Construction’s productivity problem
If workers in the UK were as productive as those in the US, they could work four days a week but still take home the same amount of money. Clearly the UK has a productivity problem and it’s starting to preoccupy politicians and business leaders.
Britain’s economic growth since the recession has mainly come from a greater number of people in employment working longer hours. We’re only producing fractionally more per worker per hour than in 2008.
Productivity levels in construction are yet to return to their 2004 peak.
The building sector has under-performed on this front for a long time. Taking output levels in 1994 as a base, productivity in the UK economy as a whole has risen by around 30 per cent over the last 20 years. In the construction sector it’s only risen seven per cent.
Flat-lining productivity in construction has broad repercussions. Builders provide our schools, hospitals, offices and homes. If they’re delivered late or to a poor standard, that has a knock-on effect on the rest of the economy.
So why is the construction sector innovating at such a slow pace? And where will the next leap forward in productivity come from?
M&A feeding frenzy
The construction industry is on the cusp of its first real IT revolution, around 10 years later than most of the rest of the economy.
BIM (building information modelling) is the software set to transform the sector. The technology itself isn’t particularly groundbreaking, it simply allows users to create and add information to digital models of buildings. The reason BIM is big news is because it’s changing the way companies are structured.
The trend over the last 20 years has been for firms to become very lean. “We’ve moved to a lot of subcontracting and extended subcontracting,” says Dr Paul Chan, a lecturer in project management at the University of Manchester. That means few of the largest construction firms employ their own workmen, instead they outsource much of the manual work to small independent building firms.
BIM challenges the current model because it forces companies to work in a more integrated way. For example, BIM requires users to disclose the amount they’re being paid for a project and the costs they incur.
Dr Gruneberg, a lecturer in construction at the University of Westminster, doesn’t believe BIM can be implemented in current market conditions.
“Firms are driven by their own interest, they’re not going to share trade secrets with competitors. If people knew what their profit margins were, they’d be able to undercut them. There’s a dog eat dog atmosphere,” he says.
The only way new information-sharing technologies can be integrated, argues Dr Gruneberg, is if there’s a flurry of mergers and acquisitions within the sector. He says. “The more competitive firms are going to be the ones that have integrated.”
What impact will these structural shifts have on productivity growth? Many experts believe a move towards vertical integration would boost productivity.
However, there’s scepticism in the industry about whether this ‘IT revolution’ will really take off. John O’Malley, a quantity surveyor at construction consultancy Gardiner & Theobald, isn’t convinced the building industry has the right skills to master the new technology. “A lot of contractors have been stealing experienced BIM people from other firms,” he says.
A likely scenario is that BIM won’t be used to its full capacity by many companies. In that case, the industry will be forced to address some of the underlying reasons for its weak productivity growth.
Cost-cutting vs. value creation
Everyone interviewed for this article agreed productivity isn’t a metric that construction firms pay much attention to per se. “We’re more interested in cost per square foot or cost per square metre,” says John O’Malley.
Main contractors compete primarily on price, quality is largely taken as a given, so the focus is on keeping costs low.
The industry’s penny-pinching has become more obsessive post-crisis. The government, the industry’s biggest customer, set a target in 2012 to reduce its construction bill by 15 to 20 per cent by 2015. Shepherd Group and Royal BAM are among firms making redundancies as a way of slashing costs and meeting these targets.
Is it possible for a business to cut its way to sustainable productivity growth? The question of whether austerity is good or bad for business applies just as much to the construction sector as it does to the UK economy as a whole.
Some within the industry, including Dr Gruneberg, believe more sway should be given to value creation and less to minimising expense. Others argue construction companies have no choice but to prioritise cost reduction in a price-driven market.
Either way, the pressure to reduce costs shapes much of the decision-making in the sector.
Global forces at play
Construction hasn’t innovated as quickly as other sectors, largely because it hasn’t needed to. Construction companies aren’t faced with the same scale of global competition that manufacturing or technology firms are. British building businesses don’t compete directly with, say, Chinese ones. This is because Chinese companies can’t export their main source of competitive advantage (large quantities of cheap labour) over to the UK. The simple fact Britain is an island nation has sheltered its construction industry — for better or for worse.
Part of the reason the top French construction firms have grown much larger than British ones is because it’s easier for them to tender for work in neighbouring countries.
International comparisons
Comparing the productiveness of the construction sectors in different countries is far from straightforward. Emerging economies may be able to build skyscrapers at dazzling speeds, but that doesn’t necessarily mean their workers have a higher output per hour than those in Britain.
UK health and safety laws rule out the kind of practices that make it possible for countries like Dubai to build entire metro networks in a matter of years. And, of course, that’s no bad thing. Deaths on building sites in the UK have dropped from an average of around three a week in 1974 to below one a week in 2014 — a trend that makes for a far more stable industry over the long term.
