Construction Tech Disruption: Why It's Harder Than You Think

The State of Technology Adoption in the Construction Industry

From an external perspective, the construction sector appears exceptionally poised for technological advancements. Representing 6.3% of the U.S. Gross Domestic Product, the industry encompasses approximately 1 million general contractors (GCs) nationwide, with a daily workforce ranging from 3 to 5 million individuals.

Perceptions and Realities of Tech Integration

A prevalent belief exists that construction companies are comparatively slow to embrace technology and lag behind in digital transformation. However, this generalization doesn’t apply universally.

R&D Investment and Employee Hesitancy

While GCs have historically been slower to adopt innovations, this doesn’t equate to being outdated. Approximately 60% of construction firms maintain Research & Development (R&D) departments dedicated to exploring new technologies.

Furthermore, the largest construction organizations allocate significant resources to R&D initiatives. Despite this, JB Knowledge reports that 35.9% of employees express reluctance towards experimenting with new technologies.

The Demand for User-Friendly Solutions

This suggests a strong desire and recognized need to leverage modern construction-focused technologies, provided they are intuitive, easily implemented on job sites, and deliver immediate productivity gains.

Investor Interest and Sector Disruption

These factors have attracted substantial investor interest, with at least $3 billion invested into the construction tech sector. Is construction tech currently the most promising investment area? Is it ripe for disruption, as venture capital investors seek?

If so, what led to the challenges faced by Katerra? Is Procore’s financial performance, with a $1 loss for every $4 in revenue, justifiable? And why is comparatively little investment directed towards enhancing productivity on job sites – where GCs generate or lose revenue – versus back-office operations?

Unique Challenges in Construction Tech

Experience indicates that construction differs significantly from other sectors due to the substantial variability inherent in projects, stemming from financing methods, risk management strategies, and the factors influencing project variation.

These differences are not easily addressed through data processing, unlike fintech, where financial data is readily adaptable to software solutions. Successfully navigating construction tech requires addressing project variations, extending beyond back-office functions.

Financing and Capital Investment

Project financing presents obstacles to capital investment. Although the Commerce Department reported a record $1.459 trillion in U.S. construction spending in November 2020, this doesn’t guarantee unlimited opportunities for construction tech. GCs typically make limited capital investments, funding technology from operating cash flow.

Construction projects are usually financed incrementally, contingent on demonstrated progress. Delays or unforeseen issues can significantly impact cash flow, and GCs generally avoid overhead and General & Administrative (G&A) cost burdens. A capital purchase for technology may not always be a sensible option for a GC.

Ownership Structure and Risk Aversion

GC ownership and business structure also hinder large capital investments. Many GC firms were established by tradespeople and often remain family-owned. Borrowing is viewed as a more risk-averse decision compared to how larger corporations assess productivity investments and risk exposure.

Payment Models and Technology Consumption

The method of payment for construction tech is crucial. Regardless of the specific technology, solutions must offer “pay as you go” options that can be integrated into project costs. High-capital technologies are best utilized as rentals, similar to cranes and specialized equipment.

For software, Subscription as a Service (SaaS) subscriptions and user-based pricing, expensed per project, are ideal. Procore’s model, charging a percentage of project revenues for its automation benefits, exemplifies this approach. However, even this strategy faces challenges due to the substantial training investment required to realize Procore’s full benefits.

Accounting for Local Variability

Success hinges on acknowledging local variability. This variability manifests in several dimensions:

Dimensions of Local Variation

• Market Segment: The type of construction project significantly impacts requirements. Commercial construction differs from single-family residential, and within commercial, hospitals differ from offices, and retail, and so on.
• Region: Geographic location, weather patterns, demographics, regulations, and infrastructure all vary locally. Areas prone to earthquakes, hurricanes, floods, or tornadoes necessitate unique materials and methods.
• Regulation: Construction is subject to multiple levels of regulation, with local regulations being the most impactful in purchasing, zoning, permitting, inspections, safety, and labor management.
• Economic Infrastructure: Access to essential utilities like water, electricity, sewer, internet, and transportation influences job site operations and technology effectiveness.
• Job Site: The materials, tools, and equipment needed vary based on project type, size, and complexity.
• Materials: Buildings cater to diverse populations with varying income levels, leading to significant differences in materials and methods. Supply chain disruptions, like the lumber shortage during the pandemic, impact material availability and pricing.

The Construction Workforce

The nature of the construction workforce is a key factor. The field workforce comprises numerous trades, and most tradespeople prioritize building rather than data entry or manipulation.

A construction site’s workforce often includes a mix of salaried, hourly, part-time, and contract workers, both union and non-union. The prevalence of Spanish speakers necessitates language considerations, alongside immigration status verification. Many projects rely heavily on subcontractors specializing in areas like HVAC, metalwork, or electrical.

Construction technology users resemble general consumers, requiring technology that is easy to use, adaptable to various job site protocols, and delivers tangible value to the GC.

Risk Management in Construction

Effective risk management is essential for success. GCs face a complex array of risks, including workplace safety, project management challenges, potential delays, and high insurance costs. The industry’s workforce diversity contributes to various labor-management risks.

Focus on Back-Office Operations

Construction tech success has largely been concentrated within HQ. Software companies that have thrived in construction typically target larger contractors with substantial back-office functions. Their ideal customers utilize business software for sales, marketing, accounting, and project management, making adaptation to construction industry nuances easier.

McKinsey’s analysis confirms that digital adoption in construction is primarily occurring at the HQ level, with job sites remaining largely nondigital. Digital time cards for employees represent the most common data entry point on site.

Lessons from Katerra and Procore

What can we learn from Katerra’s failure and Procore’s IPO? Katerra attempted to address all sources of construction variation through vertical integration, encompassing property acquisition, design, modular manufacturing, and construction. Despite substantial investment, the complexity proved insurmountable.

Procore focused on the attractiveness of the SaaS model for delivering data-intensive processes with minimal IT involvement. However, it has experienced 15 years of accumulated losses, and growth requires increasing its share of GC revenues, potentially straining already tight margins.

Considering that only 15% of construction firms have over 1,000 employees, the majority fall into the small to medium-sized range. This necessitates a rapid return on investment (ROI) for construction tech products, often within the first few projects. Achieving this is challenging for complex products requiring extensive training.

Future Outlook for Construction Tech

Despite past setbacks, significant opportunities remain for construction tech companies and investors, provided their products are user-friendly, adaptable to local conditions, deliver immediate productivity improvements, and offer flexible payment models.

Despite losses incurred by companies like Katerra, investor confidence remains high due to the industry’s size and underserved nature. Venture capital funding and innovation continue, with both private and public investors willing to invest in “growth at any cost,” as evidenced by Procore’s public offering despite ongoing losses.

I believe future successful investments will be specialized by building type, process, and function. Opportunities exist for workflow efficiencies in construction finance, for example. Mobile consumerization is also impacting the job site, with low-cost, easy-to-use technologies like drone surveillance gaining traction.

As with any industry, some ventures will fail while others succeed. Given the industry’s inherent risk management needs, it’s prudent to move away from the concept of “disruption.” Success in construction tech will depend on demonstrating the value of the technology, delivering immediate ROI, and ensuring workers can utilize it effectively from the outset.