THE SOCIAL CONSTITUTION OF CONSTRUCTION MARKETS IN GERMANY
The construction process is dominated by two main conditions: the site-orientated character of production and the predominant influence of the client on product and process (cf. Angermaier 1981; Schneider et al. 1982; Unger, vanWaarden 1994; Pahl et al. 1995). In Germany both conditions result in the fact that construction markets are regional, sometimes even local, markets which are dominated by the demand rather than the supply side. By far the most construction projects are tendered on a regional or even local market by regional or local clients, who give orders to regional or local enterprises.
This fact is based on two arguments: a cost argument and a social argument. The cost argument follows from the fact, that in construction not the product, but only the production facilities (plant and labour) are transportable. But to transport plant over long distances or to use labour for a longer period far from home is so expensive, that the advantage of a lower price usually disappears. It is unnecessary, if both facilities are present near to the site in the same quality. Therefore the "typical" German construction firm is strongly established in local or regional markets.
Table 3a: Construction volume by type of construction and client 1993
public%
private%
total %
Building
80.1
Residential
49.3
Commercial
22.9
Public
7.8
Civil engineering
19.9
Commercial
6.8
Street works
5.1
Public
8.1
Total
21.0
79.0
100
Total construction volume
516.4
Public construction
100.0
Federal government
21.2
Länder
19.4
Local public authorities
59.4
Total
51.6
Table 3b
Construction volume in the main trades sector by type of construction and client 1993public %
private %
total %
building
66.1
residential
35.2
commercial
23.6
public
7.4
33.9
civil engineering
commercial
8.9
street works
10.8
public
14.2
total %
32.4
67.6
100
total amoun
t218,9 Sources: Deutsches Institut für Wirtschaftsforschung (DIW): Zeitreihen für das Bauvolumen der Bundesrepublik Deutschland Berlin 1994 and Zentralverband des Deutschen Baugewerbes: Analyse und Prognose ‘95, Bauwirtschaftlicher Bericht 1994/95, Bonn 1995, p. 108-9; own calculation. This argument is valid not only for small and medium sized firms, but also for the big, nation- or even world-wide operating ones. These companies consequently have built up a dense network of local subsidiaries to be present on local markets as "home-firms". The firm structure in the German construction industry therefore shows very few big firms compared to the overwhelming majority of medium and especially small and very little ones. But employment and turnover figures indicate, that medium and bigger firms of course have a greater weight in the industry (see table 4).
Whereas the radius inside which a small or medium firm is working is limited by the cost argument to a distance which makes daily return from site possible to avoid additional payment for accommodation and special payments, for the subsidiary of a bigger company the business area is restricted additionally by the structures of the company. Each regional subsidiary is normally responsible for a region with a radius of about 100 kilometres and in this area it has to do the total of the operating business of the company (with a clear demarcation with other subsidiaries of the same company). Subsidiaries usually act as profit centres with full responsibility for their business. Thefunctions in the company at higher levels, the main subsidiary and the company's headquarters, offer special services to the subsidiary, but do not interfere with the operating business. The regional subsidiary is normally no bigger than a medium sized firm and has between 50 and several 100 employees. Only in a few cases (especially in regions with a big construction volume) do big companies' subsidiaries have 1000 and more employees.
The cost argument for the regional or local orientation of construction firms is complemented for the case of Germany by a social one. In construction the client does not purchase a well-established object of mass-production, but a single product which is a prototype. And strictly speaking he does not purchase a product, but the promise of a product. He does not purchase the work of the contractor, but its supposed and promised capacity of work. But when a project is under construction, always and nearly inevitably imponderables come up, which the client, who normally is not an expert, is unable to foresee (and very often even experts cannot). Because of these imponderable factors like time, cost, and quality cannot be controlled before the contract is signed. Indeed these parameters are fixed in the offer given by the construction firm and this offer is obligatory. But if an offer will be fulfilled or not, one can see not before, but first during the construction process and after the work is done and the product is ready. This marks a fundamental difference to other markets.
