categories based upon the ‘type’ of work performed. Clough and Sears (1994) classify the market into four main sectors – residential, building, engineering, and industrial. Engineering News Record (ENR) uses six categories (general building, manufacturing, power, water and sewer, transportation, and hazardous waste) when they collect data for their annual contractor ranking. An examination of the data collected during ENR’s 1999 rankings lends support to Clough, Sears, and Palmer’s assertions, at least concerning the 400 largest contractors operating within the US. Ninety-one percent (91%) of the contractors reported that greater than 50% of their work fell within one of ENR’s six categories, and almost half (49%) indicated that 90% of their work was from a single ‘type’, or category. The degree of specialization extends even further upon examination of the ‘sub-categories’ of a construction type. For example, in ENR’s ‘general building’ category, many contractors reported 100% of their work was residential while others had 93% in healthcare, 70% in warehouse and distribution, or two-thirds of their annual volume in education construction (ENR, 2000). Contractor specialization, or niche focus, is necessary because each type of work

often

requires

substantially

different

equipment,

materials,

labor

composition, supervisory skills, technical expertise, management abilities, corporate support, and/or financial considerations (Cough and Sears, 1994; Eaton, 1999; Male and Stocks, 1991). Eaton (1999) also claims that contractor specialization is necessary for the organization to respond to the increasing sophistication and production demands of current and prospective clients. He notes that when contractors do perform more than one type of work the contractor’s organization is often segmented into specialized business units for each project type.


International Construction Male and Stocks (1991) submit that construction is essentially a domestic industry and Yates et al. (1991) submit that multi-national contractors look to international markets to capitalize on their expertise only when opportunities in their domestic market are low. Support for these assertions is evident in the US construction industry. The combined volume (domestic and international) of construction completed in 1999 by the 400 largest contractors in the US was 175 billion. Of this total revenue 30 billion, or 16.9%, was work performed in international markets. Twenty-two percent (22%) of the top 400 contractors reported that a portion of their revenue was obtained internationally. However, the top 3 engineering and construction (E&C) firms did 57% of the reported international work and the twenty largest contractors combined for 86% of all the international work performed by the Top 400. Only fifteen of the lower 200 contractors performed any international work at all and that volume totaled less than 0.5% of the international work performed by the top 400 (ENR, 2000). Isolating general contractors, or those contractors reporting a majority of their work as ‘general building’, reveals contractors in this category performed less than 5% of the international work completed by the top 400 and international work comprised less than 2% of their annual revenue. International work performed by ENR’s top 400 is largely constructed by E&C contractors operating in the international ‘industrial and petroleum’ market. The method of reporting used by ENR for its rankings however belies the international influence on US contracting. Five of the top 20 firms are actually US subsidiaries of foreign organizations, yet their domestic construction in the US is not reported as international construction in ENR’s rankings. Interestingly, the vast majority of the work constructed by all five of these foreign owned firms in the top 20 falls into the ‘general contracting’ category, a segment of the US contractors with minimal international contracting exposure.


Industry Work Force The construction industry directly employs more than 6.5 million, or 5.8% of the private employment, in the United States (US Bureau of Labor Statistics, 2000). If the production, transportation, and distribution of construction materials and equipment

are

included,

the

industry

employs

directly,

or

indirectly,

approximately 12% of the private workforce (Clough and Sears, 1994). Union representation in the US, at 9.5% of all workers in the private sector, is at its lowest percentage level since the 1940’s. Union membership for the construction workforce in 1998 was at 17.8%, but the percentage of the workforce belonging to a union has also been declining since 1982 (US Bureau of Labor Statistics). Winston (1997) attributes union’s declining membership to a relative increase in construction activity in traditionally non-union regions of the country, discord internally within the unions, and jurisdictional disputes between the 15 building trades representing workers in the construction industry. The Construction Financial Managers Association (CMFA) annually conducts a national survey of construction firms. Fifty-two (52%) of the respondents to their 1999 survey selected ‘shortage of trained field help’ as the number one problem facing the industry, and 82% placed it in the top five. In addition, 12% selected ‘shortage of trained project managers’ as the number one challenge facing the industry with 60% placing this selection in the top five (CMFA, 1999). The shortage of skilled craft laborers and lack of skilled management were two of the top three challenges facing the industry in Fails Management Institutes’ survey in 1997 (Wolfe, 1998). Additionally, CMFA’s surveys for the past several years and an industry study conducted in 1991 under the auspices of the Construction Industry Institute (CII) have yielded similar results (Yates et al., 1991). Tulacz (2000a) submits that the construction industry suffers from an ‘image’ problem. He claims that construction is perceived as the ‘three D’s’ – dirty, dangerous, and dull. To specifically combat this problem and alter student’s perceptions the AGC initiated a campaign in the public schools during the late 90’s called Construction Futures. In spite of these efforts, and the training and educational programs conducted by the unions, ABC, AGC, NCCER, vocational


