Charting the Collapse of Construction Productivity and Profit

“An employer's interest is best served by a contractor who is able to base an accurate estimate on a reliable plan for constructing a clearly defined project, and who is able to carry out the work with a continuing incentive to build efficiently and economically despite the assaults of those unforeseen circumstances which characterise [construction] work.

*Confidence in being paid fully, promptly and fairly will lead to the prosperity of efficient contractors and to the demise of those whose success depends more on the vigour with which they pursue doubtful claims.”.  -  (Martin Barnes - 1939 - 2022; The Father of Project Management).

Introduction

The collapse of productivity is the priority topic at every conference, seminar and forum. Construction is no exception. Cures are discussed at length, high among them resources, training, AI, prefabrication, innovation, modular — all long-term or niche solutions.

Overlooked low-hanging fruit may be easier and closer than many believe.

Clients at all levels no longer trust that the industry can deliver on its promises — a quality product that meets cost and time budgets. This distrust has developed into a lack of respect for the industry, and an unwillingness to pay a fair price for a good product.

Before we can consider actions to recover productivity and accuracy, we need to have a clear understanding of how we got here.

Procurement and management of construction has changed significantly since 1980. The change has been influenced by changes in construction contracts that, essentially, shift the risk/reward point on the process continuum.

## What is a Construction Contract?

A seemingly simple question, but there are many ways to procure and deliver construction projects, even though the underlying process remains the same.

Essentially a contract is a method to share risk and reward, along a process continuum. Much of the technology improvement has been through plant and equipment development improving site productivity.

The one thing that has radically changed over the last forty years is the method of delivery — the contract.

## Four Views of Construction

For a bespoke construction project, construction delivery may be viewed as:

- a product,

- a traded commodity,

- a service, or

- a combination of these.

## Option 1 — Construction as a Product

Most clients would see construction as a bespoke product, designed and built to fulfil the client's functional needs, and delivered as a completed product.

The nearest construction contract to satisfy this definition is a Turnkey or Design & Construction contract, where a performance brief is determined and agreed in advance, after which the contractor takes full responsibility for delivery of the project at a negotiated price.

In my experience, this form of contracting works best where little change is expected, and the relationship between client and contractor is more important than price. In many cases there is a cultural component to the success of these arrangements.

Two examples from my early experience demonstrate this. In the mid-1980s, at the height of Japanese investment in Australian property, we worked for a large Japanese construction company.

The client brief was, well, brief — hardly more than a general description of a desired outcome and some perspective views.

We developed a budget on concept documents, from which the contractor offered a fixed price. It was understood that requesting variations, for any reason, was considered bad manners. The gross markup applied by head office was 25%, and we included substantial contingencies to cover client-requested variations. Every whim of the client was politely acceded to, without question.

Later, when the company attempted to bid on local work, it was not prepared to reduce its margin below 15%. They could not compete, and soon pulled up stakes in Australia.

Australian clients and governments had a long history of price bidding through the tendering process.  The success of this was based on providing contractors with sufficiently detailed information in order to make an accurate assessment of the scope of work required.

Clients quickly worked out that they could have the best of both worlds by passing more risk to contractors in a highly competitive environment.  It led to the decline in trust, performance and quality that we see today.

## Option 2 — Construction as a Combined Design, Service and Product

Whilst hybrid forms of contract have existed for a long time, before 1980, by and large, design and documentation for commercial construction was an independent service, provided by a team assembled by the client. That team comprised designers (architects and engineers), contract management (architects, engineers, quantity surveyors), and a contractor, coordinated by the architect, engineer, or occasionally a separate project manager.

Generally, after establishing and agreeing designs with the client, the designers would prepare detailed plans and specifications; quantity surveyors would prepare detailed bills of quantities for tendering and subsequent financial management; and contractors would bid on those detailed documents for delivering the product.

The advantages of this system are:

Financial transparency. Financial information was transparent between client and contractor. This provided a platform for payment and change management where process did not impede progress.

Pricing accuracy. Prices for the work were based on reliable, resolved, accurate documents. The contractor and subcontractors were not responsible for the accuracy of documents. Pricing was much more accurate than low-doc projects, and outcomes were much more predictable as a result.

Clear contractor role. The contractor was only responsible for coordinating delivery of the product detailed in the documents, including a detailed bill of quantities and a detailed construction program.

Client control. Clients were in full control of the quality of specified work.

Equitable risk. Risk was shared equitably. Parties accepted the risk for their own work.

Efficient variation management. Because all detailed design data was fully transparent, including fully priced and agreed bills of quantities, variations could be accurately and quickly assessed and agreed without disrupting progress.

Fair variation pricing. Clients were assured that variations were valued at contract prices and not used as a means to increase contractor and subcontractor margins.

