Attached.

SURVIVAL STRATEGIES OF SERVICES
SUBCONTRACTING FIRMS IN AN ECONOMIC
DOWNTURN

Bevan Michael Scott
Student Identification Number: 1324489

A Report for Industry Project CONS 7819
Submitted in partial fulfilment of the requirements for the Degree of Bachelor of
Construction, Unitec New Zealand.

Department of Construction
November 2011

ABSTRACT
The construction industry is extremely responsive to the pressures of the economic conditions
of the wider economy. Between 2007 and 2008 a major economic downturn affected
economies around the world. New Zealand was one of these economies and as a result of this
downturn the New Zealand’s economy was pushed into a recession. The construction
industry in New Zealand has subsequently suffered from a downturn as a result of this. There
is a small amount research available which focuses on how firms within the construction
industry adapt to cope with these external changes. However there is very little research
available on how subcontracting firms adapt to survive such times. This is particularly
evident of the New Zealand market. The research therefore has the objective to discover what
strategies are used by subcontractors, particularly of the services trades, to survive these
times. The research has been based off previous research on an earlier downturn in the
Singaporean main contractor’s market by Lim, Oo & Ling (2010). The survey method was a
semi-structured questionnaire of eight participants who were senior managers of
subcontracting firms from the services markets. The participants were first asked
demographic questions on themselves and their company followed by questions on the
utilisation and importance of a list of strategies. The list of strategies was based on the
findings from a literature review. Findings of the paper were that there are various strategies
which are most important to the survival of these firms increasing the focus on forming
relationships with main contractors’, ‘implementing stricter financial management on
company cash flow’ and ‘implementing stricter site management to reduce material and time
wastage’. A strategy which was also highly utilised but found to be of lesser importance as
the strategies above was ‘trying to break into new sources of work (i.e. different main
contractors)’. Further studies around this topic could investigate how companies implement
these strategies. Research could also be undertaken into how employment in subcontracting
firms is affected by economic downturns, as there was a very low response recorded by the
participants to any change in employment strategy.

2

CONFIDENTIALITY STATEMENT
The author has agreed that all personal and company names of participants in this research
will be kept confidential. The participants in the interviews were kept anonymous throughout
the process. Their responses cannot be linked to the individuals involved in any way. This
was ensured by storage and management of responses in hard form being referred to using
labels (e.g. Plumbing Subcontractor 1).

3

ACKNOWLEDGEMENTS
I would like to thank all of those who helped me complete this research including the
following:
∼ My supervisor, Derek Thurnell, for his guidance, feedback and assistance in
completing this project.
∼ My employers for all of the assistance and support they have provided me for my
academic studies during this year.
∼ All of the research participants who gave up time out of their busy schedules to be
interviewed for the project.
∼ My family and friends who have supported and encouraged me throughout the
process.

4

TABLE OF CONTENTS

Abstract………………………………………………………………………………...2
Confidentiality Statement…………………………………………………………..…3
Acknowledgements………………………………………………………………….....4
1
1.1
1.2

Introduction……………………………………………………………………....8
The Economic Downturn…………………………………………………..….8
Research…………………………………………………………………….....9

Literature review…………………………………………………………………10
2
2.1
Introduction……………………………………………………………………10
2.2
Recessions/economic downturns……………………………………………...12
2.2.1
Definition of a recession…………………………………………....................12
2.2.2
History of recessions…………………………………………..........................12
2.2.3
Present Situation…………………………………………................................13
2.2.4
Effect of a recession on the construction industry………………………….....14
2.3
Effect of a recession on construction firms……………………………………15
2.3.1
Output…………………………………………............................…………....15
2.3.2
Employment…………………………………………......................................16
2.3.3
Profitability…………………………………………........................................16
2.4
Specific reasons for company failures in the past…………………………….18
2.5
Strategies employed by construction business to survive during a recession...20
2.5.1
Diversification, differentiation & focusing on core business............................21
2.5.2
Target Markets………………………………............................……………..22
2.5.3
Marketing…………………………………………..........................................23
2.5.4
Employment………………………………………….....................................24
2.5.5
Financial Management & Investment………………………………………..25
2.5.6
Relationships…………………………………………....................................26
2.6
Summary…………………………………………..........................................29
3
Methodology…………………………………………………………………….30
3.1
Introduction…………………………………………………………………..30
3.2
Research design………………………………………………………………30
3.3
Lim,Oo & Ling’s (2010) research……………………………………………30
3.4
Other Research………………………………………………………………..31
3.5
Chosen research design……………………………………………………….31
3.6
Data collection………………………………………………………………..33
3.7
The questionnaire……………………………………………………………..34
3.8
Sample………………………………………………………………………...36
3.9
Data management……………………………………………………………..37
3.10
Reliability and validity………………………………………………………..38
3.10.1 Reliability……………………………………………………………………..38
3.10.2 Validity………………………………………………………………………..38
3.11
Research Ethics………………………………………………………………..39
3.12
Summary………………………………………………………………………40
5

