Labor Productivity Study

INDEPENDENT PROJECT ANALYSIS, INCORPORATED
Presented by:
Dean Findley
THE AMERICAS u THE NETHERLANDS u AUSTRALIA u CHINA

Why Labor Productivity?
• This is the second report back on a three year IBC

study of construction labor productivity
• Why worry about productivity:
– About one-quarter of all construction cost is field labor
– Labor is usually the largest non-material cost in a project
– Very little is really understood about how to best measure
field productivity or how to influence it
– In developed economies of Europe and North America
construction labor shortages will become more and more
common as the population ages
– In low wage countries, poor labor productivity is the
primary obstacle to low cost manufacturing facilities
Labor Productivity Phase II 2 INDEPENDENT PROJECT ANALYSIS

Goals of This Research
• Phase I Goals
– Develop and validate a reliable approach to measuring
labor cost and productivity
– Understand the relationships between labor
productivity and the project practices that IPA has
traditionally gathered (FEL, etc.)
• Phase II Goals
– Explore the relationship between engineering and
construction execution practices and labor productivity
in high wage countries
• Phase III Goals

– Explore the relationship between engineering and
construction execution practices and labor productivity
in low wage countries
Outline
• Measuring labor productivity

• Review of first year’s work
• More Practices and Productivity
• Productivity in Europe v. North America
• Doing something about the weather
• Conclusions

Labor Productivity Database
• 1185 projects in the United States and Europe

• 103 companies represented
Greater Houston
Europe 20%
27%
W. USGC
5%
E. USGC
US Northeast 14%
15%
N. Calif.
2%
US Midwest
US S. East S. Calif
4%
10% 3%
- Labor Productivity Phase II 5 INDEPENDENT PROJECT ANALYSIS

European Labor Productivity Database
• 295 projects in Europe
• 35 companies represented
Netherlands
17% Spain
Germany 4%
8%
United Kingdom
33%
France
34%
Belgium
4%

Average Median Range
Project Size $36.6 MM $12 MM $0.054 MM -

$1547.07 MM
Start Year of 1995 1996 1972 - 2001

Construction
1988 USD basis

Greenfield/Colocated
23% Revamp
32%
Add-on
24%
Expansion
21%

Defining Labor Cost
• Labor cost is the amount of money spent on field

construction, including
– Wages
– Benefits
– Small tools
– Subcontractor profits and fees
– Overtime premiums
• Does not include
– Construction equipment (e.g. cranes, bulldozers,
backhoes, etc.)
– Construction supervision
– Field engineering
Methodology (1)
• Projects were again grouped according to

process type and project type to minimize scope
variations
• A base location was created in Europe
• Database was increased from 570 to 1100
• Both large and small projects were added
• Labor cost breakouts were available for all

projects

Methodology (2)
• Each group provides a good like-for-like field work

to be performed
• Modular projects were excluded to minimize error
• Each group has good dispersal of projects
geographically
• Each group has a good sample of projects in Greater
Houston to provide a US Gulf Coast anchor
• As the methodology develops, other “anchors” will
be developed and become interchangeable
– Rotterdam has been added this year
– Singapore and São Paulo will be added next year
Methodology (3)
• Effective Labor Cost Index compares the amount

of labor required within each group; groups are
then aggregated
– The Labor Cost Index measures the relative
amount of money a project spent on field labor
– Greater Houston is set equal to 1.0
• The Labor Productivity Index is created by
adjusting the all-in wages to the same US dollar
basis
– The Labor Productivity Index measures the
comparative number of labor hours that like scope
required to complete
Labor Productivity Index
WORSE
WORSE
1.4
Poorer Labor
Productivity
1.2
0.8
Better Labor
Productivity
BETTER
BETTER
0.6

