Collaborative Contracting: A Better Way for the Construction Industry

Construction-related spending accounts for:

• An estimated 13% of the world’s economic output,
• ~$10 trillion spent annually on the production of construction-related goods and services,
• and employs 7% of the world’s labour pool

However, the industry is reported to be perhaps the least productive sector in the global economy, with meager labour-productivity growth of ~ 1% per year measured over the past two decades, compared with 2.8% for the world economy.

The causes of such low productivity growth are systemic, persistent and well recognized – having been the subject of several studies and moreover, are experienced daily by those working in the industry, both in the office and out in the field.

At the macro-economic level, causes include: extensive regulation, increasing complexity and geographic dispersion of construction sites, grey market and corruption distortions as well as demand that is highly cyclical and dependent on the public-sector investment. At the industry-level, causes include: a fragmented industry structure with numerous small firms, asymmetrical information and price transparency, poorly defined project scopes, suboptimal procurement requirements – and adversarial contracting practices that result in misaligned interests. At a micro-economic (firm or project) level, they include: poor project management and on-site execution, under-experienced project participants and insufficiently skilled labour, as well as under-investment in technology and low levels of innovation. Clearly, numerous challenges must be overcome.

The upside to this apparently dismal state is that this industry presents a huge opportunity for willing and able participants. Imagine if this sector’s annual labour-productivity became equal to that of the world economy! The sector could create an estimated additional $1.6 trillion of value each year. This amazing sum is ~ 2% of the global economy – similar to Canada’s annual GDP contribution to the world economy. This “prize” provides us all with motivation to change.

And while individual construction industry participants are challenged to effect macro-level change, they can make a difference: (i) at the industry-level by supporting and contributing to industry-lead efforts for change; and (ii) by making choices by themselves at the project and firm level to choose a “better way.”

In Venerus’ view, the low-hanging fruit (i.e. requiring relatively little investment and effort) is to change procurement and contracting practices at the project and firm level. And if made possible by a motivated collective of individual firms at the industry level as well.

More specifically, owners, contractors, subcontractors and suppliers need to change the mindset and behaviours away from the conventional. Traditional contracting methods that are often criticized for establishing a scheme of incentives that create situations of misaligned interests among stakeholders, each of whom is driven to prioritize their own interests above others – a situation which, all too often, culminates in a collective performance failure.

Instead, they could choose to embrace collaborative methodologies that result in alignment of interests, mutual benefit and increased probability of project success. To learn more about collaborative contracting, please see my blog entitled: “What is Collaborative Contracting?”