Construction Productivity Has Stagnated
Earlier this month, an op-ed in the New York Times, “The Story Construction Tells About America’s Economy Is Disturbing” states that productivity in the construction industry began to decline in 1970. A construction worker in 2020 produced less than a construction worker in 1970.
This is remarkable, given that US industry as a whole increased overall labor productivity by 290 percent between 1950 and 2020. Productivity is measured by the output per unit cost, mostly using data from the US Bureau of Labor Statistics.
In nearly every industry except construction, digital technology has boosted productivity. But it took a while — in the 90’s, economists struggled to see a correlation between computing and productivity. They called it the productivity paradox in this article by the Federal Reserve. Most of their conclusions were based on Manufacturing, which experienced productivity growth of about 4% a year.
My whole career has been spent developing digital technologies to improve productivity in a variety of industries. Now that I’m trying to do the same with the construction industry, I’m trying to figure out why and how. Why is this industry so difficult to automate? How might the slump in productivity end?
What Will It Take to Raise Productivity?
In our opinion, the answer to the productivity slump will require:
- All project stakeholders to share the same project data and use it to collaborate.
- Project organizations need to reduce the number of stakeholders (e.g., design+build) to expedite decision making.
- Field operations and the trades need to fully embrace digital data management. Unless the old dogs learn new tricks, we’ll have to wait until a younger digital native generation to take over.
- Project owners and designers need to make more use of pre-fabrication efficiencies versus custom everything.
- Policy makers in government need to incentivize all the above and streamline regulation by embracing digital methods as well.
- Top executives need to be more aggressive investing in digital change and less complacent and/or forgiving of the status quo.
How Long Until Digital Boosts Productivity
The Fed’s analysis of digital transformation and productivity goes something like this:
- Using computing to manage by data digitally makes a lot of sense
- Companies start acquiring digital technology
- But digital requires hiring people with college degrees who have such skills
- Companies reorganized to absorb more college grads
- College grads impose higher labor costs
- These higher labor costs suppress productivity — for a while
“But simply reorganizing the workplace to accommodate higher-skilled workers isn’t the end of the story. How firms reorganize is also important. In a 1997 article, Sandra Black and Lisa Lynch asserted that manufacturing firms that gave workers a significant decision-making role were markedly more productive than firms that did not.”
Productivity improved, therefore, when digital skills spread through the entire organization, not just managers. The authors also noted that profit-sharing plans or total quality programs designed by and for managers didn’t improve productivity.
How Digital Transformation in Construction Is Different
Yet comparing productivity in construction with industries such as manufacturing and finance is problematic. In financial services, productivity correlates with data processing power and software — most money today, after all, is just data in a database.
In construction, you need to move matter and mass. Mistakes aren’t easily resolved with keystrokes. While manufacturers deal with mass and matter and safety issues as well, factories produce identical products over and over.
Also, in construction,
- Every project is custom to some extent.
- Projects are built specifically for a particular industry and region.
- Projects have an ever increasing number of stakeholders, some economic, some just living in the region.
- There’s a managerial and cultural gap between a project’s knowledge workers and field operations.
- The HQ/Field gap is both available data and cultural (desk workers vs building trades).
Will Increased Investment Make Construction Productivity Rise
Investors apparently see Construction’s stagnation as an opportunity. Big investments in construction tech have grown in recent years and continue today. According to data from Cemex Ventures, investments in the construction tech ecosystem reached a record $4.5B in 2021, triple the amount invested in 2020.
And a quick look at the press that covers these investments show that bridging the HQ/Field gap is where much of the investment is going:
- Building Information Management solutions to provide a common data environment for projects.
- Digital “twins” so designs get built with less friction and rework.
- Sensor and drone use to bring field ops into HQ.
- Any number of mobile and tablet apps to get field data to HQ.
Nothing seems to be moving the productivity needle yet. Could it be that the trickle down is just taking more time?
Our view is that the consumerization of digital tech will make a difference. Most all workers now use smart phones, and eventually the culture at the jobsites will become more digital. As jobsite work is re-organized around digital data, the fifty year construction productivity stagnation could end.
Maybe There are Too Many Project Stakeholders
Too Many Cooks in the Construction Kitchen?
Productivity is the rate of unit production (buildings, roads) divided by cost. So either project costs have steadily increased, or construction workers and methods are producing less, or some combination of both.
Is poor productivity the result of too many stakeholders per project? The op-ed in the New York Times, “The Story Construction Tells About America’s Economy Is Disturbing” states that productivity in the construction industry began to decline in 1970 and hasn’t improved in fifty years.
