Productivity, Measurement and Management
Productivity, Measurement and Management
Productivity, Measurement and Management
The decision to write on these matters was entirely emotional, Productivity is a scientific concept, in the sense that it can be
originating from a growing feeling of professional and intellectual logically defined and empirically observed. It is also measurable
indignation developed while listening to concerned individuals of in quantitative terms, which qualifies it as a "variable." Like most
disparate interests and purposes. With alarming recurrence, scientific variables (such as density or pro-capita income),
managers, entrepreneurs, cost professionals, economists, news productivity can be defined and measured in absolute or relative
commentators, politicians, and others have been advocating terms. A suitable definition of absolute productivity is the quantity
measures that ignore the benefits of increasing productivity or, of physical work produced by a unit of labor directly engaged in
worse, have lobbied for measures that decrease it, on the its production.
assumption that other factors have a greater role in improving the
well being of businesses, people, or nations. This should be By this definition, productivity in a constructionproject would
enough to turn a cost engineer into a crusader. be measured in tons of steel erected per work-hour or meters of
pipe installed per work-hour, these are simply the inverse of what
Productivity is a very broad subject. Therefore, this paper industrial terminology defines as "installation unit rates" or "labor
focuses on labor productivity in plant construction projects. As a unit rates."
general principle, the fundamental concepts on productivity apply
with minor adaptations to all fields of economic activity; it is the An absolute definition of productivity is not very useful.
practical application of the concepts, or the interpretation of data, Mucl more useful, and widely used in industry, is the concept of
that require a customized approach to specific fields of activity. relative productivity or productivity factor (PF), defined as the ratio
of the quantity of physical work produced by a unit of labor on a
The paper has been developed with four broad purposes: specific project and activity, to the quantity of the same work
produced by a unit of labor on a standard project in standard
o to provide a brief theory of productivity, specifying conditions. Note that, by this definition, productivity is the inverse
definitions, measurementprinciples, variables affecting it, of what industry defines as "labor factor" (LF) (work-hours per unit
and affected by it; of work completed, divided by the corresponding "standard" work-
o to review the availability of empirical data on hours).
productivity, looking at some of the main data sources,
how closely the records seem to confirm the theory, and Also note that, using the given definitions, the productivity
how reliable and useful the data appear to be; factor can be calculated by dividing the standard labor unit rate by
o to examine the merits of managing productivity, arguing the current actual labor unit rate. This is an alternate method used
that productivity is the fundamental controllable factor in in industry to measure productivity.
wealth production, while many other economic variables
depend on it; that increasing productivity tends to have Productivity should not be confused with competitiveness or
beneficial multiplying effects on other economic profitability, which are directly affected by it, but are also
variables; and that this is generally true at every level of influenced by other unrelated factors, such as raw materials costs,
economic aggregation; and transportation costs, overhead, financial costs, and taxation.
MAT.4.1
1994 AACE TRANSACTIONS
Productivity is sometimes considered as an indicator of good In practice, the performance to budget factor is usually
work ethics, but in reality, it is only loosely affected by prevailing measured as part of standard project management; the productivity
work habits. Nor should productivity increases be considered as factor can be calculated indirectly by multiplying the performance
achievable by staff cuts, because personnel reductions follow factor by the productivity factor assumed in the budget estimate for
productivity growth; they do not cause it. Long-term wage and the project. The applicable formulas are reported below.
salary increases, not reductions, are made possible (and often
induced) by productivity growth, just as stagnation in inflation An accurate measure of the PF, therefore, compounds the
adjusted wage and salary levels is inevitable in the long term, if accuracies of two measurements and the availability (and correct
productivity fails to grow. use) of a suitable standard. Techniques for recording physical
quantities of work and work hours are not to be discussed here;
Productivity and Peiformance these techniques can be sufficiently accurate for practical purposes,
and the records are normally collected and kept for reasons
In this paper, "productivity" will always mean "relative independent from considerations of productivity, such as payroll,
productivity" measured by means of productivity factors, as defined unit price contracts, progress payments, cost accounting, and other
above. This definition is very useful and practical, for at least four "hard" requirements.
