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Advancing the Competitiveness and Efficiency of the U.S. Construction Industry 1 Background The U.S. construction industry produces all types of buildings and infrastructure—homes, workplaces, shopping centers, hospitals, airports, universities, refineries, roads, bridges, water and sewer lines—in every community across the country. In doing so, it touches the daily life of every American. The construction industry also affects the budget of every individual for this reason: [The] price of every factory, office building, hotel, or power plant that is built affects the prices that must be charged for the goods and services produced in or on it. And that effect generally persists for decades. (BRT, 1983, p. 12) A variety of statistics illustrate the importance of the construction industry to the national economy. In 2007 (the latest year for which data are available as of this writing), the construction industry conservatively accounted for $611 billion, or 4.4 percent of the gross domestic product (GDP), more than the amount contributed by many other industry sectors1 (BEA, 2009). If the value of installed equipment, furnishings, and other elements necessary to complete a building were included, construction would account for 10 percent of the GDP (NSTC, 1995). The construction industry is also a major generator of jobs. Almost 11 million people (BLS, 2008), about 8 percent of the total U.S. workforce, were directly employed by construction firms in 2007. The value of the buildings and infrastructure that they constructed was estimated at $1.16 trillion (U.S. Census Bureau, 2008a). Also in 2007, construction projects valued at $4.6 trillion were built worldwide. The United States was the largest single-country market for such projects, while Western Europe was the largest regional market ($1.4 trillion) (McGraw-Hill Construction, 2008). The importance of construction to the national economy is also reflected, in part, by the American Recovery and Reinvestment Act of 2009 (Public Law 111-5). This legislation authorized the investment of hundreds of billions of dollars in construction-related activities to stimulate the economy and create jobs. Prior to the 2008-2009 financial crisis, the Bureau of Labor Statistics (BLS) in the U.S. Department of Labor projected a net increase of 780,000 construction-related jobs in the United States between 2006 and 2016 (BLS, 2007). Worldwide construction spending was also projected to increase between 2009 and 2016, although it is likely that the financial crisis has affected these projections (Global Insight, 2007). The drivers behind the projected increases for the U.S. market were population growth, the construction of new buildings, the renovation of existing ones, and the renewal of existing infrastructure. In the global market, the driving forces included population growth and urbanization in China, India, the Middle East, and Africa and their demands for infrastructure (transportation, power, telecommunications, water, wastewater treatment) and other facilities (e.g., multifamily housing, health care facilities, schools). U.S. construction firms and the industry face significant challenges now and in the future. 1 The contribution of construction was more than that of agriculture, forestry, fishing, and hunting ($168 billion); mining ($275 billion); utilities ($281 billion); transportation and warehousing ($407 billion); information ($586 billion); and arts, entertainment, accommodation, recreation, and food services ($513 billion) (BEA, 2009).
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Advancing the Competitiveness and Efficiency of the U.S. Construction Industry Construction firms need the capacity to execute projects quickly, to design and build facilities that are environmentally sustainable or “green,” and to do so at a competitive cost. They need to find ways to compete with firms in other industries in order to attract skilled workers and recent graduates. And they need to improve their efficiency in order to remain competitive when bidding for new projects at home and abroad. How well the industry as a whole meets these challenges will affect the prices that U.S. consumers pay for durable and nondurable goods and that communities pay for infrastructure. It will also affect the robustness of the national economy. The productivity of the construction industry—how well, how quickly, and at what cost buildings and infrastructure can be produced—will also help determine how well the United States meets the challenges of environmental sustainability, energy independence, and disaster resilience. Today in the United States, buildings and infrastructure account for 40 percent of primary energy use. The heat and power used in buildings account for approximately 40 percent of the greenhouse gases produced in the United States linked to global climate change. Buildings and infrastructure also account for approximately 30 percent of the raw materials and 25 percent of the water used annually in this country. Each year U.S. construction projects generate 164,000 million tons of material waste and demolition debris, accounting for about 30 percent of the content in landfills (EPA, 2004). Changing how buildings and infrastructure are designed, built, and renovated; what materials are used; and how those materials are recycled will be essential to the success of the nation’s efforts to minimize environmental impacts, reduce overall energy use, and reduce greenhouse gas emissions. Design and construction quality and materials are also essential to the durability and resiliency of buildings and infrastructure during and after natural and human-made disasters. The quality of building design, engineering, and construction and the technologies and materials used will help determine how well buildings and infrastructure can withstand earthquakes, tornadoes, floods, or bomb blasts. Their robustness and resiliency, in turn, will help determine the magnitude of property losses and the speed at which communities recover from disasters. CHARACTERISTICS OF THE CONSTRUCTION INDUSTRY The construction industry can be