Why is construction productivity down over such a long period of time? Transient factors such as the recent inflationary surge, supply shortages and skilled labor shortages come and go quickly. But they cannot explain a decline over fifty years.
Bidding and estimating labor was mentioned in the NYTimes article as going from one estimate per bid to three on average. But why? No doubt it’s to improve overall accuracy and profits, and probably a response to poor productivity and competitiveness, not a cause.
Over Time, Ever More Stakeholders Direct and Indirect
Stakeholders can be either an entity with direct approval authority, or indirect, such as a representative of the public or other interest group.
Construction projects have always had at least three direct stakeholders: The property owner who arranges financing, the designer/architect and the building contractor. But they’ve also always had at least one indirect stakeholder: The local regional government where the construction takes place.
Fifty years ago, at least two more stakeholders were added: OSHA and the EPA. While these agencies were created for good reasons — worker safety and environmental health — they have imposed increasing compliance costs on construction projects.
In 1970, the same year cited in the construction productivity report, the Occupational Safety and Health Act (OSHA) was passed. This legislation was widely supported to reduce project injuries, illnesses and fatalities. But it also required additional costs: recordkeeping, reporting, inspections, audits, and investigation of incidents and accidents. Almost all these costs are borne by the building contractor.
The EPA also dates from the Nixon administration of the early 1970s. Environmental regulations have also grown over the decades as well, with many of the same costs, although these costs perhaps fall as much on the designer/architect as the building contractor.
The regulatory demands of federal programs have grown, but so have local government regulations modeled on the federal agencies. In the 1960s to ‘80s, town hall meetings didn’t draw large crowds including neighbors, politicians, lobbyists, and more to voice their opinions on new developments. Nor did the building process require so many experts, reports and analysis.
And when governments themselves are project owners, they dictate not only design, but costs like:
- how (“made in the USA” materials),
- who (unions, small business set asides), and
- pay (prevailing wages).
What Stakeholders Need is Data not Paperwork
Indeed, construction projects have far more stakeholders and they all impose additional costs. Stakeholder consensus needs to be achieved before permits are granted, well before breaking ground, and during a building project as well.
Fifty years ago, new building was economic “progress” and seen as a public good. Now any new building project confronts both increased regulation and NIMBYism from the general public. The NYTimes article rightfully calls out the resulting huge increase in paperwork proving approvals and compliance.
Producing such paperwork is expensive, but also the time delaying building while the paperwork is digested by all stakeholders. More workers who are not actually building are needed to satisfy stakeholders, raising overhead costs, mostly at headquarters. But compared to the number employed in the building trades and their costs, these HQ increases are marginal.
My take, as a career tech executive, is that the construction industry often conflates a desire for data with a desire for paperwork. After all, no stakeholder wants to handle and process paper, it’s expensive for everyone. What they want is accurate, timely and actionable information they can trust, not paper.
Data Solutions for the Stakeholder Problem
Haven’t advanced data communications and processing transformed everything over the past fifty years? Financial services are at least as regulated as construction, yet their productivity has been the opposite of stagnant.
Data solutions to satisfy multiple stakeholder users take various forms:
- Collaboration tools such as Office 365, Google Workplace, Slack, etc.
- Building Information Management solutions that share project files
- Workflow applications that optimize data flows between stakeholders
- Integrations between workflow applications to encompass more stakeholders
- “Platforms” that encompass the needs of multiple stakeholders in one large application
Of course more stakeholders means higher costs and project management complexity. But other industries have managed to improve over the past fifty years by utilizing the massive increases in computing and communications power. Why not construction?
A Smaller Construction Workforce, But Still Less Productivity
Where Did the Construction Workforce Go?
The construction industry cannot hire enough workers, and now has an historic workforce shortage. Construction has had a workforce shortage for a very long time. Academic research into the topic goes back to the 1990s.
The most recent narrative goes something like this:
- The residential construction boom of of 2003-2007 brought many workers into the industry, including workers from abroad.
- The great recession bust of 2008-2013 forced these workers out of the industry except for low cost immigrants.
- In the meantime, the workforce has aged and underinvested in workforce development and recruiting.
- So not enough new workers are entering the industry to offset those retiring, especially with greatly reduced immigration.
If the construction workforce has shrunk or at least not kept up with demand, why has construction workforce productivity stayed depressed?
What Happened to Construction Workforce Productivity?
Construction labor productivity has steadily declined, even with automation on the jobsite. Even a simple tool like a nail gun can easily increase the productivity of framing, and all tool costs have decreased dramatically. Even “dumb” phones make communicating with crews easy today. Dozens of examples easily come to mind, even before we get to advanced tech such as digital sensors, image and video tech, drones, AI, etc.
