Construction Productivity

Three Recent Reports

Construction productivity is much studied but little understood, or more exactly, the lack of improvement in construction productivity over the long run has not been satisfactorily explained. Its not that we don’t have the necessary tools and techniques, rather the diversity of the industry and its output makes it hard to define and measure. Three recent reports approach the issue in completely different, though complimentary ways, and it is worth summarising their main points to see the importance of their arguments.

 The CIOB report Productivity in Construction has the subtitle Creating a Framework for the Industry to Thrive. This has a good overview of the current state of data, research and recommendations in the UK. It's a comprehensive roundup of the issues and views, without saying much new. That's not a criticism, it says a number of times the problems are well known and solutions have been proposed. What is interesting is the argument that better construction leads to a better built environment and that in turn creates a more productive society. There are echoes of that everywhere these days, here the government has launched a Smart Cities policy with the goal of ‘productive cities’.






The report finds the factors that boost productivity are well known, at least in theory, and have been identified over many decades in many inquiries and reports. They conclude this suggests “the problems holding back progress lie deep within the industry”. The report identified the factors using a survey of the industry, policy makers and industry experts. Among these people there was a broad consensus on many of the policies to boost construction productivity.

The CIOB was less focused on what could be done to promote productivity and more on why measured productivity appears to be poor. The recommendations reflect this approach, with a high priority given to contextual issues as opposed to specifically directed proposals. Apart from perennials like training and counter-cyclical public investment, there are some interesting ideas:

• Create construction innovation and excellence hubs and promote, through incentives, ‘clusters’ of construction-related businesses in key regions, to act as specialist business parks to create greater links between businesses delivering goods and services for the built environment.
• Improve leadership and behavioural understanding and shift the emphasis in construction thinking and policy making from industry processes to behavioural aspects of construction.
• Develop new business models and financial models because there is increasing concern the business models currently used inhibit progress on productivity.
• Better measures of construction to support better measures of construction productivity. The CIOB recommends that satellite accounts, similar to those that have been produced for tourism, are compiled by the ONS for the delivery and maintenance of the built environment. These would capture inputs from the construction-related professions, materials suppliers, plant and machinery suppliers, as well as other related sectors.
• Build more evidence on the wider value of construction because much of the value generated by improvement to the built environment is not captured by the promoters. Understanding more broadly the impact of buildings and infrastructure and the value generated, or costs borne, would shine a light on potential opportunities to unlock value that otherwise would be missed.

CIOB believes to improve productivity it is essential to invest more heavily in attracting new entrants to the industry and improve the skills of the existing workforce. Investing in management professionals has great potential to improve construction’s productivity. More on that below.
 
Secondly, and perhaps more importantly, it stresses that the quality of the output of building and construction boosts the productivity of the rest of the economy. Therefore, productivity in construction should not be seen as an end in itself, but as a contributor to a broader national productivity strategy, which in the UK is a 15 point plan. The report then maps the industry to the points, emphasising the linkages between them. This is close to the built environment sector approach I have previously advocated.

The CIOB report in May followed the UK Government’s Construction Strategy 2016 update in March (the strategy was launched in 2011). This shows how the slow grind of policy implementation is working at the coal face of public procurement. To its credit, the Government has developed a strategy based around the twin poles of improving client capability using better data and improving industry capability through earlier involvement, more training and project bank accounts. From the report:

• Underpinning client capability principles … include informed client leadership, early engagement of suppliers, commitment to continuous improvement, and the ability to develop a collaborative culture with the supply chain.
• The Government and industry will develop the next generation of digital standards to enable BIM Level 3. The continued embedding of BIM Level 2 [across departments] is crucial to support government adoption of BIM Level 3.
• The Data Cost and Benchmarking Working Group will explore the potential for whole-life cost and carbon reductions. Similar granular comparisons with the wider public sector, and leading private sector bodies, will be explored for like for like projects.
• On fair payment and Project Bank Accounts (PBAs) the Public Contract Regulations 2015 required public sector organisations to pay undisputed invoices in 30 days and ensure this payment term is passed down the supply chain. Government departments have committed to use PBAs.

 The third report is from the McKinsey Global Institute. Following their 2013 Infrastructure report comes Bridging Global Infrastructure Gaps. They too would like to see more investment, and argue for increased asset recycling, value capture and regulatory certainty for private investors.

