The construction

productivity imperative
McKinsey Productivity Sciences Center June 2015

Sriram Changali
Azam Mohammad
Mark van Nieuwland
About McKinsey & Company
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About the McKinsey Productivity Sciences Center

The McKinsey Productivity Sciences Center works with organizations in the private and public sectors to benchmark their
productivityof labor, resources, capital expenditure, and landagainst global best practice, and then design and deliver
programs for substantial and sustained productivity improvement. Sustained productivity improvement lies at the core of growth
and economic development for companies and nations, and has been identified as a priority by business and government
leaders globally. The Productivity Sciences Center builds on McKinseys extensive global research and client work on the topic,
to assist companies in key sectors in Asia to raise their productivity to best-in-class levels.
 The construction productivity imperative
How to build megaprojects better.

Around the world, ever-larger capital projects are There are many reasons for this poor record. Start
being undertaken. Better project management with productivityor, rather, lack of it. Construction
and technological innovation can improve the productivity has been flat for decades, according
chances of success. to McKinsey research. In manufacturing, by
contrast, productivity has nearly doubled over the
Three factors are defining the future of large- same period, and continuous improvement has
scale capital projects. First, investment is growing been the norm (Exhibit 3).
fast. In 2013, global investment in energy,
infrastructure, mining, and real-estate-related A variety of factors account for poor productivity
projects was about $6 trillion; by 2030, that, and cost outcomes. Among them are the following:
could be $13 trillion, according to McKinsey
research (Exhibit 1). Second, billion-dollar-plus Poor organization. Decision-making and
megaprojects will account for a greater share of procurement processes do not have the speed
these developments. Third, the industry does and scale required.
CDP 2015
poorly completing megaprojects on time, on
Construction productivity imperative
budget, and to specifications. Our research Inadequate communication. Inconsistencies in
Exhibit 1 of 3
estimates that 98 percent of megaprojects reporting mean that subcontractors, contractors,
suffer cost overruns of more than 30 percent; 77 and owners do not have a common understanding
percent are at least 40 percent late (Exhibit 2). of how the project is faring at any given time.

Exhibit 1 Infrastructure investment will double in the next 15 years.

Global infrastructure investment by industry1 Real estate

Transportation
Selected years, constant 2005 prices and exchange rates, $ trillion
Energy, utilities, and
social infrastructure
13

5
109%

6 2

3
3
1 6
2
0
3
1

1990 2012 2030

Megaprojects share in the future2

12% by number of projects
77% by project value

1 Forecast assumes price of capital goods increases at same rate as other goods and assumes no change in inventory.
2Project award date 2015 and beyond.

Source: McKinsey analysis

3
 CDP 2015
Construction productivity imperative
Exhibit 2 of 3

Exhibit 2 Ninety-eight percent of megaprojects face cost overruns or delays.

Capital-expenditure overrun
(% of original quoted capital expenditure)
Mining Oil and gas Infrastructure

Average: 20 months

650
30 31
260 33
57
4
150 26
29 48
20 43 50
110
18
100 15 63
10 58 53
90 21
80 3 40
32 44
60 Average: 80%
70 35 34 37
59 12 1 45
60 56 47 27 42 52
2 49
50 8 61
14 54
40 5 28 39
25 46 41
30 13 22 55
23 7 36 38
20
11 9
10 6 51
19 17 24 16
0
0.5 0 0.5 1.0 1.5 2.0 4.0 6.0 7.0 9.0

Delay with respect to original schedule, years

98% of projects incur cost overruns or delays.

The average cost increase is 80% of original value.
The average slippage is 20 months behind original schedule.

Source: Companies public annual reports; IHS Herold Global Projects Database, November 19, 2013; press releases

Flawed performance management. Poor short-term planning. Companies are

Unresolved issues stack up because of lack of generally good at understanding what needs
communication and accountability. to happen in the next two to three months, but
not nearly so much at grasping the next week
Contractual misunderstandings. The or two. The result is that necessary equipment
procurement team typically negotiates the may not be in place.
contract, and this is almost always dense and
complicated. When a problem comes up, Insufficient risk management. Long-term
project managers may not understand how risks get considerable consideration; the kinds
to proceed. that crop up on the job not nearly as much.