differentiated from other industries by its organization and products, its stakeholders, its projects, its processes, and its operating environment. Organization and Products The construction industry is composed overwhelmingly of small businesses, but it is also stratified. Of the 710,000 construction firms with payrolls in the United States in 2002, almost 80 percent had fewer than 10 employees, accounting for 24 percent of the construction workforce. In contrast, only 585 construction firms (less than 1 percent) had 500 or more employees (8 percent of construction workers). Looked at another way, 98 percent of all construction firms had fewer than 100 workers (79 percent of the construction workforce), while 2 percent of all firms had 100 or more workers (21 percent) (CPWR, 2007). These statistics do not include the almost 2.5 million self-employed “one-person” businesses or approximately 1.5 million public employees performing construction (U.S. Census Bureau, 2005). National statistical data divide the construction industry into three subsectors: construction of buildings, heavy and civil engineering construction, and specialty trade contractors. The construction of buildings subsector comprises establishments involved in constructing residential, industrial, commercial, and institutional buildings. The heavy and civil engineering subsector includes establishments involved in infrastructure projects—for example, water, sewer, oil, and gas pipelines; roads and bridges; and power plants. The specialty trade contractors subsector engages in activities such as plumbing, electrical work, masonry, carpentry, and roofing that are generally needed in the construction of all building types. Thus,
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Advancing the Competitiveness and Efficiency of the U.S. Construction Industry TABLE 1.1 Number Employed in 2005 in U.S. Construction Industry Subsectors and Construction Sector as Defined by the North American Industry Classification System (NAICS) NAICS Code Industry Subsectors and Construction Sector Number Employed in 2005a 236 Construction of Buildings 1,782,200 237 Heavy and Civil Engineering Construction 974,800 238 Specialty Trade Contractors 4,714,000 23 Construction Sector 7,571,000 a Excludes self-employed and publicly employed workers. SOURCE: CPWR (2007). while two of the subsectors refer to types of construction projects, the third refers to types of workers who work on all types of projects. This statistical breakdown masks significant differences within segments of the industry, including the wide array of construction projects, the percentages of workers in skilled trades, and those in unskilled or manual labor jobs (Table 1.1). In contrast to the division of the construction industry into three subsectors by national statistical data, many industry analysts and practitioners consider construction to have at least four distinct sectors—residential,2 commercial, industrial, and heavy construction.3 Specialty trade contractors (e.g., carpenters, plumbers, masons) and manual laborers are involved in each of these sectors. In this report, the combined sectors of commercial, industrial, and heavy construction projects are referred to as the capital facilities sector. The commercial sector, which builds schools, churches, high-rise multifamily buildings, offices, and retail buildings, among other projects, accounts for about 25 percent of the total construction value put in place in the United States each year. Construction firms and contractors working in this sector may have a mix of large and small projects and a larger group of full-time workers and subcontractors. Some of this sector’s workers may belong to labor unions and may have specialized training through apprenticeships (NRC, 2009). The industrial sector delivers manufacturing plants, oil refineries, power plants, and similar projects, accounting for another 25 percent of total construction value put in place in the United States annually. The owners of industrial projects, usually large corporations, typically build them to produce the products that they market. Because such projects are specialized, cost hundreds of millions of dollars, and are integral to the “bottom line” of such businesses, owners are more likely to be closely involved in such projects. Contractor firms working in this sector tend to be large and sophisticated, and their workers are likely to be trained and certified—by trade associations, contractors, and labor unions. For some types of projects, both owners and contractors are members of professional organizations that share best practices (e.g., Construction Users Roundtable [CURT],4 the Associated General Contractors of America [AGC],5 the Construction Industry Institute [CII],6 the Associated Builders and Contractors [ABC],7 and the American Council of Engineering Companies [ACEC]).8 2 This report does not address the residential sector except for high-rise residential construction. 3 Some practitioners would suggest that transportation-related projects be treated as a fifth segment of construction based on the characteristics of these types of projects (Hinze, 2001). 4 CURT is an independent not-for-profit organization that describes itself as the “owners’ voice to the construction industry.” Additional information is available at http://www.curt.org. Accessed February 4, 2009. 5 AGC is a construction trade association representing all facets of commercial construction. Additional information is available at http://www.agc.org. Accessed February 4, 2009. 6 CII is a consortium of owners, engineering and construction contractors, suppliers, research universities, and other stakeholders whose mission is to improve the cost-effectiveness of the capital facility project life cycle. Additional information is available at http://www.construction-institute.org. Accessed February 4, 2009. 7 ABC is a national association representing all specialties within the U.S. construction industry and is composed primarily of firms that perform work in the industrial and commercial sectors of the industry. Additional information is available at http://www.abc.org. Accessed February 4, 2009.
