Construction is one of the world’s largest industries, accounting for 13 percent of global GDP.1 Yet it also struggles with low productivity growth and performance while facing urgent needs for more skilled labor, steadier supply chains, simpler regulations, and predictable commodity and equipment pricing. These would be challenging at any time but are particularly significant today as investment surges amid infrastructure renewal, the energy transition, and increased demand for data centers and facilities manufacturing advanced technology, such as semiconductor plants.
Overcoming these challenges requires numerous thoroughly developed foundational elements to be in place from the outset, whether in preparation for large capital programs or for upgrading an existing capital portfolio. One crucial element is a robust contracting and procurement strategy, starting with an efficient and effective capital procurement organization. This article details the headwinds faced by owners and contractors and proposes three actions:
- developing a contracting strategy that evaluates capabilities and optimizes resource utilization
- implementing a capital procurement strategy that assesses risks to develop a competitive and effective bidding and compensation approach
- analyzing market strengths to bridge capability gaps within organizations and their partners
Both the public and private sectors are committing billions of dollars to capital expenditure in the near term and midterm on a global scale, totaling $16.3 trillion in 2025 alone and growing at a CAGR of 6 percent.2 As always, though, execution is key. According to McKinsey analysis, focusing on contracting and capital procurement to more efficiently deliver assets has the potential to capture cost improvements of 5 to 15 percent. In North America alone, where construction spending is forecast to hit $3 trillion in 2025, this would equate to $150 billion to $450 billion of value at stake for owners and contractors.3
Overcoming construction’s headwinds
It is potentially time for the construction industry to boom. In Europe, the EU Chips Act aims to invest more than $50 billion from both public and private sectors to support semiconductor infrastructure,4 while India is allocating 3.3 percent of GDP to infrastructure investment5 and Saudi Arabia has announced $1.25 trillion of capital projects.6 In addition, geopolitics is driving a major shift in advanced manufacturing and data center footprints as companies invest in reshoring or nearshoring operations to address security pressure and supply chain resilience risks.
In the United States, the Bipartisan Infrastructure Law aims to invest $1.2 trillion in improving the nation’s infrastructure, while the CHIPS and Science Act allocated more than $50 billion to boost domestic semiconductor production.7 But while the current environment presents a huge opportunity for the country, the United States may struggle without addressing a range of market and industry pressures that are changing how owners and contractors approach projects, with inherent risks being passed through via cost-plus contracts, additional exclusions, and significant markups for contingencies—especially considering uncertainty regarding tariffs.
Construction productivity is stagnating
Despite significant technological advancements and increased investments in off-site production, construction labor productivity has stagnated for decades, trailing other sectors (such as manufacturing) and the total economy (Exhibit 1).8 From 2000 to 2022, the CAGR for construction productivity was a mere 1 percent, as compared with 3 percent in manufacturing and 2 percent in the total economy. This stagnation is global, with advanced economies such as the United States experiencing negative growth rates in construction productivity due to factors such as a lack of standardization, workforce shortages, slow construction technology adoption, and inefficiencies in daily administrative processes.
Rising labor shortages are driving up both direct and indirect costs
Labor shortages affect organizations through both the direct craft labor market and the supervision and indirect labor market across engineering, materials fabrication, on-site construction, and logistics. In 2023 and early 2024, the US construction industry had more than 400,000 job openings across different skills, which put pressure on labor costs and productivity rates. While the gap narrowed to around 250,000 openings in late 2024 and early 2025, the shortfall remains a significant issue as construction projects continue to be announced and workers at retirement age exit the industry (Exhibit 2). General volatility also persists, with implications for labor costs, risk contingency, and construction productivity.
Despite increasing technology adoption, the imbalance between the demand for and supply of workers has resulted in labor costs rising significantly, both in terms of wages and recruitment costs. Worker wages alone have increased by 16 percent since January 20219 amid labor shortages, especially for electricians and pipefitters for large advanced-technology or process-focused projects.
