Construction Industry Capacity and Worker Shortages

  Infrastructure Australia's estimates of demand and supply 

 

In the 1930s, when economic statistics were being developed, manufacturing industries were of particular importance, because their share of the economy was two or three times larger than today and they drove the ups and downs of the business cycle. Two important factors in measuring manufacturing output were inventories and capacity utilisation. Before modern logistics and just-in-time management, increases and decreases in inventory levels indicated weakening or strengthening of demand and were important leading indicators. 

 

Capacity utilisation is the percentage of current capacity being used, calculated as the current level of output divided by the maximum possible output by 100 (actual output/potential output x 100). It will not be 100% because at any one time not all equipment will be used, so allowance is made for the setup, maintenance and downtime machinery and equipment needs. For capital intensive industries like manufacturing and utilities this is obviously an important factor. Other commonly used metrics are: production throughput (how much product can be made in a given time); equipment utilisation (how much of the available machinery is actively used); and overall equipment effectiveness (how effectively equipment is being utilised, considering availability, performance, and quality).

 

This post first looks at measuring industry capacity and the issues involved in doing this for construction. Then Infrastructure Australia’s Infrastructure Market Capacity report’s estimates of the five year project pipeline and supply side issues in materials and the workforce identified in their industry survey are given, before the construction workforce estimates of future supply and shortages are discussed. 

 

Measuring Industry Capacity 

 

Capacity is the level of output that can be produced with current resources over a set period. There is a long-run series for the US: ‘The Federal Reserve Board constructs estimates of capacity and capacity utilization for industries in manufacturing, mining, and electric and gas utilities. For a given industry, the capacity utilization rate is equal to an output index (seasonally adjusted) divided by a capacity index. The Federal Reserve Board's capacity indexes attempt to capture the concept of sustainable maximum output -- the greatest level of output a plant can maintain within the framework of a realistic work schedule, after factoring in normal downtime and assuming sufficient availability of inputs to operate the capital in place.’ There are separate indexes for each industry, and within manufacturing for iron and steel, automobiles, and semiconductors. Figure 1 has the indexes for the combined total and manufacturing, showing how utilisation rises and falls with the business cycle. 

 

Figure 1. US industry capacity utilisation

Source: FRED

 

The US series do not include service industries. Estimating total capacity and capacity utilisation for service industries such as health, professional services like accounting and legal, or personal and household services, is more difficult. In service industries the main limiting factor in output is typically taken to be the number of workers available or billable hours as a share of total hours worked. 

 

Capacity Utilisation in Construction

 

Construction is a hybrid industry where capacity is concerned. A lot of machinery and equipment is used, although how much varies across different types of work, and the industry is labour intensive compared to manufacturing, although the machinery and equipment capital stock per employee is among the highest of all Australian industries [1]. The industry requires a range of specialised skills and uses many subcontractors, so capacity is largely determined by the availability of labour, skills and expertise. This is very different to the physical limits of a manufacturing plant with its fixed and easily quantifiable physical capital. 

 

Construction is project-based and output is variable. Because output is affected by factors like weather, regulations, materials supply, and project timelines, it is difficult to define the maximum potential output for the industry compared to the continuous production processes in manufacturing. Further, the industry is fragmented, with many small firms and the subcontractors, which makes collecting consistent data on production capacity difficult. 

 

A 2015 Reserve Bank of Australia research paper on firm-level capacity reported on discussions with firms in the Bank's business liaison program that suggested the interpretation of ‘capacity utilisation’ varies considerably across different industries. The paper said: ‘construction contractors generally regarded ‘capacity utilisation’ to be of some use, primarily citing some form of labour utilisation. The focus of a ‘typical’ construction contractor in the liaison program is the time spent on each project, particularly in the detached housing market. Construction subcontractors that provide and operate capital equipment (e.g. cranes) tend to measure utilisation as the share of time that their equipment is in use.’

 

This brings us to Infrastructure Australia’s Infrastructure Market Capacity reports. The latest in November was the fifth, and looked at public infrastructure demand and market supply capacity over the five years 2024-25 to 2028-29. ‘It provides an updated health check and analysis of our national construction market’s capacity to deliver public infrastructure works’ by analysing and modelling total infrastructure demand by sector and project type, with a focus on public infrastructure, labour and skills supply and shortages, materials supply and costs, and industry productivity trends. Infrastructure Australia is an independent statutory body that provides research and advice to Australian Governments.

 

Because the Market Capacity report is primarily directed at policy makers and public sector decision-makers, it does not get the wider attention it deserves. It is a very good source of industry data, covering both demand-side and supply-side factors in a detailed and thorough analysis of the Australian construction industry that captures data on work done and the labour force from the Australian Bureau of Statistics (ABS), the project pipeline from government departments and GlobalData, a private provider, and modelling by consultants Nous on workforce and skills demand and supply. In the 2025 report, results from three surveys are included, one of 200 firms by Infrastructure Australia followed up with 20 interviews, and another of 134 members of the Civil Contractors Federation. There are six Appendices explaining the methodology and classification systems used.

