Executive Summary

This study introduces complexity economics and systems thinking as a methodology and approach to understanding why boom and bust cycles exist in the construction industry. System models have been developed to better understand, not predict, the dynamics of the multiple complex interactions, which range from hard economic data to people’s irrational behaviour. During the study there has been extensive consultation with a broad cross-section of industry professionals and practitioners.
There is a broad appreciation of how the overall economic climate impacts the construction industry in New Zealand, but there is little uptake of the economic theories about boom and bust cycles by construction practitioners. There is broad agreement that cycles do exist and that they influence decision makers, but the cause of the cycles is uncertain and varies depending on the industry sector and perspective of the observer. Government spending and policy decisions are seen as a major influence for most participants in this study. Also, it is the rate of change, whether in boom or bust conditions, that cause the problem, not the fact that the industry has good years and bad years.
Generally it is accepted that a rapid upward phase of the cycle causes inflated prices and reduced competition due to full-order books; whilst the downward phase leads to competitive cost cutting, reduced margins and pressure on quality. It is this sort of

negative self-fulfilling prophecy that should be challenged if the industry is to break free of the most negative aspects of boom and bust cycles.
The study concludes that whilst external shocks will always impact the industry, much of the volatility is caused by internal system factors. Better communication within the supply chain, visibility of future orders, long range planning around resources (particularly skilled workers), and reducing delays in the approval and procurement systems can produce considerable improvements in performance and productivity.
The construction industry is an important bellwether and stimulus for the New Zealand economy. As a result, the construction industry is prone to manipulation by policy makers attempting to influence the domestic economy, often to the detriment of the industry itself. This duality of purpose causes increased uncertainty and volatility in the industry.
The key finding of the study is that the complexity and uncertainty that characterises the New Zealand construction industry demands changes to industry structures and strategic thinking that encourage collaborative learning processes.

Introduction

The aim of this study was to establish and communicate a shared understanding of the key drivers in the boom/bust cycles of the construction industry in New Zealand. This shared understanding would allow for interventions and policy making to be more effective and responsive. It would also inform the industry about what it needs to know in terms of quantitative or qualitative data that would help further explain the interplay and interactions between the industry players, the environment, other industries and government.
The study adopted a systems thinking philosophy, for two main reasons: first, systems approaches are seen by many leading thinkers and research organisations as a more effective way to view complex, interconnected real world problems. Secondly, the construction industry is complex and fragmented, with many different bodies and differing objectives – systems thinking strives to understand the key systemic behaviours and relationships rather than finding an optimal solution.

Interpreting existing knowledge

Brief historical perspective of the New Zealand economy

Since its settlement in the early 19th century, New Zealand’s economy has been based on its natural resources. Exports, dominated by pastoral products such as wool, meat, and dairy products, were sold predominantly to UK markets. Incomes rose rapidly, surpassed as late as 1960 by only the United States and Switzerland, prompting waves of migration.
The economy was also marked by a high degree of state intervention.
A cradle-to-grave welfare system was implemented, funded by taxation. Controls were imposed on labour and financial markets while state ownership of industrial and commercial activities was prolific. The result of this extreme protectionism was gross inefficiency. The economy’s profound structural weakness was exposed following a succession of shocks in the 1970s. The 1973-74 oil shock exerted huge pressure on macroeconomic balances, but more damaging were the accession of the United Kingdom to the European Community and its adoption of the Common Agricultural Policy, which restricted New Zealand’s access to its core export market.
Inflation became entrenched and the budget balance moved deep into the red. Increasing recourse was made to international debt markets to finance both the budget and current-account deficits. By 1984, the economy’s chronic macroeconomic imbalances had prompted a collapse of confidence in foreign-exchange markets as New Zealand veered close to a Third World-style debt collapse.
The Labour government that came to power in 1984 implemented one of the most radical reform programmes adopted by an Organisation for Economic Co-operation and Development (OECD) nation. The New Zealand dollar was floated in March 1985, leaving its exchange rate to be determined by supply and demand, and the Reserve Bank granted greater autonomy from the government.
The impact of these macroeconomic and structural reforms was profound. The budget balance moved into large and recurring surpluses. Net external debt was eliminated, reversing New Zealand’s former position as one of the largest borrowers in international debt markets.
From the late 1990s, the economy has demonstrated considerable resilience, weathering successive shocks buoyed by robust domestic demand. Through internal structural reforms, the economy appeared, until the latest oil price shocks, to have broken its boom-or-bust cycle to transit to a trajectory of stable, sustainable growth. This has important implications for this study.
A 2007 OECD report warned that despite New Zealand having one of the most flexible and resilient economies in the OECD, large external deficit and very low household savings, combined with strong inflation pressures, are causing uncertain growth patterns. Moreover, despite economic growth since the early 1990s labour productivity growth has been lacklustre. The OECD report suggests the large swings in the New Zealand dollar and high interest rates are two of the key factors affecting productivity.
According to Bollard & Hunt (2008) there have been a number of growth periods in New Zealand since the Second World War, some longer than others, suggesting a trend towards more stability.
They suggest that structural reforms and Reserve Bank policy changes are significant factors in the reduction of volatility in the economy. They do warn, however, that the interconnectedness of global economies can mean that external shocks, such as the recent credit squeeze and oil price rises, can easily and rapidly influence New Zealand economic stability.