The cost premium associated with securing labor, combined with supply chain volatility and inflationary pressure, has made securing lump-sum contracts challenging for owner organizations. If lump-sum contracts are secured, steeper premiums and risk contingencies could be added to bids to cover the majority of a contractor’s exposure. Alternatively, “flow through” clauses are included into contracts that allow for risks to be shared via change orders, creating asymmetric risk exposure for owners but with reduced upside if costs reduce.
Supply chain strain is leading to prolonged delays
In recent years, the capital project–focused supply chain has been strained, resulting in prolonged lead times for critical facility equipment and construction materials. What initially started as logistics-related challenges during the coronavirus pandemic has broadened into a systemic supply-side shortfall. In addition, the concentration of capital into advanced industries such as semiconductors and data centers is spiking demand for specific equipment and materials, exacerbating the challenge in certain procurement categories.
These delays not only disrupt project schedules but also escalate costs. Many companies are proactively planning and securing roll dates, effectively reducing lead times by up to nine months. This approach has become indispensable for the efficiency of large-scale projects, where obtaining essential facilities equipment such as substations and transformers often requires lead times ranging from 50 to 150 weeks, according to McKinsey analysis. Some owners are also opting to provide an up-front 25 percent deposit to ensure the timely delivery of vital components.
Material price volatility is straining budgets and schedules
During the past two years, rising demand and variable supply have resulted in price volatility surging across construction materials, with cost shifts of more than 30 percent for everything from steel to copper and (precast) concrete. These fluctuations extend beyond raw material prices, affecting manufacturing costs and logistics prices and significantly challenging organizational planning capabilities.
Due to the fragile nature of many project plans, dynamically responding to these fluctuations in real time is challenging for construction projects, affecting the sector’s performance and resulting in cost overruns and schedule delays. In addition, resequencing project schedules in response to labor shortfalls or identifying new suppliers to mitigate tariff changes while also focusing on project delivery puts project teams under increased pressure. Organizations are responding by introducing more phasing into project timelines, opting to develop a minimum viable product initially before scaling up with greater demand-side certainty, deferring capital expenditure to grow near-term value, and using more advanced contracting and procurement approaches to smooth the curve of impact from risks. For example, owners are reserving capacity on lines of major equipment manufacturers for a future pipeline of projects with a known range of requirements and developing long-term partnership agreements with major contractors.
Regulations are increasingly challenging
When choosing a project location, factors such as land costs, permitting procedures, regulatory frameworks, and labor availability—as well as geographic considerations such as cost differences between regions or union labor—must be assessed. International ventures add further complexity, from varying environmental regulations to permit challenges. Additionally, dynamic tariff policy is affecting the construction industry in line with products and countries subject to tariffs. This then affects site selection for new builds or expansions, balancing pressure to onshore and localize manufacturing with material and equipment sourcing challenges. For example, buyers of electrical equipment (such as US purchasers of South Korean generators or transformers) are seeking contracts to lock in reservations for local production to mitigate tariff exposure. In the immediate term, this exerts upward pressure on prices because demand is high for a finite amount of production slots until new capacity comes online, tariff risk fades, or demand decreases.
In addition, proximity to residential areas or airports may restrict construction activities. For example, Taiwan Semiconductor Manufacturing Company’s expansion to Arizona encountered US regulatory hurdles—such as permitting, labor laws, and visa requirements—that caused delays and increased costs. To mitigate risks such as these, companies must engage with local communities, address their concerns, and build strong relationships with local authorities.
Three actions to thrive amid market pressures
The right contracting and capital procurement strategies can help leaders overcome these challenges by providing a framework for mitigating risks and enabling opportunities to capture value, supported by data-driven decision-making and analytical assessments of commercial outcomes for each contracting party. A well-rounded contracting strategy emerges from three actions: evaluating capabilities and optimizing resource utilization, assessing risks to develop a competitive and effective bidding and compensation strategy, and analyzing market strengths to bridge capability gaps. The strategy should support the project’s goals in terms of cost, schedule, quality, safety, and sustainability while aligning with broader business objectives and market conditions. And implementing it requires undertaking a tender strategy (including robust negotiations using advanced methodologies), compiling an owner risk profile, setting vendor selection criteria, implementing terms and conditions, and having a strategy for contracting.
