Construction Labor Productivity: The $20 Billion Opportunity
FMI’s latest report digs into labor productivity, including challenges, opportunities, and what successful companies are doing right.
Construction is a labor-intensive business. Despite tremendous advances in design, coordination, and management technologies, the physical installation of work in the field remains reliant on people. Of the nearly $900 billion in construction put in place by labor intensive contractors in the United States in 2022, FMI research suggests contractors lost approximately $30 billion to $40 billion to labor inefficiencies. At the individual contractor level, these labor productivity deficits translate to project and enterprise margin erosion.
Labor productivity is a challenge for the construction industry, and it appears to be getting worse. FMI’s 2023 Labor Productivity Study confirms the well-documented trend of productivity decline, with only 23% of respondents claiming labor productivity improvements over the last 12 to 18 months. Almost half of respondents (45%) saw declining labor productivity, and a third saw stable labor productivity trends in their businesses.
Labor productivity is the economic engine of labor-intensive, self-performing contractors. Labor is also the largest, riskiest, yet most controllable variable cost. Managed well, labor productivity can significantly improve bottom-line margins. Managed poorly, labor overruns, or exceeding labor budgets, can wipe out contractor profitability.
In this study, FMI researchers explored the major challenges that must be addressed to improve productivity for the industry, including both internal and external obstacles that contractors face in their pursuit of performance optimization. Additionally, researchers identified key management practices and traits of high-performing contractors, including planning behaviors, project controls, and support for the field.
To produce these findings, FMI surveyed more than 250 senior leaders from labor-intensive, self-performing contractors in summer 2023 to understand productivity challenges and best practices.
Part one of this study focuses on the industry challenges that work against optimizing labor productivity and management practices that correlate with labor and margin performance. Part two of the study, expected in the first quarter of 2024, will explore trends and challenges in off-site construction as they relate to improving labor productivity and performance.
KEY FINDINGS INCLUDE:
- $30 billion to $40 billion is lost annually to poor productivity.
- 3 of the top 4 internal factors affecting productivity are related to planning, communication, and collaboration.
- 11% or more of field labor costs are wasted, said 60% of respondents.
- 4 of 5 contractors said low-quality design/construction documents are a top external factor stunting productivity.
- 79% of contractors could improve labor productivity by 6% or more with better management.
- A 50% average increase in profitability could be realized from a 6% productivity improvement.
Top 5 Internal and External Challenges to Productivity
“While it is easy to blame general contractors for these challenges, universal acquiescence to these issues creates the risk of victim mentality. Construction is a team sport. The best trade contractors have disciplined management practices for communicating with and influencing general contractors. When schedules compress and change orders back up, high-performing trade contractors step up and are firm but fair in letting general contractors know what is needed to get the project back on track,” noted Tyler Paré, Partner, FMI.
TOP INTERNAL CHALLENGES
- 63% Lack of qualified labor
- 58% Poor planning and communication by field management
- 56% Poor planning and communication by project management
- 51% Poor project team collaboration/teamwork
- 44% Poor site logistics coordination
TOP EXTERNAL CHALLENGES
- 80% Low-quality design/construction documents (plans and specs)
- 76% Schedule challenges
- 64% General contractor
- 56% Change orderinefficiencies
- 48% Other trades
What Top-Performing Companies Do Right
Optimizing labor productivity is an organizational and cultural journey that requires teams and individuals to adjust their planning and communication habits. The infrastructure that allows this behavioral change to take hold and scale is underpinned by disciplined management practices, proven to support the field, minimize resource-related delays, and optimize labor productivity.
- Pre-job planning: This requires consistent and thorough translation of project information from estimating to operations, followed by in-depth planning by project teams to develop strategies for optimizing labor productivity and project performance.
- Look-ahead planning: This needs a weekly cadence of field leaders communicating resource needs (labor, equipment, materials, subcontractors, and information) for upcoming activities to be coordinated and supported by project management.
- Daily goal setting: Field leaders establish and communicate clear, quantifiable production expectations and objectives for crews on a daily basis.
- Labor productivity tracking and feedback: Field leaders and project teams need regular reporting of productivity information in digestible formats so they can discuss project performance and detect labor risk early. This requires well-vetted budgets with hours and quantities prior to mobilization, accurate reporting of time and quantities by field leaders throughout the project, and reinforcement of the right behaviors.
- Cost-to-complete forecasting: This critical report is based on a monthly analysis of the costs incurred to date, the percentage of the job that is completed, accurate forecasting, and reestimating the cost to complete the remainder of the scope of work. Accuracy of the cost-to-complete forecast increases with up-to-date, direct-cost accounting, early buyout and locked-in pricing, field input on the remaining work, and accurate productivity tracking that can be utilized to project labor costs.
- Exit strategy: During this phase, the project team meets to reenergize, focus, and develop a plan to finish a project on time and mitigate the risk of late project margin fade. This would typically occur when the project is near 80% completion.
- Post-job review: After project closeout, this meeting shares and documents the lessons learned, provides production feedback to estimating, and captures lessons learned for future success and continuous organizational improvement.
High-performing companies stand out with their focus on productivity and operational excellence. They are hyperaware of the connection between profitability and labor productivity, and they take steps to maximize both in the safest and most logical manner possible. In most situations, high labor productivity delivers the best project outcomes—that is where the money is made.
By getting a handle on productivity, giving workers the tools needed to be successful, and diligently planning for jobs, companies can improve margins and profitability. In an industry where one bad job can make or break a company, harnessing the power of your biggest asset—your people—will ensure you continue to successfully operate and thrive.
FMI research team and authors included Consultant Michael Keller, Partner Tyler Paré, and Analyst Jake Howlett (www.fmicorp.com). Excerpted with permission from the 2023 FMI Labor Productivity Study. To download the full study, visit https://tinyurl.com/2aknshmn.