FACULTY OF ARCHITECTURE, PLANNING, AND SURVEYING

DQS 236
CONSTRUCTION ECONOMICS I
PREPARED FOR :
MADAM SITI SARAH BINTI MAT ISA
NAME

NO ID

AHMAD ZAFRI BIN AHMAD SABRI

MUHAMMAD AIZUDDIN BIN ZAKARIA

AAP1143C
2013588273

MUHAMAMAD TASNIM BIN

KAMARUDDIN
MUHAMMAD ZULHILMI BIN ZAKARIA

GROUP

AAP1143C
AAP1143C

2013581735

AAP1143C

CONTENT
1

No.

Content

Page

1.

Introduction

2.

Question A

4-5

3.

Question B

4.

Question C

7-8

5.

Question D

9-10

6.

Conclusion

11

7.

References

12

INTRODUCTION

In order to answer this question, it is important to know and understand the

characteristics of the construction industry itself. The construction industry
has its own characteristics and qualities that make it distinct from other
industries. A construction is unique and involves many different parties.
Hence, it is only right that emphasis is given to the construction
characteristics that differentiate this industry from other industries in the
national economy
Among the main characteristics of construction are:
a)
b)
c)
d)

Physical condition of product

Industrial structure and organisation of construction process
Determination of demand
Method in determining price

QUESTION A

Explain the characteristics of construction industry and describe

differences of the construction industry products compared to the
products of other industries (30m)
DEFINITION
Construction is constructing, altering, erecting, repairing, and demolishing
building, civil engineering, works, and other similar structure. It also
contains assembly and installation on site of prefabricated component and
building engineering services. Building a house, repairing a road,
demolishing dams, erecting bridge, etc are an example of constructions.
Industry is a group of related economic classified in accordance with the
output or services supplied. Thus, construction industry is a sector of
economic activity which erect, alter, repair, and demolish a building, civil
engineering works, and other similar structures.
CHARACTERISCTICS
Characteristics of construction industry can divide by its features of output,
its size, government as a main client, nature of demand for construction
output, nature of construction work, variety of construction technology, and
structure of industry.
Feature of construction output are durable or long lasting output such as
house, building, road, etc large and heavy units, unique, immobile, complex
process, and expensive. Construction industry is capital goods industry. It
also requires other industries to support them and contributes gross
domestic product of the country. Many worker are required by construction
industry. The main client of construction industry is a government regarding
to their policy in infrastructure development. Demand of construction is in
various types and sizes. There will be different locations, different resources,
different inputs and different stages of their process.
There are
discontinuities and uncertainties in demand pattern.
Construction industry needs a lot of worker with many level such as skilled
labor or unskilled labor. People imagine construction industry as dirty job as
well as dangerous jobs. Even some said the construction industry is
unatrractive job, but i would say this is the attractive job and lot of money
especially in off shore construction industry such as drilling, piping, and
dredging. The development of construction industry grows rapidly as well as
triangle connection between cost, quality, and time to improve benefits.
There are a lot of firm in small scale to big scale in construction industry and
it is ease to enter in construction industry. Just supply cement to the building
construction, it can say that we just enter construction industry.

Physical condition of product

-Building product is ordered in advanced
-Building product is different in terms of design,size,specification and its enduse.The end product is large ,heavy and costly. It also has a long life span.
-Geographically the construction product is needed all over the place as
majority of the client are single individuals.
-Most of building components are produced by other industries.
Industrial structure and organisation of construction process
-As construction components are largely produced by other industries, the
characteristics of product produced will influence the structure of the
industry. This includes the size and number contractual organizations, the
separation of design and construction, methods of construction and
installation and others.
-Many parties and organisation are involved in the construction industry from
the inception until the building is handed over to the client. Each new project
involves different design and construction.
Determination of demand
-The demand for construction industry is the construction product o the
building itself. The demand for the industry can be divided into whether the
building is used by the client or for the investment purposes. Demand for the
purposes of investment is used as:

A place to manufacture products factories, offices

Addition or improvements to national infrastructure highways,
reservoirs, airports
Social and welfare investments hospitals, community halls, schools
Investment for comfort houses

-The factors that determine the above demands are different and need varied
analysis. The government also plays an important role in determining these
demands which in turn will affect future demands. This is because the
government is the main client in the construction industry and the
government initiates most constructions projects.
Method in determining price
-The price fixed by the client on the building product varies and is influenced
by various factors. Some of the main factors that influence the price of a

building are land cost, infrastructure and construction cost, preliminary cost,
finance cost and taxes, contingency cost and others
-One of the ways used to determine the price is to use the measurement
method based on the SMM or to use the reimbursement cost method. In the
first method, the contractor will be paid based on the quantity of work done.
However, in the second method, the contractor is paid based on the actual
cost of materials, labour and plant used including an agreed amount to cover
profit and management.

QUESTION B
Using appropriate example , explain in detail how monetary policy
and fiscal policy can help stimulate the national economy
Monetary Policy vs Fiscal Policy
The aims of fiscal and monetary policy are similar. They are both used to:

keep inflation low (inflation target of 2%)

maintain positive economic growth (close to long run trend rate of
2.5%)

aim for full employment

The principle aim of fiscal and monetary policy is to reduce cyclical

fluctuations in the economic cycle. Often it is inflation targeting which is
stressed most for monetary policy.