1. Evaluating capabilities and optimizing resource utilization
The foundation of any effective contracting strategy is a deep understanding of the owner’s capabilities, which include financial resources, technical expertise, managerial experience, and a track record in similar projects. This insight is essential for determining what project management can be handled internally and what should be outsourced so the contract scope can be optimized for effective implementation.
So, how should work be divided among various contractors? This decision-making process should consider the optimal size and scope of each contract package to meet local market capacity and maximize competition among contractors when bidding (for an example, see Exhibit 3). Owners need to ensure that scope interfaces are well managed, with clear delineation of responsibilities, to avoid delays. Robust and clear processes that are specified in the contract document can help to mitigate challenges here, supported by a designated area or scope manager from the owner’s team. If owners take on some scope, it can reduce the handover between trades through shared access to common services and standardized documents. For example, owner-provided site services such as office trailers, scaffolding, and cranes helped a North American semiconductor project increase productivity, reduce cost, and manage interfaces between contractors with a project-first mindset, removing bottlenecks across trades.
To avoid supply chain delays for advanced-technology projects, an optimal packaging strategy involves prioritizing early in the procurement process packages with long lead times—such as cooling systems, power modules, and networking equipment. Simultaneously, dividing contracts into material, equipment, and labor packages can help manage site-specific challenges, such as fluctuating material costs or local labor shortages. For example, separating structural steel procurement from assembly labor contracts allowed a major North American data center project to lock in steel prices early while maintaining flexibility in workforce management. Strong internal capabilities, including skilled project controllers and schedulers, further enhance oversight and supplier performance, reducing overall costs and risks.
2. Assessing risks to develop a competitive and effective bidding and compensation strategy
Effective risk management starts with identifying and comprehensively assessing potential project risks using the TEMPO framework: technical, execution, market, political and social, organizational. This approach involves creating various risk scenarios, conducting probabilistic assessments, and understanding their interdependencies to formulate a robust mitigation strategy. One large energy company recently undertook precisely this process, evaluating project risks across its more than $1.5 billion in capital investments through tailored workshops, employing the TEMPO framework, and developing a customized probabilistic risk model to lower its risk profile. They then undertook a simulation via cross-functional workshops to evaluate the governance processes established to mitigate risk, examining issue escalation pathways, response times, decision-making capabilities, information availability, and impact on the broader project. The result was a series of well-understood risks, a refined and resilient project governance model, and a more capable owner’s team prepared for the project to commence.
Once risks have been assessed, developing a competitive and effective bidding and compensation strategy is essential. This includes choosing the best methods for soliciting bids and designing a compensation structure that balances contract types, payment terms, and performance incentives. Contractors that traditionally opt for lump-sum contracts incorporating risk premiums are increasingly shifting to open-book contracts that share uncertainty and risk with the owner, which requires rigorous oversight during the negotiation and construction phases to ensure costs remain controlled. Here, owners should seek to understand their capabilities, processes, and systems before engaging with a contractor to ensure the contracting strategy aligns with the owner team structure and operating model. Running an organizational assessment to identify improvement opportunities in the owner’s team and share best practices is an effective approach. Owners should seek to understand the execution-specific risks, such as project complexity, and invest in mitigation by bringing in an experienced workforce or allocating specific contingency tranches to the work.
Additionally, the emerging practice of “collaborative contracting” in the construction sector exemplifies a transformative approach to project management.10 This method fosters a cooperative environment through a unified contract among all key stakeholders, incorporating profit sharing and a no-fault clause to enhance collaboration and efficiency. Joint project steering committees further reinforce the collaborative model, keeping a project on track by holding each stakeholder accountable and collaboratively addressing challenges that emerge. For instance, a large European oil company implemented this strategy on its subsea oil platforms and facilities, achieving cost savings of more than 23 percent and completing the project six months ahead of schedule. An effective bidding and compensation strategy may also help navigate the local regulatory environment, including managing relationships with local unions and ensuring compliance with labor laws.
