< Previous10 Helping owners achieve the most productive use of every capital dollar. FEATURE previous three years. According to McKinsey analysis, between 2020 and 2022, venture capital and private equity funds invested $50 billion in AEC technologies globally – 85% more than the three previous years, with the median deal size doubling since 2017. But this increased technology investment has not yet led to an uptick in productivity. Struggles to scale improvements: Project professionals who manage to propel improvement efforts in their projects often struggle to scale their efforts across the entire project portfolio. Every project has a different scope, context, team, and culture, which can be empowering for teams, but it can also result in distinctive ways of working and a resistance to adapt to changes or learnings coming from outside the project. Timing may also impede efforts to scale improvements. The ideal time to install improvements and new working methods is in the early days of the project. However, the tender phase has a limited budget, and the effort might be wasted if the bid is lost. Moreover, because of the industry focus on lean timelines, companies typically start as soon as possible with a smaller team that focuses on technical aspects, procurement, and project deliveries rather than on improvement initiatives. Passing on results of productivity improvements: In some cases where the industry has improved its productivity and where construction companies could have improved their margins, many of these benefits are passed upward (to suppliers) or downward (to their customers) in the value chain. While this would be accounted for with perfect economic labor productivity statistics, margin pressure is strongly felt by construction firms and hinders their ability to invest in further improvement. Tender dynamics and low margins limit investments: Despite high risks, construction is a relatively low-margin industry, leading to low degrees of investment. Under the pressure of competitive tenders, particularly when construction companies have excess capacity, tender teams factor gains from productivity into cost estimates within proposals, keeping margins thin or even leading to losses when they don’t materialize. In the United Kingdom, for example, most pricing is done on a cost-plus basis, so the sector sees relatively consistent bid margins. Projects have become more complex and risky: In tender processes, the lowest bid is often the winning bid. Skeptics argue, however, that these winning bids too often come from the player with the grandest underestimation of risks rather than the player that is best and most productive, which adversely affects productivity in the sector. In principle, dealing with complexity and risk adds real customer value, can be charged for, and thus could drive up value added and productivity if properly handled. Labor market tightness and workforce churn have affected skill levels: Tight labor market conditions historically correlate with steep construction productivity declines because of firms having to bring inexperienced workforces onto projects. A large part of skill level is built on tenure and apprenticeship. New workers may require additional training and control and, consequently, achieve lower rates of productivity. Timely delivery takes priority over productivity improvements: In construction, productivity is rarely a primary metric that companies use to measure the operational success of projects. Oftentimes, companies prioritize hitting the delivery date over any other goalpost. When end products have already been contracted or other parties depend on work being finalized, a day of delay would cost the owner company more than if they added a large amount of extra workers to finalize the work on time. Improving productivity and reducing idle times across all subcontractors and tasks while meeting throughput requirements would require systemwide efforts to improve workflows, reduce bottlenecks and variability, balance loads, and improve project production rates. In larger projects with multiple trades and complex interdependencies, managing these additional factors can be more difficult compared to smaller projects with one experienced foreman in charge. Improving productivity is not only an imperative for society, but also an opportunity for individual companies to add value and gain a competitive advantage. Higher project margins provide companies the opportunity to enhance price competitiveness or increase cash flow. Moreover, a better handle on productivity enables more predictable project delivery, enhancing credibility and leading to less firefighting. To increase productivity, construction executives can first ensure that the evergreen, foundational measures are in place to set teams up for success, including adequate team staffing, robust planning and design processes, fewer and better handovers, and the apprenticing of capable people. Although these foundational measures are necessary and often considered common knowledge, they are not always common practice. For the step change improvement of productivity that will be needed to fulfill societal demands, companies need to go above and beyond foundational measures. Jan Mischke is a Partner in McKinsey’s Zurich office, Kevin Stokvis is a Partner in the Calgary, Alberta, office, and Koen Vermeltfoort is a Partner in the Amsterdam office, where Birgit Biemans is part of the Operations Practice. The