Poor productivity the ‘biggest issue’ for construction sector

A new report released by the Australia Constructors Association has found lifting productivity growth is the key to improving the construction industry.

The report found that despite strong levels of construction activity, the industry’s productivity has gone backward over the last three decades.

Poor productivity in the construction sector impacts the ability to deliver the housing and infrastructure Australia needs to accommodate its growing population and the new energy assets required to meet the country’s decarbonisation commitments, the Nailing Construction Productivity report said.

“Oxford Economics estimates that raising construction productivity to the economy-wide average will unlock an additional $56 billion in construction capacity every year. This would be enough to deliver over 1,000 new schools, 10,000 kilometres of road or 25,000 extra hospital beds,” ACA chief executive Jon Davies said in the report.

“Construction’s productivity problem reflects a broader problem in the economy. The Productivity Commission highlights that Australia is experiencing the worst productivity growth in 60 years. If we stay stuck on the current course, our living standards will go backward, with Australians working longer hours for less money.”

Opportunities to boost productivity in the construction sector

One of the main issues impacting the sector’s ability to improve productivity is the commercial structure of the industry, according to the report.

“The industry is fragmented with a preponderance of small firms. The financial realities of the construction business limit the ability of firms to make significant investments, including in new technology. Access to working capital is severely constrained—even for large players—which leads to a lack of flexibility,” it said.

“These conditions are deeply rooted in the commercial structure of the industry, particularly the tendency to contract projects on fixed price terms.”

While fixed-price contracts work well for transactions where product requirements and the cost of product are well known, these contracts do not work well where production costs are highly uncertain.

“In these situations, an excessive burden of risk is placed on the seller. If and when these risks are realised, sellers are forced to fund them out of profits. When this pattern of total risk transfer becomes entrenched, it results in a deeply unstable industry,” the report said.

A previous ACA report found that the risk of insolvency for builders is now twice as high as in other industries, profit margins are often in the order of 1 per cent, and half of all firms carry current liabilities in excess of current assets—a technical definition of insolvency.

“These precarious financial conditions translate into an industry with a myopic focus on short-term survival and little bandwidth for innovation. This suggests construction’s productivity problem runs far deeper than a simple resistance to technology adoption,” the report stated.

“The key issue we need to address has much less to do with technology than with the industry’s basic operating system. The commercial environment of construction actively disincentivises the longer-term planning and decision-making needed to drive productivity growth.”

ACA said the focus therefore needs to be on creating conditions under which opportunities for productivity growth can be harnessed.

“Construction firms and professionals know where the opportunities are and are hungry to implement them. While it is important to set standards and clear the path for adoption, our main challenge is to reset the commercial environment in a way that unleashes the urge to invest in productivity-enhancing innovations,” the report said.

The report said while the private sector has an important role to play, it will be difficult for individual clients to change practices in isolation.

“This is particularly the case for highly-levered clients with limited freedom to finance projects on innovative terms.”

Changes in this area will therefore need to be led by the Commonwealth as part of a 10 year national construction strategy aimed at increasing construction industry productivity.

The report said there was no shortage of opportunities to achieve improved productivity in the construction industry.

“Contrary to popular thinking, many of these opportunities are associated with how projects are procured and governed rather than how they are physically constructed,” it said.

The report suggested more efficient procurement processes may be one way to boost productivity.

“Traditional procurement processes for large projects are expensive and resource intensive exercises that require more than just a contractor estimating how much a project will cost, applying their mark up and submitting a tender,” it said.

“Assuming an annual government spend on infrastructure of $63.75 billion, even a modest 15 per cent reduction in the cost of tendering would result in annual savings of $0.5 billion per annum for government projects alone.”

Returning the use of standard forms of contract would also save significant time and money, the report said.

“Early standard forms of construction contract were developed over 100 years ago to save on the significant time and money spent drafting a bespoke contract for every project or negotiating based on one party’s own terms. The standard forms were developed by industry bodies and amended over time to reflect changes in legislation and industry practices,” it said.

“In recent times there has been an increasing tendency for construction clients to use either heavily modified standard forms or to revert to drafting bespoke contracts for individual projects. All efficiency gains resulting from the introduction of standard forms of contract have now essentially evaporated.”

By reverting back to standard forms of contract, the report said the reduction in costs for legal advice alone would be substantial and that all parties would save time during project procurement.

Adoption of digital technologies is also often cited as one of the best ways for industries to become more productive, the report said.

“It is perhaps unsurprising that only the hunting and fishing industry has a worse track record than construction when it comes to adoption of digital technologies. In its 2021 Infrastructure Plan, Infrastructure Australia noted,” it said.

“Implementing best technology practices could result in a productivity improvement up to 15 per cent and more than 5 per cent in cost efficiencies. If proven digital tools and practices are used now, the sector can realise benefits rapidly.”