Victor Risk Management Blog

Latest Post

A rising tide lifts all boats

We’re Big

The design and construction industry in the US is big, totaling over 6% of the US GDP and around 12% of global GDP. In 2018 alone, $1.29 trillion was spent on construction, and more than 700,000 firms employed over 7 million people. And we are the largest consumer of raw materials of any sector.

Our industry impacts all other industries and every person on the planet. We spend 90% of our time indoors. The other 10%, besides outdoor recreation, is spent moving from one indoor place to another using infrastructure and its related systems. What we build, what we don’t build, what we maintain, and what we don’t maintain impacts everyone’s quality of life and everyone’s ability to trade and transact business.

It is our industry that supports society’s ability to move and transport goods and services from point A to point B. Clean water, clean air, and the provision of electricity, transportation services, and flushing toilets all depend on us. And yet, despite the extreme daily impact of our work, our industry remains in a time loop, every year struggling to make the case to lawmakers and citizens for consistent and more robust funding to either rebuild or properly maintain our infrastructure.

Our Challenges

Productivity and Efficiency

Issues. At the risk of upsetting industry stakeholders, a bit of honest self-reflection is warranted as we push for more infrastructure funding. As a whole (and not necessarily at the enterprise/company level), our industry consistently under-performs. Our productivity, as compared to the overall economy and the manufacturing sector, for example (see the chart below), has been flat for decades due in part to the traditional process in which we build, which is fragmented and siloed and plagued with interoperability challenges.

A misaligned procurement culture that focuses on up-front construction costs instead of life-cycle costs is also to blame, as are adversarial contract structures that promote finger-pointing instead of problem-solving, which result in bloated contingencies to anticipate the worst. Technology adoption that could promote productivity and efficiencies hasn’t been easy either. To make matters worse, a large part of the economic and environmental consequences of climate change rests on us. We have a long way to go toward adopting environmentally friendly practices that could help mitigate climate change and decarbonize our economy. Admittedly, it’s difficult to find time to innovate when demand for design and construction is so high.

Solutions? To address some of the inefficiencies described above, the federal government as a regulator and significant owner of constructed assets (note: of all construction spending in the US, the public sector spends 57%) could require lean construction principles, at a minimum, to be applied to all federally funded projects. This, along with enabling innovative project delivery methods such as integrated project delivery (IPD) for certain appropriate project types, could have significant market-shaping efficiency impacts. Just instituting lean principles alone could reduce completion times by 30% and costs by 15%; full scale use of pure IPD (for appropriate projects) could see tremendous improvements in delivery times and costs based on results we’re seeing today.

By encouraging (or simply enabling) the use of IPD, litigation and claims activity will likely dwindle due to the very nature of the contractual structure associated with IPD. IPD’s unique dispute provisions and shared cost-reduction profit mechanisms offer participants “skin in the game” motivations to solve project problems from the perspective of “everyone wins or loses together.” Savings below targeted reduced costs, for example, which would be agreed upon by the owner, would be awarded proportionately to participants as a reward incentive.

Interoperability and Project Delivery Structures

Issues. Part of our challenge is the magnitude and complexity of planning, designing, and constructing massive projects. Even looking at just the initial planning phase of a project, multitudes of experts are involved with planning, permitting, environmental assessments, feasibility/economic analysis, social impacts, and financial planning. And each and every one of these experts and businesses has their own systems and project management platforms that rarely, if ever, speak to each other. A glaring lack of interoperability is pervasive. This problem is multiplied by many factors when one considers the sequential phases following the initial planning of a project with design then construction, operations, and maintenance, which includes design and construction experts, such as architects, engineers, surveyors, landscape architects, and interior designers, subconsultant designers, construction managers, contractors and their subcontractors, trades specialists, suppliers, and inspectors. It’s easy to see how inefficiencies in communications with these linear work flows and siloed project management platforms can become massive.

Some experts, including the Lean Construction Institute, estimate that 70% of all projects are over budget and delivered late. The reasons are varied but poorly structured project delivery methods and contracting methods that don’t properly align risks and rewards are partly to blame. Inefficiencies create incentives for bloated contingencies and expensive finger-pointing and litigation. Inconsistent codes and standards add more inefficiencies as they are adopted and enforced jurisdiction by jurisdiction at the state and local level. Depending on the state or local entity, modern codes can lag significantly behind the latest modernly developed and available versions. This inconsistency in adoption and enforcement creates unnecessary delays, uncertainties, and disputes which are then built into the project price.