Negotiations cannot be ignored, especially with challenging market dynamics that have shifted where and how players are willing to take on certain risks. Using advanced negotiation approaches that take inspiration from the Multiple Equivalent Simultaneous Offers (MESO) technique helps pinpoint what matters most to each party to help get to a better collaboration point. Elements of MESO are used to probe into possible solutions and the reactions of each party to those solutions. For example, scenario combinations can be tested for three key sets of terms and conditions with a general contractor. How this general contractor responds to each of the scenario combinations highlights what is important to them and where the owner may have an opportunity to get stronger terms with a trade-off in releasing other terms of lower importance.
3. Analyzing market strengths to bridge capability gaps
It is critical to thoroughly analyze contractor capabilities—including technology adoption, labor availability, and material resources—and understand the competitive landscape. Strategies should be designed to exploit market strengths and address weaknesses, which may include forming joint ventures with international firms to bridge local capability gaps. This approach is particularly relevant in the development of advanced-technology manufacturing—such as semiconductor fabrication plants in the United States and Europe, where local engineering and construction firms partner with companies in Asia that have relevant experience in developing these types of capital projects.
Owners can also invest in developing suppliers and the broader supplier ecosystem. By allocating limited-scope items to local, smaller contractors, owners can grow local capabilities and business, thereby establishing strong relationships with the local labor pool to grow talent requirements and capabilities and future-proofing capital-intensive growth cycles. Where labor availability or workforce productivity is a known challenge (such as for remote projects), a labor strategy is typically developed by owners to understand the risk profile and trade-offs early in the project life cycle. This analyzes local macroeconomic, project, contractor, and public-sector data to determine overall labor availability (and expected base wages). The strategy then explores suitable performance incentives and rewards as well as infrastructure requirements to support the workforce—both on- and off-site; it also includes catering, mobilization and badging, site access and entry, and accommodation. Given that many megaprojects require a workforce of 5,000 to 10,000 trade laborers that must mobilize over the course of a year or even less, getting the strategy right is important. Comparatively, a typical organization employing a similar number of employees would take years to reach the same headcount, giving it more time to prepare.
Tapping capabilities in this way gives companies the opportunity to support their contracting strategy with key enablers such as emerging digital technologies for improving project management. For instance, generative scheduling,11 electronic request for X, AI, building information modeling (BIM),12 3D photogrammetry, and other technologies are transforming the operational landscape of capital organizations and improving execution efficiency. Enablers such as a common data structure, KPIs, and reporting frequency need to be included in contracts with suppliers and vendors to ensure technology can be used effectively, leading to greater productivity and improved project outcomes.
Projects are now run from (digital) control towers, driving decision-making at all levels of the capital organization through radical transparency and information centralization. Site and satellite imagery is being used to support earned value reporting and quantity measurement, facilitating invoicing and payment processes. Construction sequences are being simulated using 5D BIM models to optimize the execution plan, explore alternative construction scenarios in response to supply chain challenges, and evaluate scope, cost, and schedule trade-offs.
Capturing value from the application of new technology horizons requires growth in digital capabilities and a curious mindset. Enhanced digitalization can lead to improved collaboration and control throughout the value chain, bolstering resilience to fluctuating market conditions and facilitating more data-driven decision-making. One engineering, procurement, and construction (EPC) contractor was able to derisk its schedule for a major infrastructure project by about ten months using generative scheduling, identifying strategic changes to the project scope and resource requirements that resulted in a 12-fold ROI. The EPC tested multiple execution plans and identified bottlenecks, with the resulting mitigation used to optimize the scope and contractual requirements from subcontractors, generating significant efficiencies and reducing waste.
The construction industry has an opportunity to adopt innovative new approaches to undertaking major projects, driven by the surge in global investment in infrastructure renewal—and especially the manufacturing of advanced technology. Taking advantage requires understanding the evolving complexities of the postpandemic market, mastering the intricate terrain of the construction industry, and effectively navigating supply chain challenges. The adoption and adept application of contracting and capital procurement strategies can aid all of these.
