Key Facts

• The construction sector’s labour productivity grew by just 17 per cent from 1994 to 2024, compared to 64 per cent growth across all market-sector industries and 58 per cent% in manufacturing.
• If construction productivity had kept pace with other sectors, Australia’s economy would be $60 billion better off every year.
• Labour productivity has been particularly weak; dwellings built per construction worker has declined by roughly 50 per cent since the 1970s.

The Policy Landscape

Productivity in Australia’s construction sector has been declining for decades and the consequences of this are being felt by everyone.

Earlier this year, the Productivity Commission released its report into productivity growth in Australia’s housing sector, which confirmed the bleak state of the sector.

A highly decentralised system

Australia has the most decentralised land-use planning system in the OECD. While States and Territories are responsible for planning and zoning, decision-making is often delegated to over 500 Local Councils, each with their own planning schemes, priorities, and approval processes.

This mishmash of decision-making processes creates a highly fragmented system where regulations and timeframes can vary significantly between jurisdictions - and even between suburbs.

As an example, a development application for the construction of a three-story apartment block in Sydney in the 1970s would have been 12 pages long; however, today’s applications are sometimes hundreds or thousands of pages, often requiring environmental, heritage, traffic, and sustainability assessments.

Key opportunities

While the Federal Government doesn’t directly control planning processes, it plays a critical role in driving national reform through funding agreements, productivity incentives, and skilled migration policy.

Several major federal frameworks are shaping current efforts, including:

• The National Housing Accord (2022–2030): A Federal commitment to deliver 1.2 million new well-located homes by 2030, supported by funding for social and affordable housing and partnerships with State Governments and industry. However, completions are currently tracking below the required rate.
• Workforce and Skills Policy: The Federal Government controls migration and skills recognition settings, which are critical to addressing acute labour shortages in construction. Policies include an election commitment of $78 million to establish the Advanced Entry Trades Training Program which will fast track the qualification of 6,000 tradies.
• The National Construction Strategy: In Nailing Construction Productivity, the Australian Constructors Association (ACA) called for a National Construction Strategy to drive productivity. The Commonwealth has agreed, and tasked ACA to lead the development of a stream of this strategy focused on increasing innovation and the use of modern methods of construction.
• Incentivising industry innovation and States and Territories to remove red tape: During the Federal Election, Labor promised $54 million of targeted investment in advanced manufacturing of prefabricated and modular home construction. There was also a pledge of $120 million from the National Productivity Fund to remove red tape and help more homes be built faster.

Industry proposals

Industry has also proposed a range of reforms to improve productivity.

The Business Council of Australia has urged the Federal Government to create a National Reform Fund, which would see money given to State Governments if they improve planning systems and cut red tape.

“We want the Federal Government to create a new national reform fund, like the one created in the 1990s, that incentivises states to fix regulation and planning bottle necks that hold back homes being built” - Chief Executive Bran Black

Meanwhile, the ACA has called out the construction sector’s exposure to extreme commercial risk. In its All Risk, No Reward Report, it notes that building firms are more than twice as likely to enter administration compared to all other industries. The ACA argues that the Federal Government should reform procurement practices, such as fixed-price contracting, and reset commercial incentives to support productivity.

The Productivity Commission has also recommended that the Federal Government trial extension services for the construction industry.

This idea is borrowed from the agriculture sector and would see the Government promoting new innovations and technologies and helping those in the sector with implementation – for example, government-funded experts would work directly with construction companies that don’t have the time, capital, or staff capacity to research and implement productivity innovations on their own.

Challenges

1. Small and microbusinesses

Perhaps the biggest challenge for productivity in the construction industry is its fragmentation. There are currently over 410,000 construction firms in Australia; of these 91 per cent are micro-businesses with fewer than five employees. These small and micro-businesses often don’t have the capacity to scale, invest in innovation, or manage complex projects.

It is worth noting that this structure is not accidental; it is reinforced by regulatory and tax settings. For example, the instant asset write-off for businesses with turnover under $10 million encourages firms to remain small.

Payroll tax is another example, with tax rates of between 4 and 6 per cent applied once total taxable wages reach between $900,000 and $2 million (rate and threshold varies by state).

These two taxes especially disincentivise small and micro construction businesses to grow. However, it is with this growth that firms typically experience productivity gains from economies of scale and innovation investment.

2. Skilled Labour Shortages

The construction sector continues to experience a chronic shortage of skilled workers, worsened by delays in migration settings and training pipeline gaps.

In April 2024, Master Builders members reported that 85 per cent were finding it challenging to hire suitably qualified workers, while 66 per cent of respondents identified workforce shortages as the industry’s most pressing issue.

3. Slow approvals process

One of the most significant bottlenecks constraining construction productivity is the lengthy and unpredictable approval process. Before construction can begin, developments must pass through multiple stages including concept design, detailed planning approvals, building permits, and infrastructure connections. Each stage involves scrutiny from various State and Local Government agencies, many of which are under-resourced and overwhelmed by demand.

This results in delays that can stretch months or even years, driving up costs for developers and creating uncertainty that discourages investment.

4. The Unions

The role, influence and impact of unions within the construction sector is a highly complex issue, and there have been very serious allegations and initial findings of corruption and criminal behaviour in some union organisations.

However, at its core, unions play a vital role in protecting the rights and ensuring the safety of their workforce.

Innovation, a perquisite for productivity gains, requires new ways of working and methods of construction, and there needs to be a balance of objectives across multiple stakeholders.

Conclusion

Productivity in construction is a multifaceted challenge. There are issues at a local and state level for project approvals - to be productive, there must be work. There are industrial relation challenges and a culture of regulation where you have to regulate in response to the worst behaviour. This all occurs in disparate sector with different contract arrangements and responsibilities for builders depending on their scale and which state they operate in.

‍