 

The Project Pipeline

 

Since 2021, Infrastructure Australia (IA) has built a national project database with the location, cost, stage (pre-construction, under construction, completed), schedule, funding and type. Appendix A explains the bottom-up approach used by IA to produce their ‘portfolio’ of monthly project activity, based on expenditure at the stage of each project for all projects in a ‘project typecast’, with cost breakdowns for each project typecast over the four resource categories of plant, labour, equipment and materials. There are 83 typecasts that make up 22 ‘master sectors’ that are aggregated into the four ‘infrastructure’ sectors of buildings, transport, utilities and resources.

 

Figure 2 has the breakdown of project types. Between 2024–25 and 2028–29, IA estimates total construction work of $1.14 trillion, comparable to ABS total construction activity between 2020–21 and 2024–25 of $1.4 trillion. Buildings are 62% of expected expenditure, transport 17%, utilities 16%, and resources 5%. Public spending is 28% of the $1.14 trillion total. 

 

Figure 2. Construction pipeline by sector 2024–25 to 2028–29

Source: Infrastructure Market Capacity, p. 20.

 

The project database has six categories of projects: the Major Public Infrastructure Pipeline (MPIP, with projects over $100 million in New South Wales, Victoria, Queensland and Western Australia and over $50 million elsewhere), smaller public projects, road maintenance, mining, private, and housing. Of the $1.14 trillion total for 2024–25 to 2028–29, the MPIP is $242 billion (22%) and $66 billion (6%) is small capital projects. MPIP is up 14% from the 2023-24 report, driven by new housing, health and energy transmission projects. Within MPIP, transport at $192 billion is the largest category (53%), buildings are $77 billion (32%), and utilities are $36 billion (15%). Of the $716 billion in buildings, $116 billion is public investment, with $77 billion in the MPIP’s $242 billion and $48 billion in the $62 billion of smaller projects.

 

Using those six categories plus Defence, Figure 3 has IA’s forecast of annual construction spend from their project database, against ABS total construction activity for 2016-2025 (that includes private sector construction work not in the database). IA notes their forecast ‘uses cost estimates with limited certainty about future escalations’, with ‘forecast construction volumes peaking in 2027 at levels comparable to current ABS-reported activity.’ Peak investment is in 2027. There is $63 billion (27%) of activity outside the eight capital cities, with increasing regional demand in Queensland, Northern Territory, South Australia, and New South Wales. 

 

Figure 3. Forecast construction spend

Source: Infrastructure Market Capacity, p.19.

 

The demand-side project pipeline is for total construction, but the purpose of the report is about ‘capacity to deliver public infrastructure works’ and the MPIP. In the projected peak year of 2027, the MPIP is expected to be a bit more than $50 billion out of an industry total of around $250 billion of work. 

 

Figure 4. Major public infrastructure pipeline spend by sector 

Source: Infrastructure Market Capacity, p.21.

 

The Energy Pipeline

 

With the recent attention given to the politics of net zero, the IA’s forecast for renewable energy projects of transmission lines, solar, wind, and pumped hydro is relevant [2]. The report says: ‘As the net zero transition accelerates, the scale of energy infrastructure investment continues to grow. Irrespective of how it is funded, the pipeline for projects to build transmission, solar, wind and pumped hydro is now $163 billion for the five years from 2024-25 to 2028-29.’ This demand profile suggests workforce demand will be rising sharply from 2026.  Although most energy projects are privately funded and not counted in the MPIP, governments have $15 billion in transmission projects in the five year projection. 

 

Figure 5. Energy infrastructure pipeline

Source: Infrastructure Market Capacity, p. 28.

 

Reducing barriers to renewable energy projects by ‘accelerating approvals and smoothing supply chains’ is required. IA cites analysis from Infrastructure Partnerships Australia that 58% of the 298 energy projects included in their database ‘as having a low to moderate likelihood of being delivered to the project schedule.’ Of the organisations surveyed by IA in 2025, 47% said delays in obtaining planning and environmental approvals were among the greatest risks to project delivery. However, organisations reported disruptions to project delivery are driven primarily by cost of materials (64%), cost of labour (63%) and labour and skills shortages (59%).

 

Supply of Construction Materials 

 

IA’s Industry Confidence Survey suggests supply of key materials affects project delivery. Figure 6 shows respondents views on major or significant threats to successful delivery: 38% highlighted supply of timber and timber products, 32% steel or steel products, 30% sand or quarry products, 28% concrete or cement, 27% precast concrete, and 25% equipment and glass products.