Missed connections. There are different Limited talent management. Companies defer
levels of planning, from high-end preparation to familiar people and teams rather than asking
to day-by-day programs. If the daily work is where they can find the best people for each job.
not finished, schedulers need to knowbut
often dontso that they can update priorities These problems are serious, systemic, and all
in real time. too common. Still, some companies do manage

4
 CDP 2015
Construction productivity imperative
Exhibit 3 of 3

Exhibit 3 Productivity in manufacturing has nearly doubled, whereas in construction

it has remained flat.

Overview of productivity improvement over time Manufacturing

Construction
Productivity (value added per worker), real, $ 2005

$ thousand per worker

105
100
95
90
85
80 1.7x

75
70
65
60
55
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Source: Expert interviews; IHS Global Insight (Belgium, France, Germany, Italy, Spain, United Kingdom, United States);
World Input-Output Database

to succeed. Through our analysis of more than requiredno more, no less. Consider the example
$1 trillion worth of capital projects over the past of two utility companies who needed to build a
five years, we have found that improving basic similar substation building. One spent substantial
project-management skills offers the most time and money building a full shell, including
potential to improving site performance. This floors, walls, a roof, and so on; this required
article discusses 15 practices that can help to many approvals, followed by a long and difficult
improve productivity in the three phases of project construction schedule. The other utility defined the
deliveryconcept and design, contracting and MTS to be protection against the weather, while
procurement, and execution. retaining ease of access during maintenance; on
that basis, it built a retractable roofing structure
Concept and design with pillars. This latter option required much less
time and money to build.
The concept-and-design phase is where the most
project value can be gained (or lost). These seven Maintain a life-cycle perspective.
principles offer the most promising ways to improve Companies typically observe a certain rigor
performance, and therefore financial returns. in managing up-front capital costs; less often,
however, do they consider the full life-cycle costs of
Build only what is needed. construction and operations. Ensuring that design
Design-to-value (that is, design based on engineers and project managers are familiar with
understanding and minimizing the elements that life-cycle metrics, such as net present value (NPV),
drive up costs) and the minimal technical solution could help. So could linking incentive structures to
(MTS, design to deliver only the necessary value- NPV improvement. One approach that is gaining
added requirements) are two concepts that can traction is competitive front-end engineering
be used to reduce capital investments to what is and design, where companies invite multiple

5
 engineering, procurement, and construction replica of the first one, with some updates to
companies to apply. Bidders win by coming up accommodate new technologies. The decision to
with designs to optimize overall project costs. Its replicate shaved six months off the engineering
important for procurement specialists (see next schedule. On a smaller scale, utility companies
section) to keep life-cycle costs in mind as well, are increasingly using standard design for new
evaluating not only the acquistion price but also substations. This also improves life-cycle costs,
efficiency, maintenance, and disposal. because spare parts can be used across assets.
The use of standard designs should be considered
Strengthen scenario planning. on a case-by-case basis, taking into account local
Developing options under various scenarios conditions or the latest technologies, to avoid using
reduces risk and enhances predictability of suboptimal design. However, it is typically more
project returns. The plans for many infrastructure, efficient to start with the last design and adjust,
real estate, and energy projects are based on rather than to start from scratch.
estimated capacity, such as airport passenger
loads, or on production profiles, such as those for Consult construction and procurement teams,
oil-and-gas developments. Companies pay a great beginning in the design phase.
deal of attention to developing this base case. Less Construction and procurement teams bring
often, however, do they put in the same effort in different expertise to the table; it makes sense to
evaluating alternative scenarios that could affect bring them in from the start to evaluate concepts
the success of the asset or require expensive and designs. A construction expert, for example,
modifications. If developers thought harder about might notice that a design choice will have
the worst-case scenarios, they would do a better costly ripple effects down the line; procurement
job ensuring that they had the flexibility to cope managers can suggest new ways to minimize
with the unexpected. costs. In short, sometimes great design ideas
can come from outside the design team. T-REX,
Optimize around site constraints. a highway/light-rail project in Denver, Colorado,
This seems obvious, but unfortunately it is finished almost two years ahead of schedule, in
not practiced consistently enough. Too many part because contractors developed a way to
companies work out the design in the office and do certain tasks at the same time, rather than
therefore do not take into consideration actual sequentially. That would not have happened if they
site conditions, such as climate conditions, soil had not been in the room from the beginning.
characteristics, terrain, and weather. Its usually
easier (and cheaper) to tweak a building design Optimize engineering processes and choices.
than a landscape. One example of good practice Companies are usually stringent about
would be the Olympic Stadium in London; the managing time lines during construction. But
designers planned the structure around a natural often they do not pay the same attention during
slope to minimize the need for excavations. the preconstruction phases, even though
the work done during this period can have a
Think modular design and standardization. disproportionate effect on the project value. There
Standardizing and modularizing components can is substantial room for improvement in engineering
save costs and time. Nevertheless, a significant productivity, with respect to time and quality of
number of companies do not apply this principle; output, to prevent rework in the construction
exploration-and-production companies, for phase. For example, during a recent refinery
example, often use different specifications project, the owner ordered the engineering firm
for their wellhead platforms. Indias Reliance to set up a 24-hour global engineering factory.
Industries shows what can be achieved through This enabled the company to save several months
standardization. When Reliance built a second in the engineering phase. In another example,
refinery in Jamnagar, it was almost an exact a company with an engineering team based in

