Why is it so difficult for construction firms to invest?

Australian Constructors Association head of policy Robert Sobyra outlines the challenges constraining construction firms in their efforts to invest.

By Robert Sobyra, head of policy at the Australian Constructors Association.

Why is it so difficult for construction firms to invest? The Australian Constructors Association’s (ACA) latest report, Nailing Construction Productivity, prompted a lot of people to ask me this question. Our key recommendation is that governments lead the development of a National Construction Strategy with a singular focus on lifting the rate of construction productivity from its current low level (zero) to the national average.

The challenge I’ve been getting goes like this. Why does government need to solve this problem for us? Why can’t construction firms simply go ahead and invest in innovative technologies? After all, there’s no shortage of technology out there – you just need to adopt it.

It’s a fair question. Industry bodies are often guilty of asking governments to cure all their ills. But I want to convince you that’s not what’s going on here. We need to start from first principles.

Construction firms struggle to invest not because they’re technologically backward, as some would have it. If that’s all there was to it, new entrants would have disrupted the industry long ago. That’s how capitalism works. But a lot of very capable entrepreneurs have died on that hill. It’s not quite that simple.

Why is it so difficult for construction firms to invest?
By Robert Sobyra, head of policy at the Australian Constructors Association.

Fundamentally, construction firms don’t invest enough because the construction market doesn’t produce dynamic, innovative firms. The question we really need to be asking ourselves is, why should this be the case?

Here’s the issue. We’ve got this product, ‘construction services’, and we sell that product into a market that rewards, above all else, the lowest priced bid. Now there’s nothing wrong with that sort of market. It works really well when there’s little uncertainty in production costs – say, an office lease or software subscription.

Of course, things are anything but certain in construction. Think ground conditions, weather or industrial action.

Construction projects are beset by any number of unknowables that make any initial budget more guesswork than science and the scale of the ‘budget illusion’ rises in direct proportion to the complexity of the project.

So, we have a market that takes something inherently uncertain – a construction project – and treats it like a simple product where you can quantify all that uncertainty and price the risk accordingly. This drives a particularly corrosive set of commercial practices.

It means that, for any tender, the winning bid is not the one that has done the best job of quantifying the uncertainty – because the uncertainty is inherently unquantifiable. It’s the one that has taken the biggest gamble on that uncertainty. The company that wins the job is the one that’s willing to bet it can dodge all those unquantified risks and come away financially unscathed.

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From time to time, that approach will make money. But over time, across many projects and many firms, the law of averages inevitably kicks in. Firms get caught in a downward spiral into razor-thin margins and a high risk of insolvency – a race to the bottom.

We end up with an industry operating in constant survival mode, focussing only on where its next meal will come from. It’s like Maslow’s hierarchy of needs. You can’t indulge in higher-order activities like creativity and innovation until you clear that survival hurdle.

If you’re asking why construction firms underinvest, it’s because the basic structure of the market actively works against it. That’s why the ACA’s Nailing Construction Productivity report says the most important thing we can do to drive productivity is to create the conditions for companies to innovate. The government, because of its spending power, is best placed to reshape the market incentives. If we can give industry the financial space to invest, productivity will flow organically.

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