Pareto Principle And Operational Efficiency In Construction

Ramon Parchment, Mission Critical Project Manager, AECOM Tishman

Pareto Distribution is a phenomenon that was first discovered by Italian Economist/Civil Engineer Vilfredo Pareto In the late 19th century. Pareto discovered while observing wealth and income inequality that a small percentage of the population owned a large percentage of the wealth. In contrast, the majority of the population owned only a small percentage.

Pareto’s observations of wealth distribution led him to propose what is now known as the Pareto principle, or the “80/20 rule.” This principle states that roughly 80% of the effects come from 20% of the causes. For example, in a business context, 80% of the profits might come from 20% of the products, or 80% of the complaints is likely to come from 20% of the customers.

In the context of operational efficiency in construction, the Pareto principle can be used to identify critical factors that contribute to delays or inefficiencies in a construction project. For example, if we observe that 20% of the project activities are causing 80% of the delays, we can focus on addressing those critical activities to improve overall project efficiency.

To apply the Pareto principle in construction, we must first identify the key performance indicators (KPIs) most relevant to the project’s success. These KPIs could include factors such as the length of time for the submittal review process, long lead time items, cost overruns, safety incidents, or quality issues. Once we have identified the KPIs, we can use data analysis techniques such as Pareto charts to visualize the data distribution and identify the most significant contributors to inefficiency.

“In the context of operational efficiency in construction, the Pareto principle can be used to identify critical factors that contribute to delays or inefficiencies in a construction project”

For example, if we focus on delays, 20% of the subcontractors are responsible for 80%. Using the Pareto principle, we can address those subcontractors sooner than later and ensure they meet their contractual obligations. Similarly, suppose a particular type of equipment is responsible for a disproportionate number of safety incidents. We can improve safety protocols using Pareto distribution.

Pareto’s Distribution of Long Lead Items Delays vs. Suppliers

To create a Pareto distribution chart of construction operational inefficiency, you can follow these steps:

1. Identify the Data: The first step is identifying the data you want to analyze. In this case, you would look for data showing where inefficiencies occur in a construction project. For example, you could use data on the number of delays, cost overruns, the number of reworks, or the number of safety incidents.

2. Sort the Data: Next, sort the data in descending order based on the number of occurrences. For example, you would sort the data based on the number of delays, with the most frequent delay at the top of the list.

Calculate the cumulative percentage of the sorted data. This is done by adding the percentage of each data point to the percentage of the previous data point.

3. Create a Pareto Chart: Once you have calculated the cumulative percentage, you can create a chart. The chart will have two axes: the x-axis, which lists the sorted data in descending order, and the y-axis, which shows the cumulative percentage. You can then plot the data points on the chart, representing the percentage of the corresponding data point’s total impact on the inefficiency.

4. Analyze the Chart: Use the Pareto chart to identify the few critical factors that impact the inefficiency the most. Typically, the Pareto chart will show a steep drop-off in the cumulative percentage after the first few data points, indicating that the critical few factors are responsible for most of the inefficiency.

The company concentrating on operational efficiency over a long period can maintain lower costs, shorter project timelines, and higher quality standards than its less efficient competitors. This increase in efficiency will increase customer satisfaction and loyalty and widen the gap between them and their competitors, allowing them to become part of the 20% of companies that control 80% of their respective industry market share.