The Construction industry and the economy
Whilst there have been several growth periods followed by slowdowns in the economy as a whole, Bollard (1992) identified two significant boom periods for the construction industry; the ‘Think Big period’ from 1977 until 1982 and the ‘Construction Boom’ from 1984 until 1987. It can be argued that, since 1992, there has been an additional boom cycle, until 2007, caused primarily by house demand and subsequent price rises, albeit with a slight downturn through the late 1990s.

The Think Big Era

The ‘Think Big programme’ was initiated by the government of the day, who invested around NZ$6 billion per year through several industry departments. Although the investment programmes created thousands of jobs and supported the local production and processing of energy, it did not bring the ‘further accelerator effect’ (Bollard, 1992) that one might expect from such investment, and left New Zealand with over NZ$28 billion of debt.
The boom cycle in the construction industry was short-lived. The external environment, in the form of the international oil situation, had a very strong effect on this cycle. The ‘Think Big Era’ influenced future policy makers away from too much government involvement in a market-dominated industry. As a result we have a systemic loop set up of history-influencing economic evolution and future decision making, which in turn induces cyclical behaviour that then impacts policy and influences policy makers. Indeed, it is striking how similar the current economic crisis is to the 1970s crisis. It is all too easy to blame external conditions in these situations instead of acknowledging the influence of the internal dynamics of the economic/political system.

The Construction Boom

In the mid-1980s the government liberalised the economy and deregulated the financial sector. The subsequent growth of the financial sector coupled with government departmental restructuring increased demand for new office buildings. There were far greater returns on investments in sectors such as construction when the real exchange rate rose. This was a signal to the market to invest in the construction sector, though the key factor that caused the boom was the deregulation policy of the government (Grimmond, 1989).
There then followed a significant downturn in 1987, as stock markets crashed around the world, resulting in rapid retrenchment and over supply of non-residential property in the early 1990s. The estimated amount of ‘unnecessary, premature or misdirected construction investment’ (Bollard, 1992) was in total over NZ$3 billion. The next two years saw a sharp decline in the number of people employed in the industry.

The Recent Decades

In 1992, the New Zealand Institute of Economic Research forecasted that the contraction of the sector following the two boom periods had taken place and the trough of recession had passed. Despite small fluctuations in 1999 and 2001, there has been a steady growth in the construction sector since 1992 supported by overall building output figures Evidence from the Reserve Bank suggests that construction output closely follows the national GDP cycles, but swings more extremely. In macroeconomics, construction related indices are often used as the economy indicators. Orders for housing, building permits, housing prices and housing starts are all used as key leading indicators of the economy. Also, some indices in the construction industry, such as investment in building, plant construction and orders for engineering output, are key lagging indicators of the economy. In New Zealand at the moment there is a strong correlation between residential construction prices and inflation.
Thus there is a situation where the New Zealand economy is more volatile than its major benchmarking countries and the construction industry is more volatile than other industrial sectors in New Zealand as a whole (Figure 2). The construction industry is more vulnerable to economic fluctuations than other industries so consequently should be acutely aware of the causes and the nature of the cycles in the economy and elsewhere.
Whilst the construction industry represents nearly 5% of the total Gross Domestic Product (GDP) in New Zealand, it influences the economy in other ways. The construction industry in New Zealand has a multiplier effect into other industries. Also, efficiency improvements gained in the construction industry enhance the overall performance of the New Zealand economy, in terms of the national competitiveness.
Construction is often seen as a government economic regulation tool through adjustment of interest rates, public sector expenditure and the system of taxation. Also, government arranges for the construction of infrastructure and other goods regarded as public services, such as roads, water supply or schools. However, government is seen as handicapped by not having adequate methods for assessing the subsequent impact of changes on the industry, on society, or on the environment. Governments are often caught in a difficult position where they are damned if they do make industry interventions and damned if they do not. A clear and consistent strategy regarding infrastructure and policies that influence building and construction would help reduce the impact of cycles, but political cycles tend to work against such aims.