authors wish to thank Betzalel Cohn, Erik Sjödin, Jens Hegeman, Maud Best, Quirine van’t Eind, and Simge Genç Önal for their contributions to this article. In the United States, the average number of vacancies in construction almost doubled between 2017 and 2023, increasing from 200,000 to 380,000 across the industry. ‘ ‘FEATURE It is difficult to know whether 2025 will be a good year – but one thing is clear – it will be a very interesting one. T he construction industry retained a surprising level of momentum in 2024; construction spending currently stands at the highest level on record, contractors continued to add jobs at a faster-than- economy-wide-pace throughout the year, and backlogs remain at healthy – albeit lower than in 2023 – levels. This wasn’t supposed to be the case. The Federal Reserve began ratcheting interest rates higher in March 2022 in an effort to suppress the worst inflation in over 40 years. As of the middle of 2023, rates had risen to the highest level in over two decades. As a result, high borrowing costs and strict lending standards made project financing extremely difficult for project owners. Ongoing labor shortages also negatively affected the industry, frustrating timelines Monetary By Dr. Anirban Basu, Sage Policy Group, and Associated Builders and Contractors Masala12 Helping owners achieve the most productive use of every capital dollar. FEATURE and driving up labor costs. Perhaps the greatest headwind facing the industry was severely elevated uncertainty caused by the presidential election and the lag effects of higher interest rates. Despite a better-than-expected 2023, these headwinds did weigh on construction activity. Privately financed segments struggled throughout the year. As of this writing, private- sector nonresidential construction spending is up just 3.5% on a year-over-year basis, just barely outpacing economywide inflation. Put simply, high borrowing costs and high construction costs reduce the volume of projects that are approved, especially in segments experiencing cyclical weakness. To be clear, there are plenty of segments experiencing cyclical weakness. For instance, the warehouse segment, which boomed during the early years of the pandemic as retail spending shifted from brick and mortar establishments to eCommerce, has seen a 17% dip in investment over the past year. Construction spending on warehouses has declined in 16 of the past 18 months, and it appears likely that trend will continue well into 2025. That said, spending on warehouse construction currently sits at the same level as in late 2021. The current decline in investment is simply the unwinding of a post- pandemic boom. Investment in general office buildings, on the other hand, is at the lowest level since 2017, and that’s in nominal terms. In inflation adjusted terms, 2024 has been the worst year for office construction spending since the aftermath of the Great Recession. Even as some companies call employees back into the office, the increased prevalence of remote work will weigh on general office construction for years. Spending in the segment has declined in every month of 2024 and is unlikely to meaningfully rebound over the next several quarters. Certain other segments have struggled due to purely economic factors. Private sector lodging-related investment, hit first by pandemic-related travel restrictions and then by high financing costs, is down 7% over the past year and 29% since the start of the pandemic. Similarly, private construction spending in the amusement segment has fallen slightly over the past year. Despite sectoral weakness, three gale-force tailwinds pushed the broader nonresidential construction industry forward throughout 2024: federally incentivized manufacturing megaprojects, ongoing infrastructure outlays, and booming data center construction. Manufacturing-related construction spending alone accounted for about 75% of the increase in non-residential construction over the past year, and as of October 2024, approximately $1 in every $4 spent on non-residential construction went toward a manufacturing structure. Given ongoing megaprojects and the lingering effects of the CHIPS Act and Inflation Reduction Act, manufacturing-related construction spending will remain elevated in 2025. Certain infrastructure categories, like water supply and public safety, have also seen historically elevated construction activity, with spending in those segments up by approximately 20% over the past year. While highway and street construction has wavered over the past year, spending in the category is still up 40% since the middle of 2021. And then there’s data centers. Driven by ever-surging demand for data, which will only continue to grow given emerging technologies like artificial intelligence and driverless vehicles, construction of data centers has increased 279% since the end of 2019. Investment in the segment has risen a blistering 37% over the past 12 months and should continue to surge throughout 2025. Perhaps the only constraint on data center development is the need to power the facilities, and that will bolster energy-related construction over the next several years. While these three tailwinds will continue to drive construction activity in the coming year, they’re not alone. Labor shortages, which have long plagued the construction industry, have eased over the past several months. The number of open, unfilled construction positions has fallen 40% over the past year, and