Disclosure: I am not an economist - merely a reader, thinker, dreamer, disruptor, innovator, construction professional, and systems developer for more than 50 years.
It’s all the talk. Productivity in developed economies has stalled. The Australian construction sector has not been immune.
Whilst we hear that stalled productivity is a major problem for the construction industry, we continue to wring our hands about the many problems, with little thought as to the practical actions we might take to begin to turn the tide.
I want to unpack productivity and look at the simple changes we can easily make to seed and motivate change.
“The construction industry in Australia has not substantially improved its productivity in decades, and can waste up to 30% of its efforts. This is not a uniquely Australian issue. Rather, it is a product of the structure of the construction industry, the increasing complexity of its services, and the creation and operation of “silos” within that structure”.
“Construction productivity today is lower than it was in 1990 and the industry is out of touch with the next generation of workers who no longer view it as an industry of choice.
The Australian Constructors Association believe the biggest opportunity to disrupt the industry and improve productivity lies in fundamentally improving how projects are procured, delivered and governed—essentially white-collar activities.
“White collar occupations account for the majority of the construction industry’s 105,000 skills shortage estimated by mid-2023,”.
I agree.
Added to the productivity decline (or partly the reason), there has been a marked decline in contract management performance over the same period that has resulted in a significant trust deficit between stakeholders, leading to a loss of confidence that we, the construction sector, can deliver on our promises.
A recent survey uncovered:
Productivity growth – remains an issue in Australia – 30 years of relatively weak productivity is equal to an estimated $47 billion in lost opportunity.
Project performance – 87 percent of respondents said project performance is a continuing issue.
Completion pressures – Only 50 percent of project owners are meeting completion deadlines.
Risk management issues – 37 percent of respondents said they have missed budget and/or scheduled performance targets due to lack of effective risk management.
Defining productivity?
The common definition of productivity is “doing more with less”
This definition has been in circulation since the beginning of the first industrial revolution.
Perhaps it is time to redefine it in the context of the modern world.
We can safely change the definition of productivity to “doing more with more”
The Oxford Dictionary defines productivity [ proh-duhk-tiv-i-tee] as:
the quality, state, or fact of being able to generate, create, enhance, or bring forth goods and services: 2. Economics. the rate at which goods and services having exchange value are brought forth or produced.
So productivity is about the ABILITY to bring products and services to market.
The Australian government measures productivity through a rangeof indicators and metrics across different sectors of the economy. Some of the key measures of productivity include:
Labor Productivity
Capital Productivity
Multifactor Productivity (MFP - a mix of labour and capital)
Total Factor Productivity (TFP includes technology)
Industry and Sector-Specific Measures
Gross Domestic Product (GDP) Growth
Innovation and Technology Adoption
Efficiency and Competitiveness Indicators
Quality Adjustments
These measures are tracked over time to identify trends and make comparisons. The Australian Bureau of Statistics (ABS) is a key agency responsible for collecting and disseminating economic statistics, including productivity measures, in Australia. Additionally, various government departments and research institutions may conduct studies and provide insights into productivity in specific sectors of the economy.
Productivity and Tools
Adam Smith and Karl Marx both wrote about the pin-making machine. Not too long ago, pins (for hats, to hold shirts in place, etc.) were incredibly expensive. They were a luxury item, and a handmade pin might cost more than buying lunch.
The pin-making machine changed this. It transformed the labor of four trained workers from 20 pins a day to 10,000.
It’s pretty clear that if you wanted to make pins productively, you’d want to own one of these devices.
Industrial productivity progress grows and then ebbs or levels out. The inclined plane. The shovel. The assembly line. The computer chip. Robots…
When it’s levelling out, some people insist it will never rise again. And yet it does.
The tools that are available to each of us are so powerful, so varied and so complex that even the free ones are ignored or misunderstood. We’re too busy doing work to get much done.
And so we end up with the convenient and sexy tools (like the smartphone you might be reading this on) and fail to do the few hours or days of training we might need to transform our productivity with desktop tools or thought-through workflow improvements and new tools, AI and Business Process Automation, to streamline them.
Working harder is rarely a better plan than finding better tools. (Seth Godin)
Productivity is the measure of HOW we utilise capital, labour, machines, and technology; and how we introduce innovation.