If productivity is output versus cost, if you get the same output at less cost, you get more productivity. The construction workforce has shrunk or at least not kept up with demand. Workers are equipped with more productivity enhancing automation. So why has construction workforce productivity stayed depressed?
Labor productivity stagnation is especially surprising since union representation has steadily declined over the fifty year period as well. Because unions likely raise wages more than output, unions are largely seen as a drag on productivity. But the decline of union representation continues today.
Have Safety Regulations Depressed Productivity?
Are increased worker safety practices really a cause of lower productivity? Fifty years ago the cost of injuries and deaths onsite was borne almost entirely by the workers, not the builders. Prospective workers that shun construction often cite dangerous job conditions as a reason to avoid the industry.
With a shrinking workforce, logic dictates you keep your remaining workforce healthy. Making sure your workforce is warmed up physically and mentally before beginning a shift (as mentioned in the NY Times op-ed) makes sense.
Would we prefer that all safety related claims and costs were adjudicated by lawsuit? Even with liability insurance, lawsuit costs are astronomical. Most builders are small and can hardly afford their part time lawyer, much less a lawsuit. Everyone in the USA pays for their own lawyer. Most cases will bankrupt a small firm even when they are blameless.
I doubt we want the Turkish industry’s practices, now seen in the aftermath of an earthquake. Quibbles about particular rules aside, safety regulation is a benefit to builders, workers and the public.
If OSHA is regulating all builders equally, the costs and benefits should equalize. Sure, we want to make every business process more efficient, including safety. But we need to look elsewhere to raise productivity.
Does the Construction Workforce Need More Education?
Is poor training part of the explanation? Are our workers less skilled, motivated and “productive”? Is our education system to blame?
Most labor market experts agree that an over emphasis on classroom instruction is probably more to blame. Building is highly experiential, a physical experience where you learn by doing. There’s limits to what can be learned in a classroom when going from apprentice to journeyman takes five years.
Since much training is outsourced to unions, perhaps the decline in union representation is to blame. Most construction firms are not large enough to fund a major training program.
Poorly designed education systems, with too much book learning and not enough fieldwork training, is likely a factor of poor productivity. And poor training amplifies the worker shortage effect.
What If Minority and Skilled Immigration is Needed?
Is minority discrimination part of the explanation? Construction is overrepresented by white males – to put it mildly. Even without outright bigotry and exclusion, recruiting minority and female workers will need to overcome resistance, fear and just not fitting in. And that’s before they begin to acquire skills that typically takes five years to learn.
And then there is immigration. While the industry is loath to talk about it, it’s pretty obvious how dependent the construction industry became on low cost undocumented labor. How many jobsites have you walked by where Spanish, not English, was the language of work? How often is fear of deportation a management strategy?
I have said for years: Either the work can be done locally, or eventually it will be done remotely. Or not at all, if it becomes too expensive.
Last I checked, immigration has been increasingly restricted for over twenty years with the big exception of the tech industry. Tech has always understood the necessity of recruiting foreign-born workers. But today, we’re still preventing skilled construction workers from immigrating, even if only temporarily.
Fixing the Workforce Shortage and Raise Productivity
My view is that the current labor and productivity shortage will only be fixed via:
- Near term, 1-2yrs: Increased use of automation so we need fewer workers
- Medium term, 2-5yrs: Minority and underrepresented group recruitment and more effective training
- Longer term, 5+yrs: Immigration reform to replace retiring baby boomers
Is There Enough Competition in Construction
I’m not an economist and don’t play one on TV. But ever since I entered the construction tech market with Safe Site Check In, I’ve been struck by its contradictions. Construction is one of the easiest industries for entrepreneurs to enter, especially those with trade skills and no college degrees. At the same time, the future of construction management is highly digital, and digital almost always requires high cost knowledge workers. How does this play out in the construction industry?
Competition in Regional Construction Markets
In most industries, if the government is doing its job to prevent monopolies from forming, competitive pressures ensure that firms strive to improve productivity. So what if a lack of competition is part of the productivity slide in the construction industry?
This might seem an odd question given there are over a million contractors in the USA alone. But consider:
- The vast majority of construction projects are ultimately local and not that big.
- Winning project bids and approvals requires consensus and collaboration among local stakeholders, as the NYTimes article discussed.
- Older firms with the best connections with local stakeholders and leaders will have a competitive advantage (“old boy network”)
- Travel is expensive so most construction workers live local to their employer and their employer’s projects. And not all building is alike, so skills
- Most local construction firms have difficulty investing in construction tech and modern workflows, usually because they are too small and family owned. Over 90% have fewer than ten employees.