good reasons:
The difficulty arises in relating the current labor unit rate to
* its meaning is easy to grasp (1.1 is better than 0.9); a comparable standard rate. Considerable confusion permeates the
it is independent of the units of measure used on a issue of productivity standards, which deters many managers from
project (tons or pounds, English or metric); dealing with productivity issues. In addition, the standards are
it permits the calculation of weighted average simply not available to (or understood by) many project or
i r t cfweigntedaverage production management professionals.
productivities, thus permitting to define and measure
project productivities, or regional productivities, or EFFECTS OF PRODUCTIVITY GROWTH: DISCUSSION
productivity evolution through time; and
* it permits measuring the productivity of any project Interdependence and Controllability
versus a single accepted standard (the "standard project"),
making productivity measurements objective, not just a Some management actions have durable effects, and their
measure of performance relative to a budget for a given benefits are compounded by the resulting positive impacts on other
project. factors. Other measures tend to generate secondary effects that
will in time offset the initial benefits, or even result in a global
Productivity is an objective concept measured, ideally, against loss. In economics and management, the cause and effect principle
a universal standard, whereas budget performance is relative, is less than straightforward, and effects always feed back on their
measured against a project budget which can be "fat" or "lean," causes to some extent. We should therefore ask, "If we improve
right or wrong, commercially or politically motivated, or a bit of productivity, what will the secondary effects be, and will there not
all. Productivity monitoring is useful mainly for strategic reasons, be negative consequences after the short term?"
such as corporate planning or competitiveness improvement.
Controlling performance to budget is useful mainly for tactical Some variables affecting economic production are totally
reasons, such as project control. It follows that budget uncontrollable; others are under some control by national bodies,
performance and productivity, which are sometimes confused, are such as governments or central banks. Individual companies are
only indirectly related. rewarded for predicting these variables but cannot control them.
Other variables are controllable to various degrees at the individual
Productivity Measurements company, plant, or project level. Intelligent control of these
variables must be the objective of management. Hence, we should
Like most variables in economics and management sciences, also ask, "How controllable is productivity?"
productivity is not easy to measure, and can only be measured
indirectly, that is, by measuring other variables and then By experience as well as intuition, productivity depends on
calculating productivity from them. several major contributing factors, and in turn generates a wide
range of consequences. The main factors that affect productivity
Measuring the productivity factor (PF) for an activity involves are:
three necessary steps:
investment in production technology, equipment, and
* measuring physical work performed (typically, quantities facilities;
installed or produced); * training and experience of the workforce (including the
* measuring the work-hours to complete it, thereby "learning curve" effects);
calculating the actual labor unit rate; and * quality of management (organization, motivation,
* relating the actual labor unit rate to the standard unit rate: incentives, procedures);
Productivity Factor PF = Standard Labor Unit Rate / * egislative and regulatory environment
Actual Labor Unit Rate, or:
Labor Factor LF = Actual Labor Unit Rate / Standard *· quality of surrounding infrastructure (tranlsportation,
Labor Unit Rate suppliers);
MAT.4.2
1994 AACE RANSACTONS
° general levels of education; stimulate higher earnings and better work satisfaction. Experience
o social environment (labor relation patterns, social indicates that pay increases invariably follow productivity growth,
tensions); and after some time, and conversely, both theory and common sense
o geographic factors, including weather patterns. indicate that without productivity growth, there is no room for real
(inflation adjusted) growth in average earnings. If we also note
From the viewpoint of controllability, the first three factors are that
that these
these processes
processes tend to be
tend to be anti-inflationary, the global
anti-inflationary, the global long-
long-
term impact of productivity growth on society is highly desirable.
highly controllable at the company or project level; the fourth and These consideraions leaduone toon cde s highly desrable.
fifth factors are marginally controllable at best; the sixth and These considerations lead one to conclude that the creation of
excess productive capacity as a side effect of productivity growth
seventh are only controllable at the national levels; and the last is is probably less desirable from a societal viewpoint than the
uncontrollable. Quantitatively, the impact of these factors has been
found to be considerable. On this basis, productivity is found to "recycling displaced worers is usually easier than converting
be highly controllable, much more controllable than, for example, plants and equipment
wage or salary levels, purchased material costs, or financial costs.
