Building the foundations: mapping the construction sector’s journey to innovation
As touched on in my post on Talis’ investment in Construyo, the construction industry is worth over $10 trillion globally. It accounts for close to 13% of global GDP, with 7% of the world’s working population serving the industry. (1) (2)
However, to date the industry has had little incentive for self-disruption — unlike other industries that have gradually embraced change and digitisation to increase their productivity. This is due to several reasons, which we’ll go into below.
The lack of digitisation in the construction sector means that the annual increase in productivity is, on average, only 1% and EBIT margins are thin around 5% on average for the industry. McKinsey estimates that if the productivity levels were to catch up with the progress made by other sectors over the past 20 years or with the total economy, it could increase the industry’s value added by $1.6 trillion a year (1). As construction is pushed towards digitisation, including as a result of the recent coronavirus outbreak, innovative solutions are emerging across the board: from software to hardware, to remote collaboration tools and drones data capture, VR, new materials and modular homes.
The key challenges facing the construction industry are:
- Poor time management and budgeting: large projects typically run 20% over-time and up to 80% over-budget (2)
- Reliance on physical documentation and siloed information: $10 billion is wasted per year due to information loss in project handover (3)
- Litigation heavy: in the US, construction disputes cost $12 billion each year (4)
- Labour intense: meaning access to skilled workers can be complicated
- Geographically disperse: sites are often in far-reaching and remote locations
- Multiple parties involved in each project: multiple stakeholders involved often results in misaligned incentives and complications throughout the process
- Each site is unique: complex, unique and incomplete information from the site means that machine learning can be difficult to deploy
- Heavily regulated: with regulation varying between countries
- Negative environmental impact through CO2 emissions: construction is responsible for 11% of total emissions (5), and the energy intensity of the industry became 23% less efficient in the last 20 years. (6)
Why now is the time to invest
There are several indicators that demonstrate that the sector is ripening for investment. Firstly, hardware technologies are becoming more affordable and more widely available. For example, the cost of LiDAR scanners (or Laser Scanners — a tool designed to capture detailed measurements for entire rooms, buildings and cities by using multiple scans) has decreased tenfold since 2004, and is now integrated into the new iPad Pro. These technologies, combined with the proliferation of mobile devices within construction sites, allow for a significant amount of potential data-points to be collected, interpreted and turned into actionable insights. (7)
The coronavirus pandemic is accelerating the move to digital. The outbreak has not only taken a financial toll on the industry, as public companies’ stocks have dropped more than the average, but it is also forcing companies to swiftly re-think their operations to allow for remote collaboration. As construction sites all around the world have either shut, reduced their operations or faced disrupted supply chains and restrictions, companies are having to quickly find solutions to return to productivity as early as possible and prepare for the regulations of the post-COVID world.
Nonetheless, investors are now wising up to the opportunities that the industry presents. In 2018 alone, investors poured $3.1 billion into construction tech start-ups only in the US — a 342% increase from 2017 — bringing the total funding of the sector to over $10 billion today. It’s worth noting that 2018 was partly skewed by some large rounds (Katerra, View, Procore). (8)
The sector is still nascent, as most of the funding rounds concentrate on Seed to Series B stage. Only a few companies have surpassed the $1bn valuation, such as Procore and Katerra. Procore, for example, have been able to create an operating system for the industry (before nonexistent) that stakeholders have actually engaged with, taking advantage of the heavy use of mobile phones on site. M&A activity has only sprouted in the last couple of years, as Procore acquired three companies, and Autodesk, one of the major incumbents in the sector, has paid $1.15bn to acquire BuildingConnected and PlanGrid. This signals that investment in early stage construction tech companies can bear real fruit for venture capital firms that focus on long-term growth. (9)
The value chain is still dominated by relatively legacy software including Autodesk (Revit, Civil 3D, AutoCAD), Bentley Systems and Nemetschek (Allplan, Graphisoft) for design & planning, and ERP solutions by Oracle, Autodesk, Nemetschek, or Viewpoint for scheduling and (mostly manual) tracking and project management.
From Talis’ point of view, we’re looking for companies that are positioning themselves for end-to-end process disruption, rather than improving only specific steps of the process. We want to meet founders that are creating a new source of truth / atomic unit in this industry. We are also looking for products that have a tangible, clear monetary impact for stakeholders — particularly those linked to field productivity as this sub-segment requires the largest capital and creates most of the inefficiencies.
We’ll now analyse all parts of the value chain exploring innovation happening at each step. Below is a summary of what we’ve found out so far. By any means, if you think I missed important companies let us know!
Design & Planning
According to EY Construction and Real Estate Advisor Eric Ottinger, the design and planning phase accounts for 7% — 12% of the total cost of a construction project. (10)
Digital design involves primarily architects and engineers, and obviously, asset owners. Some innovation in this space takes care of turning photos and sketches into CAD models (Computer Aided Design) and BIMs (Building Information Models, a technology that allows planners to visualise the building’s project in 3D).