The industry has historically existed in a low-price culture that has only recently begun to take total cost of ownership seriously with life-cycle analysis and long-term thinking and planning. Most procurement statutes, be they local, state or national, have always been laser-focused on the initial low-cost-bid paradigm and, as we all know with life experiences, you get what you pay for. Performance-based purchasing of design and construction services makes sense and will be the future someday, but it isn’t close to being our current state.

Solutions? Enabling broad use of IPD, encouraging Lean Construction principles, and other innovative project delivery methods such as public-private partnerships (P3) at the federal level—lockstep with performance-based metrics such as energy efficiency—would help propel the industry toward long-term thinking about infrastructure. While P3 would help expand the infrastructure funding pool to include private sector debt/equity, more importantly it offers a new financing model with long-term payback provisions over the life of the project. This can set up a paradigm shift for thinking at an early planning stage about long-term maintenance and operations as well as innovative ways to broaden the functionality and revenue opportunities for facilities. Regrettably, the challenge with P3 integration lies in its complexity and the capacity of governments to structure their contracts meaningfully to accommodate long-term needs while balancing the ROI for investors. This is a political challenge that requires thoughtful legislative consideration to help support government in the transition as well as provide transparency for public support.

Project management platforms that allow for better interoperability among multi-disciplined stakeholders are another great solution yet to be fully discovered.

Technology Education and Staffing

Issues. Moving the industry forward can be challenging because technological change and innovation carries risk. Only the most innovative risk-takers are willing and able to pay the upfront software and hardware investment costs for technologies such as BIM, robots, drones, AI, and parametric design tools. And there’s a steep learning curve for staff which most businesses simply cannot handle, particularly in the current market where demand is high and there is little incentive to slow down and learn a new thing, which also leads to the next challenge: talent and workforce shortages.

The industry doesn’t attract young talent like it should and is doing worse than it was a decade or two ago, which doesn’t bode well for firm succession planning. In fact, the industry remains largely made up of older, white male stakeholders with very few women.

Without young new talent and diversity of thought, we struggle to innovate and shift our mindset to new ways of thinking about how we plan, design, and build for the future. This is not to say that there aren’t innovators out there, but there are significant headwinds that keep these efforts from scaling industry-wide.

Solutions? International models such as Singapore’s Construction Productivity and Capability Fund partially reimburses the cost for such things as BIM software/hardware and training, technology that improves productivity by 30%, on innovative development projects. Or Hong Kong’s Construction Innovation and Technology Fund could be explored and replicated in the US to help design and construction firms bridge the risks associated with upfront technology costs (e.g., BIM, drones, AI, 3D printing, blockchain-enabled platforms, and advanced materials) and the training required to build in-house expertise.

To address talent and workforce shortages, the US federal government could help the industry through a public relations campaign to tell a better story about the industry to attract talent such as the UK has done. There are lots of other ways where federal support could make all the difference in the world for not only the industry, but society at large. A rising tide could indeed lift all boats—economically, politically, socially, and environmentally.

There is also the European Commission’s Construction 2020 initiative that promotes market openness to international firms. A similar US-based program could help alleviate talent and workforce shortages. Core Innovation Hub out of the UK is another interesting program helping the construction industry transform itself with digital technology; a much-needed initiative that could be modeled similarly in the US.

Climate Change

Issues. To make matters worse, design and construction practices contribute significantly to climate change. The industry as a whole contributes to almost 40% of all greenhouse gas emissions globally when one considers operations, materials, and construction techniques. And a staggering 70-80% of construction and demolition waste isn’t recycled and goes straight to our landfills. The charts below offer more in-depth numbers on the overall impact.

 

Solutions? Innovative funding/financing mechanisms that could be built into project development and help prioritize climate mitigation and adaptation projects are green banks, which enable a more appealing environment for private investors to participate in energy efficiency and renewable energy project development, especially where investors may possess concerns or unfamiliarity with certain clean technologies. This innovative financing tool addresses market inefficiencies with features such as credit enhancements that can attract more investors while at the same time lowering energy costs for consumers and promoting clean energy infrastructure. Other models in Europe, such as the EU’s Build Up Skills initiative, could also help support training and education of current and future construction work force on clean technologies and energy efficiency.

Failure to Seize Opportunity Exposes Risks

The good news is that with the challenges detailed above, solutions are equally abundant—some of which might require more work than others, including federal government leadership to help facilitate industry-wide best practices through financial support or incentives schemes.

The risks in neglecting to help transform an industry that is so impactful on everyone and everything we do are enormous. And yet the rewards of even slight incremental improvements in efficiencies and processes are vast. The time is now to seize the opportunities before us. It may be low tide now, but how quickly the tide could turn.