New report from FMI unveils the labor productivity challenges that construction firms are facing and offers strategies for addressing these issues.

Labor productivity, or the comparison of output versus the amount of labor used to produce that output, is an important measure for heavy and civil construction firms that want to maintain both profitability and competitiveness.

When labor productivity is high, organizations can finish projects faster, more efficiently and more profitably. When the metric lags, it means the company isn’t producing as much output-per-hour worked as it could be. This, in turn, leads to higher costs, project delays, loss of competitive advantage and other roadblocks.

There’s no question that high labor productivity helps heavy and civil contractors improve their bottom lines by reducing the cost of projects and the time it takes to get those projects over the finish line. This, in turn, reduces the overall cost of labor, materials and equipment.

Finding the “Holy Grail”

While high labor productivity sounds both appealing and doable in theory, the realities of the current labor market and work environment have made this “Holy Grail” increasingly difficult for heavy and civil firms to attain. In fact, the 2023 FMI Labor Productivity Study reveals that labor productivity is a challenge for the construction industry as a whole. And the problem appears to be worsening.

The study confirms the well-documented trend of productivity decline, with just 23% of companies reporting labor productivity improvements over the last 12-18 months. Nearly half of the FMI survey respondents (45%) saw declining labor productivity, and a third reported stable labor productivity trends in their businesses.

“Labor productivity is the economic engine of labor-intensive, self-performing contractors. Labor is also the largest, riskiest, yet most controllable variable cost,” FMI states in the report. “Managed well, labor productivity can significantly improve bottom-line margins. Managed poorly, labor overruns, or exceeding labor budgets, can wipe out contractor profitability.”

Better Management Practices, Please

Digging down deeper into the labor productivity issues facing today’s construction firms, FMI found that 11-15% of contractors feel that field labor costs are either “wasted” or “unproductive.” Respondents conservatively believe that 6-10% of their total labor costs, or roughly $15-$25 billion—could be saved through better management practices.

In other words, the potential for labor productivity improvement in construction is downright staggering. In fact, a recent University of Chicago review of Bureau of Economic Analysis data found the value that each additional worker added to construction was 40% lower in 2020 than in 1970.

FMI data tells a similar story: In 2012, 57% of companies said productivity had slightly or significantly improved. By 2023, that figure fell to 23 percent. Similarly, in 2012 only 25% of firms said productivity had slightly or significantly declined, and by 2023 that figure increased to 45 percent.

Laying Down the Building Blocks

Heavy and civil construction firms are especially prone to fluctuations in labor productivity rates. Their labor costs typically account for 15-30% of total project costs, for example, and many of the tasks performed require a skilled workforce (i.e., to operate heavy machinery, install infrastructure, manage hazardous materials, etc.).

“Labor is the biggest risk where costs can quickly accelerate,” Bo Walters, president of Alabama-based heavy civil contractor Dunn Construction told FMI. “Most problems stem from a lack of communication or how something is communicated.”

Improving communication across teams may sound fundamental, but each construction project brings together unique partners to build a bespoke project in a unique environment. Therefore, achieving efficient and predictable collaboration at scale is often a daunting task. Companies need to get creative when it comes to opening up those important lines of communication.

For example, Dunn Construction created a proprietary communications application that can push videos, emails, text messages and other alerts directly to workers, no matter where they’re located or which shifts they’re working.

“We had a problem of relaying our vision and maintaining culture,” said Walters. “We had to figure out a way to push all this information through the smartphone and make it as easy as possible for our people to do their jobs. This app that we built, we feel like half of it is what I call people, and half of it is process. Both of those are equally important. If you’re all processes, you have no fun. If you’re all people, you’re not productive. It is a big investment, but it’s working.”

6 Steps to Better Labor Productivity

Optimizing labor productivity is an organizational and cultural journey that requires teams and individuals to adjust their planning and communication habits. Here are six areas where heavy and civil contractors can start making improvements:

• Pre-job planning: This requires consistent and thorough translation of project information from estimating to operations, followed by in-depth planning by project teams to develop strategies for optimizing labor productivity and project performance.
• Cost-to-complete forecasting: This critical report is based on a monthly analysis of the costs incurred to date, the percentage of the job that is completed, accurate forecasting and re-estimating the cost to complete the remainder of the scope of work.
• Exit strategy: During this phase, the project team meets to reenergize, focus and develop a plan to finish a project on time and mitigate the risk of late-project margin fade.
• Post-job review: After project closeout, this meeting shares and documents the lessons learned, provides production feedback to estimating, and captures lessons learned for future success and continuous organizational improvement.
• Look-ahead planning: This needs a weekly cadence of field leaders communicating resource needs (labor, equipment, materials, subcontractors and information) for upcoming activities to be coordinated and supported by project management.
• Daily goal setting: Field leaders establish and communicate clear, quantifiable production expectations and objectives for crews on a daily basis.

Field leaders and project teams also need regular reporting of productivity information in digestible formats so they can discuss project performance and detect labor risk early. By getting a handle on productivity, giving workers the tools needed to be successful, and diligently planning for jobs, heavy and civil contracting companies can improve margins and profitability.