Labor productivity in construction is getting worse.
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 than in 1970. And now, the new 2023 Labor Productivity Study from FMI reveals similar results.
When FMI surveyed labor productivity in 2012, 57% of contractors said their productivity had slightly or significantly improved. By 2023, only 23% of contractors saw productivity improvements.
Similarly, 25% of contractors said productivity had slightly or significantly declined in 2012. By 2023, that figure had increased to 45%.
Are you beating the labor budgets for your projects? If not, can you improve your labor productivity? What would be the financial impact of improving labor productivity at your organization by 5% to 10%?
$40 Billion of Inefficient Labor
“Despite tremendous advances in design, coordination and management technologies,” says the 2023 FMI Labor Productivity Study, “the physical installation of work in the field remains reliant on people.”
Nearly $900 billion in construction was put in place in the United States in 2022, and FMI says contractors lost $30 to $40 billion due to labor inefficiencies. That’s upward of 4.4% of total put-in-place value—a lot! The historical norm for average operating profit margin in construction is 4% to 5%, according to FMI’s proprietary database of financial benchmarks. So, construction firms are losing their entire profit margin, on average, to inefficient labor.
Can you do anything about it?
Respondents to FMI’s survey believe 6% to 10% of labor spending—$15 billion to $25 billion—could be saved through better management. Here’s how.
Meet your labor budgets
When projects overrun on labor, margins suffer. And if labor overruns are common, then enterprise profitability suffers.
Improve your planning
The FMI data shows that the earlier field leaders are involved and the better prepared they are prior to mobilizing, the higher the profit margins they can deliver. The percentage of contractors with profit margins greater than 4% “steadily increases along with their field teams’ levels of readiness,” FMI says.
Support your field leaders
Field leaders often manage more than seven figures in project labor costs annually. Support them with “the resources and information needed to be successful,” FMI says. It helps them “to take ownership of project outcomes,” the firm adds.
“If field managers feel like they are repeatedly set up to fail on projects, they are at high risk of being lured away by more organized competition,” the 2023 FMI Labor Productivity Study says. “Conversely, companies that do a great job of supporting the field and empowering field leaders to engage in and own the planning effort have a much greater likelihood of attracting and retaining top talent.”
Implement look-ahead planning
Such planning, in three- to six-week intervals, maps the details of materials, labor, equipment and information needs. “Contractors who have built discipline around look-ahead planning in the field have fewer resource emergencies,” FMI says.
Improve your cost-to-complete forecasting
Accuracy of cost-to-complete forecasting correlates with higher profit margins, FMI says. Contractors who accurately forecast their costs know where their projects stand and act appropriately to finish their jobs. Similarly, contractors who provide regular labor productivity feedback to their field leaders also have greater confidence in the accuracy of their cost forecasts. Weekly, even daily, touch-bases with the field can make a big difference.
Planning and Execution
It’s true the qualified worker shorter makes it hard for wall and ceiling firms to be more productive. Other challenges, such as low-quality construction documents, unrealistic project schedules, poor coordination by GCs and having to handle a raft of change orders, also make it hard to work productively.
You will just have to build better planning and field execution processes. Nobody said it would be easy. But at least you know what to do to perform better than your peers.
