Unlocking Labor Productivity in Construction
It’s morning in Chipi land. We are on the verge of releasing our product and I am really excited to see who we help and the degree of efficacy with this first version. We know we’ll have to build out more use-cases but this first release is the heart of it all. What are we offering? A way to eliminate cash-flow problems if you’re a builder or materials supplier. Sounds sexy right?
Ok not so sexy but sometimes — always actually — the ingredients of the sausage matter. Solving structurally negative cash-flow for builders is an ingredient in addressing the national housing shortage. There are other ingredients to make a great sausage, but I’ll get to that in a minute.
So how do we map negative cash-flow to the housing shortage? It starts with construction labor productivity, which has been stagnant since like World War II. Yup that’s right.
Clearly, repeating everything we are doing now is not going to get us anywhere. Unless things change, 100 years from now we’ll STILL have housing shortages, consumers who think the construction process is brain damage, and most builders living modest existences.
If construction labor productivity were to catch up with the progress made by other sectors over the past 20 years or with the total economy (and we show that it can), we estimate that this could increase the construction industry’s value added by $1.6 trillion a year. This is equivalent to the GDP of Canada, or meeting half of global infrastructure needs, or boosting global GDP by 2 percent a year.
— The McKinsey Global Institute
We need to up our game. Labor productivity is the only real source of economic wealth (I know this is incomplete but essentially correct) — unless you think digging holes and selling chunks of the earth is a meaningful way forward. Let’s imagine a new future.
No doubt there are some seriously cool and valuable things happening with robotics and construction manufacturing. However, each of us is a unique butterfly and deserve a specially designed cocoon. Customization of housing is not going away. So robots > pesky humans will only get us so far. We need to build solutions that ignite HUMAN labor productivity in construction.
Ok back to negative cash-flow sexiness. So poor liquidity is a symptom of a lack of operating scale which itself is a major cause of meager productivity growth. This lack of scale is endemic to all small businesses but becomes an acute problem when a bunch of these small construction firms are coordinating towards a goal. If you look at an organizational chart of a project team, the people doing all the work (vs. being bossypants) are small businesses, construction trades, that don’t have the resources to run businesses efficiently. This isn’t a criticism of their business acumen — although I do think there are skill sets missing — but the lack of scale to manage pre-construction mobilization, order materials, schedule and track delivery, site safety, manage the books, schedule work, QA, sales, secure permits and inspections, meet with clients and other team members, provide estimates, project management, and so on. Construction is an exercise in managing high levels of complexity and interdependencies without resources. Why do we expect all these small construction firms to get this right?
So all these small businesses need an operational partner that has scale. They need to share the resources of a “back-office” so that they are free to execute. There is no glory in paying bills and pushing paper. The definition of owning a business doesn’t mean you have to do EVERYTHING. It means freedom — but with responsibilities to your customers, employees, and your craft. Leave the headaches to someone that has the scale and expertise to make overhead efficient and as inexpensive as possible.
So imagine if all small businesses were plugged into an operational platform that freed them to focus on execution. Do you think that would unlock labor productivity? Do you think there would be less coordination problems that lead to “rework” which costs over 5% of contract values or $178 billion a year?
This business model exists in other industries. In asset management, there are these invisible partners that manage all the less glorious items of managing money. Clearing and securities custody. No one thinks of these things — until the Robinhood fiasco — but they are critical building blocks to enable all these small (and large) money management businesses to operate. Ever heard of BNY Mellon? You may be thinking, “yea its a bank you idiot”. Right! They are the #10 bank in the US. But they are also the largest securities custody firm in the world managing $41 Trillion. Pretty good chance you have securities at BNY Mellon and have no idea.
So that’s it. Be the invisible or semi-invisible partner that handles the critical but unsexy things that make these small businesses function. Cash-flow solutions that lead to operating solutions, profitability solutions, and growth solutions. The goal is to unlock labor productivity by reducing the costs of operating a construction firm. Let’s do this thing!