The design, management and construction teams largely produced results on time and within a tight budget range. Clients trusted their team to deliver on its promises.

This system is the "low-hanging fruit.” The only barrier to adoption is clients’ perception that it exposes them to more risk - the original pitch used by the risk-trading proponents.

History has demonstrated that the opposite has occurred - without open communication and transparent data, risk is hidden, until it becomes uncontrollable.  Exposing risk at the earliest possible time allows it to be managed before it runs out of control.

This system opens the door to automation.  Without transparent, shared data, automation and AI integration is a dream.

This system can be revived at any time in this or similar hybrid form, using existing Australian Standard and similar forms of contract.  It will give the industry breathing space to invest in training, resources and innovation.

## Option 3 — Construction as a Tradable Commodity

High inflation through the 1970s, reaching approaching 19 per cent in early 1975, caused clients and the industry to grasp for ideas to reduce costs and insulate themselves from cost risk.

Total costs could rise substantially during the time needed to fully resolve designs and produce construction-ready documents. As a result, fast-track construction became popular, with prices based on early design and documentation proceeding as construction commenced. Clients and contractors did not allow for the extra cost of managing the complex fast-track documentation and bid processes.

Major contractors were seeking ways to leverage the entire construction cycle to compete and improve margins. Some were openly admitting to clients that they were making more money from investing cashflow than from their tendered margins.

The market became a free-for-all. Because cost increases were unpredictable, contractors' advisors drafted subcontracts to isolate and on-sell as much risk as possible through the supply chain to those with less market power. Subcontractors and suppliers willingly accepted risks they could not manage or cover, in order to win work.

To isolate risk, data transfer had to be isolated as much as possible. Data transparency, other than for essential documents, was discouraged. Subcontractors and suppliers were required to undertake their own measurement, tender preparation, and in many cases detailed design, in the short bid time available, and to establish and manage their own construction plans within a general framework provided by the main contractor.  Accurate quantity and cost data were silo’d at every level.

There was no longer a single source of truth on any construction contract. These changes led to less accurate pricing and less predictability.

Contractual barriers were raised to prevent claims for variations and extensions of time — notorious among them were notice periods that are impossible to meet in the normal course of business, whilst maintaining progress, thereby creating delays and disputes.

Soon, clients and governments learned the same "risk-averse" contracting techniques from the same advisors. They were happy to offload as much responsibility for design and management to contractors as possible, who willingly accepted the risk as another potential profit centre.

Inflation fell sharply through the 1980s, reaching 2.5% in December 1984. The economy did not recover through the 1990s, with inflation at 0.3% in December 1992, finally falling into recession in December 1997 with the Asian Financial Crisis.

Generating profit from cashflow trading evaporated. Margins were at an all-time low. Contractors were bidding on negative margins for cashflow, hoping to squeeze some margin from subcontractors through Dutch auctions when they won a tender, and to stay alive for another day.

Much more emphasis was placed on improving margins from variations and extension of time claims, now that the pre-established, orderly contractual process for valuing variations and eot’s had long been abandoned.

Cost cutting ran deep. Design documentation was minimised, contract management fell to overworked contract managers, and detailed program management was abandoned.

This is the legacy that we work with today.

Siloed data, minimised planning and contract documentation, minimal contract management, and contractual processes that inhibit progress have all led to a situation where clients and governments no longer trust that the industry can deliver on its promises of quality products, on time and on budget.

The contract manager's role changed from process manager to negotiator.

Right at the point in history where technology is delivering huge gains through the sharing economy and the effective use of data, we abandoned the very processes that are essential to leveraging new and emerging technologies.

Current first-generation management systems are built to support this model — one that prioritises risk-averse contracts, data isolation, limited one-to-one communication, and processes that inhibit progress: the most critical objective of any construction project when the rubber hits the road.

The two key differences between risk-trading commodities (shares, products, real estate) and construction are:

(a) Traded commodities exist, in real or virtual form. Although there are obvious market risks, the seller can choose when to buy, hold or sell the product or asset.

(b) With construction, the product does not exist. Clients are buying a promise, yet to be delivered; and the contractor has little option or opportunity to choose when and how to disconnect.

The industry is struggling with margins, productivity is stubbornly low, resources are scarce, and competence has declined. I can think of no advantage in continuing to support this high-risk, low-margin, ineffective method of construction delivery that was founded on high inflation.

## Option 4 — Construction as a Service

Construction as a service is an established, if lesser-used, contractual delivery methodology. Known as Construction Management or "cost-plus," it can carry an undeserved bad name with clients, born of inadequate contract management resulting in runaway costs and time. Often it is chosen because design and construction documents are insufficient to determine a firm price, which can lead to a plan-as-you-go approach. This inevitably results in high-risk, unknown outcomes for clients, unless sufficient expert resources are allocated to carefully manage the design, documentation and procurement processes.

