This study investigates the factors that affect the profitability of construction
companies in Hong Kong. Profitability refers to income less expenses before
taxes, or net operating income, as a percentage construction business turnover (value
of construction work done). Profitability is an important indicator of a company’s
competitiveness and is also a key performance indicator of the quality a company’s
management. This study attempts to measure and explain the observed variations
in profitability across construction companies.
In this study, I have used construction company production data collected from the
Census and Statistics Department (CSD). The data set contains income and
expenses data of groups of construction companies classified according to HSIC
(Hong Kong Standard Industrial Classification) down to four-digit level over the
period 1981 to 2002. The data set was used for empirical analysis.
After controlling for depreciation of fixed assets, variation in cost of capital and
income from other businesses, our data show that profitability varies with company
size, degree of subcontracting and material content. The results suggest that as
the size of a construction company increases, profit margin declines initially.
Profit margin then increases as size increases beyond a certain size, which suggests
increasing return to scale. The scale effect, however, diminishes slowly and then
exhausted when size of the company grows beyond the optimal level, after which
the company will experience decreasing return to scale. Empirical data from Hong
Kong showed that there were only a very small number of "over-sized" construction
firms that operated beyond the optimal size. This suggests the construction
companies in Hong Kong are profit orientated and would not expand beyond the
optimal level to achieve other non-profit objectives.
In addition, I also found that both the degree of sub-contracting and the level of
material content have significant negative impact on the profitability of construction
companies in Hong Kong. The former result suggests that profit margin declines
as more works are subcontracted out. This implies that in addition to provision of
physical resources, subcontractors are also paid for their efforts in managing
resources, specialist knowledge and risk taking. The negative impact of material
content on profitability suggests that the construction material market is a very
competitive market. A construction company cannot charge a significant premium
(larger than its profit margin) for provision of construction materials as the
construction client or main contractor can also purchase the material at more or less
the same price.
The results of this study shed light on our understanding of factors that affect the
profitability of the construction contracting business, an area that serious lacks
empirical study. In addition, the results provide valuable information for the
decision makers of construction companies when tendering for construction work
and for benchmarking of the profitability performance of their companies.
Construction clients and cost consultants would also find the results useful for
construction cost budgeting and estimating. / published_or_final_version / Real Estate and Construction / Doctoral / Doctor of Philosophy
| Identifer | oai:union.ndltd.org:HKU/oai:hub.hku.hk:10722/146792 |
| Date | January 2009 |
| Creators | Lee, Fook-pui, Billy., 李福沛. |
| Contributors | Chau, KW |
| Publisher | The University of Hong Kong (Pokfulam, Hong Kong) |
| Source Sets | Hong Kong University Theses |
| Language | English |
| Detected Language | English |
| Type | PG_Thesis |
| Source | http://hub.hku.hk/bib/B47277695 |
| Rights | The author retains all proprietary rights, (such as patent rights) and the right to use in future works., Creative Commons: Attribution 3.0 Hong Kong License |
| Relation | HKU Theses Online (HKUTO) |
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