the 3.4% of industry-wide positions that are currently unfilled is the lowest share since 2020. Perhaps the biggest implication of improved labor availability is that construction workers are quitting their jobs at a significantly slower pace than in 2022 and 2023. In fact, through the first 10 months of 2024, construction workers have quit at the slowest pace since 2015. As a result, the rate of construction labor cost increases has slowed over the past few quarters. Construction materials prices have also been well-behaved in recent months, with input prices up just 0.5% over the past year. While prices are still 39% higher than at the start of the pandemic –a rate that significantly outpaces economywide inflation – ongoing input price moderation should help to control project costs. Perhaps the strongest potential tailwind for construction activity in 2025 is the prospect of lower interest rates. While the Federal Reserve began lowering rates at their September meeting, rate cuts have yet to make a meaningful impact on borrowing costs. In fact, average mortgage rates are currently about half a percentage point higher than at the time of that first interest rate reduction. If interest rates continue to decline in 2025, construction activity should pick up meaningfully by the third or fourth quarter. However, that’s a big if. Inflation has proved stickier than expected, and the incoming presidential administration will have to grapple with its expressed agenda and the potential inflationary effects of tariffs and immigration restrictions. Despite this uncertainty, industry participants are optimistic about the coming year. More than 60% of contractors now expect their sales to increase over the first half of 2025, according to ABC’s Construction Confidence Index. If inflation continues to subside and interest rates do indeed fall throughout the year, that confidence will prove justified. The southeastern U.S., while subject to the same structural economic forces as the remainder of the country, should perform somewhat better in 2025 than other regions. The reason for this outperformance is simple: nation-leading population growth, manufacturing megaprojects, and a more permissive regulatory environment. South Carolina and Florida had the fastest and second fastest population growth in 2023, respectively. North Carolina wasn’t far The Construction Users Roundtable 13 FEATURE behind, ranking fifth among all states, while Tennessee and Georgia also ranked among the top 10 states. In fact, Mississippi was the only southeastern state that didn’t experience above-average population growth last year; every other state in the region ranked among the top 16. This widespread in-migration has fueled surging levels of residential construction, and that has, in turn, buoyed commercial construction. While the largest microchip facilities are being built outside of the southeast, the region has still benefited greatly from federally incentivized manufacturing projects as well as the broader movement to reshore production capacity. North Carolina, for instance, currently has several $1 billion+ manufacturing facilities under construction, the biggest of which is the $14 billion Toyota EV plant being built in Liberty. Southeastern Georgia and central South Carolina are also experiencing surging levels of manufacturing investment. Of course, the southeastern U.S.’s excellent population growth and strong manufacturing investment are both driven by the region’s construction-friendly regulatory and economic environment. Building new homes and new manufacturing facilities – and just about everything else, too – is quicker and less expensive in the southern United States. It certainly doesn’t hurt that labor tends to be less expensive and more widely available in these states. While the outlook is mostly positive, there are several sources of uncertainty entering the new year. Perhaps the greatest unknown pertains to policy. The next presidential administration has threatened significant tariffs on Canada, Mexico, and China, and a significant volume of construction materials are imported from these countries. Beyond potentially raising construction input costs, these tariffs could cause overall inflation to reaccelerate, limiting the Federal Reserve’s ability to lower interest rates. This same uncertainty applies to immigration restrictions, which could constrain the availability of construction labor. If these tariffs are simply threats to gain trade concessions, however, and are not enacted, interest rates will likely come down over the course of 2025. While this may not spur an immediate rebound in certain commercial segments, lower borrowing costs and looser lending standards will come as a welcome development for the industry. Anirban Basu is Chairman & CEO of Sage Policy Group, an economic and policy consulting firm in Baltimore, Maryland that he founded in 2004. Dr. Basu is among the most recognizable economists, in part because of his consulting work on behalf of numerous clients, including prominent developers, bankers, brokerage houses, energy suppliers, law firms, and business associations. Among other things, Anirban serves as the Chief Economist to Associated Builders and Contractors (national) and as Chief Economic Advisor to the Construction Financial Management Association.16 Helping owners achieve the most productive use of every capital dollar. FEATURE The Impact of the award-winning Total Human Health