Labor-Productivity Declines in the Construction Industry: Causes and

Remedies (a second look)

By Paul Teicholz, Professor (Research) Emeritus, Department of Civil and Environmental Engineering,
Stanford University

Introduction
Nine years ago I wrote an article for AECbytes (Viewpoint #4, April 14, 2004), on this topic. During the
past 9 years there have been many changes in the AEC industry that have had the potential to impact
labor productivity and it is a good time to take a second look to see what, if any, changes can be
detected from the national statistics about the industry. The major changes include the increasing use
of BIM technologies and the lean collaborative processes it supports and the boom and bust in the
industry (more severe than many others) in the 2007-9 period.

Labor Productivity for Total Industry over last 48 years (1964-2012)

The definition of labor productivity is quite simple: output per work hour, e.g. 50 SF per work hour of
wall forms built to a given specification at grade level. However, when measuring the output of entire
industry rather than a task, output is defined in dollars of revenue (for a given base year) per work hour.
There are two US Government agencies that measure the outputs and inputs of almost all industries.
The Census Bureau (CB) measures focuses primarily on outputs and the dollar value of inputs while the
Bureau of Labor Standards (BLS) focuses on labor inputs and many other measures of labor. The data
sets produced by these groups are updated weekly, monthly, annually and for the Census Bureau, every
5 years in their Economic Census. BLS does calculate labor productivity for some industries, e.g.
manufacturing and all non-farm industries, but does not do so for the construction industry. It requires
careful use of the available data to make valid comparisons over time and within different sectors of the
construction industry. A third government agency, the Bureau of Economic Analysis (BEA) takes the data
collected by other agencies (CB, BLS and others) to develop GDP, Value Added, Input/Output analyses
and other measures of US economic activity. Using the data from these three sources provides many
insights into the construction industry. Fortunately, we will see that at least at the aggregate level, the
results are quite comparable and provide a consistent view of labor productivity.

There are 3 major problems that need to be addressed:

o What measure to use for output: gross output, value added,

o What measure to use for deflating current dollars to dollars in a specified base year,
o What measure to use for labor input: work hours for all workers, or only non-
supervisory workers, or to use number of employees rather than hours.

An important issue is that not all data series have been measured in the same way over the time period
from 1964 to the present. There were significant changes in methodology in 1982 and 2003 that make it
difficult to bridge these years for some of the data. The definitions used for breakdowns on the industry
by the Census Bureau (dollars of output by type of structure) differ from the breakdowns used by the
BLS (dollars and hours by type of labor function, say painting, which can be used on various types of
structures). This makes it difficult to calculate labor productivity for various types of structures, but it
can be done for major groups such as all buildings. For each of the graphs that follow, I will indicate
what data was used so that interested readers can look further into the sources and develop their own
analyses.

Total Industry Output based in current dollars

Figure 1 shows total construction industry output from 1964 to 2012 in current dollars together with
some of its major components. Private construction is by far the largest component of the total (about
75%) and residential construction represents more than 50% of the total but dropped off during the
bust to just 33% of the total. We can observe the tremendous buildup in construction volume from 1991
through 2006 and then the subsequent bust through 2009 with a gradual recovery after that. This led to
significant fluctuations in demand for labor and other resources which are reflected in the following
chart.

CONSTRUCTION VOLUME, C30 SERIES,

CURRENT DOLLARS, THOUSANDS,
1964-2002 OR 2012
1,400,000
OUTPUT, THOUSANDS OF CURRENT DOLLARS

1,200,000

Total construction
1,000,000
Private construction

800,000 Residential buildings

Nonresidential buildings....
600,000 Residential buildings
New housing units
400,000
Improvements...............
Nonresidential buildings....
200,000
Public construction..........

0
1960 1970 1980 1990 2000 2010 2020
YEAR

Figure 1. Graph of total and major sub component construction industry output in current dollars from
1964 to 2002 or 2012. Source: Census.gov Business & Industry Time Series / Trend Charts.
Price Deflators to Adjust Current Dollars to Constant Dollars for a given Base Year

In order to calculate labor productivity over a time period, it is necessary to convert current dollars to
constant dollars for a given base year. There is no single deflator that is available for the total
construction industry. However, there are a number of deflators that are available from the BLS, Census
Bureau and the BEA for various time periods. These are shown in Table 1.

