EVER since the financial crisis, theworld has been plagued by weak productivity growth. One explanation is that inuncertain times firms are keener to take more people on to the payroll than toinvest heavily in new equipment. The construction industry has been afflictedby such problems for decades. Since 1995 the global average value-added perhour has grown at around a quarter of the rate in manufacturing.
According toMcKinsey, a consultancy, no industry has done worse.Thingsare especially dismal in rich countries. In France and Italy productivity perhour has fallen by about a sixth.
Germany and Japan have seen almost no growth.America is even worse: there, productivity in construction has plunged by halfsince the late 1960s. This is no trifling matter.
The building trade is worth$10trn each year, or 13% of world output. If its productivity growth hadmatched that of manufacturing in the past 20 years, the world would be $1.6trn better off each year One source of the industry’sproductivity problem lies in its fragmented structure. In America less than 5%of builders work for construction firms that employ over 10,000 workers,compared with 23% in business services and 25% in manufacturing. Its profitmargins are the lowest of any industry except for retailing. It is also highlycyclical. During the frequent downturns that afflict the industry, any firmthat invests in capital, and thereby raises its fixed costs, is vulnerable.
Bycontrast, companies that employ lots of workers without investing much cansimply cut their workforces. A few building firms are experimenting with newtechniques, from 3D printing and drones to laser-scanning and remote-controlledcranes (see article).But the trade as a whole is reluctant to spend money on the sorts oftechnologies, from project-management software to mass production, that haverevolutionised so many other industries.The clients of construction firms haveevery interest in lower bills and speedier completions. But private-sectorcustomers are themselves too fragmented to catalyse change.
Governments areanother story. The public sector accounts for 20-30% of total constructionspending in America and Europe. As both a large customer and a setter ofstandards, it has the clout and the means to encourage the industry to improve.First, governments can mitigate theindustry’s boom-and-bust problem by smoothing out their spending onconstruction projects. Too often public investment is cut during downturns tofind budgetary savings. Greater certainty about future work will give firmsconfidence to invest more in technology. Providing greater clarity aboutproposed projects can also help. Britain’s National Infrastructure Pipeline, anassessment of planned spending by both the public and private sector, hasboosted investment in the tunnelling business because companies can see moreclearly what projects lie ahead.
Second, governments can encourage thespread of mass production by harmonising building codes. The growth ofcompanies making prefabricated houses can be stymied by the cost of adaptingtheir designs for specific jurisdictions. This is true not just across bordersbut within them.
American counties and municipalities employ up to 93,000different building codes between them. Standardising rules ought to mean biggerproduction runs and higher returns.Can they fix it?Public-sectorcontracts can also be designed to nudge companies to adopt new technologies andto co-ordinate with each other more efficiently. Too many construction jobs arestill mapped out with pen and paper. Britain, France and Singapore now requirebidders for public-sector contracts to use a process called “buildinginformation modelling”, a type of digitised construction plan, in the hope thatonce they have invested in the relevant software, it will be used inprivate-sector projects, too. Building sites are often home to many contractorsand subcontractors.
Structuring public-sector contracts so that these firms sharein a bonus if projects come in on time and under budget is another example ofgood practice.The world has an annual $1trn shortfall ininfrastructure spending. Those projects that are given the green light tend tocome in late and over budget. If the construction industry could build more forless, investors, citizens and customers would benefit. Governments can help laythe foundations.