Is Poor Construction Productivity an Investment Opportunity?

by | Feb 23, 2023

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.

How Long Until Digital Ups 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. Black and Lynch also found that productivity was higher in plants in which a high proportion of nonmanagerial workers used computers, and in plants where workers had high average levels of education.”

Productivity improved, therefore, when digital skills trickled down through the organization. The authors also noted that neither profit-sharing plans designed exclusively for managers nor total quality management programs did anything to improve plant 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.
  • Every project is 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:

  1. Building Information Management solutions to provide a common data environment for projects.
  2. Digital “twins” so designs get built with less friction and rework.
  3. Sensor and drone use to bring field ops into HQ.
  4. 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.