Delivering on construction productivity is no longer optional.
When it come to creating a more sustainable future, the construction industry has a great role to play. On top of fulfilling critical economic and societal needs for offices, housing, hospitals, and infrastructure, the industry can help meet net-zero goals by 2050 by developing and executing the needed projects, including renewables, low-carbon activities, infrastructure, building insulation, and more.
The construction industry could thus be on the brink of remarkable expansion: in constant prices, global construction spending is projected to escalate from $13 trillion in 2023 to a striking $22 trillion in 2040, which would require a CAGR of 3.2 percent.1 While this is no faster than the rapid China-driven expansion of the past two decades, outside of China, the industry will need to double its growth rate (from 1.3 percent to 2.7 percent CAGR) to deliver on the projections for 2040.
The demand is clear, but how the construction industry will meet it, is not. The industry is lacking sufficient capable workers, and economic labor productivity (the economic value added per hour worked) has stagnated for decades globally despite technological advancements and improvements by individual firms. Any shortfall in output would cause significant bottlenecks in country-level economic, social, and environmental ambitions and is hampering countries’ abilities to address critical needs of a growing population or meet societal goals, such as affordable housing and net-zero targets.
Building on the 2017 McKinsey report on construction productivity,2 this article aims to highlight the increasing urgency to bridge the gap between the construction industry’s lagging productivity and its role. As the first in a series of articles, this piece will focus on historic trends of productivity in construction, the reasons why recent efforts to improve productivity have not been effective, and the broader implications this trend has. Later articles will cover several approaches for the industry to improve productivity in more detail.
A shortfall in construction output looms without faster productivity growth
The construction industry3 remains one of the world’s largest industries. In 2023, $13 trillion worth of gross annual output was devoted to construction projects globally, constituting 7 percent of global gross output. By 2040, the industry could grow by around 70 percent, but engineers and constructors in many parts of the world are struggling to deliver even today’s project pipeline. They’re already faced with tight labor markets for critical roles, such as engineers, craft workers, and project managers, and there is no evidence that the near-term labor market will be able to keep up with demand.
An increase in productivity is hence needed to allow the industry to deliver projects with the same or fewer people per project. It would also create the financial space within construction companies to increase wages and invest in better tools and practices.
Historically, construction productivity has flatlined
The story of lagging construction productivity is an old one (see sidebar “Aggregating construction productivity”). Apart from selected economies, the issue has been perennial around the world for the past two decades. Despite individual companies’ efforts, at the aggregate level, construction productivity improved by only 10 percent (0.4 percent annually) between 2000 and 2022, compared to a 50 percent (2 percent annually) productivity improvement of the total economy and 90 percent (3 percent annually) productivity improvement for the manufacturing sector for the same period. From 2020 to 2022, productivity in the global construction industry has even declined by 8 percent.
Whatever productivity growth there was in construction in the past decade mostly came from developing economies that have adopted foundational productivity practices, such as upskilling the workforce. Conversely, in the world’s most advanced economies, namely the United States and Europe, there has been virtually no progress. For example, between 2000 and 2021, construction productivity CAGR in China was 4 percent, whereas the global average was only 1 percent and the United States had negative growth of 2 percent per annum.
SOURCE: McKinsey & Company
By Jan Mischke, Kevin Stokvis, and Koen Vermeltfoort
with Birgit Biemans