Re-imagine your building contractor as an orange juice business. Think of yourself as the assembly line, where the inputs are oranges and the output is a 300ml cup of orange juice. So, here’s the numbers: each orange costs €0.55, contains 75ml of juice, and a plastic cup costs approximately a cent. Your marketing department’s research indicates you can charge €3.40 for a 300ml container.
With the first scenario in the table beneath, you’re making a gross margin of 2.6% familiar to many construction companies. In the second case, by using some simple technology, your gross margin is nearly 13 times better. In this admittedly grossly oversimplified scenario, the productivity differential comes down to a €7 technology investment in a €5 squeezer and a €2 knife.
|No Utensils||With Utensils|
|Individual Orange Cost||€0.55||€0.55|
|Cost of Oranges||€3.30||€2.20|
|Cost of Cup||€0.01||€0.01|
Software is the modern-day commercial equivalent of using these utensils. Typically, the more software you build into a business, the more productive it becomes. Construction may never make the 80% gross margins that Facebook or Oracle usually do, but it can get more productive. As the Nobel-prize winning economist Paul Krugman once said, ‘Productivity isn’t everything, but in the long run it is almost everything’.
How Does Construction Productivity Fare Against Other Irish Sectors?
For much of the past decade, construction was the sick man of Irish industry. From 2010 – 2015, it was the least productive domestic sector when measured by Gross Value Added (GVA). This is defined ‘as the difference between the value of goods and services produced, and the cost of raw materials and other inputs that are used up in the production process’. In lay terms, it can be described as the ‘output per worker’.
According to a report commissioned by the Department of Public Expenditure and Reform (DPER), produced by KPMG, uncertainty surrounding future work is an enormous risk factor for the sector. This volatility prevents building contractors from investing in new technologies, resources, training, and further specialisation into the more technical aspects of construction.
Scale in Irish Construction
Irish construction is also an incredibly entrepreneurial, with 59,175 active companies operating during 2019. This is roughly three times the average across other sectors and the largest share of active enterprises in the EU. While admirable, it means 59% of employees working in companies with less than 10 people. This has a knock-on effect for the industry in that it spreads resources and capital thinner.
Many of these SMEs often don’t have the funds to take on apprentices, or pay for the upskilling of management or staff. As a result, there’s often sectoral difficulties keeping employees up-to-date with new work practises. So, the construction industry has a productivity problem – but why does it matter? Aside from being one of the country’s largest employers (it employs 148,800 people or roughly 6.1% of the labour force), a lack of productivity in construction is a major contributing factor to the housing crises.
The KPMG-FAC report highlights that domestic construction industry grew by 69% between 2012 and 2019. Despite this growth, the number of homes built annually has been consistently below the required levels. The Irish Government’s Housing for All Plan has stated 33,000 new homes are needed annually from 2021 to 2030. However, according to Central Bank and BPFI forecasts, only 20,000 – 22,000 units will be delivered this year domestically. This has resulted in a 11,000 unit supply imbalance causing average rent prices to rise 8% and home prices to soar 13.5% in 2021.
How Does Irish Construction Productivity Fare Internationally?
Due to costs variances across the continent, Eurostat measures sectoral output in European construction by wage adjusted labour productivity. This can be defined ‘as value added divided by personnel costs, which is subsequently adjusted by the share of paid employees in the total number of persons employed, or more simply, apparent labour productivity divided by average personnel costs (expressed as a ratio in percentage terms).‘
Similar to the CSO data, Ireland was the least productive construction sector in Europe for nearly three years hitting a low of 113.7% in 2010. As it exited the recession, this figure rose to 120.7% in 2018, which was just below the European average of 129.4% that year. While Irish construction productivity has improved in recent years, when the sector is benchmarked against the UK, it shows there are still improvements to be made. Britain’s building sector has consistently ranked among the most productive in Europe coming in at 211.7% in 2018. Over much of the past decade, the average British construction worker was nearly twice as productive as their Irish counterparts.
Does Working More Hours Make You More Productive?