Outline

• Conclusions

Primary Conclusions
• There is little variation in effective labor cost

from region to region
– Standard error across regions is only 7 percent
– Corrected by company standard error is 4 percent
• There is more variation in productivity from
region to region
– Standard error is 10 percent
– 7 percent corrected by company
• Variation in productivity is dampening the
variation in effective labor cost
• Labor unions on average supply considerably
more productive labor in the United States
Conclusions About Regional Variation
• Very little true region-to-region variation in cost,

especially in the same general labor market
– Contradicts perceptions of many company estimators
– Because they extrapolate their company’s experiences

or listen to contractors’ whining
– Accords better with economic theory
• Average productivity differences probably driven

by differential skill levels
• Much of the regional variation is really variation

by company
FEL Drives Labor Cost Index
1.15 Pr < .001
1.10
Labor Cost Index
1.05
1.00
0.95
TOO MUCH BEST Practical GOOD FAIR POOR

0.90
2 2.5 3 3.5 4 4.5 FEL
5 Index
5.5 6 6.5 7 7.5 8 8.5 9 9.5

FEL Drives Labor Productivity
• Significant components are:

– Definition of soils
– Definition of health and safety
– Engineering status
• By far the most important FEL Component for

Productivity is Execution Planning

Execution Planning Drives Productivity
1.15
Pr <.006
1.10
8 percent better
than average
1.05
1.00
0.95
0.90
Assumed Preliminary Definitive

The Effects of Detailed Scheduling
All Projects
1.10 Pr < .001
1.05
Labor Cost Index
1.00
0.95
0.90
Milestone Integrated
Critical Path Resource-loaded
Schedule

The Effects of Detailed Scheduling
Small Projects
1.15
Resource loading is not necessary to
improve labor productivity on small
1.10 projects. (But it does produce shorter
schedules).
Labor Cost Index
1.05
1.00
0.95
0.90
Integrated
Milestone Critical Path Resource-loaded
Schedule
Labor Productivity and the VIPs
• Value engineering + 5 percent
• Predictive maintenance + 7 percent
• Design to Capacity + 9 percent
• 3D CAD + 7 percent (and up)
• No other relationships with VIPs, including no

relationship with Constructability Reviews!

Outline

– contracting
– teams
– planning and control
– construction supervision
– use of overtime
• Conclusions
Contracting and Productivity
• Union jobs are almost 17 percent more

productive on average than open/merit shop in
the USA
• Union jobs averaged a labor cost index of 0.998

versus 1.08 for non-union construction outside
the USGC
• Mixed union/non-union jobs are slightly less

(Poorer) productive than open shop and much
less productive than union jobs
• Subcontractor supplied labor is 13 percent more

productive on average than direct-hire
Teams and Productivity
• Integrated team projects have 6 percent more

productive field labor
– environmental specialist involvement is important
– health & safety specialist is important
• Using an owner scheduling engineer, starting in

FEL, is associated with 7 percent better
productivity

WORSE Whose Cost/Schedule Control Plan?
1.2
1.1
0.9
BETTER
0.8
Owner “Integrated” Separate Contractor
only owner Owner & only
contractor contractor
Any Deviation from Construction Plan
Drives Poor Productivity
WORSE
1.10
Productivity Index
1.05
1.00
0.95
BETTER
0.90
-30 -25 -20 -15 -10 -5 0 5 10 15 20
Percent Schedule Deviation in Construction

Added Supervision
Improves Productivity
WORSE
1.10
1.05
Productivity Index
1.00
0.95 Below 5-to-1, productivity rises

but labor costs increase
0.90
BETTER
0.85
5 6 7 8 9 10
Ratio of Workers to Supervisors

The Effect of Overtime on Productivity
• The use of overtime is the most common way to

recover slipped schedules and accelerate projects
that are schedule-driven
• Overtime is also sometimes used to attract labor when
shortages occur
• Overtime was used on over a third of North American
projects and a quarter of European projects
• The use of overtime is increasing
• The adverse effect of overtime on productivity is
accepted as fact despite the dearth of empirical
analysis, especially for the process industries
Productivity Declines as
Work Week Increases
WORSE
1.2
1.15
Productivity Index
1.1
1.05
1
BETTER
0.95
35 40 45 50 55 60 65 70 75
Hours/Week