Long-tennm enefl
Effects of Productivity Gwth r ef
The problems frequently associated with productivity gains,
In terms of direct effects, an increase in productivity by
discussed in the previous paragraphs, should always be considered
definition reduces labor costs in direct proportion. At the primary
at
at the planning stage,
stage, but
but they should always be viewed as risks to
impact level, this causes increasing profit margins, decreasing the planning they should always be viewed as risks to
prices and increasing sales, or a combination of all. Therefore, in be managed, not as problems to be avoided altogether. Otherwise,
absurdly, any productivity increase should be avoided.
first approximation, all economic variables in the affected activities absurdly, any productivity increase should be avoided.
show improvements. That productivity gains are bad is, indeed, the undeclared
MAT.4.3
1994 AACE TRANSACTIONS
government and of public good will until, eventually and budget performance as opposed to productivity monitoring.
inevitably, the protection disappears (the subsidizers, whether Different is the case with corporate management; the lack of
taxpayers, consumers, or foreign competitors, one day will stop the objective productivity data deprives a business from an essential
subsidy). At that point, recovering the lost ground will be hard, tool to monitor its intrinsic competitiveness, and therefore its long-
painful, and perhaps impossible. term health. In business reality, productivity, whether or not it is
measured or understood, is as hard as cost or profit; referring to the
Conclusions From The Productivity Theoly reasons above, its monitoring is important precisely because it is
objective and unspecific, the main reasons why it is disliked. With
The conclusions drawn from the theory of productivity, no sufficient education and information, productivity data should be
matter how it is formulated or presented, are: neither misunderstood, nor seem soft or abstract, at least no more
than costs or profit reports. Productivity is often the hidden cause
· productivity is controllable by management; of cost and profitability trends. Attempting to act on the latter
· productivity gains always provide immediate benefits, but without trying to manage the cause is not being "results oriented";
often cause short-term pain too; rather, it leads to managerial ineffectiveness.
· productivity gains always provide long-term benefits
while short-term pains tend to revert to benefits in the In conclusion, profit for a given period and budget
longer terms; and performance on a given project are the best measures of contingent
in any case, a business cannot afford not to take the risks success and of positive results. Productivity factors and their
with
inanyociase,
productivity improvements,
associated with productivity improvements. totrends are better measures of the long-term ability to remain
economically successful for a company or, indeed, a nation. Lack
Why Pductivity is Neglected, But Should Not Be of interest in monitoring productivity by corporate management is,
therefore, never justified.
While monitoring productivity is so central to business
management, in practice many managers do not feel comfortable For these reasons, corporate (as opposed to project) managers
with it, and prefer to deal with other variables. Such neglect is an should insist that productivity records be maintained and analyzed,
anomaly and should be corrected. The main reasons for this lack and should themselves be intimately familiar with the global
of interest are: picture provided by these records. Estimators, especially on hard
money contracts, also need reliable information on productivity
trends.
* most project, production, and financial managers feel
comfortable with hard variables; costs, profits and budget
performance factors are perceived (only half correctly) as EMPIRICAL DATA ON PRODUCTIVITY
being more objectively measurable than productivity
factors; ~~~~~~~~factors; ~ProductivityData Sources
· most project managers feel responsible to a budget. Their
budget is specific to the conditions of the project, is well The following four types of productivity data sources are
understood, and is often negotiated (and further available (with examples for each type):
modifiable to some extent) with clients and/or corporate
bosses. Managers are therefore comfortable with budget international organizations:
performance factors being used as a measure of their -
project (and their own) performance; - international development banks, and
* by contrast, most project managers are equally reluctant - United Nations;
to measure their projects against an objective standard, * private monitoring organizations:
which they are not sufficiently familiar with, is not economist intelligence unit,
economist intelligence unit,
negotiable, and by definition is not meant to reflect the - international investment firms, and
specific conditions of their project; hence, while budget - some large accounting fins;
performance control seems useful, productivity national organizations:
measurements seem abstract and academic; natonal anzatons:
* while, hard variables and budget performance are - financial ministries, and
generally understood, productivity factors are easily
misunderstood and misconstrued by non-specialists, and ati
managers dislike data requiring frequent explanations; * major corporations.
