Construction industry productivity

This Issue This is a part of the Productivity feature

By - , Build 118

Jargon like ‘value added’ is commonplace, but what does it really mean, and is it the best way to measure productivity?

Figure 3: Factors important for productivity. (From BRANZ new house builders’ survey, N=189.)
Figure 1: Value added per worker with worker numbers adjusted to a 40-hour week. (Source: Statistics New Zealand.)
Figure 2: Value of work placed per worker since 1987. (Source: Statistics New Zealand HLFS and fixed capital formation series.)

There are various ways to measure productivity. The most common method used is value added per worker in the industry. This is the dollar amount of wages, salaries and profits, so it’s an indication of how the output of the industry is valued, compared with other industries. If an industry is highly valued, then wages and profits rise per worker and, by definition, productivity increases.

Value added not comprehensive

But there are some problems with this measure of productivity. There is no consideration of the:

  • quality of work
  • contribution of plant and equipment
  • off-site work such as components made in another industry (for example, manufacturing).

A low-quality product may require extensive on-going maintenance that tends to be carried out by less skilled workers having lower wages and margins. This reduces the overall productivity measure.

A high level of use of plant and equipment on site will likely improve the profit margins per worker and thereby improve productivity. The simple measure of value added per worker doesn’t capture this.

Off-site improvements, such as more intense prefabrication, are not directly included. Thus, the need for skilled on-site labour is probably reduced, thereby reducing productivity.

Construction productivity declining

Figure 1 shows a time history of productivity for the construction industry compared to the whole economy. Value added is in constant dollar terms, and the graph indicates that construction productivity has been slowly declining (at about 0.1% per year). For the overall economy, productivity is slowly rising, though at a slow rate of about 0.2% per year since 1990. It has been static in the last 6 years.

An alternative measure is the value of work placed per worker (see Figure 2). This has the advantage of capturing the off-site component, but quality issues and use of plant are still not included.

The graphs paint a similar picture of declining productivity. The different values between the two graphs are partly due to the contribution from other industries. About half the work placed comes from other industries and is mainly materials and business services such as financial, legal and insurance services.

What’s important for productivity

BRANZ surveyed builders on what factors they thought were important for productivity (see Figure 3). For house builders, the most important factors were skills, project organisation and design details. A definition of productivity was not provided to the builders, but most likely they were thinking about profit levels and downtime. Therefore ‘project organisation’ and ‘level of trade skills’ scored high. There also seem to be significant issues with ‘design details’, which is causing delays due to intepretation and buildability problems. Workload levels also affect productivity, and part of the reason productivity has been declining in the last 2 years is that firms have held on to their workers in anticipation of an upturn.

Figure 1: Value added per worker with worker numbers adjusted to a 40-hour week. (Source: Statistics New Zealand.)
Figure 2: Value of work placed per worker since 1987. (Source: Statistics New Zealand HLFS and fixed capital formation series.)

A survey of the research on productivity overseas finds that, at a firm and industry level, modularisation/prefabrication, benchmarking performance, reducing boom-bust cycles and reducing regulation and compliance costs, all improve productivity. Many of these factors are thought to be important in New Zealand too.

On-going work will provide all-round benefit

To better understand the relevant factors, BRANZ has instigated and/or is involved in a number of productivity workstreams, including:

  • helping to fund a joint venture between three Auckland universities collaborating on a multi-faceted productivity research programme (see page 33)
  • DBH, BCITO and BRANZ are collaborating with industry on the design of a work programme to address the decline in productivity, covering supply chain and production systems, skills, procurement and research
  • prefabrication – following a successful seminar, an industry group is likely to be formed to examine the barriers to and feasibility of more housing off-site work, from the component level to modularisation and whole house
  • four productivity-related research projects looking at overseas examples of productivity improvement programmes and results, cost savings from standardised housing, firm productivity variations and optimised timber-frame construction
  • the Centre for Advanced Engineering of NZ which is looking at productivity factors and skills needed in the infrastructure sector.

The above work is expected to come up with practical measures and policies to improve the productivity of local industry. These measures are likely to apply at the firm and government levels as well as to the construction industry as a whole.

Figure 3: Factors important for productivity. (From BRANZ new house builders’ survey, N=189.)

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Articles are correct at the time of publication but may have since become outdated.

Figure 3: Factors important for productivity. (From BRANZ new house builders’ survey, N=189.)
Figure 1: Value added per worker with worker numbers adjusted to a 40-hour week. (Source: Statistics New Zealand.)
Figure 2: Value of work placed per worker since 1987. (Source: Statistics New Zealand HLFS and fixed capital formation series.)

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