Initiative. I t’s commonly heard in the construction industry that the most valuable resource is its hardworking, dedicated, skilled workforce and that – without them – nothing gets done. This is something that Associated Builders and Contractors (ABC) takes to heart, and is reflected by a recent enhancement to its industry-leading STEP Safety Management System ® ; the award- winning Total Human Health Initiative (THH). ABC believes that, by putting a greater value on the whole person and acknowledging the complexities of their experiences with total human health, the construction industry will be able to lay the foundation for a healthier, happier, and more productive work environment, as well as cultivate a stronger workforce that thrives on collaboration, innovation, and a shared sense of purpose. “Total human health raises the bar of safety by going beyond the observable safety behaviors that we traditionally look at in our workplace,” says Greg Sizemore, ABC Vice President, HSE and Workforce Development. “I often tell people that there’s nothing magical happening between the time a worker leaves home and when they arrive to work that eliminates their day-to-day problems and that it’s natural that workers could take those problems into work with them, which can lead to incidents due to distraction and sometimes impairment.” The goal of THH is twofold: first to recognize and address the changing demographics of the workforce and the workforce shortage in the skilled trades, and then to reduce the construction industry’s high suicide rates. While THH is now an important part of STEP, it takes a more holistic approach when it comes to safety by focusing on multiple dimensions of well-being, which are categorized into four simple, memorable, and interconnected pillars: the body, the mind, the soul, and the heart. The body pillar tends to be most often associated with safety since it’s the most visible of the dimensions. THH encourages a balance of activity, nutrition, and sleep to ensure optimal health and functioning; they are all key to having overall physical health and well-being. “When we talk about the body dimension of total human health, it’s really about focusing on good practices for the worker and what organizations can provide, such as offering gym memberships or ensuring that things like smoking cessation supports or alcohol recovery programs are in place,” says Sizemore. “Ultimately, these are the kinds of things that can help the body just as much – if not more – than just focusing on the PPE we wear at the job site.” There are several dimensions that underpin THH’s mind pillar: mental wellness, occupational wellness, financial wellness, intellectual wellness, and environmental wellness. The importance of mental health cannot be overstated, and mental health often has an impact on all other dimensions of health – just as other dimensions of wellness can affect a worker’s mental health. An increase in mental health can come from increased physical activity, which can then lead to an increase in self-esteem as mental performance improves. In turn, this leads to more confidence in social situations and the ability to ask the larger questions about their spiritual health. “Promoting mental health and wellness is arguably the most challenging and essential part of the Total Human Health Initiative,” says Sizemore. “A focus on mental health means helping workers manage life’s everyday Resilient Workforce By Paul Adair, Staff Writer Building aThe Construction Users Roundtable 17 stressors outside the job, as well as building emotional self-esteem and fostering connections with peers.” Occupational wellness means providing workers with a sense of satisfaction with their choice of career path, as well as finding a healthy work / life balance, building meaningful relationships, and managing workplace stress. THH also recognizes that the construction industry needs to do more to foster intellectual wellness and allow its workers to participate in activities that cultivate mental growth. ABC believes that people who take the time to focus on their intellectual wellness often find that they have better concentration, improved memory, and better critical thinking – all necessary skills for working safely. “We want workers to recognize all the different stressors around them and asking themselves if they are using their unique talents to the best of their abilities, and also if they see themselves in a role that helps them succeed,” says Sizemore. “Total human health encourages owners to challenge their workers to figure out better and more efficient ways to do their jobs, which helps them engage more with the work they do every day.” American Rapper, the Notorious B.I.G. once rapped, ‘Mo money, Mo problems,’ and while many might not draw the link between safety and financial wellness, finances are a very common source of stress and anxiety for workers. Because of this, THH seeks to find ways to minimize money concerns, which can significantly enhance overall financial wellness and deliver a greater sense of financial security and financial freedom of choice – now and in the future. “If I knew what I know now when I first started out in construction, I would be so much better off knowing what financial management was all about,” says Sizemore. “People coming into the workforce today are making wages that are much higher than the national average and that means they are making some big choices about how they