Charting the Collapse of Construction Productivity and Profit

Jun 25

15 min read

Updated: 22 minutes ago

“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).

Who this is for:

This article is written for the people who decide how construction is bought and managed: clients and developers, government procurement leads, and the executives who run contracting businesses. If you sign off on a procurement strategy, or carry the consequences of one, it is for you. You do not need a contracts background to follow it.

Introduction

The collapse of productivity is the priority topic at every conference, seminar and forum. Construction is no exception. The cures discussed include resources, training, AI, prefabrication, innovation and modular building. All are long-term or niche solutions.

The low-hanging fruit is easier and closer than many believe.

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

Before we can recover productivity and accuracy, we need a clear understanding of how we got here. Procurement and management of construction have changed significantly since 1980, driven by changes in construction contracts that shift where risk and reward sit in the process.

What is a construction contract?

A construction contract is the agreement that sets out who does what, who pays for what, and who carries the cost when things go wrong. Put simply, it decides who holds which risk, and who is rewarded for managing, insuring or buying it.

The physical process of building remains broadly the same. Most technology gains have come from better plant and equipment on site. What has changed radically over the last forty years is the method of delivery: the contract.

In Australia, most commercial projects use Australian Standard forms. AS 4000, with client and government variations, is the common head contract between client and contractor. AS 4901 is the matching subcontract between contractor and trade subcontractor. These forms are flexible: the same document can support very different ways of sharing risk and information, depending on how it is set up and administered.

Five ways to buy construction

A bespoke construction project can be bought as:

1. a product: the contractor designs and builds to a brief, for a fixed price (Turnkey or Design & Construct);

2. a documented service and product: the client's team fully designs and documents the work, and the contractor prices and builds it (traditional fully documented contracting);

3. a traded commodity: risk is passed down the supply chain to whoever will accept it (risk-trading);

4. a service: the contractor is paid a fee to coordinate, and trades are tendered package by package (Construction Management); or

5. a hybrid of these (Target Price, Guaranteed Maximum Price and similar).

Option 1: Construction as a product

Most clients see construction as a bespoke product, designed and built to meet their functional needs and handed over complete.

The nearest contract to this is Turnkey or Design & Construct. A performance brief is agreed in advance, and the contractor then takes full responsibility for delivery at a negotiated price.

In my experience, this works best where little change is expected and the relationship between client and contractor matters more than price. Culture often plays a part.

In the early 1980s, at the height of Japanese investment in Australian property, we worked for a large Japanese construction company. The client brief was, well, brief: little more than a description of the desired outcome and some perspective views.

We developed a budget on concept documents, and the contractor offered a fixed price. Requesting variations, for any reason, was considered bad manners. Head office applied a gross markup of 25%, and we included substantial contingencies for client-requested changes. Every whim of the client was politely accommodated.

When the company later bid on local work, it would not reduce its margin below 15%. It could not compete and soon left Australia.

Later, using a construction management project on a complex, innovative hotel project, with a tight budget, for another Japanese client, the client was horrified when the final cost was 5% over the original budget. It demonstrates the cultural influence on contract selection.

Australian clients and governments had a long history of price competition through tendering. It worked because contractors were given detailed information to price the scope accurately. Clients then worked out that they could have the best of both worlds by passing more risk to contractors in a highly competitive market. However, whilst clients were happy to provide less, and give up substantial management control, they were (and are) still tied to a “best price” mentality.

To compete, contractors reduced design, documentation, cost and time management services that had been integral to success. Certainty declined.

That led to the decline in trust, performance and quality we see today.

Option 2: Construction as a documented service and product

Before 1980, design and documentation for commercial construction was largely an independent service, provided by a team the client assembled. Designers (architects and engineers), contract managers (architects, engineers and quantity surveyors, planners) and a contractor were coordinated by the architect, the engineer or occasionally a separate project manager.

Once designs were agreed with the client, designers prepared detailed plans and specifications. Quantity surveyors prepared detailed bills of quantities (an itemised, measured list of every element of the work) for tendering and later financial management. Contractors bid on those detailed documents.

The advantages were:

• Financial transparency. Cost information was open between client and contractor, so payment and change management did not impede progress.

• Pricing accuracy. Prices were based on resolved, accurate documents. Contractors and subcontractors were not responsible for document accuracy, and outcomes were far more predictable than on low-documentation projects.

• A clear contractor role. The contractor coordinated delivery of what the documents described, against a detailed bill of quantities and construction program.

• Client control. Clients controlled the quality of the specified work.

• Equitable risk. Each party carried the risk of its own work.

• Fast, fair variations. With fully priced and agreed bills of quantities, variations and extensions of time could be valued quickly at contract rates, without disrupting progress or inflating margins.

