Construction Tech Startups: Disrupting a $1.3 Trillion Industry

Following the onset of the COVID-19 pandemic this spring, construction locations nationwide experienced closures, mirroring the situation faced by restaurants, retail businesses, offices, and other commercial operations. Discussions arose regarding whether the construction industry’s workforce of seven million individuals should be classified as “essential,” as guidelines concerning job site operations continued to evolve. Simultaneously, the demand for projects experienced a consistent decline.

During this period of uncertainty, construction companies were confronted with a critical question: How can they maintain viability? This concern remains pertinent today, just as it was in April. As one of the least technologically advanced sectors of the economy, construction is particularly susceptible to innovation through technology.

The construction industry represents a substantial $1.3 trillion market in the United States—a multifaceted network encompassing financiers, property owners, developers, architects, primary contractors, subcontractors, and others. While each construction undertaking involves a unique combination of these essential roles, the construction process itself varies considerably based on the type of property being built. Approximately 41% of the total domestic construction value is attributed to residential properties, 25% to commercial properties, and 34% to industrial projects. Due to the differing stakeholders and procedures associated with each property type, and even variations within those categories, most construction firms concentrate on a limited number of asset classes.

Irrespective of the asset type, construction projects consistently encounter four primary obstacles:

Significant fragmentation: In addition to the developer, architect, engineer, and general contractor, projects can involve numerous subcontractors possessing specialized skills. As project complexity increases, coordinating these parties becomes more challenging, and the pace of decision-making slows.

Ineffective communication: Given the large number of parties involved, both on-site and in the office, effectively transmitting information can be difficult. Misunderstandings and inadequate project data contribute to 48% of all rework on U.S. construction sites, resulting in over $31 billion in annual losses, as indicated by FMI research.

Insufficient data visibility: Manual data gathering and input remain prevalent in construction. This process is not only time-consuming and prone to errors, but the absence of real-time data severely limits informed decision-making, often relying on outdated information.

Shortage of qualified workers: The construction workforce is aging at a rate exceeding the influx of younger workers, leading to a deficit in labor, particularly in skilled trades that require extensive training and certifications. This shortage increases labor costs throughout the industry, especially in the residential sector, which typically experiences higher turnover due to fluctuating project demands.

A construction tech boom

A significant portion of the essential procedures for overseeing large-scale construction projects—those valued in the millions of dollars—still rely on spreadsheets like Excel or even manual, paper-based methods. This limited adoption of advanced technology on construction locations directly leads to project postponements, budget overruns, and heightened safety hazards for workers. Innovative technology companies are being founded to address and resolve these challenges.

The primary areas where we are observing the growth of construction technology startups are outlined below.

1. Project conception

• How it works today: At the outset of a project, property owners and/or those developing the site formulate proposals and often collaborate with financial institutions to secure funding.
• Key challenges: Currently, managing construction loans presents difficulties and requires significant time due to the intricate nature of requesting loan disbursements.
• How technology can address challenges: Software designed for architectural planning, like Spacemaker AI, assists developers in crafting site proposals. Simultaneously, platforms such as Built Technologies and Rabbet are streamlining the disbursement process for both lenders and developers, enhancing overall efficiency.

2. Design and engineering

• How it works today: Designers collaborate with architects and engineering professionals to transform concepts into detailed plans.
• Key challenges: A common difficulty arises from the frequent separation between design and engineering groups and the external contractors involved. This separation can make it difficult for designers and engineers to immediately understand how their choices affect the project’s budget or schedule. Insufficient communication with building crews can also result in revisions that take significant time to implement.
• How technology can address challenges: Currently, the design and engineering phase represents the most technologically advanced portion of the construction workflow, demonstrating a strong level of software integration. Tools such as those offered by Autodesk are widely used for tasks like design documentation, specification creation, and quality control. Autodesk is expanding its offerings to encompass construction management solutions, fostering greater collaboration among all parties.

3. Pre-construction

• How it works today: Currently, pre-construction involves converting architectural and engineering designs into comprehensive construction documents ready for implementation. This phase encompasses several distinct activities, including securing qualified workers, overseeing the bidding process, performing quantity takeoffs for cost estimation, and establishing project timelines.
• Key challenges: Despite its intricacy, the pre-construction phase remains largely reliant on manual processes and lacks widespread digital adoption within the construction industry. Reliance on individual judgment and spreadsheet software is common, leading to inefficiencies and making it challenging to incorporate revisions or new requirements promptly.
• How technology can address challenges: Platforms such as Sweeten facilitate connections between project owners and qualified contractors. Furthermore, digital platforms like SmartBid and Building Connected assist general contractors in streamlining bid management, reducing administrative overhead and accelerating the process. Companies like Alice Technologies are pioneering the use of predictive analytics, leveraging machine learning to enhance overall project efficiency.

4. Construction execution

• How it works today: Typically, carrying out a construction project involves the efforts of a general contractor’s own workforce alongside various specialized subcontractors. Even relatively straightforward projects can necessitate the involvement of numerous contractors.
• Key challenges: Due to the inherent complexity of the construction site, it can be challenging for contractors to accurately monitor progress as it unfolds. This often leads to decisions being made in response to issues as they arise, rather than through proactive planning, and makes it difficult to fully understand the consequences of each choice.
• How technology can address challenges: Several software solutions are available to help manage the complexities of project execution. These include field management platforms such as Rhumbix, safety management systems like Safesite, and site visualization technologies like Openspace, OnSiteIQ or Smartvid.io. Additionally, some companies are implementing comprehensive solutions to fundamentally change how construction is done. Mosaic, for instance, utilizes unique software to transform construction blueprints into comprehensive guides, enabling projects to be completed with a smaller team of less highly specialized workers.

