Most people in construction are familiar with the well-known McKinsey & Company report ‘Reinventing Construction: A Route to Higher Productivity’. The report highlights that labor-productivity growth in construction averaged out at a gloomy 1% per annum over the past two decades, compared to 2.8% and 3.6% in the world economy and manufacturing respectively. When you spread that shortfall over an industry that is worth $10 trillion globally, McKinsey found that there is a $1.6 trillion gap between where construction is now and where it should be. Put simply, there is an opportunity for the construction industry to put $1,600,000,000,000 back in their pockets just by doing work more efficiently. Given that the sector is due to swell towards a $15 trillion valuation over the next decade, the potential gains become even more significant.
Given the colossal reward available for companies and individuals alike, there should be a massive appetite towards correcting this low construction productivity. Let’s look at what’s causing this construction productivity flat line, how it can be improved in a practical way, and how, as a result, you and your business can seize the opportunity to boost your bottom line.
In construction we tend to like everything broken in units – but productivity can be a difficult unit to define. A simple formula is to divide the output (the product) by the units of input (labor, capital, and materials). This works great if every person on Earth has the same job, producing the same product, in a factory with the exact same conditions (which modular construction is moving towards- more on this later!); but the reality is obviously far more complex. Even still, productivity markers across industries and countries still provide lots of useful information, giving us a look under the hood at economies on a macro and sector-specific level.
The UK’s productivity has remained low even as the economy has grown- particularly when compared with other similarly developed countries. The US has traditionally been viewed as the most productive country in the world, but this is no longer the case- the US came in 6th, behind five European countries in a recent study. Interestingly, working long hours does not automatically equate to higher levels of productivity. Both the US and the UK rank relatively high in terms of longest working hours, while the countries at the top of the productivity list, like Luxembourg, Denmark, and Norway, all have fewer working hours on average. What does this tell us? Work smarter, not harder.
So, what’s stopping us from working smarter in construction – where highly educated engineers, laser precise equipment and thousand-foot skyscrapers are the order of the day? Jan Mischke, one of the Authors of the McKinsey report, broke the reasons for low productivity down three root causes
1. External Forces
At the macro level, projects and sites are becoming increasingly complex as the population grows and increasing numbers move to high-density living. Similarly, over a fifth of global projects are now valued at over $1 billion. While you might expect that projects of this size would allow for cost synergies from start to end, in practice they perform worse than smaller projects in productivity terms. In addition, the construction industry is often entangled in extensive regulation and in some cases is dependent on public-sector demand, due to the cyclical nature of economies. Informality, and sometimes outright corruption, also distort the market.
2. Industry Dynamics
Compounding the above are industry dynamics. Both owners and buyers (who are often inexperienced) must navigate a challenging and unknown marketplace. The contracts that projects live and die by are rife with mismatched risk, leading to expensive claim events and change orders, which are often publicized and scrutinized, rather than trusted, mutual collaboration. Owners are often so focused on achieving the lowest price possible that they’ve cultivated an environment where there are hugely misaligned contract and incentive structures. See the below info-graphic to get a handle on the eye-watering costs involved (Boston’s Big-Dig isn’t nearly on top!)
3. Operational Factors
The results of factors one and two are operational failures within firms. These include hugely inefficient designs with limited scope for standardization across projects, insufficient time spent on planning and implementing the latest thinking on project management and execution, and a low-skilled workforce. Finally, the construction industry is hugely volatile and has single-percentage profit margins compared with other sectors, strangling the much-needed investment in technology and digitization that would help raise construction productivity. The lack of reinvestment creates a negative feedback loop. Put simply, the construction industry is never given enough breathing space to trial and prove new ways of improving construction productivity. Every project has too many stakeholders, with too many variables, stifling the chance for companies to step back and take stock of where advances can be made.
These root causes have become so engrained that we may think they’re as much as part of the construction industry as a hard hat and a high vis. Seizing even a portion of that $1.6 trillion reward shouldn’t be so difficult, should it?
McKinsey have identified seven key areas for action, detailed below. We’ve chosen a couple that you and your company can act on to make your day a lot easier, and enjoy the share of revenue that comes with it.
