How productivity in the construction sector can be increased

Productivity is declining in the construction sector, mainly due to labour shortages and economic uncertainty. More innovation and re- and upskilling are part of the solution, according to PwC's chief economist Barbara Baarsma and construction sector specialist Annemieke van Beek.

The Dutch construction sector is burdened by several issues. These include not only falling productivity growth but even declining productivity levels: workers are becoming less productive. In 2022, compared to 2021, productivity decreased by 2.2 per cent.

Low profit margins hamper investments   

The first set of reasons for the productivity decline are related to increased financial pressure in a sector that traditionally has low profit margins. This undermines firms’ ability to invest and become more resilient. Moreover, the construction industry faces unpredictability, which makes it difficult to think and plan ahead over the long term. As a result, investments in labour productivity enhancement can get out of the picture. 

Low margins arise because of:

• Supply chain disruptions - Global supply chains have been under strain due to the pandemic and the war in Ukraine. Among other effects, this facilitated the proliferation of late payments¹, which further harm companies’ ability to adopt a more forward-looking mindset.
• Increase in input prices - Raw material and material prices paid by construction companies have risen steadily in recent years, no doubt due to supply chain disruptions, increased energy prices, higher labour costs and inflation. According to CBS, construction input prices increased 37% between 2018 and 2024².
• Higher Interest Rates - Besides increases in purchase prices, other products and sectors also experienced inflation. The ensuing rise in interest rates placed pressure on the demand side of construction, where investment has become more expensive, and potential buyers are now less inclined to take on mortgages. Increased interest rates are also leading to higher yield requirements from investors investing in rental properties. Construction companies' ability to scale has thus been compromised, while financing has become more expensive. 
• Strict regulation - Environmental regulation, as well as zoning legislation that varies by municipality make it hard for construction firms to scale. It has been estimated that the nitrogen crisis prevented the construction of over 23,000 homes. Extra spending is mainly directed at compliance with regulation, and not at increasing productivity.
  
  In some cases, expenditure to comply with regulation goes hand in hand with investment in futureproofing the construction business. For instance, construction firms have been making large investments in electrification, also with an eye on the nitrogen crisis, which will make the sector more sustainable. The innovations being made in the construction sector are mainly about continuing building in compliance with new regulations and less on increasing productivity.  
• Lower intake in vocational training - Another reason is structural. Relevant MBO programs are producing less and less graduates. The graph below shows that process and precision technology are the most affected degrees, with decreases of around forty per cent in the number of entrants in recent years. This contributes to the labour shortages that have plagued the sector³. At the same time, demand for MBO-4 graduates in engineering, construction and process industry is expected to increase by 2.3 per cent⁴ in the period 2021-2026. The shortage of construction workers can no doubt be attributed to the fact that jobs in the sector are not the most apealing. They can involve long working hours and significant physical labour, while being heavily male dominated.

Low-productivity construction sector cannot meet societal demand 

Despite the construction of almost 180,000 new homes in 2022 and 2023, the task for the sector is still very large: more than 800,000 homes still need to be built between 2024 and 2030 to meet the shortfall⁵. In the context of a housing crisis, coupled with strong demand for infrastructure, it is of paramount importance that the construction sector can meet societal demands in an efficient manner. Currently, that does not seem likely⁶ and labour shortages do not seem to be going away any time soon. In this context, boosting labour productivity is vital.

What needs to be done to increase productivity in the construction sector?

According to the business survey of the Netherlands⁷, labour shortages and economic uncertainty drive the bulk of firms’ struggles to increase productivity. In line with our analysis, the survey reveals that financial resources and lack of innovation are important factors too. Thus, combating labour shortages is a necessary starting point for construction firms. 

• Increase the inflow of people into the construction industry

That the construction sector is now facing labour market shortages has its origins in financial crisis⁸. During that time, the sector had to lay off many skilled workers. Between 2008 and 2014, roughly half of the net outflow of 80,000 people went to work in another sector. Another part retired (early) or became self-employed. All in all, a lot of knowledge and experience was lost during this period. There are still almost ten percentage points fewer people working in construction now than before the financial crisis (Figure 3).

It is therefore important to increase the inflow of labour into the sector and to increase the knowledge and skills of those already working in the sector. In view of the latter, it is essential to set up in-service training programmes. Re-skilling of workers in redundant occupations and the unemployed is also an option. This requires close partnerships with MBO schools. Recruiting abroad is also a viable option to ensure a constant inflow of workers.

• Make working in construction more attractive

The unattractiveness of the sector is something that must be combated. Construction connects people and industries, while making the country more liveable in the long-term. It has a strong social impact and is thus not the hardest sector to market.

Besides advertising the social benefits of construction, more efforts should be directed at making the primary building process more attractive to workers. While some relevant innovations are directed at adjacent activities (such as drones for sight inspection and mapping), more innovations should be aimed to alleviate the strong burden that building itself can place on workers. One example is the development of exoskeletons, which reduce the probability of injury, while improving posture and protecting workers’ limbs. 

• Innovate to ease pressure on people

In addition, some firms have tried to mitigate the effects of labour shortages by pioneering factory-made timber houses, which besides being more sustainable, are easier to install and involve less human labour. Furthermore, timber houses are significantly lighter than concrete houses, which means they require less heavy machinery (hence less costs), while robots are very well suited to working wood. In addition, the relative lightness of timber makes it a great candidate for usage in adding floors to existing buildings. Innovations like these are certainly a viable way to cope with pressures on human capital availability. The government can also play a role in this process, by providing incentives for innovation to firms that are under severe financial strain due to economic uncertainty.

_{¹ https://single-market-economy.ec.europa.eu/sectors/construction/observatory/country-fact-sheets/netherlands_en
² https://opendata.cbs.nl/statline/#/CBS/en/dataset/84538ENG/table?ts=1710151268495
³ https://pr.euractiv.com/pr/shortage-labour-construction-industry-255982
⁴ https://roastatistics.maastrichtuniversity.nl/AIS/Login.aspx
⁵ Kabinetsbrief bij voortgangsrapportage Programma Woningbouw, 5 juni 2024
⁶ https://think.ing.com/articles/dutch-construction-faces-sharp-decline-in-2024/
⁷ Three-quarters of entrepreneurs are trying to increase productivity | CBS
⁸ https://www.cbs.nl/nl-nl/achtergrond/2016/22/het-lot-van-de-verdwenen-bouwvakkers}