24/7/2021 Improving construction productivity | McKinsey

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Improving construction productivity

July 18, 2017
| Article

By Filipe Barbosa , Jan Mischke , and Matthew Parsons

McKinsey research finds seven levers can fix construction’s productivity

problem, but they require a new approach from all players. We heard
from industry leaders about which barriers to change are most likely to
fall first.

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T
he McKinsey Global Institute (MGI’s) Reinventing construction: A route to higher
productivity  report, released in February 2017, found that the construction industry
has an intractable productivity problem. While sectors such as retail and manufacturing
have reinvented themselves, construction seems stuck in a time warp. Global labor-
productivity growth in construction has averaged only 1 percent a year over the past two 
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decades, compared with growth of 2.8 percent for the total world economy and 3.6
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percent in manufacturing (exhibit).
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24/7/2021 Improving construction productivity | McKinsey

The report confirmed many reasons for this persistently poor performance, including
stringent regulations and dependence on public-sector demand, informality and
sometimes corruption, industry fragmentation, and mismatches in risk allocations and
rewards. In addition, project owners reported that it can be hard to navigate the opaque
construction marketplace—particularly when they do not frequently manage major
projects. This struggle often results in subpar project management and execution,
inadequate design processes, and underinvestment in skills development, R&D, and

innovation.

Exhibit

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Since February, we have discussed the findings with diverse stakeholders around the

globe—in roundtables, our recent Global Infrastructure Initiative Summit , and more—and
we have heard from nearly all that change is both needed and possible. There’s a sense

that the industry is on the verge of disruption, and industry players are actively working on
new approaches. How organizations are preparing to deal with the disruption varies

greatly—though most recognize that failure to adapt could result in being left behind. To
cope with disruptive pressures, some have taken incremental approaches to adopting best

practices by establishing small, discrete programs. Others have created transformational

agendas designed to work within the current confines of the industry. Still others are

making significant strategic bets to radically restructure the value chain or establish
manufacturing-like systems of mass production. It is unclear which approach will win in a

given market segment—but understanding the challenge and the opportunity to address it
is a crucial first step.

The construction sector has much to do

To disrupt its own way of thinking, working, and building, the construction industry can

learn from successes in other industries, as well as from pockets of excellence within
subsectors of the construction industry and around the world. Change is under way, but

many approaches that have been discussed for years have yet to be adopted at the scale
needed to transform the industry.

Abundant gains are at stake. MGI’s research found that if construction productivity were to
catch up withSign 
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We identified seven ways that innovators are successfully addressing current market

failures and improving productivity. With widespread adoption of all seven, we estimate

that the sector’s productivity could increase by up to 60 percent.

1. Reshape regulation and raise transparency. Too often, regulatory complexities hinder

productivity. At one roundtable, a participant noted, “Rules and regulations are the scar
tissue for past transgressions. Just like scar tissue, they eventually limit what you can do.”

Indeed, nontechnical risks, including political risks related to regulation and transparency,

are often cited as proximate root causes behind poor outcomes, even more so than

technical factors. Both government agencies and industrial companies can ensure robust
nontechnical risk management programs are in place to help proactively manage

nontechnical risks on their projects. Governments can help reshape regulatory

environments by streamlining permitting and approvals processes, reducing informality

and corruption, and encouraging transparency on cost and performance. Many

governments also allocate grants for innovation and training.

As project owners, government agencies can also help encourage innovation and new
approaches by prescribing means and methods of delivery or requiring use of certain

technologies.

2. Rewire the contractual framework. Many in the industry shared case studies

demonstrating that when interests are aligned and aimed at well-defined outcomes,

projects are more likely to meet schedule and cost targets. To align interests, the industry

must move away from the hostile contracting environment that characterizes many
construction projects to a system focused on collaboration and problem solving. For
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example, procurement can be based on best value and past performance rather than cost
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alone, and contracts can incorporate performance and alignment incentives. To move
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toward best practice, alternative contracting models such as integrated project delivery
(IPD) help build long-termEmail
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The issue of trust came up in many forums, and it will take time to build the level of trust

needed to collaborate and transparently share data in a way needed for proper incentive

structures. Yet owners were keen to start incorporating some aspects of IPD into their

traditional models to increase focus on making the best choices for a project, encouraging
innovation, and reducing variability. Managing those contracts will also require changes in

behavior, attitudes, and skills.

Many owners, particularly in the industrial space, have adopted contracting frameworks

that aim to transfer financial risk to contractors under transactional lump-sum contracting

frameworks. At their worst, these structures often provide incentives for structural failure
in the multistakeholder collaboration process. Companies would be better served by

considering the full spectrum of options from purely transactional contracting to purely

relational contracting. This deliberation will go a long way to ensuring a collaborative

working approach is established at project inception.

3. Rethink design and engineering processes. There is a major opportunity to improve

productivity by institutionalizing value engineering into the design process and pushing for
repeatable design elements. Only 50 percent of MGI Construction Productivity Survey

respondents said their firms currently have a standard design library. In asset classes such

as deepwater oil and gas for which standardization might not be the panacea, the

opportunity for parameter specification rather than individual company specifications is

significant.