These teams largely delivered on time and within a tight budget range. Clients trusted them.

This system is the low-hanging fruit. The only barrier is clients' perception that it exposes them to more risk, which was the original pitch of the risk-trading advocates. History shows the opposite: without open communication and transparent data, risk stays hidden until it becomes uncontrollable. Exposing risk early allows it to be managed before it runs away.

This system also opens the door to automation. Without transparent, shared data, automation and AI are a dream. It can be revived at any time using existing Australian Standard forms, and it gives the industry breathing space to invest in training, resources and innovation.

Option 3: Construction as a tradable commodity

High inflation in the 1970s, peaking close to 18 per cent in early 1975, drove clients and the industry to look for ways to cut costs and insulate themselves from cost risk.

Costs could rise substantially while designs were being resolved and documented. Fast-track construction became popular, with prices based on early design and construction starting before documentation was complete. Nobody allowed for the extra cost of managing fast-track documentation and bidding.

Major contractors looked for ways to leverage the whole construction cycle. Some openly boasted that they made more money investing cashflow than from their tendered margins.

The market became a free-for-all. Contractors' advisers drafted subcontracts to isolate and on-sell as much risk as possible down the supply chain, to those with less market power. Subcontractors and suppliers accepted risks they could not manage or price, to win work.

To isolate risk, data had to be isolated too. Subcontractors and suppliers were required to do their own measurement, tender preparation and often detailed design, in short bid periods, and to plan their own work within a loose framework. Accurate quantity and cost data were siloed at every level. There was no longer a single source of truth on any project, and pricing became less accurate and less predictable.

Contractual barriers were raised against variation and extension-of-time claims. Notorious among them were notice periods impossible to meet in the normal course of business while maintaining progress, which created delays and disputes. Soon clients and governments learned the same "risk-averse" techniques from the same advisers, and happily offloaded design and management responsibility to contractors, who accepted it as another potential profit centre.

Inflation then became volatile. It dipped briefly to about 2.5% in December 1984 before returning to 7–10% for the rest of the decade. The early-1990s recession followed, and by December 1992 inflation was just 0.3%.

Profit from cashflow trading evaporated. Margins hit an all-time low. Contractors bid on negative margins for cashflow, hoping to squeeze margin from subcontractors through Dutch auctions (re-bidding trade packages after winning, to drive prices down) and to survive another day.

The emphasis shifted to improving margins through variation and extension-of-time claims, now that the orderly process for valuing them had been abandoned. Cost cutting ran deep. Design documentation was minimised, contract management fell to overworked contract managers, and detailed program management was dropped or handed to juniors with no training and basic scheduling software. The contract manager's role changed from process manager to negotiator.

This is the legacy we work with today: siloed data, minimal planning and documentation, thin contract management, and contractual processes that inhibit progress. Today's first-generation project information management systems are built to support this model.

Risk-trading suits commodities such as shares or real estate because the asset exists, and the seller chooses when to buy, hold or sell. In construction the product does not yet exist. Clients are buying a promise, and the contractor has little opportunity to choose when or how to exit.

The industry is struggling with margins, productivity is stubbornly low, resources are scarce and competence has declined. I can see no advantage in continuing a high-risk, low-margin delivery method founded on high inflation.

Option 4: Construction as a service

Construction Management, or "cost-plus", is established but less used. It can carry an undeserved bad name, born of poor contract management that led to runaway costs and time. It is often chosen because documents are too incomplete to set a firm price, which leads to plan-as-you-go and high-risk outcomes for clients, unless enough expert resources are allocated to manage design, documentation and procurement.

It need not be that way. Properly managed, it can satisfy both contractors and clients.

A management team, including design consultants, contract documentation and the coordinating contractor, is assembled under the chairmanship of the client or its project manager. Price competition happens at trade level, where each package is fully designed and documented before it is tendered, which reduces risk and sharpens pricing.

The advantages are:

• Resource-based selection. Consultants, including the coordinating contractor, are chosen on the resources they plan to commit, not the cheapest price for an undefined service.

• Direct accountability. Every team member answers directly to the client. Information is not filtered through interested third parties, and the mild tension this creates drives performance.

• Data transparency. All critical data is shared, providing the platform for simple, indisputable contract management.

• Informed client control. The client controls design inclusions and budget and sees the effect of every change in time to decide before it becomes irreversible. Any added client risk is overstated: most standard contracts already pass contingent risks and design changes back to the client.

Option 5: Hybrid forms

Target Price, Guaranteed Maximum Price and similar forms allocate risk at different points, usually with a pain/gain share of any variance from budget. They are combinations of Options 2, 3 and 4.

In my view, being neither one thing nor the other, they tend to fall back into risk-trading, as parties revert to protecting their own financial interest ahead of the client's and the team's.

