(Note: This is the first part of a three part article that address the problems of low industry productivity, the opportunity to improve productivity, and a suggested program for improving productivity).
Productivty or lack of it, is perhaps the number one problem confronting the construction industry, the construction firm, and the construction project. In this article, we will discuss the measure of productivity and the ability or opporunity to increase productivity.
Productivity can be viewed as the afficiency by which materials are placed by labor and equipment. Productivity is commonly measured by means of the following definition.
units or dollars of output (adjusted for inflation)
productivity = ---------------------------------------------------
manhours of input or effort
It should be noted that while this is a widely accepted definition, it can be misleading in that manhours is in the denominator. This might lead one to believe that the only way to increase productivity is to work harder, to make more labor effort. We will illustrate in this article that there are many ways to increase productivity via working smarter and by improved management practices.
A second point should be made regarding the above definition of productivity. Given the definition, productivity for various construction work tasks may be given as cubic yards of concrete placed per manhour (or person hour), board feet of lumber placed per manhour, bricks places per manhour, et. However, it should be noted that individuals in the construction industry, and in particular the estimator, normally speak manhours per unit instead of units per manhours. As such, it is more common for the estimator to be citing the reciprocal of productivity.
Given the above definition of productivity, the United States Department of Commerce has measured the average annual increases in construction industry productivity to be less than one percent a year for the last ten years. The average annual increase in construction productivity of 0.8 percent compares to a 2 to 3 percent increase for all US industries.
Unfortunately during the same time period when construction productivity has been nearly flat, construction costs have risen. During the past ten to fifteen years, construction costs have increased each and every year, sometimes in excess of five percent in a given year. These increasing costs and relatively flat productivity has put downward pressure on the profitability of many construction firms. Given the fierce competition of the bidding process, the construction firm may not be able to pass on added material and labor costs to the project owner. For many firms this increasing profitability owing to the failure to increase productivity while costs have increased, has resulted in risk of the bid exceeding the planned profitability in the bid. This is illustrated in the Figure 1
Accounting and estimating studies performed by the author have indicated that on the average, a contractor brings in a project for a six percent different cost than estimated independent of change orders. This is illustrated in Figure 1. However increasing costs and relatively small productivity increases has resulted in many construction firms having their profit margins (after company overhead) decrease to approximately two percent. This fact is evidenced by published financial ratio publications such as Robert Associates (RMA) ratios.
It is noteworthy to mention that inflation in any industry can be combated two ways:
Another way of looking at productivity in the construction industry is to look at the composition of the eight hour work day. Documented job site studies performed by the author indicate that between forty and sixty percent of a typical construction day is for non-productive time. One can consider non-productive time to include time associated with workers waiting for instructions, doing redo work, taking advantage of a lack of proper supervision, etc. In addition, non-productive time includes a certain amount of what can be referred to as unnecessary support time such as a worker carrying boards from one location to another merely because the material was not effectively stored in the proper location in the job site layout process. An example of such a work day is illustrated in Figure 2. Especially noteworthy is the fact that the same studies performed by the author indicate that approximately one third of nonproductive time can be traced to management actions ( or lack of actions).
Inspection of figure 2 indicates non-productive time that relates to causes such as poor communications, waiting for material, labor, or equipment, late starts and early quits, etc. These causes of non-productive time cannot be blamed on labor attitudes, or labor work rules. Simply put, they are the fault of management and can be corrected by improved job site management. Hundreds of thousands of dollars if not millions of dollars of work are performed each year that can be traced to poor communications. The supervisor tells the worker what to do, and the worker may do the work incorrectly owing to the fact that what the supervisor said is not what the worker heard. In addition, the fact that the worker may be always told what to do rather than asked for ideas can lead to worker attitude that may prove counter productive.
It is not being suggested that the solution to the problem of low construction productivity or non-productive time is an easy problem to solve. The construction process is a difficult one. Problems such as a variable environment to include precipitation, temperature variations, and the complexity of the building process itself are just a few of the problems that most non-construction industries do not have to confront.
Independent of the difficulties associated with improving construction productivity, it should be pointed out that tremendous opportunity exists to improve productivity. If the construction process can be correctly indentified as having fifty percent non-productive time, it can also be rephrased as having an opportunity to increase productivity by fifty percent.
It is unrealistic to believe that the construction supervisor can eliminate all construction non-productive time. However, a mere small increase in productivity on the order of five percent can have a significant impact on the profitability of the construction firm. Shown below in Table 1 is a breakdown of a typical construction bid for a building construction project. Subcontractors are consolidated in the overall estimate illustrated. The two percent profit or $20,000 is a typical profit margin in the bid if one deletes the company overhead component from the overall bid/estimate.
A five percent increase in productivity would have the effect of decreasing the overall project labor costs by five percent. As illustrated in Table 1, a five percent increase in productivity and a corresponding five percent decrease in labor costs would result in a profit contribution equal to the initial planned profit. The end result is that a mere five percent increase in productivity can have the result of doubling the profits of the construction firm. Naturally it also follows that a five percent decrease in actual productivity versus planned productivity, would eliminate any planned profits in the bid shown in Table 1. In working with contractors, it is the author's observation that for many firms, a twenty percent decrease in actual productivity versus planned productivity can have the impact of bankrupting the firm.
Another way of looking at the opportunity of improving productivity and the positive impact of such an effort is to look at the construction supervisor. Previously it was noted that on many projects, one third of the non-productive time at the job site can be traced to the lack of on-site management actions. Given this assumption, and given a typical cost breakdown for a one million dollar project as illustrated in Table 2, one can suggest that one third of two hundred thousand dollars or $66,667 can be traced to poor management or lack of management.
Assuming that the construction supervisor can implement effective management practices that will eliminate the non-productive time related to management practices, it follows that the effective supervisor can enable an additional $66,667 of profits, a number that is in excess of three times the initially planned profit in the bid estimate. There are few industries in which a supervisor can make such an impact on the profitability of the firm. Clearly a supervisor can make a big difference on the construction process!
It should be pointed out in Table 1 and 2 that the benefits of improved productivity may actually be somewhat higher than those calculated. If productivity is improved, the project duration is likely to be decreased. Given the fact that job overhead costs such as trailer rent and supervision costs are almost totally proportional to project duration, it follows that an increase in productivity would also lessen job overhead costs. This would result in additional contributions to profits. The end result is that a small increase in job site productivity can result in a significant increase in job site profitability.