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Advancing the Competitiveness and Efficiency of the U.S. Construction Industry The heavy construction sector delivers dams; water, sewer, and gas lines; tunnels, highways, and bridges; and airports and other infrastructure. Governmental entities serve as the owner of many but not all such projects. Construction firms working in this sector range from relatively small, specialized contractors to large national and international firms. Much of the work involves the use of heavy equipment and may require fewer workers per project than are needed in other sectors. As with industrial-type projects, the awareness and involvement by owners and contractors in the heavy construction sector are at a relatively high level. The commercial, industrial, and heavy construction sectors, then, are stratified and differ from each other in terms of the following: The characteristics of project owners, their sophistication, and their involvement in the construction process; The complexity of the projects; The source and magnitude of financial capital; The labor skills required; The use of specialty equipment and materials; The design and engineering processes; and The knowledge required and other factors. Stakeholders Construction projects involve a diverse set of stakeholders—owners, users, designers (architects, engineers, interior designers), general contractors, subcontractors, skilled tradespeople, manual laborers, suppliers, manufacturers, and operators, as well as regulators, financing institutions, legal representatives, insurance and bonding companies, and others. Each of these groups comes to a project from a different discipline and has its own objectives as it participates in the project. Every construction project is initiated by an “owner,” which may be a government entity, a corporation, or an individual. Even though most owner organizations typically outsource the design and construction of a capital facility to architectural and engineering construction firms, the owner organization ultimately is responsible for the successful completion of the project and has the greatest stake in its outcome. A “smart” owner of capital facilities has been defined as one that has the skill base necessary to plan, guide, and evaluate the facility acquisition process (NRC, 2000). To accomplish this, a smart owner organization must be capable of performing four interdependent functions: Establishing a clear project scope of work or definition. Industry research has repeatedly shown that preproject planning (assessing requirements, setting objectives, conceptual planning, and budgeting) has the greatest impact on the outcome of a project (FFC, 2003; CII, 2006). Translating project objectives into measurable criteria (metrics). Such criteria can include constraints (budget, delivery schedule, performance specifications) and can be used to determine whether a project is likely to be completed successfully within those constraints. Monitoring project progress using detailed data collected from the field and aggregated. The objective is to actively identify and mitigate project risks as they arise. Providing commitment and stability to ensure the successful completion of a project (NRC, 2000). 8 ACEC is a national association representing more than 5,500 private-sector engineering firms. Additional information is available at http://www.acec.org. Accessed June 17, 2009.
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Advancing the Competitiveness and Efficiency of the U.S. Construction Industry FIGURE 1.1 Examples of on-site construction methods and weather issues. SOURCE: Thomas (2008). Projects The construction of capital facilities is a high-stakes, high-risk endeavor that produces long-term, unique, and complex projects. Project costs include those for land acquisition, planning, financing, design, construction, operations (heating, lighting, utilities), maintenance, and repairs. Operations and maintenance costs include energy, water, and other utilities and the replacement of building components and systems as they wear out. The time and funds spent on planning, design, and construction (often referred to as “first” costs) are only a fraction of the total costs and resources (operations, maintenance, repair, and disposal costs) that will be invested in a project over the 30 to 50 years or more during which it is in use. The standards and regulations—building codes, permitting processes, wage rates—governing the construction of capital facilities vary by the type of project and the jurisdiction in which a project is located. Because most projects are fully constructed on-site (e.g., foundations dug and footings poured, shell and core erected, equipment and furnishings installed), construction schedules, work sequencing, and worker productivity are also affected by local weather conditions and climate (Figure 1.1).
