The construction industry has a productivity problem—and here’s how to solve it

US construction-sector productivity is lower today than it was in 1968, and investment has fallen over the past decade. While construction has appeared stuck in a time warp, other sectors have transformed themselves, write Jonathan Woetzel, Mukund Sridhar, and Jan Mischke for MarketWatch.

The global construction industry has a chronic productivity problem. Over the past 20 years, productivity has grown at only 1% annually, only around one-third the rate of the world economy and only around one-quarter of the rate in manufacturing.

While construction has appeared stuck in a time warp, other sectors have transformed themselves. Consider that in the United States between 1947 and 2010, agriculture achieved cumulative real growth in its productivity of 1,510% and manufacturing 760%. Construction managed only 6%. U.S. construction-sector productivity is lower today than it was in 1968, and investment has fallen over the past decade.

If nothing changes, the industry will fail to deliver the infrastructure and housing the world needs. An estimated 36 million new housing units will be required in the 20 largest cities alone by 2025, three-quarters of them in Asia. Infrastructure quality is also deteriorating in many countries, particularly in advanced economies. In G-20 economies, the gap between what needs to be spent on infrastructure and what is being spent is equivalent to 0.4% of GDP; in the United States, this gap is 0.8%.

New research from the McKinsey Global Institute finds that U.S. construction accounts for one-third of a $1.6-trillion-a-year global opportunity to boost construction-sector productivity—the value that could be created by the industry if productivity matched that of the global economy.

Poor productivity in construction today is the result of a multitude of factors. Although there are large players around the world, construction also has a large number of low-productivity small firms. The way many contracts are set up is confrontational, which means that disputes and changes to the project specifications are all too common. Regulation is complex and in many countries there is a high level of informality and sometimes corruption. Exacerbating low productivity in developed countries is the fact that the share of renovation and repairs rather than new builds is rising. This means having to negotiate complex building sites: consider the headaches (and delays) when a public-transit system shuts down for repairs.

Underinvestment in technology is another root cause of low productivity. There is robust evidence of the link between the level of digitization in a sector and its productivity growth. The U.S. construction industry has invested 1.5% of value-added on technology, compared with 3.3% in manufacturing, and an overall average in the economy of 3.6%. In the United States, construction is the second-least digitized sector after agriculture.

What explains this lack of commitment to investing in technology? One reason is that construction overall tends to be relatively low-margin industry, particularly for smaller players that simply don’t have the money to invest. Another is that many firms don’t recognize the fact that underinvestment is a key factor behind the sector’s poor productivity. In MGI’s Construction Productivity report, respondents (mostly large companies in developed countries) listed underinvestment in innovation only seventh out of 10 root causes of low productivity in the sector.

Innovation can make an important contribution to turning this situation around. Gaining traction are digital technologies, new lightweight materials and advanced automation. Of the three, digital technologies are spreading the most rapidly. Our survey revealed an adoption rate of more than 44% among respondents. Planned adoption within the next three years is expected to reach 70 %, far higher than adoption rates for materials and automation, which respondents said they expected to reach only 28% and 33%, respectively.

Projects can be run much more effectively using digital kit such as user-friendly apps that enable real-time communication among crews, often loaded on hand-held and mobile devices, and 5-D building-information-modelling (BIM)—3-D digital representation of a project overlaid with detail on scheduling and cost—together with augmented- and virtual-reality technology to create seamless interaction between offices and the work site. Use of such digital tools can address many of the core problems that beset the construction industry, including a lack of communication on complex sites, inefficient—and insufficient—design upfront leading to change orders and delays, and a lack of clarity on procurement and managing supply chains.

The U.S. General Services Administration mandated that new construction designed through its Public Buildings Service use BIM, and specifically encourages deployment of mature 3-D, 4-D, and 5-D BIM technologies. The cost savings on one pilot project using these technologies paid for the cost of another nine in the first year. Today, all but 18% of construction firms are using the technology.

Again in the United States, venture capital is now pouring into digital technologies such as construction management software, digital marketplaces and e-auction platforms that match owners and contractors in a transparent way, creating competition and lowering costs in real time. In one tunnel project in the U.S. with almost 600 vendors, the contractor put together a single platform for bidding, tendering, and contract management that saved the team more than 20 hours of staff time a week, and sped up the sending and receiving of documents by 90%.

The biggest leap in productivity can be achieved by use of more prefabrication and standardization with buildings largely manufactured in factories and assembled quickly on-site. Use of standardized components in China’s 10,000-kilometer high-speed-rail network, largely manufactured offsite, helps to keep costs per kilometer about 65% lower than it would be in the U.S. and around 80% lower than in the United Kingdom.

In the U.S., such approaches are increasing but are not yet the norm. In an August 2016 survey by the Associated General Contractors of America, only 13% of respondents said that they were investing in off-site prefabrication. There is a large opportunity for parts of the U.S. industry to reap huge productivity gains by moving more decisively in this direction.

Some of the most exciting developments are in developing economies. Take, for instance, new capabilities to print submodules or even complete concrete structures. In early 2015, Shanghai-based WinSun Construction, a pioneer of 3-D-printed structures, unveiled a six-story apartment building built entirely with a 3-D printer. In Dubai, a 2,700-square-foot office building was printed in 17 days at a cost of about $140,000. In October 2016, U.S. construction company Sunconomy announced plans to build the first 3-D-printed houses in the country.

Innovation is everywhere—and is rapid because of digitization. It makes no sense for the construction industry not to harness its power to save time and cost, reduce complexity, raise productivity, and create value. In conjunction with action on a broad front including reform of regulations and contracts, improvements in procurement and supply-chain management, and boosting skills, innovation has the power to unlock higher productivity in construction after years when the sector appeared stuck in a time warp.

This article first appeared in MarketWatch.

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