What contract are we recommending?

The recommendation has two steps.

1. Now: return to fully documented contracting (Option 2) on standard AS 4000 and AS 4901 forms. No new contract is needed. The change is in how the contract is set up and run: complete documents before tender, shared bills of quantities, and agreed rates for valuing change.

2. Next: move toward construction as a service (Option 4). The coordinating contractor is selected on resources, capability, systems, and experience and paid a fair fee for a trusted service. Contracts can be developed to separate contract (risk/responsibility/reward) and process that is common to, and ties together the workflow of the entire construction ecosystem.

Both rest on the same foundation: complete information before pricing, shared openly between the parties.

Both the UK, with NEC contracts, and the USA with AIA and government/military contracts, have similar suites of contracts to our existing forms described above.

The evidence that upfront planning pays

Spending more on planning and documentation before construction costs a few per cent of the project, and repays that several times over in avoided overruns and claims.

Our own record. From 1980 to 1990 we used construction management to deliver about $1 billion of commercial work (in today's dollars) for Brisbane City Council. Overall cost and time came in within ±5% of the original budgets. The highlight was the Brisbane Entertainment Centre: fast-tracked to meet Olympic bid deadlines, yet completed within 1% of a budget set three years earlier, and handed over on the promised day.

This was no accident. The client paid for sufficient documentation and management resources to keep tight control of every aspect of delivery. Because progress was the priority, we designed contract management processes around shared, transparent cost and time data, so that process never impeded progress.

International research. The US Construction Industry Institute (CII) has studied front-end planning across hundreds of projects. Its findings, as presented to the US Department of Energy, show the gap between well-defined and poorly defined projects:

Project definition at budget approval	Final cost vs approved budget	Change orders (% of budget)
Well defined, accurate	2% under	4%
Well defined, less accurate	7% over	9%
Poorly defined	22% over	16%

The same research puts the cost of good front-end planning at 1.5–5% of project cost, with typical savings of 6–25% on cost and 6–39% on schedule: a return of roughly 3 to 10 times the outlay. (Gibson & West, CII / US DOE)

Australian evidence. The Grattan Institute found that Australian transport projects ran $28 billion over their promised costs between 2001 and 2015, about a quarter of their total value. Its biggest single cause was committing to a price before the project was properly planned. The Forrest Highway in Western Australia cost nearly five times its first promised figure, and the Hunter Expressway nearly four times. (Grattan Institute)

The world's largest project database. Professor Bent Flyvbjerg of Oxford has tracked more than 16,000 projects in over 130 countries. In How Big Things Get Done (2023, with Dan Gardner), he reports that only 8.5% came in on both budget and time, and just 0.5% met budget, time and promised benefits. He calls this the "iron law" of projects: over budget, over time, under benefits, over and over again. (Thought Economics; Sydney Business Insights)

His remedy is "think slow, act fast": plan in detail while planning is cheap, then deliver quickly. His examples make the point:

• Sydney Opera House: committed to before the design was resolved. It finished about 1,400% over budget and ten years late, and early construction had to be demolished.

• Empire State Building: designed in under a year using standard, repeated floors and an experienced team. It was built in about a year and a half, 17% under budget.

• Pixar: each film goes through about eight planning iterations over roughly two years before production starts, because, as Flyvbjerg puts it, planning is "dirt cheap" compared with the shoot.

• Heathrow Terminal 5: the client kept the risk and set up a collaborative contract, rather than pushing risk down the supply chain. Flyvbjerg cites it as a model for avoiding adversarial disputes.

Flyvbjerg's work supports both halves of this article's argument: resolve the design before you commit to a price and stop using the contract to trade risk.

The lesson is consistent across all this evidence: a price set on incomplete information is not a price. It is an opening bid for the claims that follow.

The biggest risks

Risks of staying with risk-trading

1. Hidden risk that surfaces late. When data is siloed, problems appear only when they are expensive to fix, as claims, disputes and delays.

2. Insolvency in the supply chain. Subcontractors who accept risks they cannot price eventually fail, taking programs and warranties with them.

3. Margins too thin to invest. At 1–2% net margins, contractors cannot fund the people, training and systems the industry needs.

4. Locked out of AI and automation. Siloed, unverified data limits what these tools can do. Competitors who share data will move ahead.

Risks of the proposed approach, and how to manage them

1. Client cost exposure. Under construction management the client carries more cost risk. It is managed by funding enough documentation and management resources, and by tendering every trade package only once it is fully resolved.

2. Under-resourcing. The model fails if clients buy it cheaply. Selection must be on resources and capability, not lowest fee.

3. Cultural resistance. Advisers and teams are trained in risk-trading. The change needs client leadership and contract administration that is actually open.