- Local building economic conditions are much more volatile than nationally, and local recessions kill off many more firms.
- Local regulators and contractors are risk averse and prefer the tried and true to anything new. If they are winning bids, what’s the motivation to change?
Competition in the National Construction Market
What about the really big projects funded by the feds and larger states? Most such projects are so big that very few firms can even successfully bid for them, much less win. Only very large builders have the engineering and financing resources necessary and, if they win, the ability to manage the risks.
Outside of engineering, the Construction workforce is not made of the hybrid office workers we hear so much about. Even the national construction market depends on local labor providers. And as always, most of the work ends up being done by local contractors and their local workforce.
General vs Specialty Contractors
Competition between firms based on trade skills often becomes a labor arbitrage game: Who can hire the best or most trade workers at least cost? Most such firms will tend to become specialty contractors providing particular trades. Regional general contractors can still compete while employing trades, especially if they focus on particular industries, like healthcare, or government, etc.
Economic Nationalism and Competition in Construction
Governments generally encourage strategies to buy and hire within their own borders. But let’s face it: Such policies reduce competition. In Europe, contractors cross borders to compete all the time. Not so much in the USA.
Competition Digitally Transformed
Competition between general contractors is increasingly based on their ability to hire knowledge workers and engineers and manage using data. Competition increasingly becomes a game of who is smarter: Who can deploy trade and knowledge labor most efficiently and with least risk?
The larger the firm, the more it can afford to spend on computing systems and the knowledge workers who know how to exploit data. We’ve seen this in other industries as well: Large, capital-rich Amazon-like firms develop economies of scale based on digital data exploits. When will this happen in construction? Has it already?
Construction Technology Adoption – Why So Slow?
Reasons for the Construction Productivity Decline
To sum up our analysis, here are some causes of construction’s productivity decline over the past fifty years, and why construction technology adoption has been so slow:
- Ever increasing number of stakeholders (too many “cooks spoil the broth”)
- Over regulation (OSHA, NIMBYism, permitting, set asides, energy efficiency…)
- Buildings are over customized negating economies of scale (e.g., prefabrication)
- Lack of investment by contractors (small, family owned firms dominate)
- Lack of investment by VCs (an unattractive market of buyers)
- Limited competition (local firms in an old boys network)
- Too few skilled workers (poor training programs, anti-immigrant politics)
- HQ jobsite divide (knowledge workers vs building trades)
- Automation only in the office, not the field and jobsites (except for smartphones)
Blame Stakeholders and Regulation?
Repealing regulation or removing stakeholders from projects is highly unlikely. Once their rights as stakeholders are established, they never give up their authority to say “no”. For example, zoning restrictions and “not in my backyard” NIMBYism persist even when everyone agrees there is a housing shortage crisis.
Other regulations are required because of societal impacts — such as worker safety via OSHA and environmental health via the EPA. These cannot be effectively addressed via litigation. Even when bad actors are at fault, even more litigation is required for enforcement, and the whole process can take decades.
Contractors must adapt to regulation. Other regulated industries such as financial services have. Those industries adopted digital data solutions and modern communications and collaboration technology.
Regulatory rules for specific workflows should be built into software. Companies using such software lower their compliance costs and are positioned to satisfy even increased stakeholder requirements.
Why Hasn’t Construction Automated More?
Construction is notoriously late and slow to adopt technology. In part, it’s because contractors already balance a dozen or more major risks on every project. Most contractor executives know what needs improvement via technology. But technology investments are just one more risk among many.
It is true that the more stakeholders there are, the more complex the data workflow and communications become. Even relatively simple, low impact decisions require a spider-web of links. Multiple stakeholders complicates every aspect of construction management.
The same is true of internal stakeholders. Application integrations inside a firm are also difficult and expensive.
Consider what it takes to integrate bidding, estimating, and accounting with the project management/ERP applications needed to build. Such integrations are very hard to get right. The financial data needs to match on both sides of the integration.
Firms can bet the farm on one vendor’s platform to meet all their needs. But only at great cost, and with long term vendor lock-in. Large project firms can better afford such new technology adoption risks. But there is little trickle-down of such expertise into the vast majority of small to medium sized contractors.
The Cultural Divide: HQ and Jobsite
It’s not that the construction industry doesn’t use software and technology. At headquarters, for back office processes, software is used by most all desk professionals. But getting field operations to change remains a big problem, even for large contractors. We believe the field adoption problem is part cultural and part managerial.
Field professionals are not desk-based knowledge workers. Experience and seniority is gained by building, not book learning. There are fewer shortcuts up the career ladder. Unions form a buffer between workers and management.
