The Herman Trend Alert

July 3, 2019

Reinventing Construction

One of the largest sectors in the world economy is Construction. Globally, this sector represents about $10 trillion USD spent on construction-related goods and services every year. However, for decades, this industry's productivity has lagged the output of other sectors; there is a $1.6 trillion USD opportunity to close the gap. This Herman Trend Alert was informed by the recent McKinsey study about the construction industry.

The trailing construction industry

Worldwide, construction sector labor-productivity growth averaged only 1 percent a year over the past two decades. Compare that with the over 2.8 percent growth for the total world economy and 3.6 percent for the manufacturing sector. That increase would meet about half of the world's annual infrastructure needs or increase global GDP by 2 percent. In the United States, since 1945, productivity in manufacturing, retail, and agriculture has grown by as much as 1,500 percent, but the growth in construction has barely increased at all.

The "why" behind this poor performance

The construction industry is extensively regulated, dependent on public-sector funding, and highly cyclical. The highly fragmented construction market is often distorted by informality and corruption. Frequently, inexperienced owners and buyers have a difficult time working together. This difficulty results in poor project management and execution, insufficient skills, and inadequate design processes. The industry also suffers from underinvestment in skills development, R&D, and innovation.

Acting in seven areas simultaneously could boost productivity by a lot

When we look at the role models of some innovative firms and regions, we see that acting in seven areas simultaneously could boost productivity by an impressive 50 to 60 percent. These areas are: 1. Reshape regulation; 2. Shift the industry dynamics by changing the contractual framework; 3. Rethink design and engineering processes; 4. Improve procurement and supply-chain management; 5. Improve on-site execution with better project management; 6. Expand the use of digital technology, new materials, and advanced automation; and 7. Reskill the workforce. The report suggests that some processes would benefit from a move toward a manufacturing-inspired mass-production system that could boost productivity up to ten times.

What's been missing and what's changing

Though ways of overcoming the many barriers to higher productivity have been known for some time, the industry has not improved. What's been missing was the incentives and scale to change the system. However, it appears there are forces lowering these barriers, including increasing demand for higher volume, lower cost, and better quality; larger-scale players and more transparent markets, and disruptive newcomers; more readily available new technologies, materials, and processes; and the increasing cost of labor with partial restrictions on migrant workers. Construction-sector participants must rethink the way they approach operations, if they want to stay ahead of the curve.

Special thanks to McKinsey and Company for their white paper on this important topic.