4. Upfront time and cost. Full documentation takes longer before work starts. The evidence above shows it pays back several times over.

The case for change now

The historical case for reform is compelling, but four converging forces make it urgent: modular construction, AI and automation, network communication, and the sustainability of current margins.

Modular construction. Manufactured construction is establishing its place. It starts with system-built housing and is expanding into larger projects such as Freecity's Macquarie Park student accommodation and the Marriott in New York. Australia lacks the capacity to manufacture at that scale. The New York Marriott's modules were made in Poland, and Australian project modules are likely made in China. That leaves local contractors largely as assemblers, much like the old car industry. Modular relieves labour shortages, but it will squeeze the margins of Australian contractors, manufacturers and suppliers.

Automation, AI and productivity. AI and process automation depend entirely on sharing trusted information: in an orderly way for automation, and across vast datasets for AI. The world's most profitable businesses are built on shared data. Alphabet, Google's parent company, grew its annual revenue from about US$22 billion in 2008 to over US$400 billion in 2025, an eighteen-fold increase built on organising and using shared information at scale.

Applying AI to siloed data will produce some gains, but limited ones: an echo chamber of proprietary, unverified data. Right when technology is delivering huge gains from shared data, construction remains locked into silos. Yet most public standard forms of contract already provide for data sharing. It can be re-engaged with no contractual change, and small process changes will start to release its value. AI analytics and automation will be unleashed when all contract data is held in trusted, single-source-of-truth repositories.

Communication. Contractual communication still runs one-to-one, in vertical channels. But a construction project is a complex network of interconnected transactions, as data visualisation pioneer Manuel Lima shows in this 11-minute talk.

https://youtu.be/nJmGrNdJ5Gw?si=H7EYb90HB5d6e29A

Even a small change can trigger dozens of separate 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.

Business Process Automation (software that routes, checks and records routine contract steps automatically), combined with shared data and compatible contract provisions, enables near-real-time communication across the whole network. In a recent analysis of an AS 4901—1998 subcontract, we showed that 35 recognised processes could be collapsed into six automated key processes, which is why , together with an analysis we prepared for the Digital Finance CRC, estimate efficiency gains of up to 85% on those processes. It can be introduced at every point in the network with no change to current contracts and minimal training.

Thomas Friedman, in The World is Flat (2005), describes how successful companies get more from their people by engaging them directly. Your bricklayer, plumber, tiler or electrician should be expected and empowered to do more than their trade: they are your eyes and ears at the work face. Structured data from the field, actioned in real time, lets managers address hotspots before they escalate, avoid unnecessary claims, and meet contractual deadlines. It will take time and effort to earn their trust.

Profitability. Downer Group, one of Australia's largest contractors, reported statutory revenue of $10.5 billion in FY25 (July 2024 to June 2025) and a statutory net profit of $149 million: a margin of about 1.4%. (Downer FY25 results) Major consulting firms, with different capital and risk profiles, typically achieve operating margins of 15–25% or more. The comparison is instructive because most commercial contractors (excluding some civil contractors) do not build anything themselves. Their role is largely consulting: coordinating a complex, distributed network of suppliers and trades to complete each unique project.

The shrinking marginal cost of transformation. Economist Jeremy Rifkin argues, in "The Third Industrial Revolution", that technology is driving the marginal cost of producing many goods and services towards zero.

https://youtu.be/QX3M8Ka9vUA?si=Y-Y40gi20USYYqAh

(Useful points: 8:00 productivity; 12:50 network neutrality; 13:50 the Internet of Things; 15:40 the sharing economy; 17:10 zero marginal cost.) In construction, the contractor's profit lies in the cost of designing, procuring and managing the assembly of thousands of products and services into a bespoke building. Technology on site and in management is shrinking that cost, and AI is accelerating the trend. Extracting profit from a shrinking cost base gets harder each year, which creates pressure to cut inputs and a downward spiral of failure. To be reasonably profitable, construction design and management must again become a trusted, valuable service that clients are willing to pay a fair fee for.

The case in summary

Martin Barnes recalled that in 1683, after what may have been the first government inquiry into the financial control of civil engineering contracts, Louis XIV's department of works was advised:

"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."

The advice is three and a half centuries old and still holds: complete information, good faith and fair payment.

Conclusion

The immediate step is available today: document work before pricing and building it, and share that information openly using the standard contracts we already have.

The destination is construction as a service, with a coordinating contractor selected on resources, capability and systems and paid a fair fee.

That combination will encourage data transparency, give clients confidence that the industry can deliver on its promises, and generate better, more sustainable profit that matches the quality of service provided. Innovation will follow as AI matures. The construction sector needs only to be ready, with open systems and processes designed for what comes next.