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Restructuring Construction Industry Productivity

March 18, 2024
It’s beyond a labor issue.

High inflation and labor shortages are a major challenge for many industries, and no more so than in the construction and engineering (C&E) sector, where productivity has historically always been low. C&E firms can improve project efficiency by increasing productivity, lowering costs, and reducing waste. And it’s not all just about tackling labor issues — that’s just one interrelated issue.

The construction industry has lagged the manufacturing industry in terms of productivity gains in recent decades. This is due to several factors, including fixed and repeatable processes, the use of automation, and standardized materials that are common in manufacturing but not in construction.

By their very nature, construction projects are often unique and complex, making it difficult to develop standardized processes and automate tasks. The industry is also highly fragmented, with many small- and medium-sized businesses, which can make it difficult to implement industry-wide initiatives to improve productivity. And if that wasn’t enough, two additional issues must be factored in. The construction industry faces a shortage of skilled workers and is often subject to weather delays, which can disrupt schedules and impact productivity.

According to metrics from the Becker Friedman Institute for Economics at the University of Chicago, “The productivity struggle within the construction sector is real, and not a result of measurement error. Given its place in the economy, this productivity decline has real effects: Had construction labor productivity grown over the last five decades at the (relatively modest) rate of 1% per year, annual aggregate labor productivity growth would have been roughly 0.18% higher, resulting in about 10% higher aggregate labor productivity (and, plausibly, income per capita) today.”

Working smarter – away from the construction site

There are certainly lessons to be learned from the manufacturing industry here. A strong industrialized construction trend in the industry is evidence that electrical contractors and clients see benefits in adopting new ways of working. Modular and prefabrication strategies are certainly increasing, and there is a trend toward doing less work on the construction site and more work off site in production or supply hub locations.

Modular work can be performed more efficiently, at a lower cost, and at a higher quality. Shop environments let the same number of people perform more work, so as the aging skilled workforce retires, modular will be attractive for human capital management purposes. It’s no wonder more contractors, house builders, and engineering firms are pushing the use of shop-based construction, and more project owners are seeing the value.

Bottleneck is not always the labor pool

If you consider where the cost comes from in a construction project, it is typically dominated by four types of costs: labor, material, subcontractor, and equipment, such as cranes, excavators, etc.

There is a tendency to focus on labor productivity, but for some, labor costs can be as little as 10% of the project costs. Therefore, depending on the project, it may not necessarily be the right area to prioritize. Let’s look at the composition of total project costs.

The make-up of the project costs will differ based on factors such as your role — are you a main/general contractor, a specialty contractor, or a material/equipment supplier? Also, it matters whether you’re following a self-perform or subcontract construction model. This means that the focus on where to reduce costs will vary across different organizations and projects.

Looking at the big picture

Perhaps the real answer lies in not focusing on these four resource types as four independent areas, but instead recognizing that minimizing project costs requires a synchronized approach. There are many reasons for poor productivity — from bad planning and scheduling, too many scope or design changes, inexperienced labor, bad weather, etc. So, there is a huge opportunity to improve and reduce costs here.

For example, when you measure labor productivity and witness workers standing around on a construction site not doing productive work, the obvious question comes up… why? In most cases, it is not their lack of knowledge, skill, or willingness to work hard that is the issue, but the fact that they are stopped because the other resources are not available — such as materials or equipment — or because they are waiting for another work package to finish before they can start or continue their work. This is possibly the main reason why manufacturing work can be executed at a lower cost and with more reliable completion dates.

If you accept this argument, then the focus for the industry is to have integrated project and resource planning with structured work packages that can be planned and synchronized to eliminate waste and increase total resource productivity. This will also improve project delivery performance and increase project margins.

Subcontractors add extra layer of complexity

Most contractors deliver projects using a mix of self-perform and subcontract models. Subcontract packages must be efficiently managed. Stats from the National Association of Homebuilders show it takes 24 subcontractors (on average) to build a single home. Therefore, it’s critical to have effective business processes in place to ensure that the subcontractors deliver work on time and to a high quality.

Successful management of subcontractors relies on the collaboration of multiple key roles within a project, and the transparency of data, ensuring that the main contractor is working from a single source of truth. Any supporting construction software tool must provide a platform with one source of truth, where the data is real-world, live, accurate, and protected from manipulation — allowing contract and project managers to evolve away from struggling to handle hundreds of different static Excel spreadsheets at any one time.

Equipment management — sweat the assets

Now let’s look at the equipment — another place where project costs can be reduced is by improving their management of assets and equipment. Most construction companies have equipment sitting idle for long periods, which means that the project is incurring unnecessary costs that directly hit the bottom line. Better planning and tracking of equipment can significantly reduce equipment costs.

Many construction and engineering companies operate multiple business units, some of which are not project-centric (e.g., service or facilities management to offer asset operations and maintenance services or an off-site manufacturing plant, or they may own equipment that they rent or hire to internal/external construction contractors).

For these business units, optimizing their resources is just as important to maximize business unit performance. As an example, a maintenance service provider can significantly cut down costs by utilizing intelligent AI-based resource planning and scheduling software to plan and schedule work most efficiently. This smart AI technology can also be implemented in various types of businesses for similar benefits.

Restructuring construction productivity

In all of this, it is key to focus on reducing project costs in a synchronized manner. This means looking at all the factors that contribute to costs. Labor is one, but materials, subcontractors, and equipment are three important pain points. By using integrated project and resource planning, construction companies can identify and eliminate wasted time/resources and improve overall productivity. By adopting new technologies and ways of working, the industry can ultimately become more efficient and profitable.

About the Author

Kenny Ingram | Global Industry Director for Engineering, Construction, and Infrastructure

Kenny Ingram is the Vice President of Engineering, Construction & Infrastructure at IFS with specialization in the following industries: construction, contracting, engineering, infrastructure and shipbuilding. In addition, he is heavily involved in other project and asset lifecycle industries, including oil and gas, energy, utilities, and defense. His main responsibilities are to promote the IFS solution to the external marketplace and to educate the IFS workforce on the business issues and challenges these industries face. He is also a key member of the IFS product management team who are responsible for making decisions on the IFS product strategy. Kenny has been with IFS for 20 years and has worked in the business systems marketplace for more than 25 years. He is now regarded as one of the top specialists in project-based business systems and has been heavily involved in driving the IFS strategy in this area for the last 20 years. Prior to this, Kenny worked in industry in various positions covering management & project accounting, supply chain, and logistics.

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