Rewire the contractual framework
Move away from the hostile contracting environment to a system focused on collaboration and problem solving between owners and contractors. To achieve this, tendering processes must be based on best value and past performance rather than cost alone. Take, for example, Germany’s federal contracting rules for the execution of public sector works. Standardized contractual provisions define the liabilities between shareholders in a construction project, which complement legal frameworks for overall transparency in contracts. Their effectiveness has meant that they’ve filtered down into most private-sector works, contributing majorly to Germany’s 28% above-EU-average innovation performance.
Improve On-Site Execution
The sheer complexity and variability of today’s mega-projects require a project-operating approach that integrates technical and management systems to fully harness workers’ capabilities. GoContractor’s system allows managers to track worker competency and rank or rate subcontractors, providing a critical knowledge sharing connection between the project site and HQ.
In the future, new forms of digital collaboration, notably the Internet of Things and advanced analysis, will combine to enable tracking of equipment and materials- meaning far greater transparency. Consolidated Contractors Company (CCC), the construction behemoth, used IoT technology to track their global inventory of 16,500 assets worth $1.2 billion. CCC realized a productivity increase of 30% and cut annual global expenditures by $15 million.
Embrace New Technology to Boost Construction Productivity
Managing large numbers of workers is a complicated process which is still quite often done using paper spreadsheets, leading to various financial leakages and inefficiencies. Digitizing the contractor onboarding process is one of the easiest ways to slash costs and increase construction productivity. This company put over 4,500 man-hours back into their schedule through using GoContractor- on one site alone!
Technology such as Building Information modeling (BIM) dramatically improves project planning and design, whereas in the past, design problems would only become apparent once ground was broken. Construction professionals need to stay up-to-date with the latest technology such as modular construction, Big Data, cloud collaboration and advanced materials to keep them from falling behind other managers.
There needs to be the buy-in right through organizations to implement technological solutions, in particular at leadership levels. Any commitment needs to include the proper funding for implementing technology, an area where construction is lagging other sectors. The U.S. construction industry has invested 1.5% of value-added on technology, compared with an overall average in the economy of 3.6%, and is the second least digitized industry in the US, only ahead of agriculture. That is despite there being a whole host of cutting-edge technologies, like 5-D modeling, apps that communicate between worker and management, virtual and augmented reality.
Increased use of prefabrication:
The use of modular and prefabricated construction will provide a construction productivity boost in the region of 6-8% to a project. This process, where most of the construction is done off-site, is cheaper, more efficient and allows for greater standardization (and thus reliability) in parts. This means that facilities, such as power plants, have a longer lifespan because they are built in a uniform fashion so spare parts can be used interchangeably across several buildings. Prefabrication ties in with the general concept that there needs to be more focus on the planning and development part of the construction. Delays on site can be incredibly costly for construction companies as overtime can pile up. The more work that can be done to avoid these kinds of situations, the more productive the construction industry can be.
Reskill the workforce
The skills gap is one of the biggest issues facing the construction industry. Skilled workers are becoming harder to find and can demand higher wages; delaying and increasing the cost of construction projects. The industry relies more and more on migrant workers to plug the gap. There needs to be an industry-wide initiative, in partnership with governments, to attract younger workers to construction and reskill the workers already employed. Mobile training technology is one solution to both attract younger generations and upskill older generations in construction.
Today the industry remains at a standstill.
Four types of disruption—which have transformed the productivity of other sectors—could help to break the deadlock and usher in a new era of higher construction productivity:
- Rising requirements and demand in terms of volume, time, cost, quality, and sustainability
- Larger-scale players, more transparent markets, and disruptive new entrants’ risk
- More readily available new technologies, materials, and processes
- Rising wage rates and limits on migrant labor.
The critical question? Should the individual contractor continue with business as usual or take a risk and push for change. Even though owners would be the main beneficiaries of a more productive model, they tend to be risk-averse when the opportunity arises; they need productive contractors that they can trust and that provide them with choice, high quality, and low prices before they can change contracting and design practices. Many contractors stand to endanger their already tight margin by moving to productivity-based business models unless owners and the broader industry move too – stifling the opportunity for proof-of-concept with early adopters.
Change may not be a distant prospect – there are signs of improvement in parts of the globe where governments, owners and contractors work collaboratively to drive change. The remedy is well known. Best practices already exist. In countries where policy is slower to change, contractors can be the creators of their own competitive destiny’s and introduce new operating systems, invest in technology, and develop a strategic approach. Over time others will need to follow to remain in the game, if the global construction sector is to end decades of heel-dragging and transform itself as other industries have done.