 

Figure 6. Supply chain risk factors

Source: Infrastructure Market Capacity, p. 36.

 

There is a section that focuses on supply of fabricated steel products. IA estimates 26.6 million tonnes of structural steel will be needed over the five years 2024– 25 to 2028–29, of which the MPIP  will need 3.6 million tonnes. ‘As the estimated national steel fabrication capacity is approximately 1.4 million tonnes per annum, meeting this demand will require a combination of locally produced and imported steel.’ Imports are priced 15-50% below domestically produced products, and have been ‘rising rapidly in recent years’, but may not meet the quality and safety standards of locally made products. ‘Lack of traceability and certification makes it difficult to track material compositions, manufacturing processes and quality control procedures, which increases the risk of using substandard products.’ 

 

Workforce and Skills

 

This is the most important part of the report. In October 2025, Australia’s infrastructure workforce was 204,000 workers, with 62% trades workers and labourers, 26% engineers, architects and scientists, and 12% project management professionals. Note this is not restricted to employment of construction workers. IA estimates a shortage of 141,000 workers on public infrastructure works in October 2025. Figure 7 shows IA’s projection of demand versus supply with peak workforce demand of 521,000 in mid-2027, with an estimated shortage of 300,000 workers.

 

Figure 7. Demand, supply and shortage of infrastructure workers

Source: Infrastructure Market Capacity, p. 43. 

 

Of the estimated 300,000 worker shortage, engineers, architects and scientists will peak at 126,000 in late 2026 before gradually declining, shortages for trades workers and labourers peaks at 126,000 by mid-2027, and there will be a sustained demand for project management professionals, with a peak in mid-2027 at around 59,000. For firms IA surveyed in 2925, labour is a substantial delivery risk, with labour cost cited by 63% and labour and skills shortages by 59%. 

 

Figure 8. Worker shortage by occupational groups

Source: Infrastructure Market Capacity, p. 44. 

 

Shortages in capital cities are projected to rise from 131,700 in 2025 and peak at 148,000 in 2026. Regional locations are expected to have a much steeper increase, with the workforce shortage growing from 38,200 in October 2025 to a peak of 181,000 in 2027, because that is where the transmission, solar, wind and pumped hydro projects in the $163 billion energy infrastructure pipeline are.

 

Unpicking These Numbers

 

An explanation of how these estimates by Nous were arrived at is in Appendix E on Workforce and Skills Methodology.As the Appendix notes ‘The fundamental question addressed by this report is to what extent the current and projected supply of labour can support Australia’s proposed investment in public infrastructure.’  Nous defines the occupations and skills that underpin the workforce then estimates the ‘number of workers in or near the infrastructure workforce as determined by official statistics and our own forecasts or modelling based on those statistics’, plus ‘additional data (such as job advertisements) that provides extra information on variables (such as skills) not covered by the official statistics, and extra granularity.’ Figure 9 has their methodology.

 

Figure 9. Workforce quantification modelling methodology

Source: Appendix E: Workforce and Skills Methodology, p. 17. 

 

While the methodology looks good, there are some anomalies. Industry groups identified as directly linked to ‘construction of public infrastructure’ are 942 Equipment Repair and Maintenance and 529 Other Transport Support Services, along with the more obvious 692 Architectural, Engineering and Technical Services and the four industry groups in Construction Division E. Using job advertisement data, a  ‘share of non-project-management occupations are apportioned into project management occupations, to reflect that many project management roles on public infrastructure projects are undertaken by individuals captured under other occupations’, but occupations ‘that contained less than one per cent of project management professional roles in its job advertisements were excluded.’ ‘Weightings were developed to apportion the share of workers engaged and adjacent to public infrastructure’ using demand estimates and workforce-to-spend ratios provided by IA. 

 

The six demand side categories of major and minor public infrastructure, private infrastructure, private residential and non-residential buildings, and road maintenance are the basis of the capacity forecasts. In August 2025, there were 1.35 million people employed in the ABS Construction industry, of which 125,500 were employed in Engineering construction, which is 60% public work. There were another 330,000 people employed in Architectural, Engineering and Technical Services, and IA also adds project managers to their infrastructure workforce. The problem is the shift to the ‘public infrastructure’ component where, in 2025, IA estimated there were 204,000 workers and a 202,000 shortage. 

 

There is a conceptual problem here. How, in 2025, did the work get done if there was a shortage of half the required workforce? In 2027 the shortage will be 60% of the required workforce. Do shortages mean projects are not started because workers are not available, or lead times increase, or projects take longer to deliver because the workforce is spread over many projects? Are there more delays and bottlenecks due to such shortages? 