The client in other markets to a certain extent can control the market by the "classical" client's option, the decision to buy or not to buy a product after he has inspected and sometimes even tested it. The client in construction on the contrary has to buy a product which does not yet exist, and he has to buy it on the basis of a design he can neither interpret nor evaluate. He cannot decide not to buy a product, if it is different from what he thought, because when he first can inspect and evaluate it, it is just ready and he has already bought it. So for the client the situation is much too complex to control. To supervise and examine the construction process itself, especially to evaluate the means and measures the contractor uses during the process, is normally impossible for the client and very often also for his agents. So what he needs is somebody who reduces this complex situation for him as much as possible. The employment of professionals, either in-house or by contract, only shifts the principal problem to another level, because evaluation of the work on site can be executed effectively only by the contractor itself.
Table 4
Number of firms, employment and turnover by size of firm 1994.Size of firm
(by employees)%
Firms%
Employment%
Turnover1-9
57.0
12.1
9.4
10-19
21.8
16.2
13.2
20-49
13.8
22.2
19.8
50-99
4.5
16.6
17.2
100-199
2.0
14.7
16.7
200-499
0.7
10.8
14.2
500 u.m.
0.2
7.4
9.5
Total
82.226
1.534
223.0
Source: Statistisches Bundesamt, Fachserie 4, Reihe 5.1 But how can the client know, that the contractor will reduce the complexity of the situation not only in its own, but also in his, the client's, interest? A fruitful theoretical concept to answer this question is the one of "trust", which was introduced by Luhmann (1968). Luhmann points out, that "world" as basic condition and environment of man is of an infinite complexity, so that the amount of information is too great to be processed and action based on rational choice is impossible. But action also is inevitable. Therefore complexity has to be reduced. One medium to reduce complexity is "trust". Trust can be placed in norms and rules, in institutions and procedures, and/or in persons. The reason for a rule need not be known or even understood, but following the rule reduces complexity and makes meaningful action possible. Complexity is reduced for the receiver of the result of a work not if he knows, how a task is performed and why - this could be and remain unknown and opaque - but if he knows, who is doing it. It is not the knowledge of the complex process which enables him to be sure that he will get, what he wanted to, but the knowledge of the particular person who is managing it for him - who thus reduces for him the complexity. And that is, what the contractor is doing for the client.
And this is not only valid for the casual client, but - in another way - it is true for the experienced client too. Whereas the casual client does not know at all what has to be controlled on a site during a construction process, the experienced client knows it too well. So he has - from different viewpoint - the same interest, that is, to find a construction company, which is long-term established in the market and has been proved as trustworthy concerning the control which is required in the interest of the client. Experienced clients therefore very often - without reducing competition - try to build up long-term business relations to a couple of contractors. This is not only true for private clients, for whom it may be obvious, but also for public ones. Also public clients have an interest in stable long-term relations with trustworthy firms and although they can not evade VOB/A, they have some space to manœuvre for example according to their duty to examine offers and to determine their quality.
The contractor tries to do the same (or the complement). It is acting under conditions, where demand is crucial and which does not give it control of the rate of utilisation of its production facilities. To get orders it can only react, but rarely act. So the contractor has two possibilities to present itself as trustworthy: one is reference projects, and the other is persons who represent the firm. So it can itself build up long-term business relations only if it delivers again and again construction works to the full and lasting satisfaction of the client; in other words: if it can present itself as trustworthy concerning the crucial parameters of the construction process also in the interest of the client.
Presentation of a firm happens through its representatives, that means: by persons. The promise of the contractor, which it offers to be bought by the client, is not an abstract capacity of work and the trustworthiness of an enterprise (although tradition plays a role here), but the capacity and trustworthiness of its representatives: managers, engineers, workers. So the mechanism of real supervision, to which the contractor is subject to a great extent, is a social control between the persons, who act in the network of clients, professionals, and firms representatives. That is why the contracting system in the German case is a social system too. Representatives of firms guarantee as responsible persons the trustworthiness of their firms on the level where firms are invited to tender and construction orders are placed. And that is why it is the local area where the network as a social system can been constructed and can be set to work much better. Here information is close, direct, detailed, and can be processed and evaluated fast and without much loss. Trust works well, because "people know each other".
This is, what can be called the social constitution of construction markets. It is - beside the cost argument - through this person-to-person relation (i.e. this social supervision and control) too, that clients prefer to co-operate with "home-firms", which are well proven, well known and highly regarded also by other experts and important actors inside the network.