The Effect of Extended 50 Hour Weeks
1.4
55 hours pay for 40 hours of work equivalent

1.3
Productivity Index
55 hours pay for 46 hours of work

1.2
equivalent
1.1
Start with 8 percent loss

1.0
0.9
1 2 3 4 5 6
Months of 50-Hour Weeks
Outline

• Conclusions

Europe v. North America
• Differences are generally not large
• The relationships between practices and productivity

results are virtually identical
– same effect of FEL
– same VIPs, etc.
• One interesting difference:

– Environmentally-driven projects on the USGC are
characterized by poor labor productivity (+12 percent)
– Such projects in Europe are characterized by excellent

productivity
Productivity Over Time
1.4
1.3
Productivity Index
1.2
1.1
1.0
0.9
Indexed to USGC = 1
0.8
1986 1991 1996 2001
USGC Europe Southern UK

Regional Variation Within Europe
Region Effective Relative

Labor Cost Productivity
Northern UK 1.04 1.10+

Southern UK 1.05 1.12
Belgium 0.97 0.97+
France 1.12 1.13
West Germany 1.15 1.10++
East Germany 1.12 1.15++
Netherlands 1.06 0.96
Spain 0.89 1.16
At 1 March 2002 exchange rates
+ Result is driven by a performance of single company

++One company is influential
Very Little Difference in Labor Productivity
US outside GC=1.074
Europe=1.084
USGC=1
.76 1 1.24
Outline

• Conclusions

Why Worry About the Weather?
• The weather is a significant risk factor for many

projects
• The weather is an important estimating issue

between owners and contractors and is sometimes
used by contractors to “fatten” estimates on
reimbursable or negotiated lump-sum contracts
• Therefore, establishing some quantitative data

around the effects of specific weather on
productivity should be useful

Weather data
• The US National Oceanographic and Atmospheric

Administration (NOAA) keeps very detailed
records of weather at most construction locations
in the USA
• We purchased daily weather information in

electronic form for the construction periods of
approximately 50 percent US projects in our
productivity database
• We then matched weather results to productivity

Weather Variables
• Temperature Variables
– temp90 - Percent of construction days with the daily high
temperature above 90 degrees Fahrenheit (32 degrees C)
– coldxx - Percent of construction days with the “cooling degree
days” measure greater than 10, 15, 20, or 25. Cooling degree days
are measured as each degree of temperature of the daily mean above
65 degrees F (18 degrees C).
– Heatxx - Percent of construction days with the “heating degree
days” measure greater than 10, 15, 20, or 25. Heating degree days
are measured as each degree of temperature of the daily mean below
65 degrees Fahrenheit.
• Precipitation Variables
– snow - Percent of construction days with 1/2 inch or more of daily
snowfall

Weather Variables (cont.)
• Wind
– windxx - Percent of construction days with resultant wind speed
greater than 15, 20, or 25 miles per hour. Resultant wind speed is
calculated as the vector sum of the wind’s speed divided by the
number of observations.
• Discomfort
– Caution - Percent of construction days where combination of heat
and humidity qualified as a “caution” condition by the National
Weather Service
– Danger - Percent of construction days where combination of heat

and humidity qualified as a “Danger” condition by the National
Weather Service

General Effects of Weather on Productivity
60%
50%
40%
30%
20%
10%
0%
Wind15 Danger Cold15 Caution Temp90 Cold10

Weather Effects in Warmer Regions
25%
20%
15%
10%
5%
0%
Danger Caution Cold15

Weather Effects in Northern US
70%
65%
60%
55%
50%
45%
40%
35%
30%
Wind20 Snow Heat25 Heat20

Weather Conclusions
• High winds are most destructive of labor productivity
• The effects of rain are too small to detect except for

projects that involve large amounts of difficult
welding, e.g. hydroprocessing
• The effects of weather are quantifiable
• Data necessary to find averages are generally

available
• Owners might consider taking weather risks

whenever the contractor’s predicted effects are
higher than average
Outline
• Conclusions

