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Are inefficient builders the reason we don’t have enough houses?

Smart Money: technology and training are acknowledged as key areas

Is a low-productivity building industry one of the reasons why it is so difficult to accelerate house and apartment construction?

An official report this year quoted figures showing productivity in the sector was well below the EU norm. The industry argues that the figures are overstated, but accepts new investment in technology and training is vital.

So what is the evidence about the productivity of the Irish industry? And how big a factor is it behind the problem of building affordable accommodation?

1. The overview:

The sector was decimated in the recession and has been slow to recover. A report entitled “ Construction Sector Performance and Prospects 2019” published by the Government’s Investment Projects and Programmes Office at the start of this year points to the poor productivity record of the sector.

To measure productivity it looks at the gross value added of the sector – roughly equivalent to company profits plus what employees are paid. It also looks specifically at labour productivity – gross value added divided by hours worked.

The trends up to recently are, on the face of it, not encouraging. There has been little or no growth in value-added per worker in the construction sector between 2000 and 2016, according to official data.

The trend has been largely flat, bar a jump between 2007 and 2009, largely driven by the statistical impact of large-scale lay-offs.

Growth in the overall gross value added in the industry has averaged 1.2 per cent per annum over the 2000 to 2016 period, though little of this was due to improved labour productivity.

Overall Irish productivity figures for the wider economy are affected by the presence of very high productivity sectors like pharma and tech, where data is affected by multinational accounting practices.

But the report says that even excluding these, had the construction sector keep pace with productivity growth in other domestically-dominated sectors, its gross value added would have been €3.1 billion higher by 2016. That would have meant a lot more house and apartments built with the same workforce.

Internationally the figures suggest we also compare poorly, though the data is a bit out of date. In 2015, labour productivity in the Irish construction sector was 24 per cent below the euro zone average and Ireland ranked fourteenth out of 22 euro zone countries measured.

This is likely to have improved since, the report says, but it argues that a big challenge remains, particularly given labour and skills shortages.

2. The arguments:

The construction industry argues that the productivity figures overstate the problem in the industry. The Construction Industry Federation (CIF), which represents the sectors, also says that it is unhappy with the focus on productivity, when much of the problem lies elsewhere. Let's look at these arguments.

First, there is no doubt that – a bit like farming – construction is comprised of a huge number of smaller companies and a small number of very big ones.

Hence getting a handle on productivity is complicated. In total the CSO finds close to 50,000 companies involved in the sector – the includes architects, civil engineers and others associated with the industry as well as builders themselves.

The CIF estimates there may be around 14,000 building companies. Of all the companies in the sector, over 95 per cent had fewer than 10 employees and just 14 – the big contracts – had more than 250. The productivity of the bigger firms is. not surprisingly, much higher – their gross value added per person is almost double the average of the smaller firms.

Further study of this productivity issue is now being undertaken by a group of consultants including KPMG, Future Analytics Consulting and TU Dublin on behalf of the Department of Public Expenditure and Reform. This work is being led by the Construction Sector Group of senior civil servants and industry and trade union representatives.

Their report is expected in the coming months.A key issue they face will be to get to the bottom of this productivity issue.

The international comparative figures do suggest there is a problem here, though the scale of it is hard to assess given the fragmented nature of the industry and the number of smaller players. But in terms of the national policy priority – getting houses and apartments built – it will be vital to make an assessment of how significant this productivity problem is when it comes to building larger-scale developments of houses and apartments.

In a recent tender for a study on the sectors’s skills needs, the Department of Business, Enterprise and Innovation warned that this could hit the “cost-effectiveness and the competitiveness of the broader Irish economy” as building activity ramped up to meet Government targets.

Government policy of building more houses closer to city centres – so-called “densification” – would suggest more homes built by fewer, bigger, builders.

It is vital that a way is found for this to be undertaken as efficiently as possible, getting away from the current problems which, the Department of Business,Enterprise and Innovation warned was a sector “with a widespread dependency on sub-contractors and agency workers, with multiple parties working to different schedules and budgets, fragmented decision-making, often incompatible work processes, and ill-defined risk transfer mechanisms”.

Productivity in construction is also an issue internationally, with the sector showing much slower improvements than other areas like manufacturing – where trends such as lean manufacturing have revolutionised production – and even retail.

A 2017 report from McKinsey called Reinventing construction: A route to higher productivity report, found that the construction industry internationally has an “intractable productivity problem” and was stuck in a “time warp.”

3. The answers:

There are a range of policy issues here – the most obvious of which is the need for investment and more efficiency in parts of the construction industry.

The industry argues that improvements in the whole tending and planning process – and in financing –are also vital. And the availability of sufficient number of skilled employees is vital – and has been a particular problem in recent years as a knock-on from the collapse in entry to building-related professions after the bust.

Here the pull of skilled staff into the huge development of office projects has also been a factor.

The Construction Sector Group is due to consider a response to the forthcoming productivity study. Investment in technology and training by the industry is key and more funds are already being put into higher and further education. The idea of a Centre of Excellence for construction has been suggested as one way to monitor productivity.

And clearly the fragmented nature of the sector is also an issue – as is the way houses and apartments are designed, generally on a bespoke basis for a particular project as opposed to any kind of modular approach which could allow more efficiency.

The McKinsey study pointed to areas such as design and engineering processes, supply chain management, management on site and the use of digital technologies, advanced materials, and construction automation as offering opportunities for the sector internationally.

Much of this relates to how houses are planned, the availability of standard templates and the use of digital technology in planning and delivery.

Here , the conundrum of how to built and fund multi-unit developments in city centres efficiently and affordably must be solved – and the construction industry will have a big role here , drawing on what has happened internationally.

With the Government putting money behind the infrastructure here and the Land Development Agency making appropriate sites available, the key is to fund ways of designing and building on this land and public/private means of financing.

The industry also argues that Government and local authorities have a role, in terms of tendering, regulations and planning, as well as the imposition of VAT and development levies.

A 2016 report by the Society of Chartered Surveyors estimated that around 45 per cent of the cost of an average house in Dublin was accounted for by the actual cost of building, with the rest coming from the cost of the land, taxes, levies, professional fees, the cost of finance and the builder’s margin.

Their argument was that there is much the Government could do by cutting VAT and the development levies, improving the availability of serviced land and reducing regulation, where possible.

With planning permissions and new building developments now on the rise, and the Government pushing ahead with the Project 2040 programme, getting houses and apartments built efficiently is a vital national challenge. When, for whatever reasons, a house or an apartment development can’t be financed and built at reasonable price, there is a problem – or a range of problems – to be solved.