6
a number of different places analyzed the data the contractors to indicate which risks they would
analytics associated with its e-mail traffic. This assume, and at what cost. This allowed for a clear
helped the company optimize locations, team demarcation of risk and a better understanding of
sizes, and work flows, and resulted in productivity associated costs.
improvements of up to 25 percent.
Set up an efficient process for claims and change-
The use of Building Information Modeling (BIM) order management.
helps improve productivity as projects progress, During construction, substantial time can be
because all information is contained in a single lost in claims and change-order management,
location. BIM tools are based on 3-D models, and particularly if processes and contracts are ill
they help planners avoid design clashes. Some defined. Creating a stringent process for change-
companies are exploring adding dimensions, such order management and an efficient one for
as cost, time, and resources, in order to smooth claims management can minimize time lost in
project management in the execution phase and disputes during construction. Delay in decisions
facilitate maintenance during operations. on claims leads to delays in constructionand
could also lead to a breakdown of trust between
The use of aerial, laser, and radar technology
the owner and contractor. One successful
can rapidly improve surveying productivity. For
company installed a board for change-order and
example, in the design of transmission lines, the
claims management as part of leaderships war
ground survey can be conducted with helicopter-
roomthe place where everything is monitored
mounted radars rather than having ground crews
and major decisions are made.
do manual surveys.
Align the interests of owners and contractors.
Contracting and procurement
It is important to see contractors as partners in the
It is important to define a contracting-and- effort to complete a megaproject, not hirelings who
procurement approach that minimizes cost and just execute the terms. Most contracts penalize
risksand to think this through for each project. contractors for delays; these penalties can be
Its awkward but true: practices that worked well draconian, even punitive. The better approach is to
on one project may not be suited to another. base contracts on a set of common interests, with
Companies cannot always do things the same a well-defined payment structure and a balanced
way. Here are some best practices that can help mix of incentives and penalties.
companies avoid delays and save money.
Incentives for early completion, or for benefit
Integrate risk allocation into the contract. sharing (when the contractor suggests ways to
It is tempting for those paying for construction improve project NPV), can help ensure that the
to try to transfer all risks to the contractors owner and contractor are working with each other
even when the latter lacks the required financial as allies. Some companies create a contingency
capacity. A more balanced approach that assigns budget and will pay a bonus if the project comes in
contractors only those risks that they can influence on time and on budget. The design of the payment
may be preferable, not only for good relations but structure can also help to align incentivesin the
also for economic reasons. When contractors form of mobilization fees paid when the site office
are forced to assume risks that arent naturally is ready, main equipment quotes/contracts are
theirs, then they wind up paying higher insurance in place, and a workforce is presentversus the
premiums; these costs, of course, are passed on more traditional approach of paying when the
to the customer. T-REX again provides an example contract is signed. A payment system based on
of better practice. During the bidding period, the completing milestones rather than end-of-month
different government agencies involved allowed payments also motivates teams to finish early.