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Advancing the Competitiveness and Efficiency of the U.S. Construction Industry Processes Taking a construction project from concept to realization involves a complex set of processes, materials, technologies, and regulations and may take from 1 to 5 or more years. Operating conditions and stakeholders may change as the project progresses (FFC, 2007). Most construction projects are developed in stages: planning, financing, design, engineering,procurement,9 construction, operations, and maintenance (Figure 1.2). Typically these stages are performed in sequential order, with different parties and disciplines involved at each stage. This level of segmentation limits opportunities for the sharing of expertise across disciplines. Inefficiencies in labor, time, and knowledge management are created as each phase starts and stops and as project responsibilities and information are handed from one group to the next. This way of operating also has implications for the quality of the final project because choices made in the earliest stages of project planning about materials, technologies, and other factors determine the durability, energy efficiency, and total costs of a project for its entire life cycle. The importance of effective planning up front to successful projects is well documented (FFC, 2003; CII, 2006). An essential factor for effective planning up front is bringing the stakeholders from each phase together to agree on a project’s objectives and design before construction begins. As a project progresses from planning through design and construction to operations, its associated risk also shifts among general contractors, subcontractors, lending institutions, and others. The one constant is the project owner, who is exposed to risk at every project phase. FIGURE 1.2. Construction-related processes. SOURCE: Adapted from presentation “Advancing the Competitiveness and Productivity of the U.S. Construction Industry” to the committee by Dr. Shyam Sunder of the National Institute of Standards and Technology, July 17, 2008. 9 Procurement can include the acquisition of equipment, materials, or services (e.g., design). Industry and government organizations use an array of contracting methods for procurement, including design-bid-build, design-build, lump-sum contracting, construction manager-general contractor, and public-private partnerships.
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Advancing the Competitiveness and Efficiency of the U.S. Construction Industry Operating Environment Construction project stakeholders operate in an environment in which there is continual pressure to deliver projects in less time and at lower cost. Given the complexities of delivering a project, the multiplicity of organizations and individuals involved, and the magnitude of the financial risk, it is not surprising that many projects are characterized by an adversarial operating environment that generates disputes and claims over schedule targets, performance guarantees, or deviations from the original contract. The root causes of construction disputes include an inequitable allocation of risk among owners, contractors, and subcontractors; inappropriate contracting strategies; the low-bid process; a lack of alignment among the objectives of the owner, the general contractor, and the subcontractors; inadequate owner involvement; poor communication; poor project management; and fast-track scheduling (FFC, 2007). Some researchers estimate that the transactional (e.g., litigation) costs for resolving disputes and claims on construction projects range from $4 billion to $12 billion per year (FFC, 2007). Indirect costs include inefficiencies and delays in the process, loss of quality in the project, and poor working relationships among parties who might otherwise profit from continued long-term working relationships (FFC, 2007). MEASURING CONSTRUCTION PRODUCTIVITY U.S. industries have experienced almost continuous productivity growth for the past several decades. The one anomaly has been the construction industry, for which overall productivity declined from 1995 to 2001 (Triplett and Bosworth, 2004). For industries other than construction, improved productivity could be attributed to advances in and increased usage of information technologies, increased competition due to globalization, and changes in workplace practices and organizational structures (Triplett and Bosworth, 2004). Measuring productivity for the construction industry is challenging. Despite its importance to the national economy, there is no official productivity index for this industry. Such indexes are available for manufacturing, agriculture, and other industries that produce outputs that are easily recognizable and measured: for example, numbers of vehicles, tons of steel, or bushels of wheat (Haskell, 2004). In contrast, the highly varying projects that comprise the construction industry’s output are difficult to compare and measure even within the industry: for example, imagine comparing single-family houses to roads, schools to bridges, or office buildings to shopping centers. Even comparing the same types of projects—schools to schools, water treatment plants to water treatment plants—is difficult because the characteristics of projects vary by size, region, climate, and other factors. Factors affecting construction and labor productivity include resources (materials, information, tools, equipment, workforce skills, and support services), the quality of on-site supervision, project management, work flow sequencing, weather, and safety. Industry analysts have reached different conclusions when asked to determine whether construction industry productivity is improving or declining. One analysis of the entire industry (Teicholz, 2004) measured labor productivity as a function of constant contract dollars of new construction work per hourly work hour. The author noted that this measurement indicates that construction projects have required significantly more field work hours per dollar of contract, or more simply, that the construction industry seriously lags other industries in developing and applying labor-saving ideas and in finding ways to substitute equipment for labor (Teicholz, 2004). The author concluded that relative to other industries, productivity in the construction industry as a whole, has been declining for 30 years or longer (Teicholz, 2004) (Figure 1.3). Another author (Harrison, 2007) used a different set of data but reached the same general conclusion, estimating that construction productivity in the United States declined by 1.44 percent annually between 1961 and 2005.