But what does that mean to us, and how can we use these measures to understand and improve construction industry productivity?
How do we measure productivity and, more importantly, what can we do as an interconnected community of clients, consultants, managing contractors, contractors and suppliers to lift productivity in our industry sector?
Construction Costs are made up of:
People (Labour)
Buy-in (raw materials, manufactured components; facilitating products and services)
Machines (new tools, advanced plant and technology)
And the marginal cost of transformation into a completed project (project management; business overheads; financing costs).
The key influences are labour costs, buy-in costs, and time.
There is no juice left in the Labour lemon - We know that people in the industry are overused, compared with other sectors. Hours are long, remuneration is not attractive for the work required, and the work is not always regarded as stimulating. This is demonstrated by the critically poor replacement of people leaving the industry.
The buy-in of materials, manufactured components and subcontracts is highly competitive.
Whilst there is a lot of interest in large-scale prefabrication, its wide acceptance at scale may be some way off. Offshore prefabrication of components (steel, windows, cabinetry) has not always been as successful as hoped because of the time lost and cost of corrections and modifications when they are required. Local component prefabrication, at scale, requires significant investment, and sufficient volume to sustain the investment. This has long been an issue for Australia. Some local prefabrication is little more than transferring site based work to a warehouse. Whilst there are some efficiencies of repeatability, and less risk, it’s a long way from large scale robotised manufacturing that we are seeing in Europe and the US.
We know that technology uptake in our industry is slow and selective, particularly in management areas. Adoption is based on perceived short-term commercial advantage rather than a genuine desire to improve efficiency. Technology uptake is also inhibited by poor capital accumulation at every level, though the technology (not the capital) is getting more accessible every day.
Recent events have made it clear that the industry has struggled to survive unexpected shocks.
Profits at every level of the sector are at dangerously unsustainable levels. This can only be the result of our service being undervalued by clients, because our performance is sub-par.
We can not beg clients and governments to pay for a more sustainable sector without, and before, demonstrating reliable, valuable performance. It is a major challenge only we, the industry, must face together.
Drivers of Change
Few areas in the existing system present obvious opportunities for immediate change, without systemic change.
The three drivers of revolutionary change are :
Communication / Technology (including data transfer, automation and robotics)
Power
Transport
All three of these drivers are in a state of exponential flux, right now. Power and transport changes are being driven by climate change and international events beyond our influence. The future is not clear.
Communications and data is the area that stands out as an immediate opportunity.
Nothing is stable or proven at this point, so we must be attentive and agile to the changes and be ready to move quickly to leverage the benefits to keep pace with global competition.
Where can we look for productivity improvement? What can we do to be more effective and efficient?
efficiency. [ ih-fish-uhn-see] is the state or quality of being efficient, or able to accomplish something with the least waste of time and effort; competency in performance.
effectiveness. [ ih-fek-tiv-nis], is the quality of producing an intended or desired result.
Productivity is an outcome of doing things well. Improved productivity implies doing things better.
The link between efficiency, productivity and profit can be analysed.
Aggregate efficiency is the increased value of transformation minus the transaction cost.
With the rapid rise in the speed and efficiency of communications and production technologies, the marginal cost of transformation in project and construction management, as with many other industries, will continue to decline.
Since profits are drawn from the marginal cost of transformation, the question remains, how to increase the value of the service, and thereby increase proft, whilst improving productivity?
Increasing the Value of the Service
It has become a standard, worldwide cynical joke that projects at all levels can not be completed on time and on budget. The reputation of the entire global industry to deliver on its promises is poor.
Since 1980, price competition for work right across the construction supply network, based on lowest price, has been a race to the bottom. It is achieved by cutting margins, cutting services and cutting corners. “Behind-the-scenes” services including design, supervision and contract management/project controls services are particularly vulnerable. As a result of price competition for undefined services, competence in design documentation, planning and contract management has declined.
The result is that performance has suffered to the point where trust between all parties is seriously eroded. Documentation and detailing are minimised, project control mechanisms (cost and time) are minimised, and trade contractors complain that they find themselves attempting to solve design management issues that they are neither equipped nor paid to do.
Clients can not trust that we, as an industry, cannot deliver on our promises.
