EVER since the financial crisis, the
world has been plagued by weak productivity growth. One explanation is that in
uncertain times firms are keener to take more people on to the payroll than to
invest heavily in new equipment. The construction industry has been afflicted
by such problems for decades. Since 1995 the global average value-added per
hour has grown at around a quarter of the rate in manufacturing. According to
McKinsey, a consultancy, no industry has done worse.

Things
are especially dismal in rich countries. In France and Italy productivity per
hour has fallen by about a sixth. Germany and Japan have seen almost no growth.

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America is even worse: there, productivity in construction has plunged by half
since 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 had
matched that of manufacturing in the past 20 years, the world would be $1.6trn better off each year

 

One source of the industry’s
productivity 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 profit
margins are the lowest of any industry except for retailing. It is also highly
cyclical. During the frequent downturns that afflict the industry, any firm
that invests in capital, and thereby raises its fixed costs, is vulnerable. By
contrast, companies that employ lots of workers without investing much can
simply cut their workforces. A few building firms are experimenting with new
techniques, from 3D printing and drones to laser-scanning and remote-controlled
cranes (see article).

But the trade as a whole is reluctant to spend money on the sorts of
technologies, from project-management software to mass production, that have
revolutionised so many other industries.

The clients of construction firms have
every interest in lower bills and speedier completions. But private-sector
customers are themselves too fragmented to catalyse change. Governments are
another story. The public sector accounts for 20-30% of total construction
spending in America and Europe. As both a large customer and a setter of
standards, it has the clout and the means to encourage the industry to improve.

First, governments can mitigate the
industry’s boom-and-bust problem by smoothing out their spending on
construction projects. Too often public investment is cut during downturns to
find budgetary savings. Greater certainty about future work will give firms
confidence to invest more in technology. Providing greater clarity about
proposed projects can also help. Britain’s National Infrastructure Pipeline, an
assessment of planned spending by both the public and private sector, has
boosted investment in the tunnelling business because companies can see more
clearly what projects lie ahead.

Second, governments can encourage the
spread of mass production by harmonising building codes. The growth of
companies making prefabricated houses can be stymied by the cost of adapting
their designs for specific jurisdictions. This is true not just across borders
but within them. American counties and municipalities employ up to 93,000
different building codes between them. Standardising rules ought to mean bigger
production runs and higher returns.

Can they fix it?

Public-sector
contracts can also be designed to nudge companies to adopt new technologies and
to co-ordinate with each other more efficiently. Too many construction jobs are
still mapped out with pen and paper. Britain, France and Singapore now require
bidders for public-sector contracts to use a process called “building
information modelling”, a type of digitised construction plan, in the hope that
once they have invested in the relevant software, it will be used in
private-sector projects, too. Building sites are often home to many contractors
and subcontractors. Structuring public-sector contracts so that these firms share
in a bonus if projects come in on time and under budget is another example of
good practice.

The world has an annual $1trn shortfall in
infrastructure spending. Those projects that are given the green light tend to
come in late and over budget. If the construction industry could build more for
less, investors, citizens and customers would benefit. Governments can help lay
the foundations.