Book Description

This dissertation, "Factors Affecting the Profitability of Construction Companies in Hong Kong" by Fook-pui, Billy, Lee, 李福沛, was obtained from The University of Hong Kong (Pokfulam, Hong Kong) and is being sold pursuant to Creative Commons: Attribution 3.0 Hong Kong License. The content of this dissertation has not been altered in any way. We have altered the formatting in order to facilitate the ease of printing and reading of the dissertation. All rights not granted by the above license are retained by the author. Abstract: 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 res