Los Angeles 2017: Reinventing construction

The session aimed to identify specific ideas and initiatives that could help overcome contractual and regulatory challenges, increase adoption of technology and address skills gaps in the workforce.

Context: McKinsey Global Institute’s 2017 Reinventing Construction report found that U.S. construction productivity is lower today than it was in 1968 and it lags significantly behind industries such as manufacturing and agriculture. However, if the U.S. construction sector could meet the productivity levels of the overall economy, it could unlock more than $500 billion in value. This represents a significant opportunity for all stakeholders across asset types, but also requires action and shared commitments among all.

Some of the key themes discussed included:

  1. Owners and contractors must both be invested project champions with a shared definition of success. Project outcomes improve when owners and contractors establish a collaborative working model backed by a contractual framework that allows appropriate risk sharing. Collaborating and risk-sharing contracting strategies lie along a spectrum. The best practice examples include: shared targets for cost and schedule, minimal claims or reliance on liquidated damages, and collective management of risks instead of allocation. One structural way to help align parties is to establish incentives and increase use of performance-based contracts. The challenge in the industry is the relentless drive to shift risk and rely heavily on the “stick” vs the “carrot” to improve project outcomes. The first push in this deadlock system is likely to come from owners. However, given the highly-fragmented nature of the industry, the need for collaboration extends beyond just the owners and primary contractors so incentives could also be implemented for subcontractors and specialty trades.

    Another initiative that has helped establish collaborative relationships on major projects is to integrate Lean planning tools, including Lean pull-planning sessions during which the owner’s team, contractor and subcontractors agree to set milestones and together identify the best approach to successfully meet them. Financiers also have a role to play as they develop more domain expertise and use that to develop specific construction risk quantifications, create insurable products and persuade owners to push for specific changes.
  2. Megaprojects can be used as catalysts to help address the skills gap. Both the public and private sectors have a vested interest in workforce development and participants agreed all play a role in helping to address it. A more “bottom-up” and employer-driven approach could help the funders, educators and public officials who run workforce training programs to collaborate directly with contractors and trades about their greatest needs and current gaps.

    One key idea that emerged was to use major, long-term projects as catalysts to work with local workforce boards or non-profits and develop training programs in a region. For example, the California High Speed Rail project is working with local workforce investment boards, and the Crossrail program in the UK has also been used to establish training and apprenticeships. These programs help eliminate some of the volatility in the available labor force while also assuring the workforce that there are long-term needs for the new skillsets. Preferences for local hiring could also be reconsidered in the light of the investment needed to build expertise in a workforce.
  3. Cultural and legal changes are required to successfully adopt new technologies, methods and materials. Though cultural and systemic behaviors within the industry, as well as legal barriers, need to evolve to maximize the opportunity presented by technology, external forces may quicken the pace of adoption. For example, safety-driven concerns have led to greater use of autonomous machinery. While it has been long been used by other industries such as mining, some contractors are beginning to use autonomous equipment for major earthworks jobs on civil projects. Many engineering and construction firms face relatively low margins, which in many instances is already pushing them to innovate and improve field productivity. This includes a recent uptick in the adoption of digital tools, specifically within residential and commercial construction. This trend is further augmented by interest in construction technologies by the investor community.

    Developers are also increasingly adopting modularization. This is particularly true in the residential and commercial building industries where they have identified ways to deliver finishes perceived as “high end” or “exciting” to consumers using modular building components. Greater reliance on modularization may also become a necessity as the industry grapples with labor shortages. However, zoning and land use requirements need to be lowered to enable manufactured homes to grow and to capture benefits of lower costs of off-site fabrication.
  4. The public sector can help spur change in its two primary roles: as regulatory agencies and public project owners. Today, regulatory complexities, processes and often competing mandates can have a significant negative impact on productivity. Some of the most successful projects have been delivered when regulators partner with owners to help navigate complex funding, regulatory and siting/permitting processes. For example, in the wake of a natural disaster, agencies, public officials and the infrastructure community all work together to relentlessly push priority projects forward and deliver them quickly and efficiently. While extraordinary measures are needed in these cases, there is also an opportunity to learn from the streamlined processes and carry certain efficiencies forward to help improve the delivery of all projects. Some state and local leaders are already taking steps in this direction. For example, the city of Los Angeles has established a concurrent plan-check process that allows projects to start in parallel with design permitting.

    As public sector project owners, the government can also help establish standards and encourage innovation. For example, Los Angeles is launching a Sustainable and Resilient Building Program to identify barriers to these designs. Governments in the UK and Singapore have required contractors to use BIM on all public projects. With such consistent requirements, contractors are more likely to invest in the technology and skills needed. There have also been many pilot programs run by federal, state and local governments that reward project owners and contractors who are thinking creatively and changing the way they do things; for example, by including means and methods qualifications in tenders.

    When considering new productivity-based regulations or mandates about the use of technology, such as a requirement to use BIM, it is important for cities to understand where industry is and where it is headed. For example, developers and city leaders could consider Type 1 housing pilots for a digitized procurement process to accelerate speed and transparency of the process. In Los Angeles, public officials could further explore productivity-based regulation like Title 24 and consider how such regulation might create changes to the city’s own planning capabilities and processes.
  5. The industry has a role to play in helping investors better understand construction risk. It is well reported that in the United States many investors are on the sidelines with capital to spend, but they are reluctant to make major investments in infrastructure because they do not understand the inherent risks and how to adequately price them. Many struggle to find experts in the industry who can help them understand and define the conditions for their investment. However, when public-private partnerships are approached as a project delivery scheme, and not just a financing mechanism, they can help to catalyze productivity, lower lifecycle costs and deliver more value for money—when executed under the right conditions.

    Owner and contractors can help attract private capital by establishing business cases that incorporate lifecycle-cost analyses for projects that are well suited for private investment. Institutional investors may find greater attraction as more contractors begin to invest capital into projects. By defining best practice for construction project delivery, financiers can create products to ensure against downsides similar to efforts by multilateral financing institutions to introduce construction risk facilities.

What can each stakeholder do tomorrow to start addressing the productivity challenge?

While it will require long-term and sustained initiatives to generate real change, specific actions can be taken in the short term.

  • Investors: Prioritize understanding the construction risks and establish a forum with industry to communicate the conditions for successful partnership (e.g. what would it take to enter a PPP).
  • Public owners: Create a path to pilot and test alternative contractual / performance-based arrangements. Consider opportunities to streamline permitting and regulatory processes.
  • E&C companies: Embrace the change in technology—not just as pilot projects but at scale to drive bottom-line impact.
  • Regulators: Establish much greater linkages with private sector developers to support innovation in construction technologies and to co-invest in developing workforce skills.