On top of this, different countries require different types of building work depending on their stage of development. Construction companies in fast growing economies can make big bucks on enormous infrastructure projects. Britain has the oldest housing stock in the world; so much UK construction work is dedicated to the less remunerative task of refurbishing existing buildings.
Industry make-up
British building businesses have no say over the large-scale economic and political trends that affect their output. But there are many factors they can control, including the terms on which they employ their staff.
Figures from the Office for National Statistics show that four in 10 construction workers are registered as self-employed.
False self-employment has long been an issue in construction. It’s believed many builders choose, or are pressured, to register as self-employed because of the tax benefits it brings. HMRC clamped down on the practice in 1996, but in recent years the proportion of self-employed workers has started to climb back up.
Quantity surveyor John O’Malley believes this trend has a negative impact on productivity. “Subcontractors hire and fire as required. There’s not a lot of loyalty or continuity. That can cause problems with shoddy workmanship. If you’re a freelance, you’re not around to see the implications,” he says.
Self-employed workers are less likely to go on training courses than employees at construction firms, research from the Construction Industry Training Board found. Given that education is known to enhance workers’ productivity, this is another sign that current high levels of self-employment may be damaging the sector’s growth.
Short-termism
For many sole traders and small firms, their business strategies only extend as far as finishing the next job. Dr Paul Chan looked into the issue and found that on average building firms only plan six months ahead.
Short-termism is a problem throughout the industry. For example Balfour Beatty, the UK’s largest building firm, has had three CEOs in as many years. The vulnerability of the largest construction firms to takeover makes it hard for their management to think long term.
Building company Carillion made several unsuccessful bids for Balfour Beatty last year, on the back of the larger firm’s poor financial performance. Construction is a narrow-margin business, where even small mistakes can mean the difference between profit and loss, survival and bankruptcy.
Company failures can boost productivity in a sector. Dead wood is cut loose, making way for new growth. But in construction the failure rate is alarmingly high. In the last six years 19,000 construction firms have become insolvent, six per cent of the total.
“Very low profit margins mean that if a company isn’t paid on time it can easily run out of cash,” says Dr Gruneberg, explaining why bankruptcies are so common in the industry. Little thought is given to productivity, when day-to-day survival is the priority.
Research and development
According to economic theory, one of the most effective ways to enhance productivity is to boost spending on research and development (R&D). The Construction Leadership Council, made up of construction executives and senior politicians, is critical of the sector’s approach to R&D. The minutes of the Council’s meeting from November last year say: “There is a clear market failure — the construction industry is yet to undergo a technical revolution and has [a] low percentage spend on research and innovation.”
There’s no comprehensive data showing how much the UK construction industry spends on innovation each year. However figures are available on a company-by-company basis. Last year Laing O’Rourke, the UK’s second largest construction firm, had total revenues of £4.4bn and spent £38m on R&D. To put those numbers into perspective, Laing O’Rourke spent 0.009 per cent of its revenue on R&D in 2014, compared to technology company Apple, which spent 3.3 per cent.
Karen Heigham, a quantity surveyor at construction company Wates, sums up the industry’s approach to innovation saying: “Construction suffers from an attitude of ‘that’s the way we’ve always done it and that’s the right way’.”
When it comes to investing in machinery, the UK also lags behind many of its Northern European neighbours. A higher percentage of building work is carried out offsite in Germany than in the UK. A popular backlash against ugly prefab tower blocks built in the 1960s made construction firms suspicious of prefabrication. However, offsite manufacturing has come on a long way since then and offers substantial efficiency savings.
Another factor that’s made the UK construction industry slow to invest in machinery is the steady supply of builders and tradesmen arriving in Britain from Eastern Europe. When labour is abundant and cheap, there’s less of an incentive to invest in machine automation.
Innovation by accident
Construction relies on breakthroughs in other industries to fuel its growth. That’s the view of Dr Gruneberg who says: “Innovation is very much embedded in the process because materials, products and components are constantly being innovated by manufacturers.”
The development of graphene is a case in point. The material’s unique properties -it’s tougher than diamonds and more flexible than rubber- means that it has an array of potential applications in construction. Scientific discoveries like this help to improve productivity, without the construction industry needing to pioneer change.
Technical advances
One of the technologies the construction industry is championing is 3D printing. Earlier this year a Chinese firm successfully printed a five-story villa. European companies aren’t anywhere near mass-producing houses using 3D printers, but they’re taking their first tentative steps with the technology. Leading the pack is the British arm of Swedish firm Skanska, which has entered an 18-month partnership with Loughborough University to develop the world’s first commercial concrete-printing robot.
Productivity growth in construction tends to be fitful. 3D printing could bring about the next enormous leap forward in output per hour worked. But experts estimate the use of 3D printing in construction won’t become the norm for another 20 to 25 years. In the meantime construction has plenty of other productivity-sapping problems