THE EFFECTS OF CYCLICAL CONSTRUCTION DEMAND ON THE PERFORMANCE AND OPERATION OF CONSTRUCTION FIRMS

This study consists of two separate but complementary parts. The first part employs the Lau-Yotopoulos model to study the impact of cyclical construction demand on the production efficiency of various types of construction firms. The Lau-Yotopoulos model is built upon McFadden's restricted profit function using the Theory of Duality. The model is modified so that the relative efficiency of the same type of firm in different time periods can be compared. Extensions are developed to enable the model to study construction firms. A direct test of relative technical efficiency is also introduced.

The second part of the study investigates the impact of operational variables on the performance of construction firms in different output demand conditions. A performance index is devised to measure a firm's relative market performance in a given time period. The Step-wise regression technique is used to model the relationships between operational variables and the performance index.

Ten interviews with senior construction executives were conducted to provide practical insights on this research problem and to guide the development of the above models. The data for these models were collected directly from non-residential building construction firms in the Greater Boston area for 1982 (economic good time for the building industry) and 1977 (bad time) by mail questionnaire survey.

The research found that the construction firms in general were both economically and technically less efficient during the good time. However, they could maximize profits under both demand conditions. The union firms were always more technically efficient than the open-shop firms. Nonetheless, due to the higher union wage rates, the union firms were only equally competitive with open-shop firms in the good time. In the bad time, the union firms, particularly the small ones were less competitive.

The operational variables which have significant impact on a firm's relative market performance include: (1) efforts in planning and control; (2) control at firm level; (3) effectiveness of project planning and control; (4) efforts in marketing; (5) effectiveness of marketing; (6) subcontracting; (7) long range planning; (8) safety; (9) geographic diversification; (10) technological competence; and (11) union/open shop construction. Not all of these variables are significant for every construction firm at all times. Methods for improving contractor's performance in cyclical business environments are recommended.