TBC

Lean Construction is a philosophy based on the concepts of lean manufacturing. It is about managing and improving the construction process to profitably deliver what the customer needs.
Because it is a philosophy, Lean Construction can be pursued through a number of different approaches.

In particular the following tools are used in the Construction Industry:

• Last Planner: Collaboratively plan, track and improve
• Value Stream Mapping: Identify and remove waste
• 5S: Organise the project workspace

This fact sheet outlines the elements of Lean Construction and how they are delivered in practice.

History of Lean Construction

Lean Construction has been adapted from the highly successful principles of Lean manufacturing which was initially pioneered and developed by the large Japanese car manufacturers. Lean Manufacturing has been implemented by a wide range of manufacturers worldwide inside and outside the automotive industry with considerable success. You can learn how to implement lean in your business here.

The Lean Principles

• Eliminate waste.
• Precisely specify value from the perspective of the ultimate customer.
• Clearly identify the process that delivers what the customer values (the value stream) and eliminate all non value adding steps.
• Make the remaining value adding steps flow without interruption by managing the interfaces between different steps.
  Let the customer pull – don’t make anything until it is needed, then make it quickly.
• Pursue perfection by continuous improvement.

Lean is about designing and operating the right process and having the right systems, resources and measures to deliver things right first time. Essential to this is the elimination of waste – activities and processes that absorb resources but create no value.

Waste can include mistakes, working out of sequence, redundant activity and movement, delayed or premature inputs, and products or services that don’t meet customer needs.

The primary focus is on moving closer and closer to providing a product that customers really want, by understanding the process, identifying the waste within it, and eliminating it step by step.

Last Planner

Last Planner is the main tool used to implement Lean Construction and it has been highly successful in the New Zealand infrastructure and building environment.
Take-up began in 2009 when Constructing Excellence NZ first introduced the concepts into New Zealand. Since then, many projects have reported a range of benefits, not least the Manukau Harbour Crossing project completing 7 months ahead of schedule and one large contractor reporting a 30% increase in profitability since using Last Planner. Organisations such as Fletchers, Fulton Hogan, NZTA, Arrow International and Naylor Love and now use Lean Last Planner, often as a standard approach for their projects.
Last Planner is a methodology which empowers a collaborative culture of planning and enables a team to manage programme risk on a daily basis.

Benefits

Benefits are often surprisingly quick to be realised and are usually tangible and measurable. Typical benefits include:

• Waste is owned and removed across the project.
• Productivity is measured and tangibly improves within weeks.
• A collaborative approach develops, enabling an enjoyable environment of Trust, Openness & Honesty.
• The project team becomes integrated; each individual gains a better understanding of their part in the overall project and how their performance impacts others.
• Delays are mitigated or if introduced to a project in delay, it can substantially help to get the project back on track.
• Communicationisimprovedsignificantly.
• “Fire-fighting”isdramaticallyreduced.
• Profitability increases for supply chain members whilst other important performance criteria such as completing to time and budget improve.
• The team gains a better understand of project risks and manages them on a daily basis as part of a collaborative team.
• Winning teams of suppliers are developed which encourage them to stay together for the future.

Endorsements

To date, every project which Constructing Excellence has helped to implement Lean Construction Last Planner has been on time or early, even when there have been significant delays at the outset of implementation. Some comments from users are:
“Last Planner has been an outstanding help in bringing our project in on time” Fulton Hogan, Auckland
“We would not have delivered this project
nor made our margin without Last Planner” Higgins, Wellington
“Our Hunua 4 project has embraced Last Planner and is producing great results in a very challenging and evolving project environment. Watercare, Auckland
The Last Planner tool works. This tool produces bottom line results by including and communicating to all levels & designations of construction delivery and operations. Highly recommended. Worthington Contractors, Christchurch

What’s Your Personality Type?