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Advancing the Competitiveness and Efficiency of the U.S. Construction Industry FIGURE 1.3 Labor productivity index for the U.S. construction industry and all non-farm industries, 1964-2003. SOURCE: Teicholz (2004). However, analysts measuring construction productivity at the project and task levels have reached very different conclusions. Haskell (2004) measured project-level productivity using two different methodologies.10 He concluded that productivity for individual projects increased about 33 percent, or 0.78 percent per year, between 1966 and 2003, and stated: We are receiving more building for less money than we did 37 years ago, and moreover, the product is qualitatively superior. These improvements are the result of increased productivity made possible by mechanization, automation, prefabrication, less costly and easier-to-use materials, and lower level of real wages (which, unlike the other drivers, is not a good thing). (Haskell, 2004, p. 8) Research conducted through the Sloan Center for Construction Industry Studies focused on a wide range of construction-related tasks, yet another level of measurement. It examined labor and partial factor productivity trends as part of a larger effort to analyze the relationship between equipment technology and construction productivity (Goodrum and Haas, 2002). The results indicated widespread improvement in construction labor productivity across multiple construction tasks, ranging from 0.2 percent to 2.8 percent per year between 1976 and 1998, especially in machinery-dominated tasks such as site work. A more recent effort to examine the relationship between material technology and construction productivity found that labor productivity improved at an annual compound rate of 0.47 percent between 1977 and 2004 (Grau et al., 2009). 10 The first methodology is based on outputs in which real costs, as measured by dollars per square foot for several building types and adjusted for enhancements in quality and content, are compared for the period 1966 to 2003. The second methodology constructs a model based on observable changes in labor productivity at the task level and changes in the costs of materials, tools, and equipment used at the job site (Haskell, 2004).
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Advancing the Competitiveness and Efficiency of the U.S. Construction Industry These contradictory findings about the direction of construction productivity stem primarily from (1) variations in the definitions and measures for productivity, (2) the level at which productivity is measured (industry, project, or task), and (3) the diversity of construction projects, their functions, and costs. One common point of agreement is that there is significant room for improvement in the costs, schedules, quality, and safety of construction projects of all types. STATEMENT OF TASK In 2008, the National Institute of Standards and Technology11 requested that the National Research Council (NRC) appoint an ad hoc committee of experts to plan and conduct a workshop to identify and prioritize technologies, processes, and deployment activities that have the greatest potential to advance significantly the productivity and competitiveness of the capital facilities sector of the U.S. construction industry in the next 20 years. The capital facilities sector is defined as commercial (including high-rise and multifamily residential), industrial, and heavy construction (infrastructure) projects. The report, therefore, does not address single-family and low-rise residential projects, a sector of construction that produces a significant portion of the total construction put in place annually and which is predominantly composed of firms with fewer than 10 workers (CPWR, 2007). The 10 members of the Committee on Advancing the Competitiveness and Productivity of the U.S. Construction Industry established by the NRC have expertise in the U.S. construction industry, construction methods and project delivery, construction research and materials, large-scale engineering, construction economics, global markets and competitiveness, innovative technologies, fabrication processes, information technology, project and supply chain management, and productivity measurement and performance metrics. They have extensive work experience in industry, government, and academia (Appendix A presents biosketches of the committee members). The committee held its first meeting in Washington, D.C., on July 17 and 18, 2008. Its second meeting, which included a 2-day workshop with other industry experts, was held on November 19-20, 2008, in Washington, D.C. (Appendix B provides the workshop agenda and list of participants). In preparation for the workshop, the committee commissioned three white papers by leading industry researchers: “An International Perspective on Construction Competitiveness and Productivity,” by Carl Haas (presented in Appendix C); “Technical Change and Its Impact on Construction Productivity,” by Paul M. Goodrum (presented in Appendix D); and “Creating and Cultivating the Next Generation of Construction Professionals,” by Jeffrey S. Russell (presented in Appendix E). The committee’s third meeting was held on February 3, 2009, in Irvine, California. The committee’s conclusions and recommendations are based on its three meetings, including the workshop; on published materials, including the white papers that it commissioned; on several conference calls among committee members and staff; and on the expertise of its members. Chapter 2 addresses four obstacles to improving productivity that are most relevant to the committee’s task: limited use of automated equipment and information technologies; attracting and retaining skilled workers and recent graduates; lack of performance measures; and a lack of research. Chapter 3 identifies five activities that the committee believes have the potential to create breakthrough improvements in construction efficiency and competitiveness in the next 2 to 10 years. Chapter 4 presents the committee’s recommendations for implementing these activities in order to improve efficiency and competitiveness of the capital facilities sector of the U.S. construction industry. 11 NIST’s mission is to promote U.S. innovation and industrial competitiveness by advancing measurement science, standards, and technology in ways that enhance economic security and improve our quality of life. Additional information is available at http://www.nist.gov. Accessed September 15, 2008.
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