Managing contractors do not trust Trade contractors to do a quality job,
Trade contractors, design and management consultants do not trust Managing contractors will manage and coordinate the complex processes and interactions efficiently, and they risk not being paid.
Everyone in the value chain prioritises getting paid, instead of prioritising their client’s interests.
The value of our services is diminished.
We will not improve profitability until we improve the value of our service.
Where to begin?
Much more effort and resources must go towards planning - design, documentation and management. There is no reason not to know, within fine tolerances, the exact scope of work of a project, or parts of a project, before starting construction. This alone leads to a more accurate prediction of cost and time. Combined with current and emerging technologies, there is no reason that we should not be improving quality and accuracy.
Much more effort and resources must be allocated to contract management and project controls. Current and emerging technologies, with known techniques, can track and manage cost and time performance in near real-time, but the data is crucial.
It will be important for governments to take the lead, setting an example with the change management required.
The creation of data.
Data sharing is integral to the shift towards more cooperative contracting where contractors at every level can focus on their work, rather than the clumsy contractural processes that impede progress and create conflict.
Future value creation will not be derived from owning data, but from sharing fine-grained data.
“For a number of reasons including the near zero aggregate efficiency, or conversion costs (where profits are taken), the vertically integrated silo’d economy is exhausted. The emerging economy is driven by complex communication networks. Owning is less productive than sharing. Productivity and wealth are driven by large, open, knowledge sharing networks.
This is a major shift in mindset for traditional businesses driven by 200 years of industrial growth. But for generations born to the internet, Facebook, Twitter, Instagram and Tik-Tok, it is perfectly natural. They know the future in not about ownership, but about sharing”. (Jeremy Rifkin - The 3rd Industrial Revolution".)
The quality of construction management data - detailing, specification, quantities and programming has declined over 40 years. It was driven by the pitch that the cost of these “back-room” services did not represent value. This resonated with clients, governments and politicians, who saw more value in the sight of physical results.
The outcome has been uncertainty, and cost and time overruns far more than the cost of detailed planning and preparation.
Data creation and sharing in construction, through BIM, BPA (business process automation), and AI will facilitate and ultimately automate many cumbersome, time-consuming management processes that we continue to rely on.
However, to access these technologies and innovations, we must first rebuild the structures that they rely on.
Preparing for more automated management will require changes to contracts and procedures, as well as rebuilding competence in the preparation and use of these management tools.
Smart contracts, that require rules-based processes, will automate contract management and payment processes in seamless, end-to-end contractual chains, ensuring that all parties in the construction network will concentrate on the collective, client objective, instead of focusing on protecting and collecting payment.
Understanding the interactions of complex networks and leveraging the efficiencies through networked data
Our classic understanding of communications channels on a construction project is dozens of vertically integrated, isolated contracts and subcontracts. The invention of the internet and data visualisation has given us a new understanding of the interactions in complex networks, and how to manage them.
We now understand the effect of change in a complex network. We are yet to develop processes to effectively move to effectively managing information flows in a network. This will require shifts in responsibility, contract and process.
THis new understanding of complex network interactions and visualisation from Manuel Lima, Jeremy Rifkin and others helps us see why and how the sharing economy can kick-start productivity.
Contracts will adapt to take advantage of structured, rules-based shared data and frictionless contracts that reduce the transaction cost of cumbersome processes.
Fortunately, the skills and knowledge, that are the cultural enablers for the adoption of structured, rules-based shared data in many new ways, are not completely lost.
Disruptors
Apart from finding ourselves in a blind alley, with few choices, change is often driven by disruptive ideas, and enabling technologies.
My knowledge area is CONTRACT MANAGEMENT. That’s what I will concentrate on here.
There are three disruptors that will bring a surge in productivity and accuracy to traditional construction.
They are :
business process automation,
frictionless contracts
and advanced analytics.
They are all inextricably linked, and readily implemented. Of the three, advanced analytics, with the development of AI, has more energy and focus at the moment. It’s role will be to identify and assist with more accurate forecasting and risk management.
Business process automation (BPA) is floundering. Adoption of available systems is selective, based on the perception of individual advantage. Some systems are poorly understood and can be manipulated for perceived advantage. Until the collective, cooperative management model becomes dominant in the market, the value and uptake of
BPA will not be realised.
