Size matters: Why construction productivity is so weak

The dominance of very small businesses, Australia’s tax settings and overly complex land regulation are dragging down productivity in the construction sector, the Committee for Economic Development of Australia (CEDA) has found. 

The new report, Size matters: Why construction productivity is so weak, finds Australia is building half as many homes per construction worker as in the 1970s, CEDA Chief Economist Cassandra Winzar said.  

“While many factors are dragging down construction productivity, a critical contributor is the dominance of very small businesses,” Ms Winzar said. 

“We’ve found 98.5 per cent of Australian construction companies have fewer than 20 employees and 91 per cent are microbusinesses with fewer than five employees. 

“This figure has more than doubled from 43 per cent in the late 1980s. 

“Smaller firms are less productive than bigger firms because they can’t achieve the same productivity gains from innovation, investment and economies of scale. 

“This is important because we’ve found building companies with 200 or more employees generate 86 per cent more revenue per worker than those with 5 to 19 employees. 

“In other words, construction workers generate more revenue per worker in bigger firms.” 

We found the sector could generate an extra 12 per cent or $54 billion in revenue per year without needing any more workers if building firms were similar in size to manufacturing firms - that’s equivalent to gaining an extra 150,000 construction workers. 

"Construction is the backbone of our economy,” Ms Winzar said. 

“It is critical to meeting our housing needs amid a deepening housing crisis, to building the infrastructure the rest of the economy relies on, and to ensuring Australia can meet its net-zero ambitions. 

"Yet the sector's multifactor productivity has barely moved since the mid-1990s, while in manufacturing it’s grown by 23 per cent and in the overall market sector by almost 20 per cent over the same period. 

"Even accounting for improvements in the size and quality of buildings today, productivity is still declining. 

“This is a sector that’s working harder, not smarter.” 

The report identifies several factors that are keeping Australia’s building companies very small: 

• Tax settings: Being self-employed can result in paying less tax than a salaried employee earning the same income. We found independent contractors in construction are four times more likely to disclose income under the tax-free threshold than salaried workers. Incentives such as asset-write-offs also favour smaller businesses.
• Complex regulation: Australia has the most decentralised system of land-use planning in the OECD, making it harder for firms to grow and expand interstate. State-based occupational licensing also creates barriers for productive firms wanting to expand.
• The construction sector is highly segmented by product and geography; it is also very cyclical, with swings in demand making contracting and sub-contracting more attractive. 
• An economy-wide shift to outsourcing and contracting.  

To improve construction productivity, Australia should: 

• Streamline land-use regulation across all levels of government, including planning and zoning laws and subdivision regulations. 
• Consider adjusting the relative tax rates and settings for individuals and small and large businesses as part of broader reform of the entire tax system.  
• Governments can reduce volatility by creating a more predictable pipeline of work, such as through their social housing and infrastructure programs.

Australia has not built enough homes to keep up with demand. Sydney is now the second most expensive housing market in the world, while Adelaide is sixth and Melbourne is ninth. 

"With the Federal Election in the rearview mirror, all levels of government must focus on policies to lift productivity in construction alongside policies to increase housing supply,” Ms Winzar said. 

“We must ensure that basic policy foundations such as regulations and tax don’t stand in the way of targeted measures to build more homes.   

“If we don’t, Australia will struggle to build the housing we so desperately need.” 

CEDA Chief Economist Cassandra Winzar and Economist James Brooks are available for further comment and interviews. 

Media contact:  
Justine Parker, Media Manager and Content Specialist 
Mobile: 0436 379 688 | Email: justine.parker@ceda.com.au