4
4.1
4.2
4.3
4.4
4.5

Data.................................................................................................................... 41
Introduction .................................................................................................. 41
Demographic Data………………………………………………………….41
Strategy Utilisation Data……………………………………………………43
Strategy Importance Data…………………………………………………...47
Summary…………………………………………………………………….48

5
Discussion……………………………………………………………………….49
5.1
Introduction………………………………………………………………….49
5.2
Demographic Information…………………………………………………...49
5.3
Strategies…………………………………………………………………….49
5.3.1
Project size…………………………………………………………………..50
5.3.2
Forward agreements with suppliers and subcontractors…………………….52
5.3.3
Bid margin strategies………………………………………………………..52
5.3.4
Specialisation………………………………………………………………..53
5.3.5
Relationships………………………………………………………………...54
5.3.6
Marketing and new work sources……………………………………………57
5.3.7
Diversification……………………………………………………………….58
5.3.8
Cost Reduction………………………………………………………………60
5.3.9
Employment………………………………………………………………….61
5.3.10 Financial Resources………………………………………………………….64
5.4
Summary……………………………………………………………………..64

6
6.1
6.2
6.3
6.4
6.5

Conclusion……………………………………………………………………….65
Introduction…………………………………………………………………..65
The Research…………………………………………………………………65
Key Findings…………………………………………………………………66
Limitations……………………………………………………………………67
Future Study…………………………………………………………………..67

7

References…………………………………………………………………….….69

Appendix A: Questionnaire……………………………………………………………74
Appendix C: Participant Information Sheet………………………………………….77
Appendix C: Lim, Oo & Lings’ (2010) Study…………………………………………78

6

LIST OF FIGURES
Figure 1: Grid shown literature involving different strategies as adapted from Lim, Oo &
Ling (2010)……………………………………………………………………………..……19
Figure 2: Respondent’s utilisation of relationship strategies…………………………...……53
Figure 3: Mean Rating of Importance of relationship strategies………...…………………..54
Figure 4: Number of participants utilizing employment Strategies…..……….……….…….60
Figure 5: Mean Ratings of importance of employment strategies…..……………………….62

LIST OF TABLES
Table 1: Respondent’s position within the company……………………………………......41
Table 2: Experience in the industry………………………………………………………....42
Table 3: Company Turnover……………………………………………………………...…42
Table 4: No. of Employees……………………………………………………………….....43
Table 5: Frequency of “Contract Related” strategies utilised by participants……………....45
Table 6: Frequency of “Cost Control” strategies utilised by participants………………..…46
Table 7: Frequency of “Financial” strategies adopted by participants…………………..….46
Table 8: Ranking of Strategies in terms of mean ratings of importance…………………....47
Table 9: Results of project size strategies…………………………………………………..50
Table 10: Different sub-trade responses to strategy 1………………………………………51
Table 11: Results of bid margin strategies………………………………………………….53
Table 12: Results of marketing & new work source strategies……………………………..58
Table 13: Results of diversification strategies………………………………………………59
Table 12: Results of cost reduction strategies………………………………………………60

7

1

INTRODUCTION

1.1 The Economic Downturn
The construction industry as a whole has a significant relationship to the economy, in that a
change in economic output of an economy can result in a proportionate change in demand
and, as a result, a change in the output of the construction industry (Raymond & Ganesan,
1997). The follow-on effect of this change is that firms within the industry have to
dramatically adapt to the changing economic climate (Forman, 2010).

