Competition and Construction Productivity

by | Mar 7, 2023

Competition in the Construction Industry

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?