Table 1. List of price deflators applicable to the construction industry

Price Index Range of

Years
Annual construction labor cost index 1964-2012
Annual consumer price index 1964-2012
Annual construction value in place index 1964-2002
Annual building value in place index 1964-2002
House price index 1964-2012
Price deflator (Fisher) index of new one-family 1964-2012
houses under construction
Producer price index for inputs to construction 1987-2012
industries
Producer price index for non-residential maintenance 1987-2012
and repair
Producer price index for maintenance and repair 1987-2012
Producer price index for residential maintenance and 1987-2012
repair
Producer price index for new construction 1987-2012
Producer price index for residential construction 1987-2012
BEA Chain-type price indexes for value added 1947-2011
BEA Chain-type price indexes for gross output 1987-2011
 PRICE INDEXES FOR THE CONSTRUCTION
INDUSTRY
Annual construction labor cost index, 1987=100
Annual consumer price index, 1987=100
300.00
Annual construction value in place index, 1987=100
Annual building value in place index, 1987=100
250.00
Producer price index for inputs to construction industries (1987=100)
Producer price index for non-residential maintenance and repair (1987=100)
200.00 Producer price index for maintenance and repair (1987=100)
Producer price index for residential maintenance and repair (1987=100)
Producer price index for new construction (1987=100)
150.00

100.00

50.00

-
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Figure 2. Graph of Construction Industry Price Indexes for 1964-2012. Source: Census Bureau
Figure 2. A variety of price indexes that are relevant to the construction industry, 1964-2012
Source: CB, BLS, BEA

CONSTRUCTION PRODUCER PRICE INDEXES,

1987-2012
250.00
Producer price index for inputs to construction industries (1987=100)
Producer price index for non-residential maintenance and repair (1987=100)
Producer price index for maintenance and repair (1987=100)
200.00
Producer price index for residential maintenance and repair (1987=100)
Producer price index for new construction (1987=100)
150.00 Producer price index for residential construction (1987=100)
INDEX

100.00

50.00

0.00
1982 1987 1992 1997 2002 2007 2012
YEAR

Figure 3. Construction Price Indexes for 1987-2012. Source: Census Bureau

We can see from these chart that all of the price indexes are almost identical until around 1990 with some
significant dispersion starting around 2000. Figure 3 gives a more detailed picture of this period. This
dispersion reflects the fact that during the rapid expansion of the construction industry that started in
1990, the prices for various resources began to reflect different supply and demand pressures. For
example, as housing expanded rapidly, the price of homes rose faster than other segments of the
industry. Hence the price indexes tied to hoe prices, rose faster than others. It would be inappropriate to
apply a price index for homes to all industry output. Thus, in selecting deflators to use for calculating
constant dollar output for the total industry, only those indexes that apply to the total industry will be used.

Total Construction Industry Constant Dollars of Output

Using the selected deflators from Table 1, we can now deflate the current dollars of output shown in
Figure 1 to constant dollars for the base year of 1987. This is shown in Figure 4.
 Index of Construction Output in Constant Dollars
for various Price deflators
C30 Value of Construction Put in Place deflated by producer price index for new construction, 1987=100

C30 Value of Construction Put in Place deflated by annual construction labor cost index, 1987=100

C30 Value of Construction Put in Place deflated by annual consumer price index, 1987=100

C30 Value of Construction Put in Place deflated by annual building value in place index, 1987=100

C30 Value of Construction Put in Place deflated by house price index, 1987=100

C30 Value of Construction Put in Place deflated by price index of new one-family house under construction,
1987=100
180

160

140

120

100
Index

80

60

40

20

Year

Figure 4. Constant dollars of Total Construction Industry Output for various Price Deflators, Source CB

This figure clearly illustrates the very significant increase in construction volume starting in 1992 and the
subsequent rapid decline starting in 2006-7 back to the 1992 level. It also shows that the difficulty of
evaluating the price index for all construction during the boom years. Finally, it illustrates that for the
majority of the construction price indexes, there is very little difference in calculated real output over
the period prior to 1992.
Construction Industry Work hours
The annual work hours collected by the BLS are derived from weekly input collected from a large sample
of companies from all segments of the industry. These hours when multiplied by the number of workers
for each week become the basis for annual work hours. Figure 5 shows the index of work hours over the
time period of 1964-2012.

Index of Hours Worked for Total Construction Industry for 1964-

2012, 1987=100
Index of Hours worked by all workers, 1987=100
Index of Hours worked by production workers, 1987=100
180.00
160.00
140.00
120.00
100.00
Index

80.00
60.00
40.00
20.00
0.00

Year

Figure 5. Index of Hours Worked by All Workers and by Production Workers in the Construction Industry,
1964-2012. Source: BLS Employment, Hours, and Earnings from the Current Employment Statistics
survey (National)

The chart clearly shows the fluctuations of labor resulting from the boom and bust cycles that
characterize the construction industry. During the peak years of 2006-7, there were 15.5 million hours
worked. This dropped to 11.4 million hours in 2012, a decrease of 26% or roughly 1 out of every 4
workers.

