Adopt relational contracting to promote a collaborative project environment instead of one based on conflict.
The default contractual approach to construction projects is one founded on risk rather than collaboration. This flawed practice has been a root cause of low productivity in the industry, with stakeholders focused on protecting their own interests instead of working together to develop the best outcome. Owner organizations are often guilty of focusing on risk transference to contractors instead of viewing their supply chain as a strategic partnership.
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However, there are examples of closer collaboration generating substantial benefits. In particular, relational contracting is starting to become more prevalent in Australia, the United Kingdom, and the United States. And leading Southeast Asian energy company PT Energy Indika saved 10 percent of its costs thanks to a collaborative approach. Participants noted that collocating the entire design and build team has hefty advantages. For London’s Heathrow Airport, for example, bringing together the deep domain expertise of a large energy and construction firm and the client’s intimate knowledge of the asset helped produce quality technical results quickly.
Private-sector project owners are leading the move toward greater collaboration. For the public sector to fully engage, it will need to move away from relying on punitive contracts and develop the capabilities to ensure that public interest is being protected. Across both the public and private sectors, this transformation will require owner organizations to become more sophisticated contributors in the design and construction process. To realize the benefits, this change will also require more data transparency and the involvement of stakeholders earlier in the project.
“The pace of change of innovation and technology growth has to be matched by an adequate improvement in the pace of process innovation and sophistication as well. And we’re seeing the emergence or the need for a common platform for owners, developers, contractors, and subcontractors to speak a common language, function around a common contract, and have common incentives.”
—Mukund Sridhar, Partner, McKinsey & Company
Make skill- and capability-building activities an ongoing practice.
The construction industry has a series of capability gaps that need to be resolved to improve productivity and performance. Currently, young engineers tend to be moved from one project to the next, without exposure to the wider project ecosystem. They are thus unequipped for weathering challenges associated with building and leading a successful team. In particular, participants cited stakeholder management, conceptual thinking, and owner project management skills as core areas where improvement is needed.
Organizations should start looking at different ways of upskilling their workforce by supporting employees’ participation in continuing education such as MBA or apprenticeship programs in a range of industries. Participants expressed optimism that these young employees are more likely to stay in the industry when equipped with the right skills to perform.
Learn from other industries to embrace rapidly evolving technologies and create a culture of innovation.
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Participants discussed increasing evidence of construction projects innovating with processes, technologies, and new materials. They unanimously agreed that the industry is on the verge of disruption as advanced materials, connectivity, data and analytics, and technologies such as Building Information Modeling (BIM), 3-D printing, and augmented reality/virtual reality (AR/VR) are poised to dramatically change how owners and contractors approach work across the project life cycle. MGI research shows that greater adoption of such technologies could support the step-change in productivity so greatly needed across many parts of the industry.
For example, off-site modular construction has become prevalent in the affordable housing market. In the United States, Katerra has dramatically reduced materials waste by moving work from construction sites to manufacturing facilities. At the other end of the spectrum, Bechtel’s Curtis Island development successfully deployed industrial modularization, enabling the construction of a project that would have been significantly more complex through conventional means. We are also seeing technological developments—such as drone-enabled 3-D models being used throughout the life cycle in some countries, including China and India.
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To create a step-change, companies need to embrace a culture of innovation. The construction industry should learn from sectors or other industries that have successfully made this shift. For example, the mining and resources sector uses automation of trucks and sensor-enabled processes extensively. Infrastructure industry leaders need to aggressively adopt this change to ensure that it filters down to the smaller players. Experience demonstrates that if owners and contractors agree to use a system, the rest of the ecosystem will follow. To facilitate the process, the government could establish an independent body to provide guidance and recommendations on various practices and technologies, as has been successfully done in other industries.