The shift to frictionless contracts can begin immediately, using existing forms of contract. Existing contracts already have mechanisms for adopting shared, rules-based financial data that will unlock some productivity gains, and pave the way to genuinely frictionless contracts. However they are not the current preferred options over the current “risk silo’d” model of contract management that inhibits progress and accurate forecasting.
Moving to existing shared-data contract models, will open the door to integrated, end-to-end smart contracts that will allow all stakeholders to focus on the collective, client interest.
Major inhibitors of change are:
Fear of Change - Those clients, contractors, consultants and financiers who prefer the existing risk-trading/middle-man model cannot expect clients and the government to underwrite their downside risk.
Those willing to lead must move away from the risk-trading model of construction (dominant for 30 years) towards a team-based service delivery model. This should be led by clients and governments, who have the most to gain.
Legislation - Legislation designed to regulate payment and outlaw unconscionable contract conditions are likely to become inhibitors in a fast-changing contractual environment. Frictionless smart contracts will be inhibited by existing payment processes that are based on manual transactions.
Contract - Less than one generation ago, construction contract and process was more orderly than it is today. After we moved to risk trading as a model of economic engagement communication broke down, as we jealously guarded our "secrets" for economic advantage. But the downside was cumbersome, inefficient, ineffective process that eventually clogged the arteries of commerce. Productivity stalled and declined. It is clear that the silo'd, vertically integrated contracting model is breaking down.
Today, most contracts and subcontracts in use include contract management processes that seriously inhibit progress. It is a major cause of conflict and disputes, delays and uncertainty. Some improvements can be made, using existing contracts, though major productivity gains will only emerge from introducing seamless, frictionless contract management processes. These changes require shifts in responsibility together with shared, rules-based financial data and transparent processes. These changes will prepare the path to business process automation and frictionless, smart contracts.
Competence - Competence amongst contract managers has declined. Young, inexperienced people are required to undertake contract management tasks that they are not prepared for. Training, education and supervision is required to address these deficiencies. Clients must prepare to pay for a better service, in the short term, in return for more certainty.
Culture - Contract managers and site supervisors must move from enforcers to leaders, managers and coaches. These changes will be difficult for some, since these are new skills, and in some cases will expose management deficiencies. However, a shift in culture away from aggressive enforcement to genuine management in a fast-moving, challenging environment, is much more likely to attract high-quality new entrants to the profession and more reliable results for clients.
The key drivers for early change are:
transparent, rules based shared financial (cost and time) data. This alone unlocks all the possibilities for seamless contract processes and automations.
contracts that separate process from progress. The most innovative contracts will deliver the best results.
Flat management. Successful businesses have been implementing flat management since Thomas Friedman and others studied and promoted flat management structures for business.
With the growth of mobile communications, the internet and social media, people at all levels can have, and demand, a say in their day-to-day lives. Releasing and leveraging the locked-up value of staff at every level will generate very significant efficiencies, and offer people a sense of achievement and collective commitment. This alone will require a courageous shift for managers from top-down data flows, to bottom-up data flows. Their decisions will be made in real-time, with real-time data.
The Co-ordinating contractors role will focus on leadership, team building, motivation and management of large, complex teams rather than protecting ever-decreasing margins. The move from individual, short-term success towards a client-focused, collective success will transform the value of the construction service for every participant.
These changes will transform performance, attract skilled entrants to the industry, and will begin to address the upstream causes of the mental health crisis.
THIS IS NOT A DREAM
Business Process Automation it’s waiting in the wings. We’ve been preparing for this for 15 years. There is NOTHING in contract management that can not now be automated, augmented or facilitated by BPA. (There are a dozen examples on my YouTube channel)
Seamless smart contracts (implemented with BPA) will arrive in the next 5 years. Trust accounts will be a bad memory. We developed proven, innovative frictionless, contracts as far back as 1983. They can be implemented immediately.
Analytics is being advanced at warp speed by Bent Flyvbjerg of Oxford University, Martin Paver of Project Data Analytics, UK, and David Porter of Octant.ai in Brisbane.
There is no need to re-invent anything, it’s just a matter of changing existing systems with known processes and new tools.
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