The global economy suffered a major recession in the years of 2007-2009. This recession has
been labeled “the global financial crisis”. It is well documented that there are numerous
reasons for this collapse. A large downturn in the US housing market combined with
financial stress (also known as the “credit crunch”), high oil prices, as well as a large slide in
economic confidence are some of the well noted reasons for this recession (Ranchhod, 2010).
According to Chan & MacCabe (2008) the financial stress, which began in the United States
can be summarised as “The sub-prime mortgage market in the US coupled with imprudent
investment behavior by banks have led to the decay of financial assets, which have in turn
caused the collapse of major financial institutions” (Chan & McCabe, 2008, p. 523). These
collapses and their subsequent government bail-outs then had a ripple affect which impacted
markets world-wide.
This recession is the largest felt by the economies of the organisation for Economic Cooperation and Development (OECD) since the Great Depression of the 1930’s. All 30 nations
of the organistion have suffered a decrease in real GDP with an average drop of 5% recorded
over all of the nations within one year (The Treasury, 2010).
At the time of writing the New Zealand economy had narrowly avoided two consecutive
quarters of negative growth, which , in terms of the definition above some would have argued
would have resulted in a recession (or in this case a double dip recession where the economy
had looked to be starting its recovery when it fell back into recession) (Tarret, 2010). This
shows that the New Zealand economy is yet see the recovery which we many have expected.
It is also a similar pattern to those which have affected New Zealand in recent times. The
recessions in the late 1980’s, early 1990’s and late 1990’s all suffered from a double dip
recession before recovering (New Zealand GDP Growth Rate, 2011).
8

Statistics New Zealand (2011) provide statistics on the value of building work put in place by
the New Zealand construction industry. Between 2005 and 2008 the New Zealand
construction industry’s output was consistently over $12billion NZD, peaking in 2007 at
$13.5billion. Since this time, in 2009 only $10.7billion was achieved, and just over $11billion
of building work was produced in 2010.
The number of building consents issued is also recorded by Statistics New Zealand and
provides a useful tool for assessing the short term forecast for the construction industry. Since
2008 the value of building consents has dropped from over $12billion to just over $9billion.
More recently the number of consents issued has dropped over a further 30% since March
2010, causing a negative trend which is the situation in the building industry is currently at
the time of writing (Statistics New Zealand, 2011).

1.2 The Research
A number of studies on the effect that economic downturns have on construction firms, and
the resulting changes in strategies of those firms, have been conducted for different times of
recession around the world. Examples are the global downturn as a result of the stock market
crash in the late 1980’s (Hillebrandt, Cannon & Lansley, 1995), the Asian financial crisis of
1997-1998 (Pheng & Hua, 2002), the extended recession as a result of the Asian financial
crisis in Singapore (Lim, Oo & Ling, 2010), the downturn in building activity in America in
2001-2002 (Tulacz, Rubin, Grogan, Hampton, Powers, Illia & Dixon, 2003) and the recent
global recession as a result of the ‘credit crunch’ of 2008 (Redfern, 2010).
However all of these studies focus on main contractors and subsequently there is little
evidence of research into subcontracting firms within the industry. This is despite the large
number of firms who operate in the subcontracting market. In particular there is a lack of
research into the adaptation of subcontractors in the comparatively small New Zealand
market. Therefore this research will provide an insight into this area of the topic, using the
research of Singaporean main contractors by Lim, Oo & Ling (2010) as a basis for the study,
and including their suggestion to not only question which strategies are utilised by the
contractors, but also which strategies are the most important to the contractors. This research
will therefore answer the research question ‘What are the strategies used by services
subcontractors to survive the economic downturn?’
9

The research aims to add to the existing body of knowledge about survival strategies of
construction firms in an economic downturn. As the economic downturn is still having an
effect on the New Zealand construction industry, the research is relevant to the current
context. By adding to the existing body of knowledge it is hoped that the research will assist
firms and individuals within the New Zealand construction industry to understand the ways in
which firms operate in this industry during a recession.