 

Conclusion

 

Assessing industry capacity requires identifying maximum potential output and the industry’s ability to meet current and future demand, based on supply of factors like the workforce and materials, and the effects of technology and market conditions. Other factors that are often considered are the number of active firms, trends in output and productivity, and capacity utilisation (i.e. the level of output compared to potential maximum output, often used to allow for downtime needed for maintenance of machinery and equipment). 

 

Infrastructure Australia (IA) produces an annual Infrastructure Market Capacity Report that provides forecasts of Australian infrastructure demand and supply of resources, and  makes recommendations to improve the capacity of the construction industry to meet forecast infrastructure demand across four areas: to actively manage demand; to increase material supply; to increase labour supply; and to improve construction productivity. 

 

Since the first report in 2021, Federal and state governments have adjusted the project pipeline, and the reports show a stretching out of work over more years and reductions of IA’s forecast peak in public infrastructure investment. IA notes this is ‘likely reflective of planned expenditure being pushed back as the market struggles to meet overly ambitious delivery targets.’ However, whether those decisions were based on the report or the result of delays in project funding, preparation or commencement is hard to tell. Compared to last year’s report, IA’s projected activity peak has fallen and has been shifted out a year, illustrating the uncertainty associated with long-term forecasts.

 

The report has a focus on projects in the Major Public Infrastructure Pipeline (MPIP). IA collects data on planned projects and labour and material supply, supported by interviews and surveys with key stakeholders, including state and territory governments and the Australian Department of Infrastructure, Transport, Regional Development, Communications and the Arts. Project data is classified by type, sector, phase and funding source. The report has evolved over five editions, to include current and emerging market conditions, availability of labour and construction materials, productivity trends, the supply of apprentices and trainees and other workforce issues. It includes regional demand, and the energy projects located in the regions have become an increasingly important component of total demand.

 

The research is not without challenges. In particular, the cost estimates for projects in the pipeline that are the basis for demand forecasts unavoidably have some uncertainty about future cost escalations. IA’s National Infrastructure Project Database aggregates data from public and private sources, including the ABS, but does not and is not intended to capture all private sector activity. How serious these issues are is a matter for debate. 

 

Industry capacity is the overall ability to deliver output, typically at a national and sectoral level. For IA, this is the capacity of the construction industry to deliver major infrastructure projects. There are two issues here. The first is the lack of a clear statement of what the maximum output possible with existing resources of the Australian industry actually is, whether for total work or for the three industry sectors of residential and non-residential building and engineering construction. These estimates should be clearly made.

 

The second is linking worker shortages to the numbers for the value of total public infrastructure and the major project pipeline, which is developed from the project database. There is no separate section in the report on how these estimates are derived. Although the methodology is in the Appendices, how the MPIP is used to estimate worker shortages is not explained. Given that managing the public infrastructure pipeline is the main point of producing the capacity forecasts, the analysis should be highlighted and be made more explicit. 

 

A serious problem is that there is no analysis in the report of the effect of increased demand on project duration. One of the characteristics of construction is that project delivery times increase during periods of high demand, because this the most important way the industry adjusts to increasing demand. As the available labour and materials are fixed in the short-run and capacity is limited by availability, these get spread over more work as new projects are started. Contractors bid for projects to ensure they have sufficient work in the future, adding to their workload, and the result is fewer people on a site and slower progress of ongoing work. Lead times and cycle times increase with workload, as project duration from order to delivery and from start of construction to completion increase. At high levels of activity, there is more potential for delays or bottlenecks in supply chains, as the reporting on industry survey results and discussion shows. 

 

Another problem is that, by assessing capacity against total demand, there is an underlying assumption that workers move between engineering and building work. However, there is no good evidence that there is much worker mobility between sectors. BuildSkills Australia 2025 Housing Workforce Capacity Study published in September 2025 found limited evidence that infrastructure activity is materially drawing labour away from residential construction [3]. How the shortages of architects, engineers and project managers are estimated is also not clear. 

 

A final point is that infrastructure is conventionally divided into physical (roads, rail, ports, energy etc.) and social (schools, hospitals, community centres etc.) projects. These divisions are not used by IA, instead they have four sectors of transport, utilities, buildings, and resources, and the portfolio breaks down ‘these three sectors’ [sic] across 22 Master Types and 83 separate typecasts (detailed in Appendix C). No reason is given for not using these categories and putting everything into the MPIP. 

 

The report could do with an edit and has a couple of basic errors, where different numbers are given for the same thing: transport is $129 billion on p.18 and $192 billion on p. 20, and the public infrastructure worker shortage in 2025 is 141,00 on p. 42 and 202,000 on p.43. However, the report has a detailed, a five-year forecast that covers sectors like transport, energy, water, and buildings, including housing. It analyses critical issues such as labour and skill shortages, material costs and equipment demand, productivity, and the challenges of the energy transition, including regional breakdowns. Insights from industry surveys and interviews add perspective on market conditions, risks, and challenges. It is an important source of data and provides a comprehensive overview of Australian construction.