Nearly everyone we spoke with agreed that change will only be achieved if owners and
contractors alike can shift mind-sets from custom scopes for each project to more
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standardization and repeatability. Building up libraries of optimized designs can support
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4. Improve procurement and supply-chain management. The construction sector ranks

in the lower range of sophistication in McKinsey’s Global Purchasing Excellence Survey,

suggesting ample room for improvement. A combination of best practices seen in other

industries and innovative, digitally enabled approaches can improve reliability and
predictability. Digitizing procurement and supply-chain work flows will enable more

sophisticated logistics management and just-in-time delivery.

More strategically, owners, contractors, and material suppliers are also exploring ways to

learn from industries such as automotive and aerospace when it comes to building longer-

term supplier and subcontractor relationships.

In industrial companies, final investment decision (FID) is often a misnomer, as the decision

tends to be a foregone conclusion given the incremental financial commitment that has
already been made to procure long-lead-time stocks pre-FID. Supplier development

programs that aim to reduce lead time through the application of lean supply techniques

can help restore the integrity of FID and help owners avoid obsolescence issues.

5. Improve on-site execution. In our discussions, stakeholders voiced several challenges

with on-site execution, including inconsistent use of best practices across all sites,

projects, and staff, as well as difficulty finding and developing talented project managers.
In addition, many struggled to identify and use hard data to baseline project (and project

managers’) performance rather than anecdotes about the difficulty of a project.

To truly transform on-site execution, owners must implement change across all three

aspects of a project: management systems, technical systems, and mind-sets. Four key
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achieved a 70 percent increase in the project’s productivity. Second, companies should

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meetings. It is critical to complement common KPIs with forward-looking metrics to

identify, and subsequently reduce, variance. Third, project owners can improve project
mobilization by ensuring all prework, such as approvals, is completed prior to starting on-

site work. Fourth, careful planning and coordination of different disciplines on-site, along
with the application of lean principles, can reduce waste and variability.

6. Infuse digital technology, new materials, and advanced automation. Construction

lags significantly behind other sectors  in its use of digital tools and is slow to adopt new

materials, methods, and technology. Significant advances being deployed or prototyped

today can transform the effectiveness and efficiency of construction in three areas: digital
technologies, advanced materials, and construction automation. Digital technologies—

from 5-D building information modeling to advanced analytics—have spread rapidly. Our
survey revealed that more than 44 percent of respondents have adopted some type of
digital technology, and planned adoption within the next three years is expected to reach

70 percent.

In our discussions, stakeholders voiced several challenges in deriving more value from

digital tools, such as maintaining accuracy in transitioning to virtual models: today,

frequently, there is no consistent “digital-twin” of a structure, but rather digital models are

being printed for use with suppliers, who make changes and optimizations without feeding
them back to the models, and there are substantial differences between as-built and plans
that make optimizations in supply chains, work processes, and life cycle management

difficult to capture.

Given constrained R&D funds, industry players are using pilot programs to test innovations
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while minimizing risk. In a few leading cases, owners and contractors are pooling
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resources to overcome capital constraints. The Crossrail Innovate portal, where owners
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and contractors share ideas, is one example of effective cross-industry innovation.

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Technology alone will not address poor productivity. We heard nearly universally that a

fundamental culture change is needed alongside adequate systems, processes, and buy-
in from the field to embrace these solutions.

7. Reskill the workforce. Change cannot be achieved without investment in retooling a

workforce that is undergoing major demographic shifts, from aging managers to
increasing numbers of migrant laborers. Apprenticeship programs can train frontline

workers in core skills that are currently underdeveloped, as well as in new technologies to
help break seasonality and cyclicality, thus improving workforce stability.

Collaboration is key; funders, educators, and public officials who run workforce-training
programs should collaborate with contractors and trades to ensure skills programs match
the industry’s needs. Megaprojects should be seen as long-term catalysts to work with

local workforce boards or nonprofits and develop regional training programs.

Beyond these seven ideas, parts of the industry could make a more radical change by

moving toward a manufacturing-inspired mass-production system, in which the bulk of a

construction project is built from prefabricated standardized components off-site in a

factory. Such a system would negate most of the market failures that are currently holding
back productivity; the experience of firms that are shifting in this direction suggests that a
productivity boost of five to ten times is possible.

While stakeholders have mixed views on the experience of precast building parts from the
1950s and 1960s in terms of cost and building quality, many are building up new

capabilities today based on different, lighter-weight materials that are easier to ship and
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The pressure to act is rising. Demand is soaring. The scale of players and projects is
increasing, making a more productive system more viable. The price of productivity-

enhancing technology is falling, making it more accessible. There is increasing

transparency in the market, and disruptive entrants are bringing a new wave of
competition and increasing the urgency of digitization.

After decades of stasis, the industry appears to recognize the pressures bearing down on
it, and these forces are motivating owners and contractors to change. As pioneering

organizations transform, they will create best practices that can be emulated across the
industry. Players that don’t rethink their approaches may be left behind in what could be
the world’s next great productivity story.

We intend to continue to collect case studies and best practices from across the globe,

and we hope to share them with the Global Infrastructure Initiative community. Read the
best ideas from the 2017 GII Summit .

ABOUT THE AUTHOR(S)

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Filipe Barbosa  is a senior partner in McKinsey’s Houston office, Jan Mischke  is
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and Matthew

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