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Does construction have a 'productivity problem'?

The chancellor has singled out improving productivity as one of the government’s key aims, but what can the construction industry do to increase efficiency?

In last summer’s Budget, George Osborne made it clear that tackling low productivity would be one of his priorities for a new Conservative government.

”Our weak productivity shows we don’t train enough or build enough or invest enough,” he said. In the following weeks, the Treasury published its ‘productivity plan’, outlining measures to improve productivity across the economy, although there was little mention of construction.

The chancellor reiterated this in November’s Autumn Statement, adding that while productivity is growing the UK “still lags behind most of our competitors”.

Boosting productivity across the whole economy remains a government target, but since last summer’s productivity report, few solutions to the problem have been forthcoming.

Construction has traditionally struggled to push up efficiency – especially in the aftermath of a recession. So what are the challenges the industry will face as it looks to improve both efficiency and productivity?

Measuring productivity

Office for National Statistics data suggests that productivity, measured by construction output per worker and construction output per hour, has improved little in the last 20 years.

Construction output per worker_points in the cycle_ONS

Construction output per worker_points in the cycle_ONS

Source: ONS

In Q1 1997, output per worker stood at £15,211, while output per hour measured £390.85.

Fast forward nearly 20 years to Q3 2015 and output per worker stands at £15,431, while output per hour is £403.71 – increases of 1.4 per cent and 3.3 per cent respectively.

In contrast, output has risen 21 per cent over that same period, while the total number of construction jobs is up by 17.1 per cent.

“The way productivity is measured does not adjust for quality or standards”

Noble Francis, CPA

These statistics would suggest that little progress is being made in productivity. But is this data a fair representation of what is happening on the ground?

Construction Products Association economics director Noble Francis argues that the truth is somewhat more nuanced, saying “the way that productivity is measured does not adjust for quality, standards or health and safety advances.”

There may not appear to be a huge difference between output per hour of £391 in Q1 1997 and Q3 2015’s output per hour of £404, but this does not take into account improvements the industry has made in safety standards and the quality of that output, for example.

“Output per hour in the 1990s compared with now might not seem far apart, but that doesn’t account for improved standards,” Prof Francis adds.

Output per worker Q1 97-Q3 15_ONS

Output per worker Q1 97-Q3 15_ONS

Source: ONS

Productivity in construction also appears low when compared with an industry such as manufacturing, but that is simply due to the way in which work is carried out.

A labour-intensive industry such as construction will have a different statistical profile to one which requires very little or minimal manual labour. As a result, setting targets and benchmarking any ‘improvement’ in productivity can be problematic.

What’s more, the cyclical nature of the industry makes it difficult for firms to improve their efficiency and productivity.

Workload uncertainty

The uncertain nature of construction is one factor in this, argues Arcadis head of strategic research and insight Simon Rawlinson. “A lot of the issues around casualisation of the industry are associated with a lack of certainty around workloads and an inability to invest,” he says.

He adds that increasing levels of subcontracting, self-employment and casualisation creates two major barriers to tackling inefficiency within the industry. “The first is that it becomes very difficult to train people because you have a casualised workforce that is mainly looking after itself, rather than thinking long term,” he says.

Construction output per hour worked_points in the cycle_ONS

Construction output per hour worked_points in the cycle_ONS

Source: ONS

“Secondly, it’s very difficult to substitute people for other forms of capital – plant and suchlike – because businesses have a model that’s based on calling people down on a day-by-day or week-by-week basis.”

The industry has also lost a significant number of workers due to the global financial downturn: in Q4 2008, the workforce stood at 2.18m, but the recession saw this figure plummet.

By Q1 2013, it was down to 1.94m – a fall of around 240,000 people. By Q3 2015, this had risen to 2.09m – but still around 100,000 jobs shy of its pre-recession peak.

With skills shortages continuing to cause problems, it is difficult for contractors to improve productivity when they are struggling to recruit. On top of that, there is also the issue of profitability.

Profitability problems

With the top 25 contractors in the UK posting an average profit margin of only 1.2 per cent last year, funding capital investment in plant, manufacturing and increasing efficiency has also become problematic.

Output per hour Q1 97-Q3 15_ONS

Output per hour Q1 97-Q3 15_ONS

Source: ONS

Prof Francis says the best way to encourage growth in productivity is through investment, but sluggish growth in profitability has resulted in a lack of cash with which to invest. He adds that any major investment “needs to feed into the supply chain” for the industry to feel the full benefits.

Offsite manufacturing has been cited as one way the industry can improve efficiency and productivity, but this comes with one caveat: manufacturing would not be reflected in construction output statistics, and would therefore have no bearing on how productivity in the industry is measured.

“Manufacturing doesn’t deal well with a volatile market,” Prof Francis says, citing the example of the private housing market, where output fell by around 71 per cent from its pre-downturn peak to its recessionary trough.

“You’re unlikely to industrialise house building that is designed around a build-to-sell model”

Simon Rawlinson, Arcadis

“Firms need to be confident of a return on their investment and in many ways the construction industry is too volatile to be planning 20, 30 years in the future.”

Mr Rawlinson agrees that it is difficult to fully industrialise in construction due to the cyclical nature of the industry. “You’re unlikely to industrialise a housebuilding industry that is designed around a build-to-sell model,” he argues.

Warning signs

While industrialisation of construction processes via offsite manufacturing is important for improving efficiency, Mr Rawlinson says there is a very real danger that overinvestment could lead the industry down a similar path to the steel industry, suffering due to a global fall in prices and cheap imports.

“When you do start to make significant investment in skills, plant and suchlike, and then these downturns hit, it can take out huge chunks of capacity in one go,” he says. “It would be much less likely to happen to an industry that’s flexible and can shift with demand.

“If you go too far the other way, you’re almost ignoring the fact that the industry is cyclical; if people don’t want houses, nobody will build them. That’s a really difficult balance to be struck.”

Striking that balance will be a challenge for the industry in the long term, and the risk of overinvestment – especially if the industry is underprepared for another downturn – is a very real one.

But KPMG’s UK head of infrastructure, building and construction Richard Threlfall says the industry should not be viewed as having a productivity problem, more “a productivity opportunity”.

“The industry is 20 years behind others in its adoption of technology and remains far too dependent on manual processes,” he says. “If the industry invests in technology, onsite, offsite and back office, there must be a significant productivity gain to be had.”

Investment in offsite manufacturing, workplace efficiencies and staff training will all help to improve the industry’s productivity, but as the steel industry’s recent woes has taught us, it comes with a significant caveat.

In a cyclical industry such as construction, marrying efficiency and productivity improvements with sustainability will be the big challenge.

Having learned the harsh lessons of recession, businesses must now find the most effective way of building a sustainable and efficient future.

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