REINVENTING CONSTRUCTION:
A ROUTE TO HIGHER
PRODUCTIVITY
DR. JAN MISCHKE
CONSTRUCTION: LET'S BUILD CHANGES!
BRUSSELS, JULY 6, 2017
CONFIDENTIAL AND PROPRIETARY
Any use of this material without specific permission of McKinsey & Company
is strictly prohibited
CONTENTS
A $10 trillion sector challenged by market failures
50-60% improvement opportunity – or 5-10x from
moving to a production system
Government intervention may support disruption
McKinsey & Company 2
Construction matters: Construction related spending accounts for 13 percent
of global GDP
$ trillion
Global GDP
Construction industry spending
13.9 14.0
13.4
3.6% p.a.
12.9
12.4
11.9
11.4 11.4
10.9
64.5
(87%)
$74
trillion
10.5
9.5
(13%)
10.0
9.5
2014 15
SOURCE: World Bank; IHS; ISSA
16
17
18
19
20
21
22
23
24 2025
McKinsey & Company 3
Globally, labor-productivity growth in construction lags behind
that of manufacturing and the total economy
Construction
Total economy
Manufacturing
Global productivity growth trends
Real gross value added per hour worked by persons engaged
210
3.6%
195
180
165
2.8%
-2.6p.p.
150
$39/
hour
135
1.0%
$37/
hour
120
105
$25/
hour
0
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
SOURCE: OECD; World Input-Output Database (WIOD); GGCD-10; World Bank; US Bureau of Economic Analysis (BEA); US Bureau of Labor Statistics (BLS);
Turkish National Statistics Bureau; Singapore National Statistics Agency; Malaysian Statistics Agency; Rosstat; McKinsey Global Institute analysis
McKinsey & Company 4
Construction productivity matters – for businesses, workers, and owners
$1.6tn
value creation opportunity from raising construction productivity
Value can be shared across...
Businesses
Profitability;
%, US
Current
Potential
Workers
Hourly wages;
EUR; EU-28
4.4
ca. 6.4
+45%
Owners
Cost index change;
Percent; 2000–2016, EU
Construction
16.9
Construction
Total
economy
18.6
Total
economy
+10%
47
34
-13 p.p.
McKinsey & Company 5
Unaligned contractual structures and inadequate design processes
highlighted in survey as top reasons for weak productivity
Rankings
Root cause
External
Forces
Industry
dynamics
Firm-level
operational
factors
(1 highest, 10 lowest)
▪
▪
Increasing project and site complexities
04
Extensive regulation and cyclical nature of public
investment
08
▪
Informality and corruption distort the market
10
▪
Contractual structures and incentives are misaligned
02
▪
Bespoke or suboptimal owner requirements
06
▪
Industry is highly fragmented horizontally and vertically
09
▪
Design processes and investment are inadequate
01
▪
▪
Poor project-management and execution basics
05
Insufficiently skilled labor at the frontline and
supervisory levels
03
▪
Industry underinvests in digitization, innovation, capital
07
Productivity
impact
SOURCE: MGI Construction Productivity Insights Survey
McKinsey & Company 6
CONTENTS
A $10 trillion sector challenged by market failures
50-60% improvement opportunity – or 5-10x from
moving to a production system
Government intervention may support disruption
McKinsey & Company 7
Construction can catch up with total economy productivity by taking
action in seven areas
Potential global productivity improvement1 from implementation of best practice
% impact on productivity
14 – 15%
5 - 7%
48 - 60%
50%
6 – 10%
7 - 8%
8 - 10%
8 - 9%
Enabler
Total
1.
Regulation
2.
3.
Collaboration Design &
& Contracting Engineering
4.
Supply
Chain
Mgmt.
5.
Onsite
execution
Gap to
Total
Economy
6.
7.
Techno- Capability
logy
building
SOURCE: McKinsey Global Institute analysis
McKinsey & Company 8
Where is construction headed?
Better
projects
?
Production
system
McKinsey & Company 9
Example production system
Illustration of finished buildings
SOURCE: Barcelona Housing Systems
Illustration of construction process
McKinsey & Company 10
CONTENTS
A $10 trillion sector challenged by market failures
50-60% improvement opportunity – or 5-10x from
moving to a production system
Government intervention may support disruption
McKinsey & Company 11
Correlation between productivity and profitability – market failures to be
resolved?
Profitability1, EBITDA2 as % of revenue, annual
Productivity/profitability pair for one firm in one year
30
25
20
15
10
5
0
-5
Construction companies can
achieve ~1 point higher margins
on average by increasing
productivity by 25%
-10
-15
-20
0
100,000
200,000
300,000
400,000
500,000
Productivity, Annual value added per employee, $ thousand
1 100 largest construction companies by revenue with publicly available data for FY 2005-15
2 Earnings before interest, tax, depreciation, and amortization.
SOURCE: Bureau van Djik; McKinsey Global Institute analysis
McKinsey & Company 12
Government intervention may be needed to realign incentives
Government as policymakers can…
Government as owners can…
▪
▪
Combat informality and corruption
▪
Create transparency on cost
and performance
Pool projects into standardized
portfolios of work
▪
Increase speed and lower
uncertainty of permitting
Move to best value and performance
based contracting and tendering
▪
Support piloting of or mandate
new approaches and technologies
(e.g. BIM)
▪
▪
Move to outcome based and
harmonized building codes
▪
▪
Support land pooling and scale
Develop skills
McKinsey & Company 13
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