The Myers-Briggs Type Indicator® (MBTI®) has been used by millions to gain powerful insights about the personality preferences that guide interaction. Leaders in construction and engineering can use training courses on this practical tool to drive business strategy.
MBTI® breaks personality preferences into four dichotomies: introversion/extraversion, sensing/intuition, thinking/feeling, and judging/perceiving. These dichotomies can provide construction and engineering leaders with critical information about clients and the people they manage, and they can also reveal their own management styles and preferences.

Interaction
Introverts tend to focus their attention inward; quiet reflection and solitude energize them. Too much interaction with others can drain introverts, causing them to pull away from the team. Extraverts, on the other hand, focus their attention outward. Action, conversation, and interaction with others energize extraverts. When isolated, extraverts can become drained or even depressed. The strongest teams tend to balance these opposite personality profiles.

Information Gathering
Different types attend to different types of information. Sensing types focus more on concrete facts and the present. They tend to excel in task-driven mid-management positions. The intuitive type focuses more on high-level leadership. They consider the overall vision of an organization, abstract ideas, and future goals. Strong leaders understand what motivates their teams from top to bottom—and their clients.

Decision Making
Thinkers are logical and rational. Rule followers, they make consistent decisions but tend to focus on what’s wrong with a situation. The truth of a matter, even when it’s ugly, matters to a thinking type. Feeling types, however, strive for consensus and balance. They may be inconsistent and emotional, but they offer frequent praise and highly value optimism. The chasm between these two types can be a source of conflict in many organizations.
World View
Most managers fall into the judging type rather than the perceiving type. Judging types are direct and goal-oriented, list-makers with action plans. They, too, prefer logic over feeling. Perceiving types tend to be more empathetic managers, and as employees, are often more flexible and open to change.

Excellence in Construction and Engineering

The construction and engineering industry is rapidly evolving. Construction leaders need practical strategies for excellence in construction. Strong leaders must apply both business skills and people skills to drive solid, innovative business strategy. The Academy of Constructing Excellence’s MBTI® Personality Profiling course can equip leaders and personnel with the best strategies for effectively managing an ever-changing workforce and navigating an increasingly complex industry.

For real excellence in construction and engineering leadership, a plan for ongoing training is non-negotiable in a solid business strategy. In this rapidly-evolving industry, it is no longer sufficient to master current processes. Real leaders in construction must prepare for the future by expanding their knowledge base and by taking steps to develop their personnel. It’s simply good risk management.

Why Ongoing Training Is Critical

The landscape of the construction industry is complex and ever-changing. Successful leadership requires business skills, practical knowledge, and expert people skills. Modern business models are developing trends toward highly collaborative, integrated teams; networking; and coordination among suppliers, contractors, and clients. Construction industry leaders must be well-informed of current best practices in construction if they want to succeed in client satisfaction and business growth. Ongoing training courses are essential.
It is no longer sufficient to have the basic project skills for project execution. Regulations, building methods and standards, and workforce laws are constantly in flux. Cutting-edge technologies are being developed every day. New technologies lead to new regulatory considerations, and client expectations often follow these trends closely. What worked yesterday may not work today.
Employee turnover and promotion in an increasingly diverse workforce also create ongoing needs for training and re-training. Built environment executives need proficient communication skills to lead their teams toward innovation and excellence in construction delivery.
Ongoing training helps built environment construction leaders achieve their goals for managing change, supply chain management, performance measurement, and mastering the principles of lean construction or Building Information Modeling (BIM).

10 Hallmarks of Quality Training Courses

A well-developed course of training in construction management should:

• be developed and delivered by top industry professionals
• offer nationally recognized qualificationsfor alumni
• lead to real, measurable results in staff development
• help reduce turnover and lead to promotions
• build confidence, knowledge, and expertise among alumni at every level
• support business growth with real and viable networking opportunities and strategies
• offer hands-on, practical applications of tools and strategies
• incorporate international best practices at all levels of construction project management
• provide business leaders with tools for managing change, customer relationship management, supply chain management, high performance team management, business strategy, and financial management.
• offer expert insight and consultation on industry-specific areas like Building Information Modeling (BIM), Lean Construction, and risk and contract management.

Benefits of Training Courses

High-quality training courses deliver real results for construction and engineering professionals. With increased business, project, and people skills, alumni can lead change within their companies and the industry, bringing collaboration and the development of strong, integrated teams to the forefront.
Self-aware leaders and teams reduce strain on management and can spend more time networking, developing customer relationships, improving processes, and innovating in the industry. Reduced turnover and increased promotions for highly-qualified teams allow results-focused business growth and true excellence in construction delivery.
The Academy of Constructing Excellence (ACE) can lead the way.