schools, colleges, and other trade organizations, attracting and retaining construction workers remains an industry challenge (Liska and Piper, 1999). Almost all contractors are suffering from a worker shortage that is likely to persist as long as the present US economic expansion remains in tact (Tulacz, 2000a).

Financial Performance Since most of the US construction firms are privately held, financial data on individual firms and the industry as an aggregate is not readily available. However two organizations, Robert Morris Associates (RMA) and Construction Financial Managers Association (CFMA), regularly gather detailed financial data for their respective constituencies and publish their findings for general consumption. RMA, founded in 1914 to facilitate the flow and interchange of financial data, gathers information for lending and credit risk professionals. RMA collects contractor financial data from over 3000 commercial banks and thrift institutions. CFMA, established in 1981 as a forum for education and construction financial management information, collects financial and organizational ‘benchmarking’ data to support its 6,000 members. Both RMA & CFMA conduct industry surveys and publish results on an annual basis. Table 1 and Table 2 present financial data for “General Contractors – Nonresidential Buildings” that has been extracted from RMA’s annual publications for the ten-year period from 1990 to 1999. RMA categorizes the yearly data based upon constructor annual volume as noted on the top of each section of the table. The average sample size over the ten-year period, for all volume categories combined, was 1,060. Table 1 provides the percentage of profit before income tax based on revenue (%PBT), and Table 2 lists the percentage return on equity (ROE). Apparent from an examination of Table 1 is that contractor profitability, as a percent of volume, is relatively small when compared to other industries (Clough and Sears, 1994). Subtracting a representative tax rate of 35% from RMA’s pretax data, over the ten-year period from 1990 to 1999, the average contractor operated at a net after tax profit of 1.4% of revenue. Even eight years into the


longest economic expansion in US history, the average after tax profitability in 1999 is slightly more than 2%. The construction market remains very competitive even in a robust economy. Table 1 Commercial Contractor Financial Data Source - RMA % Profit Before Income Tax Year 0-1m 1-10m 10-50m > 50m All 1990 3.9% 2.4% 2.0% 2.2% 2.4% 1991 1.0% 2.2% 2.2% 2.0% 2.1% 1992 -0.8% 1.6% 1.6% 2.0% 1.4% 1993 -0.3% 1.4% 1.4% 0.9% 1.2% 1994 3.7% 2.0% 1.1% 0.7% 1.8% 1995 2.8% 2.8% 1.5% 1.6% 2.3% 1996 4.5% 2.4% 2.2% 1.9% 2.4% 1997 3.6% 2.6% 2.4% 2.8% 2.6% 1998 2.8% 2.7% 2.5% 2.3% 2.6% 1999* 8.5% 2.7% 2.4% 2.6% 3.1% 10yr 3.0% 2.3% 1.9% 1.9% 2.2% Ave. * Volume categories are from 0-1m, 5-10m, 10-25m, > 25m, and all Table 2 Commercial Contractor Financial Data Source - RMA % Return on Equity Year 0-1m 1-10m 10-50m > 50m All 1990 16.9% 16.4% 17.8% 23.3% 17.5% 1991 11.6% 14.5% 18.7% 22.1% 16.7% 1992 3.0% 11.2% 13.6% 18.7% 12.2% 1993 6.4% 11.3% 11.4% 12.9% 11.2% 1994 11.3% 12.0% 9.6% 10.5% 11.2% 1995 18.4% 17.5% 14.3% 14.7% 16.8% 1996 13.8% 17.9% 20.4% 21.8% 18.9% 1997 14.8% 17.7% 18.9% 26.8% 19.8% 1998 14.3% 18.9% 23.0% 24.7% 20.8% 1999* 34.8% 18.8% 18.8% 26.7% 21.7% 10yr 14.5% 15.6% 16.7% 20.2% 16.7% Ave. * Volume categories are from 0-1m, 5-10m, 10-25m, > 25m, and all

