Fragmented Private sector is hurting the Construction sector. How to fix it?

There has been a general trend among firms after 2008-09 financial crisis to increase workforce
rather invest in equipments, technology and, skills. This has plagued the global economy with
decreased productivity and cut down revenues pushing firms to cut down investments in
technology and equipments and workers with less wages. Unfortunately, Construction industry
has been facing this problem from several decades. To give a perspective, Construction sector
labor productivity increased by 1% a year whereas, total world economy and Manufacturing
industry grew at 2.8% and 3.6% between 1995 and 2015. One of the reasons for this
notoriously low productivity is its fragmented structures, extensive regulatory framework,
dependency on public-sector demand and lack of big firms which can catalyze towards
implementation of new technologies. For example, In USA only 5% of construction firms employ
more than 10,000 people compared to 23% and 24% for the business services and
manufacturing firms. Also the contracts being highly cyclic, Companies do not have much
incentive in buying machinery, As any downturns will make it vulnerable to bankruptcy. So
Companies are more keen to hire people, which makes it easier to cut workforces in financial
distresses.
Even though there has been advances in 3D Printing, Robotics, Laser scanning and robotic
cranes, but the trade is reluctant to employ these technologies and Project-management
services to boost production which have revolutionized other industries. Even Contractors who
are interested and believe in the idea doesnt have enough capital to utilize these technologies.
Even the private sector consumers are too fragmented to lead the change. Also the public
sector doesnt seem to have much interest in it because it is more concerned about the cost
rather than value based evaluation. This has led to decreased productivity over years. If
Construction productivity has grown equal to world productivity, then industrys value added
could rise by $1.6 trillion a year and 2% of global GDP.

How to overcome problems of fragmentation?

Some of the many solutions for such firm-level fragmentation are to reshape regulations,
Rewire contractual framework, Optimize procurement, better supply-chain management, and
some long term solution is to rethink design and engineering processes.
Construction projects have a built-in conflict of interest between the owners (desiring lowest
cost and short schedule) and contractors (maximizing profits). This requires interventions from
policy makers to value performance, which is beyond the cost. This can be done by evaluating
on non-cost factors like risk exposure, project-management systems and other IT tools, and
compliance with health, safety, and environmental regulations. Authorities should also put an
absolute baseline that all bidders must pass to take up the project. This will boost firms to use
scientific methodologies and ensure filtering out of contractors who undermine quality of work.
One other way to increase to productivity without hurting sub-contractors is to foster a
collaborative culture outside the contractual framework. This is possible if policy makers keep
project integration and interface management priorities by calling contractors, requiring to set
up a team with sufficient technical capabilities to manage this integration, even if third party
sub-contractors are allowed. Inefficiencies of communication between contractors has delayed
projects and hurt public interest. This can be solved by an agreed version of the truth in project
drawings, schedules, KPIs, and so on. Achieving this will require investment in modern digital-
collaboration platforms and solutions. Singapore has already taken steps to invest in Building
information modelling, hoping private firms will catch up soon and promote collaborations
among sub-contractors, by establishing a single source of truth. The regulatory frame-work
under which sub-contractors work have no specific legal framework to protect them and leads
to longer time to settle law-suits. A broader intervention by policy makers and implementing
Information modelling technologies will help in faster settlement of law suits and avoiding
conflicts in the first place. The way forward for the industry is not to cut down small private
firms, but to enhance communication and transparency among them, help them grow and
merge to be more productive and reach a bigger consumer base.

CHARTS

Globally, labour-productivity growth lags behind that of manufacturing and the total economy

SOURCE: OECD; WIOD; GGCD-10, World Bank; BEA; BLS;

Fragmentation level among subsectors of construction is strongly related to their productivity

2012 $ per employee

Average number of employees per firm, 2012

SOURCE: US Economic Census; McKinsey Global Institute analysis
Sources for the article
McKinsey Global Institute - Reinventing-construction-A-route-to-higher-productivity
The Economist Issue August 19TH25TH 2017