10

2

Literature Review

2.1 Introduction
Research into the effect of the recession on companies is well documented. In particular, the
construction industry is the focus of numerous studies in relation to economic downturns
because of the large impact changes in the economic condition have on the construction
industry. Research in this area includes topics such as the effect of the recession on the
industry as a whole, on sub-sectors for the industry, on individual companies and on
indicators of the industry such as employment. There is a wide range of literature available
with a focus on main contracting; however information on sub-contracting is limited.

The following chapter is a literature review on the effect of the recession on the construction
industry and survival strategies of contractors to survive. More specifically, the effect on
subcontractors will be investigated. The chapter begins with information on recessions and
their effect on the industry as a whole. The focus then switches to reasons for company
failures within the industry and the strategies companies use to avoid such failures in times of
recession.

11

2.2

Recessions/economic downturns

2.2.1

Definition of a recession

The most common definition of a recession is two or more continuous economic quarters of
decreases in an economy’s GDP (gross domestic product) growth (New Zealand Herald,
2008). However this is a relatively simplistic definition, and numerous economists believe
that it doesn’t consider other variables such as unemployment and consumer confidence
(“Definition”, 2010). The National Bureau of Economic Research (NBER), which is the
agency that officially declares a recession in the United States, defines a recession as “a
significant decline in activity spread across the economy, lasting more than a few months;
and normally visible in production, employment, real income, and other indicators” (Iqbal &
Vitner, 2011,p. 22). This definition is widely accepted as an accurate explanation of a
recession. An important aspect of this definition is that a recession is required to be a
significant decline in economic activity. As noted in the first definition, economic activity is
generally measured by the GDP of an economy.
It is widely accepted that recessions are an economic certainty as a part of the business cycle.
Recessions generally occur after a time of economic prosperity (a peak) and the contractions
of a recession are always followed by a expansion period, also known as a recovery (although
the length of time to get to this point differs). (Iqbal & Vitner, 2011)

2.2.2

History of Recessions

History is plagued with economic recessions all over the globe. As noted by Adams (2010)
the NBER has recorded a total of 33 recessions in the United States since 1857. Due to the
large number of recessions over the course of history the following section will focus on the
most recent recessions and the effect they have had on the New Zealand economy. It is
because of the relatively small size of the New Zealand economy that it often follows the
recesionary lead of the larger economies which it trades with.

Early 1990’s – Following the share market crash in 1987 there was a global recession in the
years of 1990-1991. Various reasons were behind this economic slowdown, namely a global

12

economic slowdown, financial stress and high oil prices (Ranchhod, 2010). The high oil
prices are a reflection of the oil price spike over this period.

Late 1990’s – The recession in New Zealand in the years of 1997-1998 was as a result of two
major events. The first was the Asian financial crisis. This was an economic downturn in
Asia which was a result of the opening up of capital markets in south East Asia as well as
significant weaknesses in the banking systems of these nations. Although this was not in New
Zealand the flow-on effects had dramatic consequences on the New Zealand economy as well
as many others around the world. (Gan & Li, 2000)The second event was a major drought
which had a considerable impact on the New Zealand economy as a result of the high
proportion of the economy involved in agricultural related business.

Early 2000’s – During 2001 a number of events occurred which resulted in a world wide
recession. Once again a global downturn occurred, on the back of the “dot.com burst” which
was a large scale collapse in the value of the rapidly growing internet industry. According to
Ranchhod (2010) the other major event which caused this recession was the September 11
terrorist attacks and the subsequent fallout in the American economy.