A continued examination of Table 1 reveals that contractor percent profitability started to decline in 1991 during the latest US recession, and remained depressed until a positive trend developed in 1993. With a reduced supply of new work contractors often cut margins, and their resulting organizational profitability, to retain market share (Hillebrandt and Cannon, 1990). Even though new work in the US returned to 1990 levels by late 1992, the effects of the slowdown lingered


with general contractor profitability not returning to pre-recessionary levels until 1995 or later. A comparison of contractors with revenue of zero to one million to those with greater than 50 million reveals that the smaller contractors exhibited the effects of the recession sooner, but also recovered faster than the larger firms. Once new work margins are reduced it can take months, or years depending on project size and duration, for the financial effect to work its way through a contractor’s financial statements (Jackson, 1999). Another relationship exhibited in Table 1 is that contractor profitability, as a percentage of revenue, decreases as contractor volume (size) increases. The disparity is especially pronounced when comparing contractors having annual volumes of 10 million or greater with contractors having less than 10 million. Jackson (1999) and Milliner (1988) note two primary factors supporting this disparity. Higher volume contractors generally contract for larger projects. Larger projects tend to elevate market awareness and corresponding competition for the work and thereby depress project margins. Secondly, while contractors with higher annual volumes may have relatively higher absolute values of fixed overhead or costs, they tend to have a lower percentage of fixed overhead because there is more volume over which to ‘spread’ their fixed cost. This in turn encourages, or supports, a percent margin reduction on new work. An examination of the data in Table 2 concerning percent return on equity (%ROE) reveals the same basic recessionary effects as exhibited in the %PBT data. Similar to %PBT, the data also points to a relationship between firm size and %ROE, but with a trend opposite that exhibited with %PBT. As firm size increases the %ROE tends to increase. The primary factor influencing this relationship is that larger contractors tend to self-perform less work than smaller contractors. In essence larger contractors function more as “brokers” – subcontracting most of the ‘actual’ work to third parties (Milliner, 1988). Larger contractors that ‘broker’ their work require less investment in ‘plant and equipment’ and often rely on subcontractors and material suppliers for a substantial percent of their short-tern financing requirements. This increases accounts payable as a percentage of liabilities and net worth and a


corresponding relative reduction in equity requirements. As a result larger general contractors are often more highly leveraged. So while %PBT may decrease as contractor size increases, %ROE increases because of the relative reduction in equity invested in the firm (Jackson, 1999; Milliner, 1988). In addition to the correlation between contractor size and profitability CFMA’s annual survey reveals a relationship between contractor ‘type’ and financial performance. Figure 5 - %PBT by Contracting Type, presents data on the %PBT over a 5-year period for three different ‘types’ of contractors: a) ‘Non-Res’; industrial and nonresidential contractors, b) ‘Heavy’; heavy and highway contractors, and c) ‘Spec.’; specialty trades. Combined (‘All’) financial performance is also depicted in addition to the averages over the five-year period from 1995 to 1999. Figure 5 %PBT by Contracting Type Source - RMA

The %PBT disparity is greatest when comparing ‘Non-residential’ (1.7%) constructors with ‘Heavy’ (3.4%) and ‘Specialty Trades’ (3.5%). An examination of RMA’s data categorized by ‘type’ again yields similar relationships. These different financial results by contractor type, or category, can only partially be explained by the variance in average firm size and the traditional amount of selfperform work within each category (Jackson, 1999; Milliner, 1988). In CFMA’s 1999 survey the average volume for ‘Non-residential’ firms at 75 million is close to that of ‘Heavy’ at 70 million, but substantially higher than for ‘Specialty Trades’


at 37 million. Similarly, both ‘Heavy’ and ‘Specialty Trade’ firms traditional selfperform a higher percentage of the work than ‘Non-residential’, yet the average ROE over the same five year period yields mixed results. There are a number of environmental forces and organizational characteristics that are unique to a contracting entity based upon the ‘type’ of work the firm performs (Jackson, 1999).

