It’s no secret that much of the U.S.’s infrastructure is in desperate need of repair or modernization, and that many cities struggle to meet demands for infrastructure and affordable housing. It’s also not controversial to argue that any infrastructure investment must get more out of each dollar invested, raising the productivity of the construction sector.
Global labor productivity growth in the construction industry has averaged only 1% a year over the past two decades, and was flat for most advanced economies. In the United States, the construction sector’s labor productivity is lower today than it was in 1968. In contrast, many U.S. sectors, including agriculture and manufacturing, have increased productivity tenfold to fifteenfold since the 1950s.
Our research at McKinsey Global Institute finds that the construction industry could boost productivity 50% to 60% by instituting best practices and innovations in seven areas: regulations; contractual relationships; design and engineering processes; procurement and supply chain management; on-site execution; digital technology, new materials, and advanced automation; and workforce development.
The productivity challenge cannot be solved by any one actor. Private-sector project owners, public-sector project owners at the federal, state, and local levels, and the engineering and construction industry will all need to act to drive change. The industry is currently in a deadlock. Owners should be the main beneficiaries of a move to a more productive model, but tend to be risk averse; they need productive contractors that they can trust and that provide them with choice, high quality, and low prices — at scale — before they can change procurement practices and build capabilities for a new paradigm. Many contractors stand to lose revenue and margin from moving to productivity-based competition if owners and the broader industry environment don’t move as well. A shift to productivity-based competition is only likely to be attractive if contractors can build the scale (and repeatability) needed to drive cost efficiencies from productivity gains that outweigh revenue losses from lower price points and fewer customer claims, and provide payback on up-front and ongoing investments in technology or skill building.
The U.S. construction market has two distinct halves: large-scale players that work on major civil and industrial projects, and smaller, specialized contractors. Firms with less than $1 million in annual revenue are half as productive as those with revenue over $10 million. However, the higher-productivity large-scale half of the industry is not immune to the low productivity of the other half. Large-scale players routinely subcontract to smaller specialized players, and their productivity in civil, industrial, and buildings, including trades subcontractors, drops by 12%, 26%, and 28%, respectively. Therefore, any action to boost sector productivity needs to apply to the entire supply chain and to both parts of the market.
The fragmentation also affects the workforce, and in particular skills building and training on new tools or approaches that can accelerate productivity. Companies cannot find enough skilled workers, such as carpenters, plumbers, and electricians, to meet demand.
Construction companies also sorely underinvest in the technology, automation, and digital tools that would allow them to achieve significant productivity gains. In the United States, construction comes in second to last in terms of digitization, ahead of only agriculture, according to MGI’s digitization index. The index finds there are particular deficiencies in the sector’s ability to use digital tools to facilitate stakeholder interactions and in the rate of growth in digital tools available to the frontline labor force.
Technology has the power to disrupt this situation by creating more transparency and competition among the small contractors. A handful of online marketplaces have emerged in recent years for individuals looking to hire local contractors, but we have yet to see a truly disruptive digital marketplace for use by owners and large contractors.
More broadly, the use of digital technologies in construction has demonstrably had substantial productivity benefits. In a tunnel project that involved almost 600 vendors, the contractor put in place a single platform solution for bidding, tendering, and contract management. This saved the team more than 20 hours of staff time per week, cut the time it took to generate reports by 75%, and sped up document transmittals by 90%. In another case, a $5 billion rail project saved more than $110 million and boosted productivity by using automated work flows for reviews and approvals.
Robotics has already had a dramatic impact on manufacturing productivity, and it could do the same in construction. Highly repeatable elements of construction, such as bricklaying and concrete paving, have already started to incorporate it. Companies in Australia and the United States have achieved a masonry productivity gain of more than 100% through the use of bricklaying robots.
For some in the industry with repeatable structures, such as affordable housing, the shift to a system of mass production in which precast units and panels would be manufactured off-site, streamlining and simplifying work on the site itself, would change the dynamics of the industry. Such an approach would negate the majority of market failures that constrain the industry’s productivity. Evidence on the cost and time savings achieved by companies using the production system suggests that productivity could be five to 10 times higher.
The opportunity is large. If global construction productivity were to catch up to the total economy over the past 20 years, the industry’s added value could rise by $1.6 trillion — and one-third of that opportunity is in the United States alone. There is no reason to wait. There is a clear opportunity now to improve how we plan and deliver infrastructure in America.
This article first appeared in Harvard Business Review