This need not be the case. Properly managed construction management can be an effective and satisfying method of contracting for both contractors and clients.

In this arrangement, a management team — including design consultants, contract documentation (including bid documents), and the coordinating contractor — is assembled under the chairmanship of the client or the client's project manager.

Price competition, as with all other contracts, is found at supplier/trade contractor level, where work is fully designed and documented before bidding each trade package or package group, reducing risk and sharpening pricing.

Our experience of this method ran from 1980 to 1990, constructing approximately $1 billion of commercial work (today's dollars) for Brisbane City Council. The overall cost and time accuracy was within ±5% of the original contract budgets. The highlight was the Brisbane Entertainment Centre, completed within 1% of the original budget set three years earlier and handed over on the promised day. The fast-tracked design, documentation and construction were completed in record time to meet Olympic bid deadlines.

Of course, this success was no accident. The client was prepared to engage sufficient documentation and management resources to maintain tight control over every aspect of the project's delivery. In addition, we recognised that progress was a priority — this building was originally developed as an Olympic Games bid showcase project — and developed innovative contract management processes that put progress first. Process was not allowed to impede progress. These processes were designed around shared, transparent cost and time data.

The success of this, and any similar or hybrid system, relies on the provision and sharing of all mission-critical information.

The advantages of this method are:

Resource-based selection. The team is assembled on the basis of the planned need of each consultant, not on the cheapest price for an undefined service. All consultants, including the coordinating contractor, can include sufficient resources to provide an excellent service, rather than competing on price alone.

Direct accountability. Every member of the design, management and coordination team is directly responsible to the client. Information is not filtered through interested third parties. This separation creates a mild tension within the team that drives peak performance.

Data transparency. All critical data is shared and transparent, providing the platform for simplified, indisputable contract management.

Informed client control. The client has full control over design inclusions and budget. Added client risk can be overstated: most existing forms of contract include provisions to pass contingent risks, design changes and other risks back to the client. With this method, risks are not only minimised through better-resourced management processes, but clients are fully informed and aware of the effect of all changes within time frames that allow for decisions and adjustments before they become irreversible.

## Option 5 — Hybrid Forms

There are any number of hybrid forms of contract, designed to allocate risk and risk-reward at different points in the process and in different ways. These include Target Price, Capped (Guaranteed Maximum) Price and similar forms, usually with a pain/gain share of the variance from budget. They are all combinations of Options 2, 3 and 4 above.

In my view, these forms — being neither one thing nor the other — tend to fall back to risk-trading, as parties revert to concentrating on protecting their financial interest in preference to the client and team interest. They are designed to incentivise contractors to perform, but they tend to fall back to the tried and failed risk-trading system.

## The Case in Summary

“An employer's interest is best served by a contractor who is able to base an accurate estimate on a reliable plan for constructing a clearly defined project, and who is able to carry out the work with a continuing incentive to build efficiently and economically despite the assaults of those unforeseen circumstances which characterise [construction] work.

*Confidence in being paid fully, promptly and fairly will lead to the prosperity of efficient contractors and to the demise of those whose success depends more on the vigour with which they pursue doubtful claims.

*As Louis XIV's department of works was recommended in 1683, as a result of what may have been the first government enquiry into the financial control of civil engineering contracts: 'In the name of God: re-establish good faith, give the quantities of the work and do not refuse a reasonable extra payment to the contractor who will fulfil his obligations” — Martin Barnes (1939–2022), Father of Project Management; Peter Higgins, Chair of the NEC Contract Board, recalls that he was "immediately struck by Martin's depth of knowledge and commitment to developing a better way of contracting — through collaboration."

The historical case for reform is compelling. But the argument for change does not rest on history alone. Four converging forces — the rise of modular construction, the demands of AI and automation, the untapped potential of network communication, and the sustainability of current margins — make the urgency of acting on it immediate.

## The Case for Change Now

### Modular Construction

Manufactured construction is establishing its place in the industry. It provides efficient, consistent, automated manufacturing methods that traditional site construction cannot compete with. Initially, its impact is in manufactured and system-build housing, expanding into larger modular projects including apartments and hotels, such as Freecity's Macquarie Park student accommodation and the New York Marriott.

Australia does not have the capacity to manufacture at the scale required for large modular projects — the Hyatt hotel modules were manufactured in Poland, and Australian project modules are likely manufactured in China. This leaves local contractors as substantially assemblers, not unlike the old car industry. While these methods relieve labour shortage pressures, they will put pressure on the margins of Australian construction companies, manufacturers and suppliers.

### Automation, AI and Productivity

AI and process automation rely for their success entirely on sharing trusted information — in an orderly way in the case of automation, or across vast datasets for AI.

