Term Paper: Subcontracting in the Construction Industry Today

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¶ … Subcontracting in the Construction Industry Today

The vast majority of the operations connected with the construction of buildings and public works are carried out by various companies, an important category of which is the construction firm or contractor. The management of the general contractor function is particularly important because, following the design, the contractor is responsible for giving shape to the end product; furthermore, the construction process includes features that complicate its management, such as labor-intensivity, handling and storage of large amounts of bulky materials, difficult site conditions, and tasks of coordination of materials and subcontractors (Sebestyen, 1999).

In addition, the construction industry is different from virtually all other types because of the structure of the industry itself. For example, in sharp contrast to other industries where the design, construction and marketing of a product are handled by one company, construction contractors are presented with the end result of the planning and marketing process with alternatives existing only as to how the work will be accomplished. In this regard, Bosch and Phillips (2002) emphasize that, "The idea of the building has been sold to the customer before the construction contractor bids on the project. Moreover, the winning general contractor does not even make most of the contracted product. That is subcontracted out to others" (p. 9). As these authors and empirical observations confirm, general contractors in some cases will be "pushing actual construction work down towards subcontractors while at the same time attempting to obtain some of the work associated with the design or engineering of the project. All the while, the project manager may be attempting to assume some of the site management work traditionally associated with the general contractor" (Bosch & Phillips, 2002, p. 9). As a result, the construction industry today represents a moving target of sorts concerning who does what on the construction site: "The relative roles of consumer, designer, manager, and 'constructor' are constantly shifting. This constant evolution of structure is both a source of and an attempted - if temporary - solution to the ever-present turbulence of this industry" (Bosch & Phillips, 2002, p. 9).

This ubiquitous turbulence may be part and parcel of the construction industry today, but it is not particularly conducive to the efficient management of construction projects. Furthermore, there remains a paucity of timely guidance for construction contractors concerning the most advantageous approaches to subcontracting. According to Dulung and Pheng (2005), "Main contractors need subcontractors with good caliber and appropriate resources to execute the work at a fair price and high quality. Therefore, there is a need to develop an advanced decision tool to undertake this selection process in a more formal way" (p. 93). To this end, and to help determine when and what components of a given construction project should be subcontracted out in a given construction project setting, this study was guided by the following research questions:

What are the considerations that a construction company should use to determine what work will be contracted out and what work should be retained and completed by the construction company itself?

Is the use of subcontractors always the most effective approach?

Research Findings and Discussion

As noted above, the construction industry is different from most other types of industry; therefore, management theories intended to help manufacturing managers are applicable to construction to only a limited degree (Sebestyen, 1998). Furthermore, given the fundamental changes that have taken place in the industry in recent decades, today is not even possible to consider the construction industry as being one homogeneous economic sector. In this regard, Sebestyen (1998) emphasizes that, the constituent enterprises of the construction industry today differ in terms of size and professional character, and their managements must also conform to varying characteristics. "Large companies experience most of the problems," the author advises, "although it is quite justifiable to consider the management problems of small and medium-size firms" (Sebestyen, 1998, p. 248).

Many larger contractors may have some commonalities with their manufacturing counterparts in other industries in that they share with their industrial counterparts a linear staff and a functional staff; cooperation between the two types of staff can be organized along the military system of general staff and linear subordination, or by the so-called "matrix management method" characterized by the dual structure of project managers and functional divisions (Sebestyen, 1998). Whatever management framework is used, large (and successful) construction contractors share some commonalities that can be defined by the following five features:

They are diversified;

Management, not fixed assets, is their main scarce resource;

They have low fixed assets;

They have a positive cash flow; and,

They subcontract extensively (Sebestyen, 1998, p. 248)

It has also been determined that a majority of large construction contractors undertake various types of projects such as housing, property development, production of building materials and components, and frequently non-construction activities as well, that will influence their decision whether to subcontract a particular component of a job or not (Sebestyen, 1998). This decision will also relate to the relative size of the contractor and any subcontractors involved, but this is not necessarily a make-or-break factor. In fact, it is not unusual for construction subcontractors to range from the very small to the same size as the construction contractor (or even larger in some cases), and the choice of which company is best suited for a particular job depends on a number of factors that can spell the difference between success and failure.

For example, in their study, "Factors Influencing the Selection of Subcontractors in Refurbishment Works," Dulung and Pheng (2005) report that, "Refurbishment projects differ from new build projects, the former are perceived to be more difficult to manage than new build projects" (p. 93). These types of projects may require the extensive use of subcontracting because, "Subcontractors perform vital roles in these projects" (Dulung & Pheng, 2005, p. 93). If managed improperly, though, contractors may lose time, money and credibility because of problems that result from a poor choice of subcontractor:

Time and cost over-runs, and contractual disputes are common in these projects because of the improper selection of subcontractors. Currently, however, there is a lack of knowledge relating to the selection of subcontractors for building refurbishment projects" (emphasis added) (p. 93).

Complicating the issue of whether to subcontract or complete a given component of a construction project in-house is the wide array and sizes of businesses structures used throughout the construction industry today. According to Finkel (1997), "Construction firms appear as a mind-boggling array of different-sized units of capital. Proverbial mom-and-pop shops are typical participants in alteration and small-scale building projects. In these situations the employer is often estimator, expediter, and installer while family members work as bookkeepers and occasional helpers" (p. 33).

From a purely pragmatic perspective, using subcontractors to augment the core competencies of the contractor just makes good sense in many cases because of the specialty areas involved in a major construction project as Finkel (1997) emphasizes, "It is not difficult to get a sense of the fragmentation of the construction industry. A walk down a busy big-city block where buildings are under construction is usually very revealing. Multimillion-dollar structures are erected by large-volume contractors only a few yards from small-scale projects that are handled by one- or two-person shops" (p. 32). A survey of 135 construction contractors by Dulung and Pheng (2005) identified the following trends and common practices for subcontracting:

Almost all of the respondents (89%) had a pool of subcontractors from which the firms regularly selected to carry out the subcontracting works;

Although they maintained the subcontracting pool, these contractors also considered new subcontractors from time to keep up with the competition;

More than 50% of the respondents indicated that they have a written policy to serve as a guidance in the subcontractor selection process; however, fully 86% of the respondents answered that they did not employ a specific computer tool to support data processing for the selection of subcontractors;

Almost three-quarters (71%) of the respondents used a group decision-making process that was based on informal discussion, experience and intuition to select subcontractors; and,

The decision for the selection of subcontractors was mainly produced manually and decided from more than one decision maker; because a majority of the respondents did not utilize a special decision support system, they made decisions through unstructured and unsystematic ways, and consequently, the decisions made may be ineffective and inconsistent (Dulung & Pheng, 2005).

The salient findings from the Dulung and Pheng (2005) study are illustrated graphically in Figure 1 below.

Figure 1. Percentage of surveyed construction firms using various subcontractor selection methods.

As can be clearly seen from Figure 1 above, a majority of the construction contractors surveyed by Dulung and Pheng recognized the ongoing need for selecting appropriate subcontractors for a given project and a majority of them even had written policies in place to help guide the process, but there remains a dearth of computer-assisted applications used for this purpose and the decision-making process has suffered as a result.… [END OF PREVIEW]

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