and
* productivity information, if disclosed to competitors, The first three sources collect productivity data at the global level,
as productivity indicators (typically as a percentage of U.S.
cus tomers,and the public in . an uncontrolled manner, can productivity in a reference year), mainly for macroeconomic fine
tuning (governments and central banks) or for strategic reasons
These are justifiable reasons for project managers to concentrate on (investment companies). Some of these sources make their data
available; some do not. Some are politically motivated. Most do
MAT.4.4
1994 AACE TRIANSAMCTONS
not provide good documentation on their data collection methods Project conditions include the work conditions already
and assumptions. The vast majority of the productivity indicators mentioned plus other possible requirements such as schedule
reported by these sources are related to the manufacturing industry. accelerations or slowdowns, construction work in operating plant
All sources are interesting from the viewpoint of global conditions, or through inclement seasons.
perspective, and to occasionally verify the data used for business
management purposes, for example, to estimate work transfers The practical necessity of this separation for planning as well
from one location to another, as for monitoring
separation be madeis when
obvious. This productivity
historical requires that factors
the same
are
recorded for future reference. A smart analysis of the data is
For planning and management, however, businesses have to required when history is recorded; otherwise, the data may be
rely mainly on their own data. Typically, the major construction almost useless in the future.
and manufacturing companies maintain standard labor estimating
manuals, also used as productivity standards, and collect historical Hstoical Data Conelations
productivity factors.
A classic historic association is the "boom and bust" cycle.
Pidulactivity Standardns Normal productivity factors show a considerable worsening during
a strong increase in business activity (boom cycle), especially the
For a typical corporation, the standard labor estimating manual late phase of the cycle; by contrast, the PF improves during a
provides labor unit rates for the detail operations most frequently recessionary cycle, especially towards the end, when business
performed in its business, under standard conditions. Detail volumes cease to decrease. The range of this variation has been
operations are defined in similar, but not identical, ways by found to reach 25 percent on construction projects in Western
companies in the same line of business. Some familiarity with Canada. With reference to the factors affecting productivity, boom
company manuals and definitions is therefore required for correct conditions lead to deterioration of workforce experience and
interpretation. training, of management quality, and, to some extent, have a
negative impact on infrastructure and social variables.
Standard conditions include:
Another recurring historic pattern is the association of pay
o a standard place (often in the proximity of the company levels, tooling, and productivity. A classic case is provided by
headquarters); South Korea in the past 25 years. In 1974, the pay levels for
o a reference time, often meaning the time frame when the unskilled construction labor in South Korea were a fraction of
standards were developed and found applicable, and those in the U.S. (less than 1:10); levels of tooling were at an
o standard working conditions, meaning different things to absolute minimum (almost no cranes or hoists); and staffing was
each company, but usually relating to factors such as huge (10 to 20 workers in lieu of one crane), giving a PF of
workforce training, tooling, learning curve, and weather perhaps 0.1 (10 percent). Under these conditions, construction
and environment. These factors are assumed to be either equipment was simply not economical. Ten years later, in 1984,
ideal/optimum, or average/typical, depending on how South Korean pay levels had grown to 25 to 35 percent of those
each company defines its own standards. in the U.S., the levels of tooling appeared comparable, and
productivities made the South Korean total costs comparable to
Productivity factors (PF), when recorded, refer to these standards; those in the U.S. The PF, still lower than in the USA, had
for example, for a given project, the historical PF is the ratio of the increased in rough proportion to wage rates, that is, work-hour
theoretical work-hours calculated using the standard labor unit factors had decreased in inverse proportion to wage rates, keeping
rates, to the actual work-hours historically recorded for the project. total labor costs in balance with those in the U.S. By 1989, the
situation had evolved into the typical "boom" phase of the "boom
Similarly, at the planning level, a planned or budgeted PF is and bust" cycle, with productivity still growing, but slowly, while
defined by estimating the expected overall deviation of project wage and indirect cost levels were spiralling upwards. Overall
conditions from the standard. The PF formula is the same as for fabricators' costs were on the verge of losing the competitive
the historical PF, but using the budgeted in place of actual work- advantage on those in the U.S.
hours.