Conclusions
• Overall project-to-project variation in labor

productivity is 24 percent on a single standard
deviation
• Even within highly homogeneous projects in the same

region, the variation is about 15 percent
• This means there is a substantial gain available in

improved labor productivity
• Good labor productivity does more than reduce cost

– Improves schedule
– Improves quality

Keys to Better Productivity
• Detailed execution planning is the single most

important driver of better field productivity
• Execution planning has been progressively

outsourced to contractors
• But the data are clear: owner execution planning and

control are central to securing good labor productivity
• The principal role of the engineering contractor is to

provide timely, high-quality engineering documents to
construction; it is not to take the place of the owner in
the execution planning process

Path Forward -- Phase III
• Work will continue on the collection of more

detailed practices in the field that may affect
productivity
• Regional focus for IBC 2003 will be Latin

America and Asia
• Main emphasis will be on low-wage, generally

lower skilled labor situations in which major
cost swings can be achieved

Labor Productivity Study

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INDEPENDENT PROJECT ANALYSIS, INCORPORATED

THE AMERICAS u THE NETHERLANDS u AUSTRALIA u CHINA

• This is the second report back on a three year IBC

Labor Productivity Phase II 2 INDEPENDENT PROJECT ANALYSIS

• Phase III Goals

• Measuring labor productivity

• More Practices and Productivity

• Productivity in Europe v. North America

• Doing something about the weather

Labor Productivity Phase II 4 INDEPENDENT PROJECT ANALYSIS

• 1185 projects in the United States and Europe

- Labor Productivity Phase II 5 INDEPENDENT PROJECT ANALYSIS

- Labor Productivity Phase II 6 INDEPENDENT PROJECT ANALYSIS

Average Median Range

Project Size $36.6 MM $12 MM $0.054 MM -

Start Year of 1995 1996 1972 - 2001

1988 USD basis

- Labor Productivity Phase II 7 INDEPENDENT PROJECT ANALYSIS

- Labor Productivity Phase II 8 INDEPENDENT PROJECT ANALYSIS

• Labor cost is the amount of money spent on field

• Projects were again grouped according to

• A base location was created in Europe

• Database was increased from 570 to 1100

• Both large and small projects were added

• Labor cost breakouts were available for all

Labor Productivity Phase II 10 INDEPENDENT PROJECT ANALYSIS

• Each group provides a good like-for-like field work

• Effective Labor Cost Index compares the amount

- Labor Productivity Phase II 13 INDEPENDENT PROJECT ANALYSIS

• Measuring labor productivity

• Review of first year’s work

• Productivity in Europe v. North America

• Doing something about the weather

Labor Productivity Phase II 14 INDEPENDENT PROJECT ANALYSIS

• There is little variation in effective labor cost

• Very little true region-to-region variation in cost,

– Because they extrapolate their company’s experiences

– Accords better with economic theory

• Average productivity differences probably driven

• Much of the regional variation is really variation

1.15 Pr < .001

TOO MUCH BEST Practical GOOD FAIR POOR

- Labor Productivity Phase II 17 INDEPENDENT PROJECT ANALYSIS

• Significant components are:

– Definition of health and safety

• By far the most important FEL Component for

Labor Productivity Phase II 18 INDEPENDENT PROJECT ANALYSIS

- Labor Productivity Phase II 19 INDEPENDENT PROJECT ANALYSIS

1.10 Pr < .001

- Labor Productivity Phase II 20 INDEPENDENT PROJECT ANALYSIS

• Value engineering + 5 percent

• Predictive maintenance + 7 percent

• Design to Capacity + 9 percent

• 3D CAD + 7 percent (and up)

• No other relationships with VIPs, including no

Labor Productivity Phase II 22 INDEPENDENT PROJECT ANALYSIS

• Measuring labor productivity

• Union jobs are almost 17 percent more

• Union jobs averaged a labor cost index of 0.998

• Mixed union/non-union jobs are slightly less

• Subcontractor supplied labor is 13 percent more

• Integrated team projects have 6 percent more

– health & safety specialist is important