 

                                                                          *

 

[1] This post looked at the capital stock of Australian industry.

 

[2] Opposition to net zero is bizarre. A 21^st century economy runs on abundant electricity, and today the cheapest source of electricity is solar with storage. The Ember 2025 Global Electricity Review found: ‘Renewable power sources added a record 858 TWh of generation in 2024 … brought low-carbon power to 40.9% (12,609 TWh) of the mix in 2024, compared with 39.4% in 2023. Hydro remained the largest source of low-carbon electricity (14.3%), followed by nuclear (9.0%), with wind (8.1%) and solar (6.9%). Solar generation has doubled over the last three years to reach over 2000 TWh. Solar was the largest source of new electricity generation globally for the third year in a row (+474 TWh) and the fastest growing source of electricity (+29%) for the 20th year in a row. More than half (53%) of the increase in solar generation in 2024 was in China.’

 

[3] A Residential Mobility Study is currently being done by BuildSkills Australia, supported by Jobs and Skills Australia and the ABS, to understand actual and potential labour flows between residential and other construction. 

 

 

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Projects, Procurement, and Complexity

 Issues and options for Australian construction 

 

There are many issues that affect construction productivity. Some are long-term, such as innovation, R&D, and education and training systems. Others are structural, like the number of micro and small firms, or institutional, like state based occupational licensing and building codes. However, for the Australian industry by far the most important factor in low productivity growth is the lack of business investment in intellectual and physical capital, the amount of machinery, equipment, buildings, structures, software and R&D, and the skills of the workforce. 

 

The construction industry has been the subject of a number of recent reports from both government and industry, the latest being  the Queensland Productivity Commission’s Opportunities to Improve Productivity of the Construction Industry, which followed the NSW Productivity and Equality Commission report Housing Supply Challenges and Policy Options in August 2024 and the Productivity Commission report Housing Construction Productivity: Can We Fix It? in February 2025. This year from industry has come the Committee for Economic Development’s Size matters: Why Construction productivity Is So Weak and the Australian Industry Group’s Australian Home Building in Crisis.

 

These reports have raised many issues and highlight their wide range. Some issues are well known and there is a broad consensus on both their importance and reform direction, such as training and skills, occupational licensing, and workplace health and safety. Others like collaborative contracting and increasing innovation and R&D are more aspirational. For better or worse, the decision has been made that updates and revisions to the National Construction Code (NCC) will be delayed and less frequent, and the code will be reviewed to make compliance easier. Including issues around government procurement and contracting allowed the Queensland Productivity Commission’s Interim Report to address some important productivity determinants that were not in the other recent reports, which has led to this post. 

 

The issues discussed in this post are in the broad categories of projects, procurement, and complexity. The post first looks at project estimates and reference class forecasting, then argues for separating design and construction. On procurement the topics covered are project sizing and access, industry capacity and BIM mandates. The last two topics are project complexity and collaborative contracting, and using target cost contracts for major projects. 

 

Project Estimates and Reference Class Forecasting

 

A significant reason for poor decisions on projects is unwarranted optimism about outcomes and the time needed to complete tasks. Planners often underestimate a project’s time, costs, and risks due to size, gestation and time taken to deliver, and overestimate the benefits, particularly for major projects. In some cases there is strategic misrepresentation of costs and benefits, where project promoters produce biased appraisals at the approvals stage. After a project has started there are the risks of escalated commitment and lock-in, scope changes, and conflicting interests.

 

Project estimates can be improved by using the performance of previous projects to inform those decisions. Clients collecting and using data from previous projects in the evaluation and definition stages of new projects makes for better decisions. Bent Flyvbjerg proposed a system called Reference Class Forecasting that has three steps:

1.                          Identification of a relevant reference class of past, similar projects;

2.                          Establishing a probability distribution for the reference class;

3.                          Comparing the specific project with the reference class distribution [1].

 

Reference Class Forecasting allows project time and cost estimates to be compared and evaluated against previous similar project outcomes and performance. The data on comparable completed projects provides a range of probable outcomes for a proposed project, with realistic and more accurate time and cost estimates for major projects.

 

Another example is Independent Project Analysis (IPA), established by Ed Merrow in 1987 for industries like oil and gas, petroleum, minerals and metals, chemicals, power, LNG and pipelines. Depending on the project, between 2,000 and 5,000 data points are collected over the initiation, development and delivery stages. From the IPA database companies can compare their project with other, similar projects, across a wide range of performance indicators. Merrow argues defining and planning a major project should cost 5% of the total, and the cost of not spending that money is much more. Merrow’s projects are mostly private sector resource developments like oil and gas projects, and he notes they have different dynamics to public sector projects [2]. 