Similar quantitative correlations among variables would be
D£ta Nounnmalsizolon found if the corresponding cycles were examined in the EEC
countries, Japan, and the U.S.
To be useful for management and planning, productivity data
must be normalized. This means separating the effects of specific
conditions or requirements of a project, from the productivity PIROIDUCTIVIMIIY OIIORMG
typical of the place and time. In practice, referring to the above,
this is achieved by splitting the project PF in two components, so Pnbject PndanlLcdviy IRepoRnng
that:
At the estimating and budgeting stage, the expected project
PF(Project) = PF(Location, Time) x PF(Project Conditions) productivity rates should be studied and evaluated, and used to
Equation (I) derive estimated installation unit rates for detail operations. At the
project execution stage, "performance to budget" will be monitored
PF(Location, Time) is defined as the normal PF for that location and managed, while productivity will not be directly monitored
and time. during day to day operations:
MAT.4.5
1994 AACE TRANSACTIONS
In other words, monitoring "performance to budget" indirectly CONCLUSION: PROPOSAL THAT AACE START A
provides constant information on productivity, as long as the PRODUCTIVITY MONITORINGPROGRAM
budget PF is known. Purpose and Scope of the Program
At project completion, the actual "final performance to Once fully implemented, the program should gather
budget" will be recorded for the project, and compounded with the productivity records, verify and validate them, normalize them,
original budgeted productivity as shown, to calculate the historical categorize them, and report the resulting information, at minimum
productivity rate for the project. Once historical productivity to the entities participating in the program, and possibly to public
records have been normalized for several projects, a databank of bodies and the public.
historical productivities will become available for future reference
and planning. The scope should cover at minimum labor productivity data
in construction projects in the U.S. and Canada. Possible additions
To be meaningful, PFs on each project should also be broken in future could include Mexico and other locations.
down by main category of work (mechanical, electrical, piping,
civil). Organization of the Program
MAT.4.6
1994 AACE TRANSACTIONS
0 the committee would constantly verify and improve the ° the information may be too expensive to produce with
reliability of the process, and the value of the information the resources available for the effort.
generated.
PnogmnnOimplementafion
IBnefts and RiDsks of XIe Itgrm
The program should be implemented in stages, with success
This program should be of considerable benefit to the after each stage being a precondition for proceeding to the next.
participating businesses, because each of these would gain access A proposed plan could be:
to a volume of information that reflects the experiences of all.
Ways should be explored to extend the regular availability of o 1-general feasibility study;
the produced information to other parties, possibly for a o 2-detail feasibility study, including survey of businesses
subscription fee, with proceeds used by the program to offset interested in participation and budgeting;
operating costs and enhance the process. o 3-formation of initial committee;
AACE should gain in profile and prestige, and upgrade its o 4-defimition of process, procedures, methodology,
abilities as a generator of sophisticated information and smart standards, operating rules;
analysis. Individual AACE members would benefit from 0 5-recruit participating companies;
privileged access to the information, for example, an annual issue 0 6-gather historical data from companies and other
of the database extract at no cost (or at a reduced rate). sources (20 years of history);
o 7-compile 20-year history of productivity indicators by
The public good in general would be well served, because the region
information produced would serve purposes of general education o 8-activate continuous data gathering and processing
on business and economic issues, and possibly inspire political and
social leaders in positive and useful ways. system; and
o 9-program up to speed;
Risks of failure exist, and could originate from two causes:
A realistic time frame might be nine months for steps 1 and 2; six
o the information produced may not carry enough value to months for steps 3 and 4; nine months for steps 5 through 7; and
generate sufficient interest from enough parties; and 12 months for steps 8 and 9, a three-year total.
MAT.4.7