Construction productivity shows room for growth

Our new report highlights the importance of productivity growth in reducing construction costs and addressing workforce demands.

The report, Economic performance of New Zealand’s construction industry, found that between 2000 and 2020 labour productivity increased 23% in building construction, 25% in construction services, but only 5% in heavy and civil engineering construction. This compares to economy-wide labour productivity growth of 30%.

“Faster productivity growth can help bring down costs, improve quality and reduce pressure on an already stretched workforce,” says Peter Nunns, Te Waihanga’s Director of Economics. 

“While the overall news is positive for the construction sector, low productivity growth in civil construction is concerning as it represents about 80% of the cost of building and maintaining New Zealand’s infrastructure networks. This is everything from power and water connections to transport and telecommunications,” Nunns says. 

“Our estimate is that, if civil construction had matched building construction for productivity growth over the last 20 years, our infrastructure construction prices would be about 10% lower, workforce requirements would be about 11% lower, and we’d be building 5% more infrastructure than we do now.” 

The researchers also compared New Zealand’s construction labour productivity growth to other OECD countries and found that New Zealand sits in the top half of the pack. New Zealand’s productivity performance is not as strong as some Eastern European countries that are experiencing ‘catch-up’ growth, but our productivity growth outpaces a number of countries that are considered high performers in construction, such as the US and Japan. 

“An interesting finding from this research is that, internationally, construction productivity growth doesn’t appear to be affected by boom-and-bust cycles, such as the 2008 Global Financial Crisis. We also found that economies of scale don’t play a strong role. If anything, larger countries experience slower productivity growth than smaller ones,” Nunns says. 

“However, international comparisons do show that construction permit processes have an impact. Inefficient processes are correlated with slower construction productivity growth. This could reflect the fact that they make it more difficult to adopt new designs, technologies, and building methods. 

“We have an opportunity to significantly lift infrastructure construction productivity. This is essential for addressing the infrastructure challenges ahead of us.”  

Other findings in Economic performance of the NZ construction sector:

• The researchers looked at productivity trends in the New Zealand construction industry for the 1961–2021 period. Construction productivity grew rapidly between the early 1960s and mid-1970s, prior to stagnating between the late 1970s and late 2000s. Productivity levels dropped sharply during the recessions of the late 1970s and early 1990s, followed by slow recoveries to previous levels.  
• Since the 2008 Global Financial Crisis construction productivity has entered a period of sustained improvement. 
• In 2000, construction made up slightly less than 5% of New Zealand’s GDP (1.1% building construction; 1.2% heavy and civil construction; 2.5% construction services). By 2020, construction had grown to nearly 8% of GDP, mostly driven by growth in building construction and construction services (2.0% building construction; 1.6% heavy and civil construction; 4.0%construction services).
• During the early stages of the COVID-19 pandemic (2020–2021), large construction firms’ profitability, solvency risk, and liquidity risk improved slightly. This highlights the resilience of the construction sector during this period and significant government financial support through measures like the COVID-19 wage subsidy. However, the sector remains vulnerable to ongoing cost pressures and demand risks.