Small construction firms drag productivity: CEDA

Australia's laggard construction productivity and deepening housing crisis have been made worse by the small businesses that dominate the sector, the Committee for Economic Development of Australia (CEDA) says.

While several factors have contributed to the construction productivity problem, including complex, slow approvals, lack of innovation and scale, workforce issues and policy settings, small business providers appear to be a key driver in the report, Size matters: Why construction productivity.

In the 29 years to 2023-24, CEDA found that labour productivity in construction as measured by output per hour worked grew by just 17%. Conversely, labour productivity grew by 58% in manufacturing over the same period.

Small construction firms' poor productivity is contributing to such inefficiencies, starting with the fact that they are less able to achieve economies of scale and scope. They also have less capacity to innovate, invest in equipment and technology, and devote to training and capability building.

The Australian construction sector comprises 98.5% of companies that have fewer than 20 employees, while 91% are microbusinesses with fewer than five employees.

CEDA found that these figures have more than doubled from 43% in the late 1980s. Furthermore, building companies with 200 or more employees generate 86% more revenue per worker than those with five to 19 employees.

CEDA chief economist Cassandra Winzar said: "In other words, construction workers generate more revenue per worker in bigger firms."

"We found the sector could generate an extra 12% 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."

The Productivity Commission's recently published report also found that the construction sector is helping fuel the housing crisis, lagging Australia's productivity levels by 49%.

CEDA also found several factors incentivise businesses to stay small, namely that tax settings can result in the self-employed paying less tax, and complex regulation makes it harder for firms to grow and expand interstate.

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

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

To improve construction productivity, CEDA recommends streamlining land-use regulation across all levels of government, including planning and zoning laws and subdivision regulations.

It also urges the government to 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.