Beyond ramping up finance, there is even bigger potential in making infrastructure spending more efficient and effective. Accelerating productivity growth in the construction industry, which has flat-lined for decades, is critical to this effort. Additionally, as our 2013 research showed, improving project selection, delivery, and management of existing assets could translate into 40 percent savings.

Since our original report was published, McKinsey has completed a detailed diagnostic in 12 countries to measure the efficiency and effectiveness of their infrastructure systems. Our findings indicate that even the most advanced economies have significant room to learn from each other and to build stronger capabilities and institutions. Capturing the full opportunity for infrastructure productivity requires a detailed understanding of where processes tend to veer off track in each country. Virtually every location needs to build expertise and establish the right organizational structures for developing critical skills and sharing best practices. This effort can pay remarkable dividends, since infrastructure influences the quality of life for citizens everywhere and paves the way to productivity growth and competitiveness.

Australia doesn’t look too good on McKinsey’s infrastructure quality score:


Chapter three of their report is on construction productivity. Like the CIOB they have a list of factors, many the same or similar (fragmentation, innovation, skills, inefficient procurement). Unlike the CIOB they do not discuss the problems associated with measuring construction productivity, but focus on client capability, better data, greater transparency and best practice benchmarks. McKinsey sees the three fundamental issues as:

1. Principal-agent problems and incentive structures. Public owners operate on public budgets, and their incentives steer them toward risk mitigation rather than innovation. In some cases, they are more focused on building a legacy than on controlling costs. Contractors may not have an incentive to improve designs and specifications, as that might lower their contract volume and stand in the way of charging for change orders later.
2. Information asymmetry. Owners tend to be unsophisticated buyers of construction, and because there is limited market transparency, they are often hard pressed to compare … agencies may lack deep experience for nonstandard projects.
3. Regulation. Sometimes well-intended labor market regulation leads to industry fragmentation, encouraging the sector to use small-scale subcontractors, self-employment structures, or informal workers to circumvent wage and safety rules. In turn, very low-cost labor, together with the boom-bust cycle of the industry, creates disincentives for higher capital intensity in the sector. Complex local building codes are often a source of additional cost and further limit standardization. Important reviews by health, safety, and environmental regulators can slow progress. 

McKinsey is not really focused on the building and construction industry as such, their concern is with infrastructure delivery and operation, and they define infrastructure broadly as the components of the built environment. Because construction accounts for 25 per cent of total project costs (their estimate, land is 50 and materials 25 per cent) it can make an important but not decisive difference to performance. In the 2013 report the process was divided into five stages, and McKinsey estimated the potential gains at each stage:

 

While this is described as a potential 40 per cent gain in construction productivity it is clearly more than that. In fact, better project selection, data driven procurement and approvals processes account for much of the improvement. While this accords nicely with the UK Government approach, it is distinctly different from the CIOB recommendations for hubs, behavioral and business models, and satellite accounts. What they all agree on is the need for increased professionalism:

One country that we [McKinsey] reviewed put in place a dedicated unit to improve infrastructure planning and cost effectiveness for the country. Over the course of three years, average scores improved from 3.6 to 4.1 on our diagnostic in one asset class. The country started by developing a clear infrastructure strategy and plan, then standardizing and upgrading project evaluation. It introduced a tighter stage gate process for value assurance, hired additional project managers, and built an academy to train them.

This shift to seeing construction productivity as an outcome of factors like project selection and procurement, the quality of project management and the policy framework has gained traction remarkably quickly. The UK Government created the Major Projects Authority, within the Cabinet Office, in March 2011 and in 2016 merged it with Infrastructure UK to form the Infrastructure and Projects Authority, which is also central to the City Deals underway in the UK. McKinsey’s Infrastructure Practice started around the same time, claiming "Over the past five years, our practice has advised private companies and public entities on more than 2000 projects. We are active in all geographies, asset classes, and project stages—from planning and financing to delivery and operation."

