Construction Productivity In The News and Economic Research

I’m following up on my prior post about the New York Times article on Construction’s productivity crisis. That article just scratched the surface of the issues of why unit output per cost has not improved in many decades.

My perspective comes from a career in tech where innovation is a religion. Being new to Construction, I keep asking myself “what gives”? Why are so many people breaking their picks, so to speak, trying to improve the Construction industry with limited results?

In “The Strange and Awful Path of Productivity in the U.S. Construction Sector,” Austin Goolsbee and Chad Syverson try to research a root cause. Personally, I agree with Syverson: “I don’t know how you get 50 years of decline without having multiple problems”. So lets make a list of problems and see where it leads us.

My Construction Productivity Problem List

Stakeholder Data Demands Raise Costs and Slow Workflows

Any project has minimally a contractual relationship between an owner/developer, a designer/architect/engineer, and a general contractor. Then there are the financers, insurers, regulators, subcontractors, unions, property managers, neighboring residents, etc. And then there are the internal stakeholders within contractor firms, field vs headquarters. Collaboration and communications among these stakeholders is a problem, but easier than aligning everybody’s economic and regulatory interests.

But perhaps the biggest issue with having so many stakeholders is the data collaboration problem: Each stakeholder and profession has different data requirements, and endlessly growing data requirements. The problem shows up in never ending requirements for “paper: reports, invoices, bids, documentation, etc. Connected and collaborative data environments exist in other industries, such as finance and manufacturing. But they take a long time to develop, requiring cooperation among sometime competitors, a dominant technology leader, or government leadership around standards.

Every Building’s Uniqueness Lowers Productivity

From household remodels to corporate office parks to Trump towers, project owners insist on uniqueness. They want a building that’s a reflection of a business’s or person’s brand. That means customization, often determined emotionally on the fly, not well-designed in advance. The result requires change orders making bid estimates obsolete, cost claims, etc. Uncontrolled variation in project scope means either huge cost overruns or a project that never finishes.

Regulate More and Inconsistent

The federal government both regulates directly and indirectly through their procurement requirements. States are similar, and some easier going than others. Property owners and tax paying entities predominate at the local level. And in most places, everyone in the neighborhood can, at a minimum, cause delays. Nobody willingly gives up regulatory control.

Regulations on real property often actively inhibit productivity improving innovation in the name of safety. Perhaps even the safety of the regulators themselves, who would just as well prefer everything in construction stay with the tried and true versus innovation.

Lawyers and the legal system negotiate the interests of our many stakeholders. These professionals profit from the competing interests of project owners and builders and the regulators. But at great indirect cost to construction productivity.

Lack of Contractor Competition…

If government is doing its job, it assures markets stay competitive. Competition is a spur to greater productivity.

But construction projects are always somewhere local, and wherever that locality is, there will always be a limited number of qualified reputable builders willing and able to bid. Regional developers succeed in large part because they know their local stakeholders well. Construction labor is not highly mobile, after all.

And for the largest projects and civil construction, there are a limited number of builders big enough to take on the bidding, scope and risk. They must also be big enough to be sued for poor performance.

Over time, this creates a set of regional oligopolies for most projects, and a small number of bidders for very large projects.

…Or Just Too many Contractors?

A huge percentage of contractors are small firms with 10 or fewer employees. Contracting is one of the few businesses that’s relatively easy to start. That’s a good thing. But they are not necessarily easy to run with so many stakeholders. Smallness limits their ability manage risk, attract talent, invest, comply with regulations, etc. At a macro economic level, that means the industry cannot achieve economies of scale without extensive M&A.

Safety is Only a Cost Diminishing Productivity

Construction safety, like productivity, has been flat or down over the past four decades. The insurance industry’s role, in part, is to subsidize poor safety practices by distributing the cost of accidents over the entire industry. As long as all competitors have the same insurance cost burden, there’s no advantage to being safer. Safety is seen as a cost, not a virtue, and safety professionals often marginalized. Resistance to safety mandates helped make Covid the leading cause of construction worker deaths in 2020/2021. Manufacturers cannot be indifferent to quality. How can builders be indifferent to safety? Is it because safety risks occur only during construction, and thus temporarily?

Never Enough Skilled Workers

This is the one productivity issue everyone talks of, but often for the wrong reason: The industry is historically addicted to low cost non-union labor facilitated by lots of undocumented Spanish speaking workers. Cheap labor has traditionally been an easier solution than technology, automation, process improvement or other productivity enhancements. But when those labor costs increase, productivity heads south.