7
 Develop the owners perspective on costs. Use prefabrication and preassembly methods.
Too often, owners rely on third parties or the Strong performers design a specific supply chain
engineering department for cost estimates. for prefabrication and assembly. In one case, this
Strong performers maintain an in-house cost translated into building a 30-story structure in just
database that incorporates quotes from new 360 hours; on-site construction work amounted to
construction and existing facilities. In addition, only 7 percent of the construction work. Substantial
these owners have a clear understanding of what prefabrication also helps to minimize waste.
factors affect costs, and they use this information
to their advantage in design and negotiations. Although it is early days yet, universities and
For example, they scrutinize the factors behind companies are exploring the use of additive
equipment costs, such as steel prices, and manufacturing techniques, such as 3-D printing,
constantly update their databases accordingly; as a next stage of innovation in building. The use of
they also perform bottom-up cost estimates for select design elements and fixtures could pick up
core equipment. rapidly, as 3-D technology allows for new shapes
and forms to be efficiently constructed.
Project execution
Build structures to cooperate on project performance.
There are four practices that set the strong To encourage an environment in which problems
performers apart from the weaker ones during are addressed head-on, its important to have
the execution phase. timely and consistent feedback. All too often,
though, the area supervisor, the project manager,
Overinvest in planning. the planner, and the owner have different views
Unforeseen events are inevitable; creating a on what is going on and where the problems are.
continuous work flow means construction Usually, this is because they are not getting the
workers need to be able to anticipate and react right information in a timely manner; sometimes,
quickly. Many companies use 30-, 60-, and they are not getting the same information. In
90-day plans, but they overlook the importance effect, they are operating from different versions
of microplans that look at what needs to of the truth. The better approach is to agree on
happen the next day or the next week. Strong a standard reporting system and then to devise
performers know what is happening day by ways to ensure timely feedback, such as daily
day at the work site and adjust their microplans discussions with on-site staff and weekly reviews
accordingly. They assess whether drawings, on project status, pace of progress, and risk
equipment, materials, and people are available management. The underlying purpose is not to
and troubleshoot before the actual due date. create more paperwork but to create a transparent
Companies are exploring how to incorporate environment that fosters quick issue resolution.
these elements into planning software and to Some companies are exploring how to track
make this a routine step in the planning process. performance using handheld devices that report
This reduces idle time and is the most promising completion levels on a daily basis to planners.
way to improve site productivity.
Minimize waste.
Companies are also beginning to manage The same lean principles that apply in
multiple critical paths. To put it simply, manufacturing could work for construction.
some activities have to happen in a specific Actively seeking opportunities to reduce
sequenceno putting up a wall until the inventories, overproduction, rework,
foundation is done. Strong performers go a transportation, and waiting times can substantially
step further. They plan what to do if the improve productivity. For example, one company
foundation is running late and get other reviewed the placement of a boiler; in the original
activities going on a parallel critical path. plan, this would have required more than 1,000

8
serpentine tubes and ten full-time workers to As with every other economic sector, technology
install. Instead, through preassembly (attaching the will also play a role in improving construction
serpentines during the fabrication process), parallel productivity. Specifically, there are innovations in
processing, and setting up a flexible team, the firm areas as diverse as 3-D printing, computer-aided
cut labor costs in half and completed installation design, laser and radar technology, and pipe laying
43 percent faster than estimated. that could make for faster, less mistake-ridden
construction. But technology is only a tool. The
Organizational skills bigger priorityand opportunityis in improved
project management from design to execution.
These practices apply to specific moments in
project delivery. There are also ways to set up the The best practices and innovations outlined in this
entire organization for success. Again, the analogy paper are only a starting point for discussion. The
to manufacturing is pertinent. Manufacturers have larger point is that these conversations are worth
learned to keep value creation and efficiency in mind having. A healthy, productive construction industry
all the time, which is one reason that the sector has benefits the whole world.
seen sustained productivity gains. When it comes to
megaprojects, though, it is common to concentrate The authors wish to thank Anna Joke Breimer,
on just finishing the joband not to consider how Jonathan Kho, Joseph Leong, Jonathan Ng, and
value can be enhanced along the way and how to Mrinalini Reddy for their contributions to this article.
transfer knowledge between project teams. High-
Sriram Changali is an associate principal in Singapore,
performing megaproject teams, on the other hand,
where Azam Mohammad is a principal; Mark van
review project NPV every three to six months and
Nieuwland is an associate principal in Bangkok.
think through the most important risks and how to
mitigate them. Once a project is done, they have
structured meetings to discuss what lessons to learn.

These kinds of issues, related to governance

and processes, are rife. For example, in
operations, the site manager might have a
signing limit of $100,000; that could be far too
low for a megaproject and could end up wasting
management time as people run after signatures.
The same can apply to decision making. The
key is to look at the scale of the job and assign
responsibility to suit.

One way to devise and institute these capabilities

on a company-wide scale is to set up an in-house
project management academy, as a number of
companies with large project portfolios are doing.
Good project managers are a rare breed. It is no
easy task to manage the contractors, engineers,
lawyers, procurement specialists, and public-
relations experts any big project needs. The
best approach is to combine structured training,
including certification in specific modules, with
on-the-job coaching, so that people can apply the
skills they learn.

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June 2015
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