From the outside looking in, the construction industry appears ripe for tech innovation. The construction industry represents 6.3 percent of the GDP. There are close to one million general contractors (GCs) in the country, and anywhere between three and five million workers on job sites every day. Meanwhile, there’s a common (with some justification) belief that construction firms are slow to adopt technology.
These factors have made construction tech appealing to investors who have poured an estimated $3B into the sector. Is construction tech the “it” place right now? If that’s true, what went wrong at Katerra? And why is Procore’s losing $1 for every $4 in revenue? And why does so little investment go into improving productivity at the office versus the job site?
Construction is different from other sectors, and addressing those differences is key to succeeding in construction tech investment. Here are the critical factors to consider.
Not every construction company is a technology laggard. While GCs are historically slower to adopt new technologies, this doesn’t necessarily make them laggards. About 60 percent of construction companies have R&D departments for new technology. Yet 35.9 percent of employees are hesitant to try new technology, according to JB Knowledge. One way to interpret this data is that there is a strong interest and need in taking advantage of newer construction-centric technologies. But only if they’re easy to use, easy to carry or access while on a jobsite, and improve productivity almost immediately.
Don’t assume the roads are paved with gold. While the Commerce Department reported that construction spending in the U.S. reached a record high of $1.459 trillion in November 2020, this doesn’t mean there’s unlimited opportunities for construction tech. The reality is GCs make few capital investments, because they must fund investments in technology out of operating cash flow.
Complicating the matter further, construction projects are typically funded incrementally in phases as each stage of the project demonstrates progress. Delays or accidents can have a huge effect on cash flow. Therefore, asking a GC to license technology on a yearly basis doesn’t always make sense. Think pay as you go.
Ownership and business structure also make a difference. Most GCs were founded by trades people that either started as or remain sole proprietorships of family-owned firms. Borrowing what’s considered the “family’s money” is a much bigger decision versus a corporation putting its assets at risk.
These are some of the reasons GCs are risk averse when it comes to buying technology that lacks an immediate ROI, or the ability to pass it through as a project expense, as they do with equipment rentals.
Success requires accounting for variabilities in the industry. There are multiple variables that impact a construction company’s need for technology. These include:
Market segment: Commercial construction obviously differs from residential. Yet within commercial, hospitals and healthcare differ from offices, and offices differ from retail, and so forth. The same goes for infrastructure, manufacturing, mining, utilities, data centers — the list goes on and on.
Job site: Variables in construction field operations are perhaps the biggest impediment to technology adoption. This is because the materials, tools, and equipment needed on-site varies between segments. Higher cost equipment is ideally rented, but rental agencies will only want to rent tried and tested technology, not the new stuff, which may not be insurable.
Region: Areas with earthquakes, hurricanes, floods, or tornadoes require unique materials and methods. Also, building in densely populated cities is different from building in rural areas or locales where space is not at a premium.
Infrastructure: The availability of water, electricity, sewer, internet access, and transportation also impact the job site and whether certain technologies will be effective.
Materials: These, too, vary based on the customer. For example, buildings that are created for people or businesses with particular levels of income are built using materials that differ from those used in affordable housing. Additionally, as the supply chain struggles, largely as a result of the pandemic, the cost of acquiring certain materials such as lumber continues to rise. This makes selling a new technology even harder when a GC has to decide where to put their investments.
Workforce: The nature of the construction workforce also factors into technology adoption. In the field, there are many trades to be managed, and most trade workers are not knowledge workers. Any technology that’s to be used on a job site must take into account the worker using it. This means it must be easy to use on the first try and be made part of the job site protocol if it’s to return any value to the GC.
Who’s Building Success in Construction Tech?
The technology companies that have had the most success in construction tend to target larger contractors with back-office and HQ functions. The ideal customer for many construction tech companies is one where business software is used for purposes like sales, marketing, accounting, and project management. These functions are more broadly applicable to any business, so the software is more easily built and applied to any construction company no matter its segment specialty.
However, when you consider that only 15 percent of construction firms have a staff of over 1,000, that leaves the vast majority of GCs in the small to medium-sized range. This means a construction tech product has to prove its ROI very quickly – often on the first couple projects where the new technology is used.
Arguably, there’s still a lot of opportunity for construction tech companies that offer a highly specialized solution. Despite the $2B of investments in Katerra, investors are still bullish on construction tech. Expect future investments to go into workflow efficiencies as opposed to recreating structural processes. For example, an online construction management software
built solely to improve a specific function on a construction job site will have an easier time getting the attention of a GC. A construction management software will also reduce the need for a construction site daily log book by providing GCs with an automated record of all on-site activity.
The key to closing the sale is to prove immediate ROI. This explains the popularity of software as a service offerings, such as that from Procore. Software as a service eliminates in-house technology deployments, although in most cases, mobile interfaces still require a download. Pricing strategies that are “pay as you go” also help — e.g., Procore often charges a percentage of total revenue vs a big one time capital cost.
Construction tech will continue to evolve and grow because funding and innovation show no signs of slowing. Investors are still willing to pay for “growth at any cost”, which explains why Procore, with huge annual losses, can still go public.
Like any industry, we’ll see some “sure bets” close down while others continue to succeed. Success in construction tech will come down to proving the need for the technology, delivering immediate ROI, and ensuring workers know how to use it on the first take.