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Market Intelligence

McKinsey Construction Report Has Compelling Advice for CRE Owners

McKinsey & Company released an insightful report on why the construction industry lags so far behind other major industries in productivity, and what can be done to fix the problem.

There are a number of recommendations that address how commercial real estate owners can better drive productivity with their general contractors and with their internal teams. We scoured the 155-page report and pulled out the most relevant insights so you can make use of them immediately. 

Background

The construction sector is one of the largest in the world economy, with about $10 trillion spent on construction-related goods and services every year. However, the industry’s productivity has trailed that of other sectors for decades, and there is a $1.6 trillion opportunity to close the gap. [p. vi]

If construction productivity were to catch up with the total economy, the industry’s value added could rise by $1.6 trillion a year. One third of the opportunity is in the United States, where, since 1945, productivity in manufacturing, retail, and agriculture has grown by as much as 1,500 percent, but productivity in construction has barely increased at all. [p. vi]

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What is causing the sector's lag in productivity?

McKinsey points to several factors that negatively impact productivity in construction projects, but places the industry's delayed adoption of technology and poor communication near the top.  

Delayed adoption of technology

According to McKinsey, "Even if the sector had a top-notch skilled workforce, construction companies today sorely underinvest in the technology and digital tools that would enable them to achieve significant productivity gains."

In fact, the report cites a "robust correlation between the level of digitization in a sector and its productivity growth over the past ten years (Exhibit 31)." 

Digitization in construction relative to other industries.png

Poor communication

McKinsey makes three very important points here that directly impact owners:

1. Projects suffer from major time and cost overruns due not only to insufficient attention to design at an early stage, but also to an inability to execute projects effectively... [T]oo often, poor communication, a lack of sufficient and deliberate front-end loading, and low adherence to collaborative planning processes lead to high levels of change orders during the life cycle of projects. This drags down productivity by forcing work stoppages, necessitating rework, and disrupting flows of materials and labor. [p. 54]

2. One of the biggest challenges facing inexperienced owners looking to build complex projects is the gap that exists between what they know about the cost of a project and what their contractors know. [p. 72]

3. Transfer of knowledge within the industry is limited. Projects exist independently of each other, and it is too unusual for best practices to be communicated and deployed elsewhere. This undermines productivity. [p. 109]

McKinsey's recommendations for better productivity

Work together to reduce change orders. A different McKinsey analysis of large investment projects found 80 percent average cost overruns in the sector due to change orders. The analysis found that all the parties involved in projects had contributed to change orders, the implication being that all actors need to foster improved and deeper collaboration. [p. 73]

Perform thorough contractor due diligence that goes beyond project cost. Owners can benefit by thoroughly evaluating prospective contractors on critical non-cost factors such as their past performance, competence, risk exposure, project-management systems and other IT tools, and compliance with health, safety, and environmental regulations. This due diligence should involve building a fact base and set an absolute baseline that all bidders must pass to take on the project. [p. 73]

Set up a “single source of truth.” A key foundation of effective collaboration is ensuring that everyone is working from the same basis—that there is one 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, in addition to well-structured and fact-based project-performance reviews. [p. 75]

Assist in knowledge transfer. Investment in knowledge-management systems, including software tools, company intranets, and libraries, enables best practices to be codified and shared among projects. [p. 109]

Summary thoughts

McKinsey's authors get right to the point about why this research should matter not just to construction firms, but also to owners:

"Our survey found that contractors currently use standard productivity norms and measure productivity regularly but that owners do not. This makes it difficult for the latter to have an accurate view of on-site performance and to hold contractors to account." 

Read the complete report: Reinventing construction through a productivity revolution

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Pauline Nee

Written by Pauline Nee

Pauline is the head of content for Honest Buildings. For over twelve years in the commercial real estate industry, she has held diverse roles focused on product development, digital marketing, user research, web design and arts programming.