Touching Another Third Rail — HQ Culture
In my prior post, I talked about culture in the field and its inhibiting effect on digital adoption. But not all objections to construction tech come from the field. Construction management culture within HQ has its own prejudices.
I’m new to construction, but I immediately learned there’s a vast difference in how the industry views technology. In most industries, managers use digital because it’s the new normal. Digital is part of every company’s DNA. In construction, not so much.
I find managers reluctant to talk about the business culture in the construction industry. Why? Probably because it hits a political nerve. Culture includes the kind of topics you don’t bring up at family gatherings. It’s very personal, and today, very political.
But we need to talk about the culture of the industry. Construction needs to take advantage of today’s digital products and processes to address its labor shortages, productivity lag and safety deficits. So I ask: Why is construction’s culture even at HQ slow to invest in digital?
Small, Private, Family-Owned Firms Dominate
Most construction firms are private, small, and family owned. Last time I checked, there were over a million licensed contractors of all sorts in the USA alone. Over 90% (some say more) employ less than ten people.
Why so small? First, contracting is one of the easiest businesses to start, especially for ambitious trade professionals. If you are good with local customers, and know your trade, you can either step into a management role for an existing firm, or start your own. Contracting exams are not that big of a hurdle, nor the costs of incorporating, nor creating a web presence, especially with today’s online tools. Capital requirements are usually modest, especially if you already own your own vehicle and tools.
Why do contractors stay small? Contracting is a complex and risky business in many ways. Contracting is the third riskiest industry in the country:
- Contractors are highly dependent on the overall economic health of their region: No new building, no work;
- Construction puts workers at risk of accidents and safety processes and regulations are complicated and insurance expensive;.
- Because they work on real property, Contractors take on a number of significant liability risks, and more insurance;
- Property developers are usually much wealthier giving them more power over contract terms;
- Public projects are won by competitive bids, and come with regulatory hurdles;
- Projects are rarely time and materials terms, so payments only occur at milestones, so cash flow is always an issue;
- Project financing costs are dependent on interest rates;
- Modern bidding, project management, accounting and purchasing all require software packages and related data management skills;
I could go on. Unless you are a natural born business manager, running a successful contracting business is tough. If you got into the industry by rising through the trades, you are less likely to have the skills to deal with these financial and legal complexities.
So most contractors stay small, local, named after the founder, acquire customers via personal connections, don’t stray far from the trade work of their founders, and don’t employ professional managers. Contracting firms are easy to start, but also easy to go bankrupt.
Family Wants Maximum Income Before Investment
Successful small construction firms are private and family owned. And family owned businesses are more likely to make the family’s cash flow a priority over investment.
Have you been watching the HBO series Succession? In season one, note how the patriarch rejected digital innovations and acquisitions. The plot of Succession is supposedly based somewhat on the Murdoch family’s media businesses. But other family firms behave similarly. The Economist regularly covers the nature of family-owned firms.
An Oxford Economics study found that family owned firms’ prioritize cash flow. A desire for cash-now leads to the firm itself being treated as a cash-cow, a cash-cow to be “milked” by the family. And that’s not just a USA phenomenon, but world-side.
Family Owners Value Control More than Management Talent
Again, as in the HBO series Succession, family owned firms prefer to keep control of the firm in the family even when they know there are better management choices. They invest less in management talent.
One finding of that same Oxford study found that when children inherited a business, the family owned firms were less productive by a sizable margin compared to firms managed by non-family managers. And the ones that handed the firm over to the oldest son were the worst of all.
Family Owners Hate Taxable Income
All firms dislike taxes (heck, don’t we all). But family owned firms perhaps more. Why might that be?
Many family owned firms are pass-thru entities, such as S corporations. For pass-thru firms, taxes are paid on the owners’ personal tax returns, not a corporate tax return.
That makes taxes literally personal, which raises emotional temperatures a whole lot.
Not the Party of Business Anymore?
Not surprisingly, on the issues of taxes and regulation, the industry leans Republican. But the modern Republican party is built on culture war issues. If the those culture issues conflict with business, business loses:
- The party is negative on immigration, even though the construction industry cannot hire enough skilled workers of all types.
- The party is now negative on college education in a world where knowledge is power;
- The party is negative on imports which would drive down material and tool costs;
Is the Democratic party great for business? Of course not, but that makes the modern Republican party’s anti-business stances more disturbing.
How Construction Fakes It Until It Makes It
Running a contracting business is complex and difficult. In other industries, the complexity and risks are tamed via digital data processes and software.
If you are going to avoid modern digital technology, how are you going to compete?
Just Hire Low Cost (Immigrant) Labor
Another sensitive topic, given the industry’s political leanings. I’ve had conversations with owners in construction and agriculture who openly delight in their illegal workers –because they work so hard, fear deportation, and require such low pay.
It’s a strategy that’s worked for decades since Reagan’s administration. Aside from needing bi-lingual supervisors, there’s no investment required. So why change?
Unfortunately, the labor shortage and immigration restrictions of the past twenty years are making this strategy less and less viable.
Compliance is Only a Cost If You Get Caught
Construction is a regulated industry, like finance and healthcare. Finance and healthcare have widely adopted digital technology for compliance and safety. But not construction. The attitude of the construction industry seems to be: Compliance and safety should only cost you if you get caught. Or if a bad accident occurs. Risks that might get you thrown in jail in finance or healthcare are accepted routinely in construction.
This is rational to some degree: Unlike healthcare or utilities, construction sites are temporary jobsites. The construction firm is only liable for what happens on a jobsite before the project owner retakes control upon close-out. Spending on safety and compliance on all projects can be risk-weighted based on the size, type and duration of the project. So it may make sense to roll the dice.
This also explains why so many construction firms don’t let go of paper processes: Safety and compliance processes are probably not used on all projects. Why invest in expensive technology designed to be used on all projects? As long as paper is still accepted by inspectors, there’s no penalty for staying old-school.
The industry also lobbies reflexively against compliance and safety requirements. As with the issue of funding the IRS, politicians are lobbied to reduce compliance budgets. Inspectors all come from the industry, and are easily co-opted. So even though construction safety and compliance requirements have been around longer than such regulations in finance or healthcare, they are much much weaker.
Risk Aversion – An Aversion to Spending on Tech
At the same time, a desire to spend less on compliance and safety technology is coupled with deep risk aversion. Here, the small size of most construction firms explains a lot.
Turns out that mitigating construction risks is expensive, but the investments in technology as a percentage of overhead go down with size. There are scale efficiencies. Go big or go home?
Age Discrimination – Against Technology
I’ve been told straight up by construction business owners to bypass managers over fifty years old. Which disturbs me, given my own age!
The explanation why older construction managers should be avoided: They know the trades, they know their customers, but they don’t know technology. They’ve probably been convinced to try various products in the past, but it hasn’t turned out well, or fast enough. And they’ve probably got less than ten years until retirement, so the old dogs are interested in new tricks.
Wish it weren’t true, but it often is. Productivity and safety won’t improved without digital adoption. Fortunately, the Boomer management workforce is aging and is being replaced by GenX who are more digitally native. And GenY etc. even more so. Which is affecting hiring as well, as the younger generation wonders why construction jobs are so off-line and digitally unaware.