 

Merrow argues that the owner’s job is to specify the project and the contractor’s job is to deliver the project as specified, on time and on budget. In his view contractual relationships are more tactics than strategy, and cannot address any fundamental weaknesses in the client’s management of the project. While risk can be managed by contracts, it cannot magically be made to disappear with contracts. 

 

Clients are responsible for project shaping and definition, what Merrow calls Front End Loading, which is a necessary prerequisite for creating value. There are three stages of Front End Loading, the first evaluates the business case, the second is scope selection and development, and the third is detailed design. His argument is that there needs to be gates between these stages that prevent less viable projects from getting to authorisation

 

Separating Design and Construction

 

Merrow also argues the best form of project delivery is what he calls ‘mixed’: hiring engineering design contractors on a reimbursable contract and construction contractors on a separate fixed price contract. The evidence from the IPA database is that this is the most effective form of project organization, and is basically traditional construction procurement where consultants are appointed to do the design and a competitive tender is held for one or more contractors to execute the works on site against a complete design.

 

Unbundling design and construction for major projects has a number of advantages. Breaking a project into smaller, sequential contracts spreads the cost out over time, and does not incur interest costs on finance for design work. It makes quality control easier and more effective, by being focused on each stage, an important risk management tool. Completion of design and documentation before tendering significantly reduces contractor risk and therefore total project cost. 

 

Design and construction of major projects should be contracted separately to spread the cost over time and reduce project costs and risks. As far as possible, design and documentation should be complete or nearly complete before tendering. The success or failure of the great majority of projects is determined during definition, planning and development.  

 

Project Sizing and Access 

 

Competition can be limited for major construction projects, for several reasons: procurement costs can be excessive; high technical complexity is sometimes an important factor; and for contractors outside the first tier access to finance for large projects can be difficult. Projects can benefit from economies of scale and scope, but large contracts restrict competition if potential bidders are constrained by technical skills and other resources. 

 

Therefore, dividing a large project into a number of smaller contracts is an important policy decision. Having the design complete before tendering facilitates the division of a large project into sub-projects, for example a road or highway project can be done as stages that link up on completion. This creates opportunities for local contractors, particularly in regional areas. Increased competition for work contains costs as well. 

 

Where possible, a major project should be broken into sub-projects to reduce barriers to entry for tenderers, create opportunities for local contractors and suppliers, and increase competition. This can also reduce project costs by removing a layer of management on projects where a large contractor wins the work then subcontracts it out to smaller local contractors, but charges a project management fee. 

 

Industry Capacity

 

There are significant capacity constraints in construction, as the experience of cost increases and schedule slippage with major projects in Australia shows. Industry capacity is the limit on production, a theoretical maximum of what can be produced in a single period. In some cases this is straightforward, based on the installed capacity of machinery, plant and equipment, adjusted for the utilization rate and maintenance requirements, that produce a set amount day after day, week after week. Construction is not like this, it is geographically dispersed and brings together many suppliers at many sites. Shipbuilding for example brings together many suppliers at a few sites, automobile manufacturing has a small number of specialist suppliers, often co-located. 

 

Separating design and construction allows sequencing of major projects. As the design work is completed a project can be added to a pipeline of projects and released for tender when conditions are appropriate, or when other projects are approaching completion. Suppliers and contractors can use the pipeline of projects to build capacity in the knowledge that there will be ongoing opportunities for their staff and equipment, reducing the set-up costs incurred by re-establishing project teams. 

 

Construction is much more labour intensive than industries it is typically compared to such as manufacturing or mining. This makes the number of people employed one of the key constraints on construction industry capacity. As well as a pipeline of work, developing industry capacity is a long-term strategy based on providing training and skills, improving management practices, and support for SMEs. 

 

Construction industry capacity and productivity will be improved by increased investment in the capital stock. Traditional policy instruments to increase investment are tax incentives like instant write-offs, accelerated depreciation, and financial incentives like production subsidies, grants and loan guarantees. Business investment can also be promoted by development of industry technology strategies, revising public procurement methods, and advanced market commitments for products like prefabricated buildings and services like digital twins. Investment in physical and intellectual assets is essential for building industry capacity and upgrading technology. 

 

BIM Mandates

 

BIM mandates are important because the use of BIM unlocks the potential of digital construction and affects all suppliers of materials, products and services. The ISO 19650 standards for BIM and digital twins provide a framework for creating, managing and sharing data on built assets, establishing consensus on what is to be done and how. There is evidence from surveys that BIM increases efficiency, reduces rework, and improves productivity and workload capacity [4]. In Australia, the Queensland Department of State Development and Infrastructure has had a BIM mandate for public projects over $50 million since 2019. 