Labor Productivity and Comparison of Construction to Nonfarm Industries

We are now able to compute labor productivity based on calculated constant dollars divided by work
hours for the total construction industry over the 1964 to 2012 time periods. In addition, we can
compare this to labor productivity for the nonfarm sector as calculated by BLS and available at their
website. These results are shown in Figure 6.
 Index of Construction Labor Productivity, 1964-2012
based on various deflators
C30 deflated by annual construction labor cost index, 1964=100
C30 deflated by annual consumer price index, 1964=100
C30 deflated by annual construction value in place index, 1964=100
C30 deflated by house price index, 1987=100
C30 deflated by price index of new one-family house under construction, 1964=100
C30 deflated by price index of new one-family house under construction, 1964=100
All non-farm industries
C30 deflated by annual building value in place index, 1964=100
300.000

250.000

200.000
TTULO DEL EJE

150.000

100.000

50.000

0.000

Figure 6. Construction Labor Productivity, 1964-2012 based on various deflators vs. Productivity for
Nonfarm industries. Source: Census Bureau, BLS

We see that labor productivity for the total construction industry declines over this time period (with
some minor exceptions), and that there is some variation depending on which deflator is used.
However, the general rate of decline is about the same: a linear trend line shows a -0.32% per year
decline, while the trend for all nonfarm industries is positive 3.06% per year. Thus, we are left with the
rather depressing result showing that there are a number of structural problems within the industry that
stand in the way of improved labor productivity. We will now turn our attention to these issues.
Causes of Stagnant Labor Productivity in the Construction Industry
The description of potential causes for poor labor productivity that has not improved over many years is
well known to practitioners. It is difficult perhaps impossible to know the relative importance of each
factor which will vary from project to project and the types of work involved. Some factors have more
significance for buildings and perhaps less impact on heavy civil work (roads, dams, power plants, etc.)
which tends to be done by larger firms using more capital intensive methods. There is some data to
support this, but this will not be pursued in this paper which is concerned with the industry as a whole
and not its sub components

Unique work products built by varying teams under varying site, regulatory and weather
conditions
Construction projects are all different in many ways: owners, financial relationships, design, team
members, workers, site locations, weather, regulatory conditions, etc. are all reasons why it is so
difficult to optimize knowledge and utilize capital intensive methods which might not work on future
projects. There is a need for flexible approaches that minimize risk instead of the most efficient solution
for a particular case. This leads to more labor intensive solutions unless there is a significant
opportunity to benefit on a large project from a specialized efficient solution. It also leads to resistance
to change because the benefits of change may not be realized on the current project and thus require
multiple projects to achieve a payback.

A procurement system based on competitive rather than collaborative teams

In most project teams, there is a lack of integration of design and construction, a lack of collaboration
among team members who tend to protect themselves from claims, extensive changes caused by errors
omissions and owner modifications. These issues are often present on design-bid-build and even
design-build projects where some team members submit bids (typically sub-contractors), the low
bidders receive awards and then try to benefit from extra work. These conditions cause higher eventual
time and costs, and more claims. They also stand in the way of efficient construction practices that
increase labor intensive work methods.

Poor use of data based largely on paper documents produced by a highly fragmented team
The use of paper document produced by architects and designers working independently and not able
to find many problems until the construction phase, leads to difficulties in coordinating and managing
the work effort. There are significant additional costs from capturing and resolving the data from
multiple independent sets of plans which are inherent in this process and result in errors, omissions,
extra work and claims. The additional costs of poor data interoperability were documented in a NIST
study titled Cost Analysis of Inadequate Interoperability in the U.S. Capital Facilities Industry,
12/1/2004 (see http://www.nist.gov/manuscript-publication-search.cfm?pub_id=101287).

An economic environment characterized by large boom and bust cycles

We have seen from the graphs of construction output and work hour input that the construction
industry is characterized by periodic boom and bust cycles. This tends to reduce investment in capital
equipment and use of off-site prefabrication which might not be utilized during a subsequent period of
low demand. This reinforces labor intensive methods which in turn puts an emphasis on reducing costs
by reducing training of the labor force and use of the cheapest labor available. We see from Figure 7
that hourly earnings for construction workers, on a constant dollar basis, have a declining trend. To
calculate this series the current dollar values were deflated by the Construction Labor Cost Index values
for the same year.

AVERAGE HOURLY EARNINGS OF PRODUCTION AND

NONSUPERVISORY EMPLOYEES, 1987 Dollars (includes benefits
& overtime)
16.00

14.00

12.00
1987 Dollars per hour

10.00

8.00

6.00

4.00

2.00

0.00

Year

Figure 7. Graph of average hourly earnings of production and nonsupervisory workers in the
construction industry, in 1987 dollars. Source: BLS Series Id: CEU2000000008.

An industry characterized by many very small firms that perform a significant percent of the
work

The construction industry is characterized by a large number of small firms and relatively few large ones.
The smaller (many single employee) firms have difficulty adjusting to more capital intensive methods
since they cannot make the necessary investment.

An industry where a significant of output consists of remodel and renovation of existing

facilities as opposed to new work

Finally, a significant amount of the work in the construction industry is remodeling and upgrading work
as opposed to new construction. This work has lower labor productivity than new work because it must
be done under more difficult conditions where safety, access and space are limited. In addition, it is
necessary to adapt to existing spaces (which are often not as predicted on plans) and problems.
Sources of Potential Positive Change
Better use of Data using BIM rather than 2D documents

More Integration of Project Team using IPD

More use of Lean Design and Construction Practices

Greater use of Off-Site Fabrication and Modular Construction

An improved Business Model that supports owner Life-Cycle requirements