are going to spend or save their money. We want our workers to better understand Workforce continued on page 18 financial security, money management, even retirement planning, and help them through their monetary concerns.” Last but not least, environmental wellness speaks to the surroundings in which employees work and connects overall well-being to the health of environment; both social and natural. ABC’s mental health champions promote positive mental health and wellbeing in the organization. Photos courtesy of ABC. In 2024, Greg Sizemore spoke about the Total Human Health Initiative as part of a roundtable at the White House.18 Helping owners achieve the most productive use of every capital dollar. FEATURE The soul pillar encompasses two dimensions: spiritual wellness and social / community wellness. Spiritual wellness refers to the values and beliefs that help workers find meaning and purpose in their life, and may come from activities such as volunteering, self-reflection, meditation, prayer, or spending time in nature. Social / community wellness is more a sense of connectedness and belonging and involves creating and maintaining a healthy support network, such as the relationships that workers have and how they interact with others at the job site or in the community. The heart pillar focuses on emotional and social wellness, as well as a worker’s ability to cope effectively with life and build satisfying relationships with others. Those who are in touch with their emotional wellness tend to be confident, in control of their feelings and behaviors, and are able to handle life challenges, which is good because working through life challenges can build greater resiliency. Emotional health can be maintained or improved by engaging in regular leisure and recreational activities. Social wellness is outward-looking and is more about a sense of connectedness and belonging. The social dimension of health involves creating and maintaining a healthy support network and refers to the relationships workers have and how they interact with others. “Doing these activities often provide self- confidence and a feeling of belonging, which is part of total human health,” says Sizemore. “We want to help you live the fittest, healthiest, and ‘well-est’ life possible, and we’re doing that through the Total Human Health Initiative by tapping into the questions and concerns that you have but may never have even thought to ask.” A career in construction is one of the best kept secrets in the world. But even though the sector provides great, high-paying jobs with tremendous benefits, the industry as a whole continues to struggle attracting new talent, thanks in large part to persistent misconceptions about what working in construction means. Because of this, the THH is not only benefiting individuals who are already part of the industry – the initiative is also important to recruiting and retaining the next generation of skilled tradespeople. “When we talk about our 23,000 members and contractors at ABC, we tell them that if you really want to differentiate yourself among the more than 700,000 licensed contractors in America today, follow total human health,” says Sizemore. “If you do this, people will come to you. People want to work for a company that looks at them as a total person, as opposed to just being a number on a line.” Greg Sizemore is the Vice President of Health, Safety, Environment, and Workforce Development for Associated Builders and Contractors, a national construction industry trade association that represents more than 23,000 members. With more than 45 years of industry experience, Sizemore is a subject matter expert and thought leader in construction and the business community on health and safety and workforce development initiatives. Scan the QR code to update how you are receiving The VOICE. You can choose to continue to receive a printed copy, digital only direct to your inbox, or sign-up to get it both ways. If you’re happy with how you’re getting it currently, there’s nothing to do! Your Subscription Your Way! The VOICE is published four times per year for the Construction Users Roundtable. If you have questions, please email ssavory@matrixgroupinc.net. Print?Digital?Both? http://eepurl.com/ie7SwPThe Construction Users Roundtable 19 FEATURE How Will Artificial Intelligence (AI) Transform Industrial Construction? A rtificial intelligence (AI) is all the rage. While nearly all the discussion surrounds how efficiently it can perform repetitive tasks, there are fears that AI will displace humans and their jobs. The industrial construction industry has long believed that physical construction work requires such a high skill level and experience, it will be insulated from change… is this true any longer? Over the coming months, Continuum Capital will profile 100 artificial intelligence, machine learning (ML), and robotic innovations. Attendees at the Construction Users Roundtable National Conference in February will get a first-hand look at our discoveries. Here’s a sneak peek. A famous yoga teacher from India, B.K.S. Iyengar, wrote, “Change is not something that we should fear. Rather, it is something that we should welcome. For without change, nothing in this world would ever grow or blossom.” Artificial intelligence is the most powerful change that we will experience over the coming decade and firms that embrace it will have AI Transformation By Mark Bridgers and Kyle Kerestes, Continuum CapitalNext >