 

The experience of overseas jurisdictions with BIM mandates is that BIM use increases over time. The UK is a good example. There has been a significant increase in the use of BIM in the UK since 2011 when a BIM mandate for public construction was introduced. In  2018 a BIM Framework based on ISO 19650 provided a roadmap for firms and clients, and the government developed clauses in construction contracts covering contentious issues such as intellectual property and data ownership. The UK is now a leading user of BIM, along with other early movers with BIM mandates like Singapore and Norway. 

 

In the UK BIM maturity levels are defined as: 

·      No BIM: Information generated manually by hand;

·      Level 0: 2D Computer-Aided Design (CAD) and no or minimal collaboration;

·      Level 1: 2D CAD for documentation and 3D CAD for specific elements;

·      Level 2: Collaborative 3D CAD models with a Common Data Environment, this is required for UK public projects;

·      Level 3: Shared 3D cloud-based model of the project, with the team working collaboratively in real-time.

 

Industry has a collective action problem because the cost of adopting a new technology is significant and skills are typically in short supply. Firms will invest in BIM if they believe that they will profit by it, but legitimately fear future technical progress could make today's investments unprofitable as change makes today’s technologies obsolete. Paradoxically, when innovation and technological progress is rapid, uncertainty can hold back investment by firms because there may be a better, cheaper technology available tomorrow. Why invest today if there will be a competing technology that is half the price in a few years’ time? 

 

Therefore, BIM mandates from government and private sector clients are needed to promote BIM use. For small and medium size firms the initial software and training costs are a barrier to adopting BIM. There should be grants and subsidies to provide financial support to get SMEs to level 2 BIM, with a limit of 50% of these costs. 

 

Complexity and Collaborative Contracting 

 

Contractual relationships are more tactics than strategy, and cannot address any fundamental weaknesses in the client’s management of the project. While risk can be managed by contracts, it cannot magically be made to disappear. An important point on final costs is that a fixed price contract for a project is a floor, not a ceiling. Contractors will allow for the extra risk a poorly documented tender involves, and have a range of contractual provisions available to make claims and cover cost increases during delivery. 

 

Simple or standardised projects are low risk with minimal technical requirements. These commodity-type  projects have well-known structural features and components, their design and location do not present any particular challenges and the construction methods and project management requirements are not exceptional in any way. Examples are car parks and some industrial and commercial buildings. These projects can be accurately estimated, precisely documented and have little uncertainty about what is to be produced and how it is to be done, and should be awarded through competitive tendering on a fixed-price contract.

 

Figure 1. Project characteristics and contracts

 

 

Complicated and complex projects are challenging, each in its own specific way, because of the many characteristics that can cause complexity, such as design, materials, technology, location or site issues, logistics, non-traditional project organisation, or significant coordination and integration issues. Complicated projects require significant development and will benefit from early contractor involvement or have to be well documented before tendering. 

 

Complex projects require more collaborative implementation with early involvement by designers, contractors and suppliers. These have significant uncertainty about their final form, and should be awarded through negotiation with some form of cost-plus or incentive contract.  It may also be advantageous to look for innovative ideas or design options, so for these projects an incremental approach allows contractors and suppliers the opportunity for input during the development of the design.

 

Traditional forms of project organisation and procurement are designed for delivering well documented commodity projects and making repetitive decisions in a stable, predictable environment. By contrast, complicated and complex projects are not fully documented and have significant uncertainty about their final form, and should be awarded through negotiation with a qualified supplier on some form of cost-plus or incentive contract. What will be an appropriate procurement strategy for a simple project will be inappropriate for more complicated or complex projects.

 

Target Cost Contracts

 

A target cost contract (TCC) is an incentive-based procurement strategy that rewards a contractor for savings, using an agreement on cost with an incentive fee. The three components of a TCC are the design, with reimbursable cost with an agreed margin, a lump sum amount as an incentive for the contractor to reduce construction cost below the agreed estimate, and a compensation mechanism for major design changes (not design evolution).

 

Under a TCC, the actual cost of completing the project is compared to an agreed target cost. If the actual cost exceeds the target cost, some of the cost overrun will be borne by the contractor, known as the ‘painshare’, and the rest by the client following an agreed formula. Conversely, if the actual cost is lower than the target cost, then the contractor will share the savings with the client, known as the ‘gainshare’.  This painshare/gainshare mechanism is intended to align the interests of contractors and clients, and is the distinguishing feature of these contracts.

 

Claims under a TCC can be difficult to manage if there are changes in the target cost. These can be cost reductions due to contractor input (through design revisions for example) and cost increases due to client design changes. The challenge is to preserve the incentives while resolving disagreements about the extent and effect of target cost changes. 