This policy of the client taking responsibility for project initiation and definition requires larger and more capable client teams, and cannot be achieved solely through consultants or interim employees, a point made in a 2009 National Audit Office report on complex government projects in the UK, which strongly argued for better development and management of procurement expertise. Both Shell and BP established project academies in 2005 because they understood that significant risk transfer from clients to contractors is structurally impossible on the oil and gas projects they undertake. In the public sector the UK Cabinet Office started it’s Major Projects Leadership Academy to reduce reliance on consultants, and in Australia a similar Leadership Academy was announced in 2013 and six MBA-type courses on procurement developed with government departments are now running at Australian universities.

A client-driven agenda has featured in the recommendations of many inquiries, for example those in the Latham Report and Gyles Royal Commission are now 25 years old. However, as projects get larger, more complex and more contentious, institutional capability is becoming more important. From the CIOB report it is not clear that the industry understands the implications of this policy framework for ‘business as usual’. It is also noteworthy that academic research has, apparently, so far played a minor role in the development of these policies.

Three Approaches to Projects

Networks, markets and psychology

Over the last decade a wide range of firms, organisations and industries have done or are in the process of restructuring themselves into some form of project-based production, following the lead of industries like construction, defence contracting, consulting and software that have traditionally used this form of organisation. At the same time the idea of what constitutes a project, using distinctions such as hard/soft, standardised/complex, mega/other and so on, has greatly expanded.

If project based production makes an important contribution to economic output that is a reason to study it, applying the methods and tools available. Given their multifaceted nature, it is obvious that ideas from many different fields of inquiry can be usefully applied to a range of issues found in projects and their characteristics. From economics there are interesting, relevant ideas that have come out of research across a diverse range of topics, including organisational and regulatory economics, property rights and contracts, governance and the principle-agent problem.

One way of harnessing this diversity is to use some of the characteristics of projects as a mechanism to group ideas together. The method used here is based on three broad approaches to understanding projects: projects as networks; projects as markets; and the psychology of projects:

1. Projects as networks covers fields including incomplete contracts and procurement, collusion and corruption, supply chains and sub-contracting, lean production, integrated teams and temporary organisations.
2. There is both a market for projects, and a project as a temporary market. Topics in this area include market characteristics and structure, market power and monopsony, auctions, bidding and information, Williamson’s fundamental transformation and asset specificity, and the ratchet effect in contracting and tendering.
3. The psychology of projects is based on recent developments in behavioural and experimental economics, in turn largely based on Kahnemann and Tversky’s work. Optimism bias, bounded rationality, incentives and Flyvberg’s delusion and deception view are examples. Underpinning these are the principal-agent problem, moral hazard and information asymmetry.

The fields ideas can be drawn from, that are outside the general project management literature, include management and organisation studies, psychology and behavioural economics, network analysis, lean production, legal and institutional research, and transaction cost economics. Economic theory can be applied to a range of issues found in the procurement and contracting of projects. Thus topics such as competitive and oligopolistic markets, auction theory, game theory and buyer and supplier power are relevant.

Another example is the economics of contracts. This field includes the role of incomplete contracts in self-enforcing relationships, the design of contracts, economic reasoning and the framing of contract law, and the contract as economic trade. It overlaps transaction cost economics and its application to property rights, agency theory, moral hazard and incentives. Other related topics are norms and the theory of the firm, allocating decision rights under liquidity constraints, authority and flexibility in contracts, and theories of contract regulation.

Many of these topics are also found in New Institutional Economics and work on the econometrics of contracts and markets. Because projects can be seen as a collection of contracts, written and unwritten, all this is clearly relevant. Another is the role of legal and regulatory structures in institutional economics, which emphasises the importance of a stable and predictable environment for entrepreneurs and businesses, here taken to be the clients and contractors involved in the business of delivering projects.

Where the study of how economic activity is organized fits is a grey area. It exists somewhere between micro and macroeconomics, and is primarily interested in imperfectly competitive markets, like those found in professional services. In these sorts of markets reputation, relationships, regulation and risk are major factors, all of which have been extensively studied.

What the diversity of ideas collected here provides is, in many ways, the overall context and framing of a project. In the same way as a business plan starts with a scan of the environment and a SWOT analysis, a project could have a context scan of the network, market and behavioural aspects. That’s not to say these factors are not all part of professional project planning. Obviously they are. Rather, the economic approach shifts the focus to questions about how best to design and structure a project from the point of view of organising production and fulfilling a social or economic role. It’s a functional approach that has a limited amount to say about managing production or specific PM decisions.