2.2.3

Present situation

The global economy suffered a major recession in the years of 2007-2009. This recession has
been labelled “the global financial crisis”. It is often documented that there are numerous
reasons for this collapse. A large downturn in the US housing market combined with
financial stress (also known as the “credit crunch”), high oil prices as well as a large slide in
economic confidence are some of the well noted reasons for this recession (Ranchhod, 2010).
According to Chan & MacCabe (2008) the financial stress, which began in the United States
can be summarised as “The sub-prime mortgage market in the US coupled with imprudent
investment behavior by banks have led to the decay of financial assets, which have in turn
caused the collapse of major financial institutions.” (Chan & McCabe, 2008, P. 523) These
collapses and their subsequent government bail-outs then had a ripple effect which impacted
markets world-wide.
This recession is the most significant experianced by the economies of the Organisation for
Economic Co-operation and Development (OECD) since the Great Depression of the 1930’s.

13

All 30 nations of the organisation have suffered a decrease in real GDP with an average drop
of 5% recorded over all of the nations within one year (The Treasury, 2010).
At the time of writing the New Zealand economy has narrowly avoided two consecutive
quarters of negative growth, which some would argue would have resulted in a recession (or
in this case a double dip recession, where the economy had looked to be starting its recovery
when it fell back into recession) (Tarret, 2010). This shows that the New Zealand economy is
yet to see the recovery which many have expected. It is a similar pattern to those recessions
which have affected New Zealand in recent times. The recessions in the late 1980’s, early
1990’s and late 1990’s all suffered from a double dip recession before recovering (New
Zealand GDP Growth Rate, 2011).
Statistics New Zealand (2011) provide statistics on the value of building work put in place by
the New Zealand construction industry. Between 2005 and 2008 the New Zealand
construction industry’s output was consistently over $12billion NZD, peaking in 2007 at
$13.5billion. Since this time, in 2009 only $10.7billion was achieved and just over $11billion
of building work was produced in 2010.
The number of building consents issued is also recorded by Statistics New Zealand and
provides a useful tool for assessing the short term forecast for the construction industry. Since
2008 the value of building consents has dropped from over $12billion to just over $9billion.
More recently the number of consents issued has dropped over a further 30% since March
2010, causing a negative trend which is the position of the building industry at the time of
writing (Statistics New Zealand, 2011)

2.2.4

Effect of a recession on the construction industry

Extensive research has been conducted into the effect that an economy wide or global
recession has on the construction industry as a whole as well as specific businesses within the
industry. There are many similarities between the effects felt by the economy as a whole and
the construction industry in particular. However there are also a number of characteristics of
the construction industry which summer in effect from a recession which are unique to the
industry.

14

2.3

Effect of a recession on construction firms

2.3.1

Output

Hillebrant, Cannon & Lansley (1995) note that during times of recession the output of the
construction industry falls dramatically. Indeed, in their study of the UK construction
industry during the recession of the early 1990’s they record the output of some sectors of the
industry falling in the trough of the business cycle to less than 30% of what they were in the
peak, only three years earlier (Hillebrant, Cannon & Lansley, 1995). In the four years
leading up to the Asian Financial crisis of 1997 the value of new construction output in the
Hong Kong construction industry increased steadily by just under half of the total output of
the industry. In the years of recession which followed the crisis the amount of output fell
dramatically at first, then steadily returned to pre-boom levels (Leung & Wong, 2005).

Ramond & Ganesan’s (1996) research into construction flows conclude that GDP, one of the
key measures for recording a recession is heavily interlinked with construction output. This is
because construction output makes up part of the measure of economies’ GDP. The
conclusion is that a decrease (or increase) in GDP will cause a decrease (or increase) in the
demand for construction projects. This will in turn affect construction output as the suppliers
to the market (the contractors) decrease their production (revenue) to meet the demand
requirement. This decrease in output will cause GDP to fall further as construction output
makes up a sector of GDP.

Almost all of the previous research supports the idea that an economic turndown has a lag
effect in the construction industry. Tulacz’s (2009) research into the effect of the current
recession on construction contractors in the USA found that even though the recession started
in 2008, contractors had a big enough backlog of work to last through 2008 and 2009. There
was even growth in the construction industry in 2008 with 11.2% more work produced by the
top 400 contractors than in 2007. However, “as backlogs shrink, 2010 will be a tough year.”
(Tulacz, 2009)

The revenue production of subcontractors is also greatly affected by market conditions. After
the recession hit in America in 2001 subcontracting revenue fell by approximately 1...