The construction sector accounts for an annual spend of ~$10 trillion (13 percent of global GDP) but productivity has trailed that of other sectors for decades. The sector is at a crossroads with an estimated $1.6 trillion-dollar opportunity to close the productivity gap. With so much to gain, the construction industry is on the brink of a productivity revolution and digitization and innovating the contracting model have been identified as the two levers with the highest potential impact.
McKinsey research has identified that digitization through existing innovations could capture a 20-45% reduction in capital costs and a 15% improvement in operating margins in major projects. In a GII poll of industry leaders, 33 percent identified poor stakeholder alignment as the biggest cause of project failure and 46 percent said that win-win incentives will have the largest impact on building trust and improving owner-contractor relationships and performance.
On December 11th, we hosted a peer-to-peer roundtable discussion with senior West Coast infrastructure leaders from across the value chain. Over the course of the morning we explored two topics–seizing the digital opportunity in construction and leveraging collaborative contracting to improve performance. Key emerging themes are summarized below:
Seizing the digital opportunity in construction
- Identify and prioritize use cases that are sizable and near-term to generate momentum. Defining the business case early on—what problem are we trying to solve—and using KPIs to track and evaluate returns is essential to attain and retain leadership engagement. Leading indicator KPIs could include time for change orders, design quality, quality of construction and work-in-progress. Lagging indicator KPIs could include net present value/internal rate of return and the costs of delays.
- Establish a strong standardized data foundation early in the process. To realize project success, all stakeholders need to work with one shared data backbone. Additionally, it is advised that the early project conceptual design is done digitally (at least 3D BIM) to prevent prohibitive amounts of rework down the line. For industry-wide adoption, common technology standards established by the industry would go a long way to reducing uncertainty and encouraging all stakeholders to adopt digital solutions.
- Develop the necessary internal skills and capabilities to succeed. The construction industry traditionally falls behind when it comes to investments in R&D (1 percent vs. 3-5 percent in other industries) and IT (1 percent vs. 2-4 percent in other industries). This lag is also present in capability building with lower investment in training and upskilling. Increasing this investment, both through internal training and hiring new skills, is critical for better adoption and these capabilities need to be reflected in both the private and public sectors. Moreover, to fully harness the power of new technology organizations should move beyond thinking of digital solutions as part of the IT department to part of the broader strategic agenda.
- Cultivate innovation. Tight margins and deadlines hinder attempts to foster a culture of innovation among organizations in the industry. Industry leaders should be encouraged by board members and the government to create the opportunities and budgets for projects to experiment with new technologies. Similarly, creating a system for capturing lessons and refining best practices for re-use in other projects is essential for broader adoption. Crossrail’s Innovation 18 program is a good example of how to institutionalize a culture of innovation.
- Use existing tools and data more effectively. There are a myriad of tools and applications in use, but few companies are using the data to its full potential. This ties into being clear on the problem that one is trying to solve and using the data accordingly. In these cases, the result is ‘Wasted Megabytes’ which has a direct cost and little benefit. To overcome this, companies should continually evaluate what they are measuring and why.
- Learn from industries that are further along the digitization road. Lessons can be learnt from industries ahead of construction, such as aerospace and automotive manufacturing. For example, some international real estate players have successfully adopted digital tools including 5D BIM, digital control towers, seamless collaboration platforms, pre-fabrication, and even such cutting-edge technologies as augmented reality, robotics, and 3D printing.
- Challenge what is possible. The concept and benefits of collaborative contracting have been known for decades, yet many sectors have been slow to adopt it due to perceived roadblocks. In practice, many of these challenges are either self-imposed (e.g. mindsets) or can be challenged (e.g. regulatory regimes).
- Adopt collaborative contracts that incorporate risk sharing and clear requirements. Changes in procurement and contracting models are critical to achieving a more collaborative and outcomes-based approach to projects. Contracts that include appropriate risk sharing, set clear expectations, establish a problem-solving mentality, and offer financial incentives for each stakeholder will go a long way to building trust and improving performance.
- Shift mindsets from individual goals to project outcomes. Collaborating across the value chain effectively requires that all participants shift their thinking from their own individual goals to holistic project outcomes. Doing so will enable all parties to focus on solving problems and roadblocks in the best interest of the project rather than avoiding and transferring blame.
- Learn from Integrated Project Delivery (IPD). IPD has been successfully implemented in over 150 projects around the world, in both the private and public sector. IPD contracts requires a shift in the contracting structure, the project operating system and the culture. One needs to create an environment and ecosystem of stakeholders that say, “If we run into a problem, we will solve it”, with all parties equally incentivized to do so. Key contributing factors include involving contractors early in the project development process, focusing on the project outcomes, an integrated team, data transparency, risk sharing, accountability, and strong communications.
- Involve stakeholders throughout the value chain. Moving the industry towards collaborative contracting has tremendous upside but will require action across the full value chain. Siloed solutions have proven to fail in complex supply chains—and construction supply chains are among the most complex. Therefore, public and private sector organizations will need to work together to rethink the contracting model, focus on outcomes, share risk and incentives, and build trust.