Already, the largest and most profitable businesses in the world are built on leveraging shared data. AI is increasing this capability at an unprecedented rate. Alphabet, Google's parent company, grew its annual revenue from approximately $22 billion in 2008 to over $400 billion in 2025 — a more than eighteen-fold increase, with AI and large language models playing a significant and growing role, leveraging mountains of the world's shared data. The Australian Productivity Commission has proposed excluding LLM data mining from Australian copyright laws.

Leveraging siloed data with AI will produce some gains, but they will be constrained — an echo chamber, in effect of proprietary unverified data. Data must and will be unlocked to create real competitive advantage.

To repeat: right at the moment in history where technology is delivering huge gains through the sharing economy and the effective use of data, we remain locked into a system of siloed data.

Data-sharing capability is already provided for in most public standard forms of construction contract, though its use is limited and diminished by conflicting processes. It can be re-engaged with no contractual change. Small changes in process will begin to leverage the value of shared data again.

AI analytics and automation will be unleashed when all contract data, from all sources, is held in trusted, single point of truth repositories.

### Communication

Contractual communication is still conducted one-to-one in vertical channels. But construction is not a series of vertical communication channels; it is a complex network of interconnected transactions.

As explained by Manuel Lima, a founder of modern visualisation, leveraging complex networks is a powerful tool.  (11 minutes).

https://www.youtube.com/watch?v=nJmGrNdJ5Gw

With the help of sophisticated data visualisation, we know that construction is a complex network of interactions. Even the smallest change can generate dozens of separate interactions and actions, each with contractual response times of up to 30 business days. Subcontractor payment processing alone can consume a full week of a contract manager's time.

Automated network communication — Business Process Automation — together with compatible contract provisions and shared data, enables near-real-time, network-wide communications that will improve the efficiency of these processes by up to 85%, while preventing process from impeding progress.

Thomas Friedman, in his seminal book The World is Flat (2005), describes how the most successful companies leveraged employee value by directly engaging them. He proposed that employees must contribute more than their basic skill. Your bricklayer, plumber, tiler or electrician must be expected, and empowered, to do more than their trade-skilled work — they are your eyes and ears at the point of contact with the work.

Automated, structured, curated data can be transmitted and actioned in real time, allowing timely adjustments to contracts and workflow. The ability to respond quickly allows managers to address hotspots before they escalate, avoid unnecessary claims and disputes, meet contractual deadlines, and prevent process from impeding progress.

Business Process Automation can be implemented immediately at every network node with no change to current contracts and minimal training. Improvements to embedded contract management processes can be added over time to further accelerate productivity gains.

In a recent analysis of a AS4901-1998  subcontract, we demonstrated that thirty-five recognised processes could be collapsed into six automated key processes.

### Profitability

The Downer Group, Australia's largest contractor, with 33,000 employees and revenue of $10.1 billion in 2025, declared a profit margin of 1.5%.

By contrast, even given different capital, liability and delivery risk profiles, major consulting firms typically achieve operating margins of 15–25% or higher. The comparison is instructive because, in reality, most commercial contractors (excluding some civil contractors) do not actually build anything. Their role is largely a consulting one: coordinating and managing a complex, highly distributed network of suppliers and contractors to complete each unique project.

###THE SHRINKING MARGINAL COST OF TRANSFORMATION

Economic and social theorist Jeremy Rifkin makes a compelling argument for change. (Long - 37 minutes)

https://www.youtube.com/watch?v=5mQj574Cv_k

Key relevant points are at:

8:00 - productivity; 12:50 - network neutrality; 13:50 The Internet of Things; 15:40 - The Sharing Economy; 17:10 - Zero marginal Cost.

He notes that profits on the manufacture and sale of products are taken from the "incremental cost of transformation" — in construction, that is the cost to design, procure, and manage the assembly of a large number of products and services into the final product: a bespoke building.

However, the technologies at work both on site and in the management process — where the contractor's profit lies — are shrinking those costs. In a competitive environment, the ability to extract profit from a shrinking marginal cost of transformation becomes increasingly difficult. This trend is accelerating rapidly as AI is applied in ever more innovative ways to automate process and make decisions without human intervention.

Profit-taking from commodity and risk trading will continue to become more difficult.  In turn, there will be more incentive to cut inputs, leading to a downward spiral of failure.

This implies that, in order to be reasonably profitable, the construction design and management process must return to being a trusted, valuable service — or group of services — for which clients are willing to pay a fair fee.

## Conclusion

A clear understanding of the coordinating contractor's role — selected on the basis of resources, capability and systems — with a strong move toward construction as a service, will encourage data transparency, leverage data use, give clients more confidence that the industry can deliver on its promises, and generate better, more sustainable profit that is consistent with the quality of service provided.

Innovation will follow exponentially as AI, neural networks and quantum computing mature.

The construction sector needs only to be ready: with open systems and processes that are designed, and available, for future development.