Kick-starting Construction Productivity and Profit - It's Easier Than You Think

Charting the Collapse of Construction Productivity and Profit

“A generation which ignores history has no past and no future.  Those that fail to learn from history are doomed to repeat it”. (Winston Churchill)

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- all long term 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 contract 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 in every case.

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

The one constant 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

• 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 of construction 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 the delivery of the project, at a negotiated price.

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

Two examples to demonstrate this view come from my early experience.  In the mid-1980’s, 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.

Fixed prices were developed on preliminary documents.  It was understood that requesting variations, for any reason, were 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.

Option 2 - Construction as a Separate Design Combined 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, comprising designers (architects & engineers), contract management (architects, engineers, quantity surveyors), and a contractor.  The team would be coordinated by the architect, engineer or occasionally a separate project manager.

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. Sometimes a master construction program was included. Contractors bid on the detailed documents for delivering the product.

The advantages of this system were:

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

• 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, as a result, outcomes were much more predictable.

• The contractor was only responsible for coordinating the delivery of the product detailed in the documents, including a detailed bill of quantities.

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

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

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

• Clients were assured that variations were valued at contract prices, and not used a way to increase contractor’s  and subcontractor’s 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”.  It 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 1970’s, reaching a peak of 18% in March 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 to fully resolve designs and produce construction-ready documents.  As a result, fast-track construction became popular, with prices based on early design, with 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 maintain margins.  Some were openly advising clients that they were making more money from investing cashflow than 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 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 establish and manage their own construction plans (schedules) within a general framework provided by the main contractor.  These changes led to less accurate pricing and less predictability.

Contractural barriers were raised to prevent claims for variations and extensions of time, notorious among them notice times that were impossible to meet in the normal course of business, 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 the contractors as possible, who willingly accepted the risk as another potential profit centre.

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

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

Much more emphasis was placed on improving margins from variations, now that pre-established, orderly contractual process for valuing variations  had been long abandoned.

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

This is the legacy that we work with today.

Silo’d data, minimised planning and contract documentation, minimal contract management, 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.

Thte contract managers role has changed to “negotiator” over “process manager”

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 satisfy this process, that prioritises risk-averse contracts-in-use that support data isolation, limited one-to-one communication and with process that inhibits 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 chose when to hold or sell its 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 better and more thorough the planning and management, the more likely the outcome

The industry is struggling with margins, productivity is stubbornly low, resources are scarce, 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 construction delivery contractual methodology.  Known as Construction Management or “cost-plus” it can have an undeserved bad name with clients, that comes from bad or 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, where construction can become “plan as you go”.  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 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 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 $1billion of commercial work (today’s $’s) for Brisbane City Council.  The overall cost/time accuracy was within +/- 5% of the original contract budgets.  The highlight was the Brisbane Entertainment Centre, that was 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 projects delivery.  In addition, we recognised that progress was a priority (this building was originally developed as an Olympic Games bid showcase project). We developed innovative contract management processes that prioritised progress.  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:

• The team is assembled on the basis of the planned need of each consultant, not on the cheapest price for a undefined service.  All consultants, including the Coordinating Contractor can include sufficient resources to provide an excellent service, rather than competing for the cheapest price for their work;

• 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 to perform at its peak;

• All critical data is shared and transparent, providing the platform for simplified, incontestable  contract management;

• Management of all aspects of delivery can be carefully and confidently performed;

• 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 risk back to the Client for contingent risks, design changes and other contractural mechanisms. With this method, risks are no only minimised with 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 to be made before they are 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.

Im 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 / Team interest.  They are designed to incentivise contractors to perform, but in my view, they tend to fallback to the tried and failed risk trading system.

Conclusion

“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; The 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”)

Why change?

Automation, AI and productivity

AI and process automation rely for their success entirely on sharing information, orderly in the case of automation or randomly for AI.

Already, the largest most profitable businesses in the world are based on leveraging shared data.  AI is increasing this capability at an unprecedented rate.  Alphabet, Google’s parent company increased it’s revenue from $5.2billion in 2008 to $96billion in 2025. A significant contributor this year was AI with LLM’s, leveraging mountains of the world’s shared data.  The Australian Productivity Commission has proposed excluding LLM data mining from Australian copyright laws.

Leveraging silo’d data with AI will have limited benefit, but it’s an echo chamber.  Data must and will be unlocked to create real 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 are locked in to a system of silo’d 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 process.  However it can be re-engaged with no change.  Small changes in process will begin to leverage the value of shared data again.

Communication

Contractural Communication remains in one-to-one in vertical channels.  But Construction is not a series of vertical communications channels.

With the help of sophisticated data visualisation we know that construction is a complex network of interactions.  We calculate even the smallest change can generate dozens of separate interactions, and actions with contractual response times of up to 30 business days.  Subcontractor payment processing can take one week of a contract managers time.

Automated Network Communication (Business Process Automation), together with compatible contract provisions and shared data, enable near real-time, network communications that will improve the efficiency of these processes by up to 85%, at the same time 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 por 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 and act quickly allows managers to respond to hot-spots quickly, avoid unnecessary claims and disputes, and met contractual deadlines is improved dramatically, and prevents PROCESS from impeding PROGRESS.

BPA/workflow automation can be implemented immediately at every network node with no change to current contracts, and with minimal training.  Improvements to embedded contract management processes can be added over time to further turbocharge productivity.

Profitability

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

Specific, official profit margin data for the Australian operations of the Big Four firms (Deloitte, EY, KPMG, and PwC) is not publicly disclosed in detail, but they are generally considered to be high, potentially in the 10-20% or even 25% range, with margins varying significantly by service line, as consulting and cybersecurity services typically yield higher profits than traditional assurance services.  Mid-sized consulting firms typically see profit margins of 15-25%.

The reality for all commercial contractors (excluding civil contractors) is that they rarely actually build anything.  Their role is essentially a consulting role, to coordinate and manage a complex, highly distributed network of suppliers and contractors to complete each unique project.

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

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

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

1,2 ABS - 70 years of inflation

3 “How Big Things Get Done” - Bent Flybjerg