The Garrison Report #2007-6

The Future of the Construction Industry - How to Fix a Broken Industry - Part 1:
The Need for Change

Listen to the audio version of this report here

I don't have a crystal ball, but the future of the construction industry seems poised for a revolution. When predicting the future, Peter Drucker wrote, "The most important work of the executive is to identify the changes that have already happened." Two changes that will have significant impact on the construction industry are the growth of lean production in manufacturing and the breakdown of the old ways in the construction industry.

I realize that when I say the construction industry is broken, there are those who would argue. It's true there are some good things, but overall the industry isn't healthy. Most people would agree a car was broken if it didn't run. They wouldn't say things were fine because the new paint is fantastic. What would you call an industry where the clients are unhappy, contractors' profit margins are dismal, and it offers an undesirable career track for potential workers?

The first step is admitting there is a problem. A major obstacle to moving forward is the large number of dinosaurs within the industry who insist everything is fine. These individuals often have a vested interest in the broken policies or are simply in denial. Worse, many of them use their successful careers and seniority within construction industry associations to stifle change and cut off dialogue.

I often ask my audiences if they think the construction industry is better off today then, say, 10 or 15 years ago. The few people who raise their hands usually mention safety or technology. I would agree with these, but the government-mandated safety and technology is a two-edged sword. The fact is that many people would like to throw their cell phones against the wall because the technology is misused and interferes with the job. Of course, once in a while someone raises a hand and argues that we are better off. Often they are correct with regard to their company because it has already started to implement many of the ideas that will be discussed in this program. The good news is there is hope, but we can't keep doing the same thing over and over and expecting different results. That would be insane.

Instead, what's needed is a dose of reality. Jim Collins, in his book Good to Great, indicated that companies that moved from good to great were realists. They would confront the "brutal facts of their current reality, whatever that is." Unless the construction industry confronts its issues head-on, it will only see its problems grow.

The list of problems within the industry is lengthy, but the good news is most of them are related. If we focus on the central issues, we will resolve or at least minimize most of the problems. While there's insufficient time to discuss all the problems, a few of the most critical problems are as follows:

  • Business Week reports that despite the recent construction boom, the return on equity (ROE) for the construction industry is only 9.7 percent compared to the average of 16.9 percent for all U.S. industries. In 2006 the construction industry had the second worst U.S. industry ROE behind the automotive industry, which actually lost money. The national average net income for general contractors is only 1.8 percent, and for subcontractors it's 2.8 percent. These figures are certainly inadequate. Inadequate profits contribute to an environment that generates the highest turnover of any industry except the restaurant industry.
  • Owners are frustrated with the confrontation, litigation, delays, high costs, change orders and poor quality.
  • There is a critical challenge in finding and retaining qualified workers and managers. The problem is the industry is not perceived as an attractive career. In fact, Jobs Rated Almanac rates every construction trade in the bottom 20 percent of career opportunities.
  • Yet despite the pressures on prices from owners and the lack of company profits, productivity is in terrible shape. In an interview, Clemson University professor Roger Liska stated, "What I've learned is that while the construction industry calculates productivity as a standard to use in their estimates, it doesn't do a very good job of monitoring productivity or improving productivity." He added, "The average construction craft worker today is only about 40 percent productive."

There is no easy solution. Harvard professor Rosabeth Moss Kanter wrote an interesting article titled "Leadership and the Psychology of Turnarounds." She stated that the characteristics of a company in need of a turnaround are secrecy, blame, isolation, avoidance, passivity and a feeling of helplessness. While Professor Kanter was talking about an individual company, the construction industry exhibits the same characteristics; therefore, it seems logical that the construction industry needs a turnaround.

Professor Kanter reported that in order to turn around a company, one needs better communication, more collaboration and greater respect. This makes sense because the only way to solve complex problems is through collaboration. The more complex a system -- and the construction process is certainly one of the most complex -- the greater the need for collaboration. Therefore, it's time for the entire construction industry to start collaborating to find solutions to its problems.

For any solution to work, it must provide a balanced approach. It must create a desirable solution for the client, the contractor and the worker. Further, contractors need to treat their subcontractors as employees because in many ways that's what they are. So we must create a win-win-win situation, or the losers may sabotage the process.
Therefore, the process needs to start with improved communication and understanding. Each of the parties needs to understand the issues from the other stakeholders' perspectives. Otherwise, it will be impossible to find the common ground necessary to create win-win-win conditions. The construction industry needs to follow Stephen Covey's advice: "First, seek to understand, then to be understood."

Obviously, it would be impossible to get everyone to sit down and agree to anything, but that's not necessary. For example, a single contractor can sit down with one of its clients or its subcontractors and start the process. Don't waste your time trying to convert those not interested in collaboration. Spend your time and effort with those who want to change the process.

It is not simple or painless, but then, true change never is. However, this approach can improve profits for the contractors, increase value for the clients and improve career opportunities for workers. Unless we start on a new path, construction is destined for even darker times. The industry will never disappear, but it may become a nightmare where it's just not an enjoyable place to work or profitable for anyone. Further, without a vibrant construction industry, the U.S. economy will suffer. Foreign contractors will invade this country, and U.S. contractors will experience the same thing that has happened to the U.S. auto industry.

The central theme for any solution must be added value for the stakeholders. The industry must prioritize what's important to each of the stakeholders then measure its performance in delivering on those priorities. Nothing less will be sustainable. To accomplish this lofty goal, the various stakeholders must have open communication and agree to collaborate with each other to find the best solutions for all stakeholders. The process must start with mutual respect. We can no longer live in an environment of us against them because we're all in the same boat. If it sinks, we all go down. All stakeholders must respect the concept that all parties are entitled to a fair return on their labors or investment.

The key is focusing on productivity because only then can we create the resources necessary to achieve these goals. However, productivity is not merely about everyone working harder; it's about focusing on how to eliminate the waste within the system. It's not unreasonable to challenge the industry to at least double its productivity.

If you think my challenge is crazy, consider that Toyota doubled its productivity almost overnight when it introduced lean production into its operation. Similar results have been repeated in other manufacturing companies. Keep in mind many of those companies thought they were already operating at near maximum efficiency. There is no reason to expect that the construction industry can't do the same thing. I challenge the construction industry to step up to the plate.
As an industry, we create some of the most incredible projects. It's time to use that creativity and skill to reconstruct our own house. It's time to stop making excuses for the problems. It's time for the industry leaders to rise up and be accountable for the results. Start asking the tough questions. Are you going to be one of those leaders?

The ball is in your court. In Good to Great, Collins reported that great leaders looked in the mirror for the reasons for problems but looked out the window for the reasons for success. They gave credit to others for their success, and if they couldn't find anyone to give the credit to, they credited luck. In contrast, the struggling company's leadership looked in the mirror for success and looked out the window to find someone else to blame for their problems. What is your relationship with the window and the mirror?

Action is needed now. A thousand-mile journey begins with a single step, so take that first step right now!

This report focused on the case for change and the broad requirement of the needed change. The next three reports focus on specific changes that are needed from the perspective of each of the key stakeholders -- the client, the contractor and the worker.

 

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