Technology Generation Gap

I’ve been told never to talk innovation with a construction executive over 50 — discouraging, since I’m over 50 myself. Leaders who are close to retirement don’t want to change anything until they sail into the sunset. I’ve also been told innovation and change will only come from young entrants. But many younger leaders lack experience with long tail risks, the kind that are only seen over years. Youth have great facility with consumer electronics, but that may mean they overestimate technology benefits and underestimate the costs of change.

Cultural Differences Dent Productivity

Field work culture was created by the trades and is primarily male. Field experience is measured by your facility manipulating the physical world over time, not book learning or data processing Field culture values the ability to live with risks to one’s own body. In the field, hard work is physically tiring.

Much of the work in Headquarters is office work using desktop computers, operating software packages, entering and processing data. College degrees are common and staff increasingly female. At HQ, risks are reputational and financial. At HQ, hard work is mentally tiring.

Architects, designers and engineers are also all college educated and believe in working with data. These professionals push for Building Information Management solutions, digital twins, etc. Architects and designers consider themselves “creatives”, while engineers pride themselves on knowing how the real physical world works.

Design, engineering and field professionals get a big ego thrill from saying “I built that”.  That thrill matches the project owner’s ego thrill from customizing. That motivation is often stronger than the thrill of making high margins, or bragging how efficient the construction was, or how safe, etc.

Best Practice Adoption is Slow or Unaffordable

If consultancies have a macro economic purpose, it’s to facilitate and transmit best practices within an industry. The Construction industry doesn’t hire many business consultants. Look how infrequently McKinsey and other consultancies even mention Construction. Because most competition is local, there is fear of sharing any innovation that reduces competitive advantage.

Inappropriate Management Metaphors

There are several attempts to define a Construction-centric version of some tech innovation strategy. Lean construction, for example, borrows from manufacturing. But Lean is all about eliminating waste — is that really the biggest issue for construction? Agile borrows from software. But agile is all about adapting to continuous change — not a desirable thing when building buildings. Most tech is about data processing, but moving around physical matter takes much more energy of all kinds than moving electrons around.

Risk and Investment Aversion to Change

General contractors are too often the only entity with a motivation to control risks. GC profits are found only with cost-plus contracting and by encouraging change orders. Most construction firms are private family businesses whose owners rely on cash flow. Investments divert cash flow to an uncertain future when the investment may or may not pay off. Better to fund anything new-fangled only from project cash flow.

Inflexible Politics

Red: Reducing taxes improves margins but not productivity. Suppressing immigration reform only makes labor of all kinds scarcer and more expensive. Small government is not necessarily smarter, especially when your workforce needs ever more training and education. Regulation meets societal needs and helps those not contractually involved in a project.

Blue: Every regulation is an aggregate tax on all stakeholders. Unions were important for the initial wave of worker physical and financial safeguards, but regulations have taken on most of the safety duty, leaving unions with one purpose only: Raise wages. “Made in America” and prevailing wage laws may be politically popular, but they also drive up costs and productivity down.

More Science But Less Innovation

Asish Arora  at the National Bureau of Economic Research: “A defining feature of modern economic growth is the systematic application of science to advance technology …The past three decades have been marked by a growing division of labor between universities focusing on research and large corporations focusing on development. Knowledge produced by universities is not often in a form that can be readily digested and turned into new goods and services. Small firms and university technology transfer offices cannot fully substitute for corporate research, which had integrated multiple disciplines at the scale required to solve significant technical problems. Therefore, whereas the division of innovative labor may have raised the volume of science by universities, it has also slowed, at least for a period of time, the transformation of that knowledge into novel products and processes.”

Boiling the Ocean vs Incremental Change

Perhaps in frustration, investors can get carried away and attempt to remake the entire system. A couple years back, Katerra went that way and burned through billions along the way. Similar attempts at reforming healthcare (remember Berkshire, Amazon and Microsoft’s attempt?) have also floundered.

What Will Improve Productivity at Scale?

In the next posts, we’ll throw out solutions to poor construction productivity, ideas we’ve heard of, or imagined our own self.

Some of these pieces draw on work by Klein, whose excellent blog I highly recommend. Let me know what you think about this post and our others on construction innovation at david.ward@safesitecheckin.com