5. Post-construction

• How it works today: Prior to the project’s final completion, building contractors begin assembling operational guides, arranging for inspections and testing procedures, compiling final documentation, and handling other necessary steps to facilitate the transfer of the completed asset.
• Key challenges: Managing documentation, generating reports, and completing the handover process can demand significant time and effort, requiring effective collaboration among all stakeholders in the construction project.
• How technology can address challenges: Frequently, project management software includes features designed to streamline this phase. Alternatively, specialized platforms such as Pype or Buildr are available to digitally transform the closeout procedure.

6. Construction management and operations

• How it works today: Teams involved in construction management and operations oversee projects from beginning to end, handling essential tasks like record keeping, data analysis, financial accounting, funding, and human resources including payroll.
• Key challenges: The intricate nature of construction sites leads to substantial and often difficult-to-handle documentation for each undertaking. Successfully navigating this process demands effective communication and coordination among numerous parties involved.
• How technology can address challenges: Given the specific demands of managing projects with multiple stakeholders, specialized software solutions offer significant benefits. Construction management platforms such as Procore, Hyphen Solutions and IngeniousIO enable contractors to better coordinate activities and monitor progress throughout the entire project lifecycle. Furthermore, companies like Levelset provide focused solutions for areas like invoice processing and payment handling within the construction industry.

Key barriers hindering construction tech adoption

The construction sector’s gradual pace of innovation is well-known. Even with progress in areas like heavy equipment, drone systems, and computer vision, productivity per worker in construction has remained relatively stagnant over the years. Current data indicates that most construction companies allocate less than 2% of their yearly revenue to IT investments, as reported in the 2019 JB Knowledge Construction Technology Report. However, technology offers the opportunity for substantial cost reductions in areas such as administrative expenses, materials, and direct construction labor, raising the question of why adoption has been slow.

One primary obstacle is the fragmented and intricate nature of construction projects, involving numerous stakeholders, which complicates the process of deciding to implement new technologies. Construction endeavors perfectly illustrate the saying “too many cooks spoil the broth.” Identifying a definitive decision-maker can be challenging when considering the roles of the project owner, the general contractor, and the various subcontractors. Furthermore, differing priorities often exist, as the individual who will ultimately utilize a product may not be the same party responsible for its financial cost.

Another significant challenge is that many companies are hesitant to embrace specialized solutions, which characterize the majority of available products currently. Given their typically small IT departments, construction businesses can find it difficult to incorporate new systems. Consequently, many construction firms avoid solutions focused on a single process, as the potential gains in efficiency are frequently outweighed by the time and resources needed for software implementation and employee training.

Finally, the substantial liabilities inherent in construction projects often lead to a conservative approach to risk and a lack of a forward-thinking mindset within many firms. However, some organizations are starting to shift this perspective. Companies such as Suffolk and Turner Construction have appointed chief innovation officers specifically to assess and deploy construction technology.

Turning the corner on tech adoption

Similar to how established companies in sectors like finance and property eventually embraced innovation, we anticipate that construction firms will increasingly adopt construction technology – not by choice, but out of necessity. A significant challenge for the construction industry is a dwindling labor supply, compelling companies to implement new technologies to enhance productivity with a decreasing workforce.

Past economic downturns have demonstrated that construction employment recovers at a slower pace than overall construction activity. This was particularly noticeable following the 2008 financial crisis. While the total value of construction projects returned to pre-2008 levels within approximately five years, construction jobs hadn't fully rebounded even after ten years. The growth of the gig economy provides construction workers – both current and prospective – with a growing number of employment alternatives, often offering comparable compensation and more consistent schedules. Consequently, the construction workforce is aging, with fewer young individuals entering the field.

The onset of the COVID-19 pandemic in the United States intensified the pressure on construction companies to improve efficiency. Mandatory closures resulted in the loss of nearly one million construction jobs in April 2020, and despite some positions being restored, data from the Bureau of Labor Statistics indicates that construction employment in September 2020 remained 394,000 jobs below February 2020 levels. Five years of gains in construction employment were erased in a single month, and based on historical patterns, a full recovery will likely take several years.

Maintaining competitiveness requires construction firms to improve productivity for long-term viability, and integrating construction technology solutions is a key strategy. Just as COVID-19 spurred technology adoption in industries like retail and banking, we expect construction companies to accelerate the implementation of software that transforms manual procedures into digital, cloud-based systems.

Although conceptually straightforward, this transition from traditional methods to mobile devices is a substantial undertaking that necessitates workforce retraining. Construction professionals possess highly developed skills honed through on-the-job experience and mentorship. Experienced workers can be hesitant to embrace change, often favoring established techniques like paper records, pens, string, and tape measures. However, widespread familiarity with mobile applications suggests that construction workers are now prepared to enter the digital realm. Once construction firms make this digital transition, they will gain access to a wealth of data and analytics. We are optimistic about the future of construction technology, where companies can leverage data-driven insights to make informed decisions, reduce expenses, improve efficiency, optimize projects, and enhance worker safety.

We are already observing startups facilitating this digital transformation throughout the entire construction process. From pre-construction plans enhanced by the predictive intelligence platform from Alice Technologies, to real-time progress monitoring visualized through onsite images captured by OpenSpace, we, as investors, are confident in the next generation of construction technology companies.