London 2017: Reimagining Construction

March 2017

Twenty business leaders, government officials and megaproject owners convened in London on March 1st to tackle the challenge of low trends in construction productivity growth and the impact that it has in particular in the UK. There were three key questions the group aimed to answer: What are the UK priorities with respect to the construction industry? To what extent could or should construction move toward a manufacturing-style approach? And how should onsite execution of projects be improved?

Context: McKinsey Global Institute’s 2017 Reinventing Construction report indicated that productivity of the UK construction industry is relatively strong compared to other countries. However, there remains a large gap between productivity in the construction industry and in other sectors. This gap represents a significant opportunity to capture greater value and get more out of infrastructure investment. Given the uncertainty surrounding the implications of the Brexit vote, a strong pipeline of infrastructure projects planned over the next few years, and a recognized need to increase housing construction to meet demands, there is a real opportunity to rethink how the UK delivers construction projects.

Some of the key themes discussed included:

  1. Seize the opportunity presented by Brexit. While reports have been forecasting changes in the construction industry for many years, there has not been great momentum. The UK’s vote to leave the EU could act as a regional stimulus to require action. The departure’s impact on the construction labour supply, particularly in London and the South East, is a real concern. To meet the challenge of restricted supply, the industry should adopt revolutionary approaches to improve productivity. Absent this, a reduction in confidence could trigger banks to withdraw financing to the industry, jeopardizing the incremental progress that has been made.
     
  2. Manufacturing-style approaches to construction have paths to viability in the UK. Today, construction is a highly fragmented industry with great variance among different actors in the supply chain. If construction were to shift to manufacturing-style processes based on standardization, prefabrication and automation, it could represent the biggest opportunity to disrupt the industry. On the Continent, public buildings leveraging pre-fabricated components have generated successful case studies for an industrial approach to construction. The idea of offsite manufacturing facilities for construction is also not new in the UK—from J Laing producing precast concrete units in the 1970’s through to Laing O’Rourke’s recent investment in the facility in Nottinghamshire. However it has never taken hold nor delivered significantly better margins than on-site construction. McKinsey estimates that use of a manufacturing-like production system could increase productivity by up to five to ten times. If current project owners and contractors do not seize this opportunity, it may well come from an outside disruptor.
     
    The discussion surfaced several ideas to improve the use of prefabrication and off-site production in the UK. One option is to make the facilities smaller, pop in character and located closer to sites. Another idea is a shared facility between industry players to pool the upfront capital investment required. Lastly, public sector construction (e.g. public housing), could offer early support by generating the initial capital influx necessary for the economics to work.
     
  3. Construction should move to providing lifecycle support. Many manufacturing companies, such as automobile manufacturers, make equally low margins as construction in the initial fabrication of their products. Their profitability comes through the ongoing service provision to these products. Given the increasing prevalence of technology and data sources to monitor the ongoing performance of buildings, there is an opportunity for construction to move to a similar model. However, moving to such a  model will require design engineers to clearly communicate the advantages of installing and leveraging this new technology to their customers. Likewise, it is important for project owners to approach projects from the initial planning stages with a view at the total project lifecycle. By estimating lifecycle costs up front, owners can evaluate the benefits of larger upfront capex investments in turn for lower ongoing opex expenses.
     
  4. Be creative around innovation. The construction industry invests very little in research and development compared with other industries. This is partly due to the low margins in the industry. To combat this, the industry could consider further pooling R&D resources. The industry could agree to invest in or run certain pilot programs in partnerships with universities, such as Strathclyde University in Glasgow, which has a series of initiative studying different innovations and potential productivity improvements. There are also examples of cross-industry innovation being done well– such as the Crossrail Innovate portal where clients and contractors share ideas. There is an opportunity to expand these efforts beyond specific projects to be more sustained and comprehensive. There could also be an opportunity to use a “crowdfunding” model, in which numerous industry players could elect to invest in a given pilot or study.
     
  5. We need to communicate to a wider audience about productivity. When discussing the challenges of productivity, there is a need to deliver a coherent and simple message around the issues in the industry. In order to have these conversations with public officials and financiers, it is important to build a robust fact-base, clearly and consistently articulate the current situation, and suggest the key steps to drive change. The MGI report found that the UK government has helped drive better performance among contractors by regularly publishing cost and performance data. The government could build on that fact base and create transparency across all key performance indicators – and project outcomes – to help build the case for why productivity improvements are needed.
     
  6. Maintain the social equilibrium in construction. Because the construction industry offers a greater number of well-paid jobs for low-skilled workers than many other industries, it plays an important role in national employment. Proposals around the introduction of automation raise concerns over the employment prospects of this large demographic. It is important to understand how productivity improvements can be used as an opportunity to create value rather than to cut costs and therefore jobs.

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