STRATEGIC ORIENTATION Chinowsky (2000) purports that the increasingly competitive environment of the construction industry encourages management to maintain a short-term ‘projectfocus’ with organizational resources and efforts directed toward managing project risks and reducing production costs. This operational focus, coupled with the industry’s traditional resistance to change (Kavanagh et al., 1978; Clough and Sears, 1994) has often resulted in contractors reacting to environmental forces, rather than anticipating and proactively positioning their organization to effectively respond to the changing external environment of the industry (Hall, 1994).

Strategies Employed CFMA’s respondents to their 1997 survey of the US construction industry lend support to the ‘internal’ orientation of construction organizations. When asked what strategies the respondents were employing to increase organizational performance, the highest percentage of respondents (87%) noted that improving their core operational capabilities was their primary focus. The second most frequent response provided was training (52%), followed by improved safety and risk management (49%), and overhead reductions (31%). While many construction organizations tend to be internally focused, a number of firms are employing strategies with an external orientation. Strategies employed include geographical expansion of existing services (CFMA, 1997), diversification through acquisition or merger (Krizan, 1995), partnering, joint ventures, or strategic alliances (James, 1998; Zinn et al., 1997). Some seek to expand their


contracting methods to include design (Grogan, 2000) and/or facility operation and ownership (Schriener et al., 1995). Still others are altering their selection of project type (Grogan, 1995), pursuing vertical integration to maintain product quality and production control (Talacz, 2000b) or conversely the use of subcontracting to minimize risk and adapt to the variability of demand (Male and Stocks, 1991).

Industry Trends More than a decade ago Milliner (1988) identified some major trends affecting the industry. Those developments included increasing production automation and management technology, expansion of the design build method of project delivery,

increasing

competition,

expanded

firm

promotion

and

market

positioning, decentralization of operations, specialization of services, increased use of subcontracting, increasing scarcity of tradesmen, expanding percentage of renovation, and intensifying governmental regulation. Fails Management Institute (FMI) is an organization that has been providing consulting and professional services to firms in the construction industry since 1953. A review of their recently published “Megatrends Affecting the Construction Industry”, reveals a continuation of many of the same trends noted by Milliner twelve years previous. FMI noted that service, maintenance, and renovation work, which is presently over 50% of industry revenue, is expected to continue to increase. Contractor specialization, or niche focus, will continue to rise in conjunction with efforts to differentiate contractor products and services as competition for all sectors increases. FMI sees “value creation shifting toward the front end (development, financing, design) and the back end (operate, maintain, renovate) while the central component (construction) is being driven to a commodity status” (Hartnett, 2000:1). They note a trend toward customized services and the increased use of partnering to create production ‘value’ chains. “In the past 25 years, the construction industry has seen a remarkable evolution of project delivery systems in response to increasing owner requirements,


urgency of schedules, heightened demands for safety and quality, and the critical necessity of reducing adversity in construction” (Dorsey, 1997:XI). Increasing ownership sophistication and the desire to reduce project time and cost has led to a significant increase in the use of the design-build method of deliver. This trend is so pervasive that both FMI and the Design Build Institute of America predict 50% of all new work in the US by the year 2005 will be delivered by design-build. Even some agencies in the public sector, where work is traditionally awarded based upon open competitive bid, have amended procurement laws to accommodate this method of delivery (McManamy, 1994). Contractors are moving closer to the client and participating in a broader spectrum of construction related services (Hillebrandt and Cannon, 1990). Fails Management Institute also submits that the construction market will experience continued consolidation toward a two tiered market – large national contractors and small local or regional firms. This trend is evidenced in the increasing percentage of new work performed by ENR’s Top 400, a flurry of acquisitions and mergers within the Top 400 (Tulacz, 2000a), and the recent consolidation of more than fifty subcontractors to create the largest specialty contracting firm in the US (Korman, 1999). In addition, information technologies are continuing to change the way contractors, designers, and owners communicate, control, and approach the entire capital development process (Chinowsky, 2000). Technology is expected to improve communication, generate cost savings, and reduce production duration while at the same time widen the gap between the industry’s high-tech users and those organizations resisting the innovative and strategic changes being experienced by the industry (ENR, 1999).