Field workers find physical tools are more interesting than data. Data and technology know-it-alls, like myself, are held in suspicion. That’s often deserved, because prior attempts were not suited to field operations and their personnel.
Missing Leadership at HQ
The managerial friction on adoption is more subtle: Field managers are rewarded on completing their projects at a profit. This means that productivity investments for the entire firm need to be made outside of project cost budgets. It shouldn’t matter if the costs are direct or indirect. Manager need to think in terms of investment and ROI, not just cost.
Allowing project personnel to select technology without oversight can make things worse. We’ve talked to some very large firms that have huge portfolios of software. They allowed field managers to select their favorites. Data integration is now hugely expensive. CTO’s become relatively powerless.
Finally, it’s an industry dominated by small firms. Small firms are less likely to learn best practices for digital transformation. In part, they are too small to afford the consultants with such knowledge.
But maybe they also lack the patience to see investments pay off and become business as usual. Maybe there is always something tactical seen as more important requiring attention.
Investments That Could Raise Productivity in 2023-24
In our opinion, there are investments that could have an immediate impact. We are starting to see adoption on projects, and think that’s a very positive trend.
According to data from Cemex Ventures, investments in the construction tech ecosystem reached a record $4.5B in 2021, triple the amount invested in 2020. What will finally move the productivity needle from stagnant to positive? The effect on GNP growth would be substantial.
Investors and vendors are still betting contractors will be buyers of their products. Products like large software platforms, tools and apps to automate manual tasks, replace paperwork with data, and streamline workflows and collaboration among stakeholders.
Contractors will naturally look for the path of least resistance — low cost investments ideally made out of their current project cash flow.
Tech innovations that will improve construction productivity:
- Tightens data integration and workflow automation among stakeholders. Enables more digital management and collaboration. Especially if such tech can automate the expensive professional services costs of implementation…
- Adds value to a existing investments, platforms like Procore, Trimble, CMIC, etc. Buyers have already heavily invested, products that augment those investments will be sought after.
- Leverages manufacturing efficiencies. Prefabrication can reduce field operations costs, although building codes and permitting will have to be relaxed.
- Field operations: The jobsite and those who work there have to go digital and use the same data as HQ. Such technology must collect digital field data in ways acceptable to the culture of field operations. Consumer mobile platforms are key, as well as “smart” tools and machinery.
- Implements a “Six Sigma” approach to safety: In software and manufacturing, you can’t test-in quality, it must be built-in. The same principle should apply to safety during construction.
- Raises the productivity of our most expensive resources: People. Tech that creates an intelligent assistant to architects and engineers. Tech that automates routine jobsite and project management functions. Enables efficient hybrid offices for knowledge workers.
- Workforce development: Public, private, union, education institutions will play a part. Software will play a role here to track skill development in an industry where specific skills used on projects matters more than who you worked for.
- Targets specific industries. Not all buildings are the same; roads are built differently from hospitals, etc. If a technology can help someone build a better data center, for example, the tech company owners of such projects will pay attention.
Management innovations that can improve productivity:
- Business models enabling more “vertical” integration: One way to reduce stakeholder complexity is by combining design with build, for example, or even owner+design+build+operate. Such business structures could better absorb technology risk, increase the use of prefabrication, etc.
- Increased M&A: The bigger the firm, the more it’s able to afford investments in tech and process improvement.
- Regulatory reform: Restrictive residential zoning rules not only prevent building; they also drive up costs. Permitting needs to permit new tech to be tested, even though it’s riskier than today’s 30 year old technologies. Prefab!
- Immigration reform: We need more skilled labor than we can quickly create ourselves. At a minimum, demand congress approve temporary work visas.
- Unify HQ and the Field: The cultural divide between field workers and headquarters needs to end. Adoption of technology and data is essential to improve productivity. It’s not impossible; we all manage our lives using digital technology. Consumerization will help bridge the gap when management pushes adoption inclusively and tactfully.
- Compensation plans that reward productivity: Stop paying project managers as if they run independent subsidiaries. At least part of their compensation needs to align with overall profitability.
- New leadership. Other industries have innovated and changed, construction can get out of its productivity slump too. But its leadership has to be open to new methods, calculated risks in new tech — and likely a new generation of leadership.
Impractical tech innovations for now, wait and see
- Sensors/Internet of things — Wait for 5G/6G/satellite communications networks.
- Blockchain, Crypto — A technology in search of a viable use case. Databases are more affordable.
- Robots — Wait and see for proof of quality, cost effectiveness
- 3-D printing — Wait and see for proof of quality, cost effectiveness