Beating the Low Construction Productivity Trap

“Engineering and construction companies suffer from low margins and relatively low productivity. They can do better.”

According to McKinsey’s 2016 “Beating the Low Productivity Trap” report, it will take roughly $57 trillion in infrastructure investments by 2030 to keep up with the global economy. This translates into roughly 4 percent annual growth for engineering and construction firms. While this is an encouraging forecast for most, with stagnant labor productivity and a labor shortage, meeting this demand is a real concern for contractors.

What’s more, McKinsey analyzed the financial performance of 30 global, public construction and engineering companies between 2005 and 2015 and found that fewer than 15 percent experienced double-digit growth and margins during that time period.

These numbers are not what they should be.

As others have argued, construction is a low-margin industry of its own creation. By understanding the root causes of low construction productivity and embracing innovative technologies and processes, however, contractors can begin to boost margins and overall sector productivity.

What Has Gone Wrong for the Construction Industry?

First, it’s important to consider the internal and external factors facing the industry:

  • Too little accountability. As a relationship-driven industry, client satisfaction is everything, and contractors must work to deliver high-quality projects. With increasingly fragmented and subcontracted projects, however, organizational structures are often unclear with no one taking ultimate responsibility for project outcomes. While owners want projects completed on time and on budget, other stakeholders or some subcontractors may have different goals, including maximizing their own revenues and margins, which discourages collaboration and a unified view of project success.
  • Inadequate talent management. Construction companies are struggling to find enough skilled laborers for the job, yet few are investing in internal training programs. When companies only hire from “traditional” engineering and construction fields, they block themselves off from capable labor sources that can add a new perspective to their firm and bring critical skills like sales or account management.
  • Lack of consistent performance management. Companies often treat each project like it is one of a kind, failing to standardize and share best practices from one job to the next. While it’s true that no two projects are the same, that doesn’t mean contractors can’t learn from experience. In addition to being completely inefficient, companies are failing to scale up processes and procedures. Part of this relates to the industry’s slowness to adopt new technology. Clients want quality, cost-efficient projects, grounded in productive methods and technologies. Data, frequent reports and overall communication will go a long way towards managing client expectations and improving overall satisfaction.

What Contractors Can Do

Fortunately, there are three key things construction companies can do to boost overall productivity and profit margins:

  • Set clear goals. The most successful firms set reasonable, data-driven goals that are communicated – and understood – by stakeholders, managers and workers. Promote a culture of measurement and precision; when you start with data-driven baselines, you can better evaluate process and execution. This also helps companies build uniform practices, learn from their successes and failures, and carry these lessons with them into future projects.
  • Invest in your workforce. Across your workforce, and particularly project managers, encourage and enable constant improvement and training. Mentorship programs, performance evaluations and regular feedback sessions will help increase project accountability – and success.
  • Implement a single database. Finally, contractors need to create a single data system that allows them to track project metrics at regular intervals and identify areas for improvement. Currently, each stage of a project, from planning, design, procurement to construction and risk management, utilizes a separate database, which collects different information in different ways. This makes data interpretation near impossible, and when owners or executives ask simple questions, they are unable to get answers or get different answers. Make an integrated, comprehensive data strategy from the beginning. What’s more, companies that have access to real-time, centralized data can improve decision-making and mitigate risks. Systems like Spot-r that automatically collect and record data – in real-time – enable companies to make smarter, data-driven decisions, helping them “avoid making decisions in the dark.”

It’s no secret that construction, historically, has been slow to adopt technology that can drive more productive and profitable projects. The most successful contractors will adopt an end-to-end approach that targets cultural transformation. Hiring from a diverse pool of qualified candidates, investing in training and development, connecting stakeholders and standardizing project success metrics can unlock sector productivity. Most importantly, by digitizing currently manual processes and leveraging new, standardized technologies and systems, construction can unlock productivity, higher profit margins – and build the infrastructure the world needs.

Beating the Low Construction Productivity Trap