Construction isn’t an industry associated with regular working hours: you can’t lay floor tiles until a roof is done. This means any delay upstream can have a knock-on effect for every trade downstream. Working longer doesn’t necessarily mean working smarter though. As shown earlier, construction has ranked last for five years of the past decade when it comes to productivity. Yet, the CSO’s average working hour data shows the construction sector worked the longest hours of any sector each of those years. As Henry Ford once said: “improved productivity means less human sweat, not more”.
According to US Treasury Secretary, Janet Yellen: ‘productivity depends on many factors, including our workforce’s knowledge and skills and the quantity and quality of the capital, technology, and infrastructure that they have to work with. In other words, increased investment, education, and innovation, all tend to increase productivity.
What Happens Elsewhere?
As measured by Eurostat, British building was one of the most productive construction sectors in Europe. A major factor in their success is the sector’s widespread adoption of BIM (Building Information Modelling) technology which became mandatory in 2016 for government projects. According to research from Plan Radar, a construction technology company, 73% of British building companies have adopted BIM. On British construction sites, Level 2 is being used widely and active progress is being made towards the widespread adoption of Level 3.
The UK Government, through their Construction Industry Training Board has also attempted to boost the sector’s productivity through a levy, in which those companies hiring apprentices receive £3,000 (€3,534) per worker recruited. This is done by working alongside building contractors and their supply chains to promote careers, training, and development within the industry.
In the 2022 budget, the Irish government introduced a similar grant scheme where employers get €2,000 for each new apprentice hired, plus a €1,000 retention bonus if they’re retained for more than 12 months.
In New Zealand, their Innovate, Partner, Build Programme has pioneered a way of controlling costs for contractors, while giving order stability to building materials suppliers. There, the government partners with construction companies over an extended period of time, using the state’s scale to forward purchase materials at lower prices. Another scheme increasing investment in their construction industry’s skills and development, is the Construction Skills Action Plan. By altering procurement rules, tender evaluations now require training opportunities to be included.
Domestically, the Project Ireland 2040 programme includes a Build Digital initiative to replicate international best practices with seven priority actions. This includes the establishment of a technology centre for the construction sector, the creation of a digital network under Construction Skillnet, along with plans to digitise the planning application process.
In Ireland, there’s been a large focus in recent years to increase the uptake of Building Information Modelling (BIM). A BIM model can be thought of as a digital twin of a real-life building project, with physical objects represented in 3D. The model is created collaboratively and updated at important moments in the project lifecycle.
By using BIM, construction companies can improve communication between the design, project and construction teams through the creation of a single set of accurate and consistent drawings which can be used by everyone on the project. It also allows for more efficient planning and management of change during the design stages of a project.
This process is also known as off-site construction, and typically involves manufacturing prefabricated components in a factory away from a building site. These modules are then transported to the site, placed on the foundation and connected to each other. Modular construction provides a number of benefits over conventional methods of construction, including: lower overall costs, reduced construction times, and improved quality control capabilities.
Typically, a layer of material is put down, and fixed in place, then multiple layers are then placed on one another until the project is completed. By varying the shape and composition of the layers, an object, such as a house, can be crafted with little material wastage. In the US, Palari Homes and Mighty Buildings have a 10,000-person wait list on their California-based project, which has been able to build a house in less than 24 hours. Another American firm involved in the space, SQ4D has printed and sold a three-bedroom, ranch-style house costing $20,000 to build, which would have come in at $150,000 using conventional methods. In order to thrive, the industry needs to speed-up adoption of these technologies, and incorporate more novel innovations like drones, machine learning and virtual reality into their businesses.
Due to the bespoke nature of many projects, improving building processes is often difficult. It’s often easier to change things in the digital realm than in the physical world. This realisation is fuelling enormous venture capital growth in construction technology companies. Between 2014 and 2019, it has attracted more than $25 (€22) billion in funding globally, and investment in construction technology is growing at a 15-fold rate quicker than the overall venture capital industry.
Internationally, companies like Equipment Share and Versatile are doing pioneering work in equipment rental and capturing jobsite performance data respectively. Domestically, companies like Site Passport for managing subcontractors, and Prockure for ordering building materials are improving supply chains. If you’re a building contractor looking to raise your margins when buying building materials, get in touch with us and see if we can help you to get more juice from your oranges.