Economic activity is divided into service-based and goods-producing industries. The latter creates a tangible object, while service-based industries include retail trade, professional services, and other intangible economic output forms. As far as construction is concerned, is it a service industry?
The U.S. Bureau of Labor Statistics classifies it as a goods-producing sector, not a service sector. However, when analyzed thoroughly, some sub-segments of construction do meet the definition of service-based operations.
This article will explore why, as a whole, the construction industry is a goods-producing sector. It will also provide insight into the concept of servitization and how that is bringing elements of a service-based industry to construction.
Understanding the Construction Industry as a Whole
Construction is one of the broadest economic industries in the modern economy. As a result, the industry is commonly divided into multiple sectors and sub-sectors. The Standard Industrial Classification System and the North American Industry Classification System divide the construction industry into building construction, heavy and civil engineering construction, and specialty trade contractors.
These primary divisions are segmented even further based on the end-type of construction, be it residential, non-residential, infrastructure, industrial, etc.
The one thing that these segmentation and classification systems have in common is that they all end with a finished tangible product. This would be a house, building, bridge, dam, industrial park, etc. Viewed in this light, the case for construction being a goods-based industry and not a service-based industry is clear.
However, the very fact that the construction industry’s segmentation can be as extensive as it is does open the door for certain caveats to exist. When viewed as a process, as opposed to solely an end-product, sub-industries within the construction plane can be classified as service-based.
Servitization in the Construction Industry
The term servitization is defined as adding a service component to a final product as a value-added proposition. A practical example of this would be a car manufacturer that offers a one- or two-year maintenance package to those who purchase the vehicle.In the construction industry, servitization has begun to appear. It can be seen in the form of essential services offered throughout the life cycle of a construction project.
Life Cycle of a Construction Project and Service-Based Offerings
Consider for a moment what constitutes the life cycle of a construction project. Then, consider how each part of that cycle includes specialized and commoditized services to complete.
- It begins at the ideation and conceptualization phase. This is when architects and engineers begin the design and schematic process of a new structure.
- Architectural design services. Be they bespoke designs for unique structures or modular for cookie-cutter designs. These can be considered a service.
- Civil engineering. The planning and supervisory aspect of civil engineering involved in a construction project can be seen as a commoditized service.
- It then proceeds to the preparation phase. This can include scouting for a lot of land of the proper size and location. It can also include all of the necessary administrative support required to secure the piece of land.
- Land procurement services. This is an all-inclusive term that can include outsourced real estate agencies, in-house site selection staff within a construction firm, zoning experts, and financing personnel. What they all have in common is that they are all service-based.
- Pre-edification work involves all of the preparations that go directly into physically preparing a piece of land for new construction. This will normally involve grading, leveling, backfilling, and everything leading up to the laying of the foundation.
- The edification step of the process is what most people normally associate with construction. That is the laying of the foundation, building the structure, the final finishing, and the grand opening.
- After a building or structure has been constructed, post-construction maintenance covers the regular maintenance required for its continued operation over decades. This can include monitoring and repairing electrical systems, plumbing, communications networks, ambient support systems, and other systems associated with the structure.
- Post-construction services and the asset management component imply contributing 5-10% in added revenues to construction firms that offer them to clients.
Construction Reliant on Service-Based Industries
As stated at the beginning of this article, it is impossible to deny that construction produces something tangible.
However, the modern scope of construction, the bureaucratic nature of building codes and permits, and the increasing demand for efficiency in the continued operation once it’s edified, make it almost equally as impossible to create the final product without relying heavily on multiple service-based sectors.
The relationship between the construction industry and these service-based sectors is symbiotic. There is interdependence between a construction firm and the dozens of other companies that it must subcontract to bring a building into being.
The Influence of the Service-Based Economy on Construction
Since the 1970s, the U.S. economy has transitioned away from a manufacturing-based economy more into a service- and knowledge-based economy. For most of those decades, the only goods-producing sector of the economy that has fared well in consistent growth has been the construction industry.
Even so, the construction industry is not immune from the broader dynamic shifts brought about by transitioning into a service economy.
Outcome contracts and fixed-bid pricing are two examples of how the service economy elements have influenced the construction industry model. This has led to a wider section of the construction industry to follow the manufacturing industry’s example and adopt lean methodologies.
In doing so, construction companies have become more reliant on technology. This, in turn, has brought some tech companies specializing in engineering and construction under the construction umbrella, yet another service-based segment contributing to the broader goods-producing outcome of construction.https://fcb943cbcc59b124f93d217627f5f40b.safeframe.googlesyndication.com/safeframe/1-0-38/html/container.htmlSome construction firms have mirrored the customer journey model used by service-based companies as an engine for revenue growth. This contributed to the servitization described above and created the mindset for these firms to seek added-value deliberately through additional services during and post-construction.
Does This Mean That Construction Will Become a Service?
By becoming more reliant on service-based suppliers and adopting many of the practices and methodologies used by those same service-based companies, it does not mean that the construction industry will metamorphose into a service industry.
The end product of construction is always going to be a building or a structure. As market analysts at Deloitte point out, the outlook for the construction industry is sound. The trend for the industry is seen as one of continued growth. However, the impact and continued symbiosis with digital tech companies and other service-based suppliers are also expanding.
The more interaction between construction firms and service-based suppliers, the more accustomed the populace becomes with doing business in the service economy. If that happens, the more the construction industry will emulate the methodologies and approaches of those companies.
That said, such changes tend to be client-facing and, to some extent, operational. They are not fundamentally altering the core purpose of the construction industry of building structures. As such, the construction industry will not transform into a service industry despite how much more reliant it may become on service providers and methods.
Governments, economists, and financial experts all classify the construction industry as a goods-producing sector and not a service industry. As a whole, the construction sector produces something that did not exist before. Therefore, the rationale for this classification is understood.
However, by expanding the accordion of supporting elements required by the construction industry to perform its function, construction relies heavily on service-oriented entities to produce their final product, new structures.
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