This audio is automatically generated. Please let us know if you have any comments.
The authors are partners at the global management consulting firm McKinsey & Co, based in New York City. The opinions are the authors’ own.
On the one hand, the outlook is bright for the construction sector. with the rapidly growing global middle class and the need for all kinds of infrastructure, construction spending could reach $22 trillion by 2040, up from $13 trillion last year.
Jan Mischke
Courtesy of McKinsey & Co.
On the other hand, this potential will not be achieved if the industry does not increase. On the one hand, it will have to almost double its growth rate (outside China), from 1.3% to 2.7%. For another, not only is there already a shortage of skilled labor in many markets, but a large cohort of workers is nearing retirement. In the United States, the number of construction job offers doubled between 2017 and 2023.
Kevin Stockvis
Courtesy of McKinsey & Co.
Finally and perhaps most importantly, productivity growth has been poor. Of course, some individual companies have done well. However, the fact is that from 2000 to 2022, global construction productivity improved by only 10%, only one-fifth the rate of the global economy.
In advanced economies, such as Europe and the United States, the situation is even worse, with productivity falling into sinwhat 2000, although costs have risen faster than inflation. Put it all together, and construction output could drop a cumulative $40 trillion for demand by 2040.
1% annually
This is the problem and if it was easy to solve, it would have been. But that doesn’t mean it’s insoluble. If the industry could fill labor gaps while improving its productivity by 1% annually, it could go a long way toward addressing this $40 trillion shortfall.
Koen Vermeltfoort
Courtesy of McKinsey & Co.
They are big yes. But, to a large extent, the solutions are in the hands of the industry. The lack of standardization in construction design, including slow incorporation the use of modular componentsfor example, it’s been a known problem for years. Less than 4% of the current housing stock in the US and 15% in Japan have been built using modular techniques.
3 possible solutions
Here are three actions construction companies can take to increase their productivity.
Embrace skill enhancement. Businesses are often willing to accept less skilled or less experienced labor in order to get the job done. There is a place for these stops, but it’s not a talent strategy.
research on the impact of temporary employment shows that temporary work has a detrimental effect on productivity. The industry needs to step up skill training. In addition, it can do a better job of building attractive career paths for potential workers and encouraging the mobility of current ones.
Examples include technology-supported learning trips, apprenticeships and project academies. Partnerships with universities, community colleges and high schools can make young men and women more aware of the possibilities of a career in construction, while helping them develop the skills to succeed. Finally, while there is a labor shortage, there are also many people who are not working at all. Companies may want it consider overlooked sources of talent.
Foster an ecosystem of suppliers. Provider ecosystems can foster stability, so owners and partners operate with transparency, credibility and stability. On this basis, construction companies can accelerate learning and improve the way they work. Inculcate these habits in an ecosystem it can build trust and promote positive change. Owners usually establish these associations; it is important that they are a model of the desired way of working.
Management of reform projects. The traditional project delivery model characterized by a lack of integrated systems thinking, the prioritization of short-term cost management over long-term results, poor communication, rigid planning systems and tight budgets. All of this discourages managers from trying new things that could benefit future projects.
One way to approach the problem is for project teams to follow the lead of manufacturing and focus on production speed metrics such as weld counters, excavated volumes, and revised drawings. This would allow teams to be more experimental, while allowing them to catch small problems before they become big ones.
Another is to work with project owners, including governments, to spread risk, especially in complex projects and especially when delays are clearly due to matters beyond their control, such as the discovery of archaeological remains, the protection of endangered species or delays in permits. Making results more predictable could be an effective, albeit indirect, way to increase productivity in the long run.
Construction accounts for around 7% of global GDP and 8% of employment. The ripple effects of their hardships spread far and wide. If the sector does not address its labor and productivity challenges and remains at $40 trillion by 2040, it will mean fewer homes and hospitals, less transportation, slower growth, and insufficient investment in climate-efficient infrastructure of all kinds. Not to mention a worse quality of life.
For a traditional, capital-intensive industry like construction, change is neither easy nor quick. The point, however, is that for their own sake and for the sake of the societies they serve, it is urgent that companies start.