Fiscal Policy involves changing government spending and taxation. It

involves a shift in the governments budget position. e.g. Expansionary fiscal
policy involves tax cuts, higher government spending and a bigger budget
deficit.
Monetary policy involves influencing the demand and supply of money,
primarily though the use of interest rates. It can also involves unorthodox
policies such as open market operations and quantitative easing.

QUESTION C
The fluctuation of the national economy in the recent years has
given a huge impact to the construction industry. Describe how this
has affected of the supply and demand of the construction
materials.
The current financial and economic crisis has affected many sectors, and also
the construction sector. The construction market has been and will be an
important source of income for the entire Europe, totaling about 1.650
thousand billion euro, which is more than the GDP of Italy. Building no doubt
brings significant percentage in the GDP of any European country, which of
course is different from country to country. In Western European countries,
the residential market is almost 50% from the construction market, while in
Eastern European countries the majority is held by the civil and
nonresidential constructions. In addition, in the West the medium budget per
capita spent on construction is 3-4 times higher than that spent in Eastern
countries. But, according to previsions in the coming years the countries that
will witness a growth, albeit small, will be the Eastern ones. The paper
highlights the impact of the economic and financial crisis in the construction
industry on a European and national level, as the sustainable constructions
that may represent the sectors future.
Economic fluctuations are fact of life. All countries have suffered from these,
though the booms and busts have not always synchronized across countries,
and neither the length nor the amplitude have been uniform. Tables 1-3
provide the time series data on the three most significant macro-economic
variables (viz. growth rate, unemployment rate and inflation rate) for the
select countries, including India, China, Malaysia, the G-7 countries and the
world. The average growth rate in these countries during the last about 40
years (1964-1997) has fluctuated between the low of 2.3% in UK and the
high of 9.2% in China, with the standard deviations of 2.2% and 6.7%,
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respectively. For the world as a whole, while the average growth rate during
the said period stood at 3.7%, the standard deviation of that turned out to be
1.4%, giving a coefficient of variation of 38%. These indicate a fairly high
degree of volatility both over space and time.
These reveal that,among the countries included in the graphs, the maximum
fluctuations in the growth rate were in China, in the unemployment rate in
UK, and in the inflation rate in India. In India, the drought of 1979-80 ( when
the agriculture output fell by 12%) left that year the worst with a negative
growth rate of 6% and the mild reforms induced prosperity (when industrial
output went up by 9.6%, and finance, insurance, real estate and business
services' output was up by 11.4%) of the second half of the 1980s took the
growth rate to its peak rate of around 10% in 1988-89. Some striking
examples of extreme fluctuations in the globe are cited below.
a. The Great Depression of 1929-33 was fairly wide spread across all
countries. During these four years, the GDP fell by about 29% in USA, 22% in
Australia, 18% in Czechoslovakia, 16% in Germany, 11% in Each of France
and Hungary, 9% in Sweden, 6% in U.K., and so on. The unemployment rates
were high accordingly and most countries had experienced fairly high rates
of deflation.
b. The hyper- inflation (inflation over 1000%/year) plagued several European
countries, including Germany, Hungary, Austria and Poland, during the 1920s
and again Hungary during August 1945 to July 1946. Several Latin American
countries, including Argentina, Bolivia, Brazil, Nicaragua, Peru and Ukraine,
have suffered from this disease during the 1980s and 1990s.
c. The stagflation during 1974-75 and 1979-82 was fairly wide spread
through out the world. As the data in Tables 1 and 2 would reveal, the growth
rate in the world output fell monotonously from 5.8% in 1973 to 0.7% in
1975, and from 4.1% in 1978 to 0.4% in 1982. The world inflation rate stood
at the two digit levels in all these years. Several countries including USA and
U.K. had experienced negative growth rates in most of these years, and the
rest had lower than their respective trend rates in all these years. Most of the
countries had suffered a two-digit inflation rate or a high one-digit rate.
d. The fast growing prosperity was witnessed in Japan during the 1950s and
1960s. The Japanese economy is currently suffering from recession for over a
decade. China had experienced a relatively high growth rate (two-digit level)
during the most of the 1960s (barring 1967, when she had the worst
recession), and the 1980s and 1990s. USA suffered the worst recession after
the Great Depression during 1979-82 but has performed reasonably well
during the most of the 1990s. India has had a negative growth rate in 195657, 1964-65, 1972-73, and 1979-80 (maximum at - 6.0%), and a maximum
8

growth rate of about 10% in 1988-89. Most of the South East Asian nations
have achieved high growth rates during 1986 through 1996 until they were
caught up by the recent financial crisis. The business cycles are found in
Europe as well, as the growth rates in those countries were either negative
or low during the periods of stagflation (1974-75, 1979-82) as well as the
early 1990s, and better in most other years. African countries and Latin
American countries have witnessed even worse cycles. The world recorded
the highest growth rate at 6.2% in 1964 and the lowest at 0.4% in 1982. In
general, the 1980s and 1990s have been the decades of a relatively good
performance in most countries.

