Top 4 Challenges Facing The Construction Industry

Robert Leeds

Population growth statistics paint a rosy future for the construction industry. With the global population predicted to hit 9 billion by 2050 – and two out of every three people living in cities by 2050 – the demand for construction has never been greater. Worldwide, construction is already one of the largest industry sectors, accounting for more than 11 percent of global GDP and expected to grow to 13.2 percent by 2020, according to a 2014 PwC report.

But focusing on this strong demand obscures a more precarious reality. Underlying challenges in productivity, profitability, performance, labor, and sustainability could derail the industry’s growth.

Today, the construction industry is at a crossroads. Companies that address these challenges head-on and re-imagine their business processes will be poised for significant growth. Businesses that fail to take the challenges seriously, however, will face an uphill battle for viability.

Challenge #1: Poor productivity and profitability

Currently, the barriers to entry in construction are low, creating a saturated marketplace with heavy competition. This competition is shrinking profit margins and constraining essential reinvestment in new technology and better business practices. Stagnant construction labor productivity is compounding this problem. While other industrial businesses have benefited from a 100 percent increase in labor productivity, productivity within the construction industry has remained stagnant over the last 50 years.

Why is productivity stagnation? According to a Construction Owners Association of America (COAA) study, 63 percent of direct labor time on mega-construction projects is spent waiting for materials and equipment, traveling to the area, taking early breaks, and planning how to do the work. This lack of productivity is reflected in the bottom line, where typical margins for construction companies range between 2 and 8 percent. Consequently, construction companies find themselves trapped between shrinking profit margins and stagnant productivity, unable to generate the profit necessary to invest in critical technology.

Challenge #2: Project performance

The opportunities in construction are growing, but so is project complexity. With companies already operating under razor-thin profit margins, a single production surprise can wipe out profits for the whole company. Design complexity compounds this problem. As designs become larger and require greater efficiency, construction companies struggle to keep up.

The lack of on-time and on-budget projects is telling. According to an Accenture study, only 30 percent of large projects in the energy industry are delivered on budget, and only 15 percent of projects are completed on time. Worse, the 2015 KPMG Global Construction Survey found that more than half of all construction companies experienced one or more underperforming projects in the previous year.

Challenge #3: Skilled labor shortages

The construction industry is bracing for a dramatic reduction in workforce. The Associated General Contractors of America (AGC) found that 74 percent of the total respondents believe there is a crunch in skill trades, and 53 percent said they were unable to hire construction professionals such as supervisors, estimators, and engineers.

Prior to the recent recession, the U.S. construction market consisted of two generations: the traditionalists and baby boomers. Now, the workforce has split into four generations: traditionalists, baby boomers, Generation X, and millennials. This present labor diversification is a challenge because of stark differences in work ethic, attitude, outlook, and behavior between the generations, reports PwC. Traditionalists have nearly all left the workforce and baby boomer retirement is in full swing. Furthermore, the recession drove many skilled craftsmen to leave the industry and never return. By 2020, millennials are expected to represent half of the global workforce– many with little to no experience or interest in the construction industry.

The combination of increasing project complexity and decreasing experience is a risk multiplier, increasing the risk of deliverable delays, quality construction problems, and employee safety concerns.

Challenge #4: Sustainability concerns

The construction industry is the top global consumer of raw materials. The industry generates between 25 to 40 percent of the world’s carbon emissions. This volume of natural resource utilization is not sustainable and could compromise the environment for the sake of growth. Climate change and water management are two environmental issues that pose a growing challenge to the construction industry. Achieving targets for global carbon dioxide emissions reduction will be a major challenge for the construction energy in rapidly developing countries like India and China. Smart planning and sustainable design could reduce energy consumption and pollution, but require a new approach to project management– an approach that the construction industry on a whole is not yet prepared to undertake.

Next steps: Embracing disruption and preparing for the digital future

The construction industry is at an inflection point, analogous to the move from landline telephony to cellular technology. Digital technologies are disrupting the industry, providing new opportunities to address the challenges of poor profitability/productivity, project performance, skilled labor shortages, and sustainability concerns. Digitization of the construction industry is not a question of if or when—the changes are happening now.

The industrialization of construction and the application of proven manufacturing technology and best practices will help companies drive reliable outcomes and improve margins. Digitization will increase productivity, eliminate waste, and mitigate the adverse impact of on-site surprises.

Digitization will change most everything, including the competitors and the barriers to entry. The end result: a more productive and profitable industry that builds more sustainable assets. Construction companies must take steps now to join the digital future and stay ahead of the competition—or risk being left behind.

To learn more about how to tackle these challenges, read Building a Sustainable World, How to survive and thrive in a digital construction economy.

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About Robert Leeds

Robert Leeds has been with SAP for four years and has over 16 years of business development and marketing experience with enterprise software across a variety of industries and lines of business. Prior to SAP, he held a variety of positions across small software start-ups, acquisition agglomerations, and large tier 1 technology companies. Robert’s goal is to help customers understand the value of SAP’s solutions in the terms of their industry.