Global Insight


Is efficiency eluding the construction industry?

15 March 2018

With construction productivity remaining stagnant over the last 25 years, the cost of the lost opportunity is estimated to stand at US$1.6 trillion per year.

Many industries have transformed themselves and improved sector productivity over recent years, particularly in relation to the increased digitization of processes and consumer intelligence. Although construction constitutes a major sector for the global economy, with an estimated market value of US$10 trillion and employing 7% of the global labor force*, the question remains as to whether efficiency is, in fact, eluding the industry. This is a critically important question for our industry, and one that is often overlooked, but can be put down to, for the most part, the perceived cyclical nature of construction (going from boom to bust).

 

What does this mean?

Productivity has remained stagnant over the last 25 years, with research estimating that 98% of megaprojects are over budget by 30% and 77% overrunning their schedule by 40%*. A 2017 report by the McKinsey Global Institute found that if construction productivity were to match that of the total economy, it would bring an added value of US$1.6 trillion to the industry each year, which would add about 2% to the global economy. In other words, the cost of the lost opportunity that arises from the low productivity associated with the construction industry amounts to a considerable US$1.6 trillion annually.


It is difficult for contractors to scale to a size that can facilitate the levels of productivity growth needed to achieve a par with other industries.  


Why?

As mentioned above, due to the cyclical nature of construction, key stakeholders and contractors are fearful of making large capital investments in machinery or production lines given the constant fear of the ‘next recession’. Other factors that can have a bearing on productivity include; inadequate planning that accounts for the short, medium and long term, ineffective communication between project team members and inconsistencies in reporting (and the interpretation of reporting), poor organization and project governance, and insufficient risk management.

Another significant cause of low productivity is the lack of consolidation across the industry. With the bespoke nature of construction projects across different sectors, it is difficult for contractors to scale to a size that can facilitate the levels of productivity growth needed to achieve a par with other industries. The USA, for example, has 730,000 registered building contractors, with an average of ten workers. The statistics in Europe are worse still, with 3.3 million registered contractors and an average workforce of four people.

Lastly, the skills gap is undoubtedly having a profoundly negative effect on the industry. Construction is labor-intensive, and so a shortage in skilled professionals drives up the cost of projects (via higher pay rates) and can cause disruption to the project schedule.

 

Case in point

An extreme example of this problem is the Berlin Brandenburg airport. The Economist magazine recently published an article on the project, which underlines that, 

"Nine years ago the first concrete was poured for Berlin Brandenburg airport. It was expected to open in 2012, to cost €1.2 billion and to welcome 34m passengers each year. Today the only people in its terminals are those with hard hats. Six times over budget, the project has had 66,500 building errors in need of fixing."

 

Ways in which to improve industry productivity

There are, however, a number of ways which the industry can address the productivity issue. These would include:

  • Investment in quality machinery that can be controlled remotely, such as cranes. 
  • Strict implementation of BIM and other IT-supported modelling on all projects to mitigate the inefficiencies arising from a lack of planning. 
  • Embracing the future through modular forms of construction. An example of this option, as identified by The Economist, is BoKlok, a spin-off from Swedish flat-pack seller, IKEA. BoKlok carries out only one-fifth of its construction work on-site; the rest is done in factories. Parts can be standardized and costs cut as a result, with BoKlok stating that it builds twice as quickly as the industry norm.
  • The industry as a whole embracing change, and working with the systems and technologies available to help streamline processes and reduce cost (and as a result, reduce inefficiencies). This needs to be supported by sufficient capital to implement the technology, and train staff adequately.

* Source: McKinsey Global Institute