QUESTION D
Explain GST and elaborate the benefits of GST implementation and
also the impacts of GST to our national economy and to construction
industry

GST (Goods & Services Tax), which is also known as VAT or the value added
tax in many countries is a multi-stage consumption tax on goods and
services.
GST is levied on the supply of goods and services at each stages of the
supply chain from the supplier up to the retail stage of the distribution. Even
though GST is imposed at each level of the supply chain, the tax element
does not become part of the cost of the product because GST paid on the
business inputs is claimable.
Hence, it does not matter how many stages where a particular good and
service goes through the supply chain because the input tax incurred at the
previous stage is always deducted by the businesses at the next in the
supply chain.
9

GST is a broad based consumption tax covering all sectors of the economy
i.e all goods and services made in Malaysia including imports except specific
goods and services which are categorized under zero rated supply and
exempt supply orders as determined by the Minister of Finance and
published in the Gazette.
The basic fundamental of GST is it's self-policing features which allow the
businesses to claim their input tax credit by way of automatic deduction in
their accounting system. This eases the administrative procedures on the
part of businesses and the Government. Thus, the Government's delivery
system will be further enhanced.

The
benefits
of
of
GST
implementation
are
the
the
suppliers,manufacturers,wholesalers and retailers are able to recover GST
incurred on inputs. This reduces the cost of doing business, thus enabling
fairer prices for consumers.
Certain basic goods and services are not subject to GST for socio-economic
objectives. These include basic foods, residential accommodation, education,
health services, public transportation, and domestic consumption of water
supply and electricity up to a certain limit.

The impacts of GST to our national economy r below. For example, there will
be a positive impact on the economy due to the following:

(i)

Reduction in business costs:

(a)

Special schemes to alleviate cash flow problems

(b)

Credit offset mechanism

(c)

Can claim the input tax due based on the invoice produced

(ii)

Lead to more competitive pricing

(iii)

Makes our export more competitive as exports are to be zero-rated

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(iv)

Increase in Gross Domestic Product

(v)

Reduce shadow economy activities

(vi) It is a tool to manage the economy eg tourist refund scheme is

proposed as a means to boost the tourism industry and tourism spending in
the country, exports are zero-rated to make our goods more competitive
globally.
There might not be a reduction in consumption due to:

(i)

Prices of certain goods and services might be lower

(ii)
Change in consumption pattern. GST works on the affordability
concept. Consumers have to decide on which goods or services to buy and
GST is only incurred when the goods or services are consumed. They may
divert more of their expenses towards essential goods and services rather
than on luxury goods
(iii)

A lot of basic necessities are not subject to GST

(iv)

GST is a replacement tax

(v)

Input tax credit mechanism should reduce business cost.

The impacts of implemented of GST to the construction industry are the land
owners are expected to start charging six per cent to the developers. Under
the current situation, developers will allocate certain units to land owners as
part of the venture. The GST registration turnover threshold will be
RM500,000.

CONCLUSION
Traditionally , the words development and construction usually refer to
development and construction activities and only involve development and
construction parties as the contractor , architect, engineer, quantity surveyor
and developer. This superficial understanding of the terms insufficient to
depict both words and sometimes may give rise to misconceptions of the
construction industry.

Construction activities are wide and are not confined to building and
contract processes only while development processes involve far more than
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just the scope of the design and development. Development and

construction involve many parties, different processes and phases and work
stages that are distinct.

Success in development and construction activities truly depends on

quality of management, finance and organizational performance of the
parties involved. Effective coordination is the main factor in achieving
success for activities and performance for work that is carried out as a team.
Due to the rapid development in science and technology and also the
influences and restrictions by the government, development and
construction have become more complex and difficult. A sophisticated
approach is needed to suit with the planning and management of
development and construction activities.

REFERENCES
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Persistence of
Profits in the UK Construction Industry, Construction Management
and
Economics, 18: 73345
Balls, E. and ODonnell, G. (eds) (2002) Reforming Britains
Economic and
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Financial Policy: Towards greater economic stability, Palgrave:

Basingstoke
Banwell, H. (1964) The Placing and Management of Contracts for
Building and
Civil Engineering Works, HMSO: London
Barbier, E.B. (1987)
development,

The

concept

of

sustainable

economic

Environmental Conservation, 2: 10111

Barker, K. (2003) Review of Housing Supply: securing our future
needs Interim
report, HM Treasury: London
Barwell, R. Thomas, R. and Turnbull, K. (2007) The macroeconomic
impact of
higher energy prices on the UK economy, Bank of England
Quarterly Bulletin,
Winter, Bank of England: London
Baumol, W.J. (1982) Contestable markets: an uprising in the theory
of industrial
structure, American Economic Review, 72: 115
Bennett, J. and Jayes, S. (1995) Trusting the Team, University of
Reading: Centre for
Strategic Studies in Construction
BERR Department for Business Enterprise and Regulatory Reform
(2007)
Construction Statistics Annual, TSO: London

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