SUMMARY Construction is an industry that delivers a unique and complex final product. The distinctiveness of the product largely precludes mass production resulting in a highly individualistic and complex production environment (Peurifoy, 1985). Production methods and techniques are rarely proprietary and the workforce is


highly mobile. Due to the nature of the product, firms have difficulty differentiating themselves from competitors by other than the initial price of production (Langford and Male, 1991). And price, which is uniquely determined for each final product, has less influence on demand than the overall health of the economy (Skitmore, 1989). The US construction industry is the largest national market for new construction worldwide (ENR, 1998). It is a relatively ‘open’ construction market that is competitive and highly fragmented. To mitigate production risk, increase differentiation, and respond to increasing client demands firms typically specialize by type of construction and the services they provide (Eaton, 1999). Even though the US construction industry is a mature, low growth industry with a comparatively well-known and established technology, the industry can be characterized as unstable and with an ‘expanding level of turbulence’ (Junnonen, 1998). The competitiveness of the industry, changing technology, and shifting consumer demands continue to encourage contractors to effectively develop and deploy new tactical and long-term strategies for contract procurement and product or service delivery (Rwelamila et al., 1997; Eaton, 1999). Due to the competitiveness of the industry, and the difficulty of influencing demand, these strategies typically are internally focused toward increasing the effectiveness and efficiency of production and/or tempering business risk (Palmer et al., 1995). External strategies, when employed, often revolve around diversification of services and geographical considerations (CFMA, 1997).

REFERENCES Chinowsky, Paul S. (2000) Strategic corporate management for engineering, Oxford University Press, NY Clough, Richard H. and Sears, Glenn A. (1994) Construction Contracting, John Wiley & Sons, NY Construction

Financial

Management

Association

(1997)

CMFA's

1997

Construction Industry Annual Financial Survey, CMFA, Princeton, NJ Construction

Financial

Management

Association

(1999)

CMFA'a

1999


construction industry annual financial survey, CMFA, Princeton, NJ Dalle, Gaetan and Potts, Keith (1999) Joint ventures in the construction industry, University of Wolverhampton, RICS Research Foundation Dorsey, Robert W. (1997) Project Delivery Systems, Associated General Contractors, NY Eaton, David (1999) The temporal development of a competitive advantage hierarchy within the construction industry, University of Salford, Cobra (RICS), London ENR (1998) “World Market Overview,” Engineering News Record, Dec 7, 41-45 ENR (1999) “Technology,” Engineering News Record, May 24, 54 ENR (2000) “The top 400 contractors (1999),” Engineering News Record, May 22, 81-135 Gould, Frederick E. (1997) Managing the construction process: estimating, scheduling, and project control, Prentice-Hall, NJ Grogan, Tim (1995) “Builders flourish with recovery,” Engineering News Record, May 22, 70 Grogan, Tim (2000) “Builders post double-digit growth for the fourth consecutive year,” Engineering News Record, May 22, 127-128 Hall, G. (1994) “Factors distinguishing survivors form failures amongst small firms in the UK construction sector ,” Journal of Management Studies, 31:5, Sept, 737-760 Hartnett, Shelly (2000) Megatrends affecting the construction industry, Fails Management Institute, construction education.com Hillebrandt, P.M. and Cannon, J. (1990) The modern construction firm, Macmillan, London Hillebrandt, P.M., Cannon, J., Lansley, P. (1995) The construction company in and out of recession, Engineering and Physical Science Research Council Hillebrandt, Patricia M. (1985) Economic theory and the construction industry, Macmillan, London Jackson, Jerry (1999) “Getting from here to there: Strategies for subcontractors,” Fails Management Institute, fminet.com


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Dennis Bausman is a lecturer in the Department of Construction Science and Management at Clemson University. He also teaches at the NCCER Project Manager Academy and has attained a CPC certification. He has extensive industry experience and serves on the Panel of Neutrals for the American Arbitration Association.

The American Professional Constructor December 2001, Volume 25 Number 2  

The Professional Constructor is a refereed journal published two times a year by the American Institute of Constructors (AIC). The AIC's mi...