 

While incentives might be an effective way to reduce cost, improve project delivery and increase productivity on major projects, the actual operation of the painshare/gainshare mechanism is not straightforward. The sharing formula can vary from simple to complex systems of benefit and risk sharing, and can involve more than one supplier. 

 

Because the agreement and the painshare/gainshare mechanism is between the client and the contractor and typically does not include designers, subcontractors and other suppliers. This is a weakness in these contracts, as the contractor can attempt to shift risks down the supply chain to maximise their profit. 

 

Rather than the client sharing the gain from improved performance, this share could be used to provide an incentive through the supply chain, and thus allow subcontractors and suppliers to benefit as an incentive to increase their productivity. 

 

Target cost contracts can be used to provide incentives to reduce cost, improve project delivery and increase productivity on major projects. However, significant investment in planning, estimating, and preparing detailed designs is required. The potential of BIM and digital twins to improve project design documents is a factor. With the digitisation of design there are more opportunities for target costing and performance-based contracts. 

 

Conclusion

 

Delivery of construction projects is a vexed topic, particularly for large and/or complex projects. It brings together a range of economic, social and political issues for which there are no definitive answers, and thus poses challenges in decision-making and governance not found in procurement of many other projects and services. These are further compounded by the long time horizon of built assets and associated return on investment or value for money aspects of many large projects.

 

It is well known that the future is uncertain, where uncertainty is an unmeasurable or truly unknown outcome, often unique. Major construction projects are typically selected under conditions of uncertainty, not risk (which is identifiable and measurable) for three main reasons: costs and benefits are many years into the future; the projects are often large enough to change their economic environment, hence generate unintended consequences; and stakeholder action creates a dynamic context with the possibility of escalation of commitment driven by post hoc justification of earlier decisions.

 

A great deal is already known about the requirements for successful projects, based on the performance of projects over the last two decades and the many studies and reports that have been done on those projects. Better use of data from previous projects in the evaluation and definition stages of new projects and a more empirical approach by clients in collecting and using data is necessary if better decisions are to be made. This is what Reference Class Forecasting does. 

 

The procurement strategies and implementation processes used by clients can be improved.  Contracts manage risk, but ultimately clients are responsible for their projects, and specification, design and documentation should be completed, as far as possible, before going to tender or before work begins. Sequencing of major projects’ design allows input from contractors and suppliers and creates a pipeline of work. Major projects should be broken into sub-projects where possible, to reduce barriers to entry for tenderers, create opportunities for local contractors and suppliers, and increase competition. 

 

BIM mandates are important because the use of BIM unlocks the potential of digital construction. The ISO 19650 standards for BIM and digital twins provide a framework for creating, managing and sharing data, and the experience of overseas jurisdictions with BIM mandates is that BIM use increases over time. Industry has a collective action problem because the cost of adopting a new technology is significant and skills are typically in short supply. Therefore, BIM mandates from government and private sector clients are needed to promote BIM use, which will also increase industry capacity. 

 

While there are many straightforward projects being built, using conventional materials and well-known techniques, there are also many larger, more complex projects. Simple and standardised commodity projects are well documented with little uncertainty about what is to be produced and done, and should be awarded through competitive tendering on a fixed-price contract. 

 

By contrast, complicated and complex projects are not fully documented and will have significant uncertainty about their final form. Complicated projects are often better done on a cost-plus basis. Incentives are an effective way to reduce cost and increase productivity, and target cost contracts should be considered for complex projects that require more collaborative implementation and early involvement by designers, contractors and suppliers. 

 

 

 

[1] See Flyvbjerg, B., Bruzelius, N. and Rothengatter, W. 2003. Megaprojects and Risk: An Anatomy of Ambition, Cambridge, Cambridge University Press. A more recent and less academic book is Bent Flyvbjerg and Dan Gardner, 2023. How Big Things Get Done: The Surprising factors Behind Every Successful Project, From Home Renovations to Space Exploration. New York, Currency Press. From that book, in Flyvbjerg’s database of 16,000 projects 91.5% go over time and budget. The risk of a project going disastrously wrong (not 10%, but 100% or 400% or more over budget) is surprisingly high.

 [2] Merrow. E.W. 2011. Industrial Megaprojects: Concepts, Strategies and Practices for Success, Hoboken, N.J.: Wiley. Second edn. 2024.

 [3] Bajari, P. and Tadelis, S. 2006. Incentives and award procedures: Competitive tendering versus negotiations in procurement, in Dimitri, N., Piga, G. and Spagnolo, G. (Eds.) Handbook of Procurement, Cambridge UK: Cambridge University Press, 121-139.

 [4] https://damassets.autodesk.net/content/dam/autodesk/www/industry/aec/bim/aec-bim-study-smart-market-synopsis-ebook-en.pdf 

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