A recent article by The Economist titled “The construction industry’s productivity problem, and how governments can catalyze change” explores the reasoning behind the construction industry’s weak productivity during the last two decades. According to The Economist and McKinsey Global Institute February 2017 report, since 1995 no industry has done worse in terms of increasing productivity. “Things are especially dismal in rich countries. In France and Italy productivity per hour has fallen by about a sixth. Germany and Japan have seen almost no growth. America is even worse: there, productivity in construction has plunged by half since the late 1960s. This is no trifling matter. The building trade is worth $10trn each year, or 13% of world output. If its productivity growth had matched that of manufacturing in the past 20 years, the world would be $1.6trn better off each year.” (1)
The reasons behind the stagnation in productivity are a highly fragmented industry economically, regionally, and cyclically. The economic fragmentation consists in a large number of small firms rather than a small number of large firms. “In America less than 5% of builders work for construction firms that employ over 10,000 workers, compared with 23% in business services and 25% in manufacturing.” (1) Regional fragmentation consists in firms clustered by regions rather than competing globally. In the construction industry, the complexity in terms of code and regulations is a constant barrier to firms being able to design products that are applicable in different places. “American counties and municipalities employ up to 93,000 different building codes between them.” (1) The construction industry is highly cyclical, causing firms to deter from increasing fixed costs so that these do not become a burden during cyclical downturns.
This results in construction companies not investing in technology and infrastructure, often relying on a larger workforce to reduce investment and fixed costs, resulting in an inefficient industry with little eager to improve. The Economists points that governments “can help lay the foundation” to becoming more efficient through three initiatives:
Increasing the requirements for design and construction of government facilities, raising the standard so that in years to come these benefits will bleed over to the private sector.
Simplifying and integrating code to reduce regional fragmentation and reduce barriers to pure competition.
Reducing the cyclical traits of this industry by proposing well-planned projects ahead of time to allow firms to plan ahead for growth.
The Economist “The construction industry’s productivity problem.” February 2017. Link: https://www.economist.com/news/leaders/21726693-and-how-governments-can-catalyse-change-construction-industrys-productivity-problem
McKinsey “Reinventing construction through a productivity revolution” February 2017. Link: http://www.mckinsey.com/industries/capital-projects-and-infrastructure/our-insights/reinventing-construction-through-a-productivity-revolution