Skilled construction professionals have mastered the art of balancing construction’s four M’s–money, manpower, machines and materials. Despite advances in capital management, machines and materials, managing construction labor is still a people challenge. This industry relies on manpower to turn blueprints into tangible structures, operate machines and interpret documents. Inefficiencies in labor are the leading cause of recurring waste on construction projects, and the impact continues to grow.
DECLINE IN LABOR PRODUCTIVITY
Labor productivity, crucial for the financial health of labor-intensive contractors, is declining. A University of Chicago examination of Bureau of Economic Analysis data found the value that each additional worker added to construction was 40% lower in 2020 compared to 1970. Polls support this trend: Nearly 50% of construction professionals believe labor productivity has declined in the past decade. A recent McKinsey study on labor productivity in construction shows that over the past two decades, construction labor productivity has remained stagnant—at 1% annual growth—contributing to high costs and project delays.
This decline suggests underlying systemic issues in planning, communication and collaboration—all of which are crucial for efficient project execution. Furthermore, 79% of contractors believe they could improve labor productivity by at least 6% with better management practices. This improvement could lead to a 50% increase in profitability, highlighting the direct connection between effective labor management and financial success.
THE COST OF LOSSES
In the United States, the construction industry is experiencing a staggering annual loss of $30 to $40 billion due to labor inefficiencies, as reported by FMI’s labor productivity study. This significant loss not only affects the industry’s profitability, but also has a substantial impact on the entire construction ecosystem. In 2022, the labor-intensive construction sector completed projects totaling $900 billion, resulting in an annual labor cost of $270 billion, according to FMI. Of this, approximately $40 billion was wasted due to inefficiencies, leading to considerably reduced profit margins at the individual contractor level.
This also presents a tremendous opportunity for improvement. FMI estimates that a 10% increase in labor productivity adds more than 3% to a company’s bottom line, increasing profitability by 100%. Let that sink in: Improving labor productivity by just 10% can double profit margins.
FMI estimates that $25 billion could be saved through enhanced management practices. Our recommendations are grouped into three categories: improving planning and management; using new technologies; and developing the workforce.
IMPROVING YOUR PLANNING AND MANAGEMENT
Enhanced planning and preconstruction efforts: Contractors should optimize planning and preconstruction activities. This involves detailed project planning, risk assessment and resource allocation before the project begins. Effective planning can identify potential bottlenecks early and ensure smoother execution. Practices such as target value design and value engineering already emphasize multi-disciplinary approaches to integrated project planning and preconstruction efforts.
Improved communication and collaboration: Establishing clear and consistent communication channels within the project team and with external stakeholders is crucial. This includes transparent information sharing and collaborative decision-making processes between the field and office to ensure everyone is aligned and working towards common goals. It is important to maintain this throughout all stages of the project life cycle.
Addressing supply-chain and vendor management: Efficient supply-chain management and vendor relationships can reduce delays and cost overruns. This involves strategic sourcing, maintaining strong supplier relationships and effective inventory management.
Strategic use of prefabrication and offsite construction: When applicable, shifting to prefabrication and modular construction can minimize waste, enhance quality control and expedite construction timelines.
NEW TECHNOLOGIES
Beyond building information modeling and project-management software, both of which are essential to efficiency and productivity, newer technologies—like AI platforms with agents tailored to the needs of a particular construction company—can be layered in to significantly increase productivity outcomes.
Performance-based incentive programs: Performance-based incentive programs implemented in construction companies drive productivity by motivating employees to meet specific goals and deliver high-quality work. These programs align individual performance with company objectives, fostering a culture of accountability and excellence. By shifting the psychology around effort, they can help retain talent by rewarding exceptional performance, contributing to improved project outcomes and overall business success. Aligning incentives across the organization leads to improved business outcomes and happier employees.
Artificial intelligence and robotics: AI and robotics can automate repetitive tasks and reduce human error. These technologies enable precise and efficient execution of complex tasks, increased evaluation and processing of information, and can lead to faster project completion and cost savings. Moreover, AI and robotics facilitate advanced data analysis and real-time decision-making, improving project planning, resource allocation and operational efficiency. Placing simple AI tools in workers’ hands can prevent costly mistakes and coordination errors at negligible costs, offering a low-risk way to integrate new technologies.
DEVELOPING THE WORKFORCE
Focus on workforce development and training: Continuous training and development programs are essential for cultivating a skilled workforce. Training should cover not only technical skills, but how to use digital technology and implement internal management and communication processes, which are critical for effective teamwork and project execution.
Strengthening field-management practices: Field managers should be empowered and equipped with the necessary resources to make informed decisions onsite. This involves better resource planning, site-logistics management, incentive management, field-management tools and proactive problem-solving. Educating field managers on new technology-driven practices and equipping them with the right tools and training to elevate their individual impact is key to achieving this goal.