The UK is actually one of the world’s leaders in BIM usage, mainly down to government initiatives, which made it mandatory across all centrally procured construction projects; Germany is working towards similar regulation to come into effect at the end of 2020. The adoption and perception of BIM is also increasing across the industry, with ‘aware and currently using’ jumping from 13% to 62% in only 6 years. (11) While BIM isn’t mandatory across the US, much of the Federal Government is moving towards requiring BIM on most types of building projects. Wisconsin and Texas are among the early adopters of BIM standards across the board. Other countries are following similar trajectories (France, Sweden, Norway, Finland, etc).
Overall, more people are using BIM than not. Between 91% and 100% of MEPs (mechanics, engineers and plumbers) and structural engineers have adopted it, and 60% of contractors and site workers. (12)
However, the BIM model is far less helpful if it stays with the architect in a data silo, which is why it’s important to have interoperability of data collected throughout the construction process and matched back to the planning phase. The BIM model also needs labelling in order to connect with the project schedule — which does not happen often or is a very manual process.
Innovation in this space is reflected in the use of different digital tools to gather data in the first place, such as drones, LiDAR scans, VR sets, geospatial technology, photos and videos, and in the software used to present this data in a readily accessible formats, such as 3D models, CAD files and BIMs.
Traditionally, the construction industry would spend a considerable amount of time preparing models that were subject to human error: now, this phase can be completed in a matter of days with a higher accuracy through use of software solutions. Some solutions go even earlier in the process to the discovery phase, with AI tools like Continuum advising on the best spots for development.
Budgeting & Estimating
A good budgeting tool is essential for the industry, where projects can often range from few hundred thousand to hundreds of millions of dollars. Recently, there has been innovation that automates and improves the accuracy of bid estimates.
Innovation in this space can offer better predictive cost estimation for builders, while also monitoring real-time budgets and costs throughout the project. This will ultimately offer better transparency to both buyers and contractors.
It’s worth highlighting that many project management tools covered later on also cover budgeting, hence this type of solution often covers more than the initial budgeting phase.
Scheduling is essential in order to manage collaboration and scheduling of tasks among the different stakeholders in a construction project. The construction industry is characterised by geographical dispersion and a fragmented value chain, making scheduling tasks — while factoring in various moving parts — very difficult.
Timing is also key. For instance, ready-made concrete has only a small window in which it can be delivered and used by workers. Software that effectively improves scheduling improves time efficiency on a project, and significantly reduces the number of tasks and interactions required from a supervisor, reducing risks.
The software landscape in this space has mainly been dominated by Oracle Primavera, although new innovative start-ups are building on top of it to aid with decision-making and fill the missing links in the schedules.
Integrated marketplaces are platforms for stakeholders to evaluate and contact partners, contractors and purchase materials. Construction projects require multiple stakeholders, therefore innovation in the space is mainly aimed at finding ways to connect and discover contractors, lenders and experts to facilitate the matching and training process.
Suppliers in the industry, especially if SMEs, have little opportunity to market their services to businesses or individuals and most contacts are obtained through word of mouth. Integrated marketplaces give them access to an efficient and continuous stream of work, as well as tools for invoice and contract management. On the demand side, it’s difficult for enterprises to acquire and retain talent in the long term and recruiting is typically outsourced to inefficient staffing agencies (or in the case of B2C marketplaces, to online searches).
Workflow Collaboration & Project Management
Companies in this space have produced a range of products, from simple admin tools to sophisticated ERP software solutions. Communication in construction is key: however, the different stakeholders in a project are usually geographically disperse, so coordinating them can be an incredibly time-consuming task.
Project management platforms allow for asynchronous communication among stakeholders, enabling them to plan tasks across digital multi-platforms, and execute cloud-based collaboration between teams on and off site. Most innovators in this space handle task allocation, digital documentation and communication processes, but some innovation is happening on the payment side of projects too, bridging the gap between progress tracking and finances, or allowing a more friction-less relationship between lenders and project managers.
Construction-specific CRMs might offer add-on built-in services, such as integration with construction marketplaces and bid management systems. Smartphone proliferation on site accelerated innovation in this vertical, making uploading and accessing documents much easier: hence, the category is larger and more mature than others.
Interesting companies to watch: Procore, PlanGrid (acquired by Autodesk $875m), Corrux.io, PlanRadar, 3drepo, Alasco (Operating systems) / BuyChain (Sales acceleration tools) / Followup CRM (CRMs) / Rabbet, Levelset (Construction Fintech)
Market Intelligence & Data Analytics
This vertical looks at gathering and analysing information related to the construction market. As the industry becomes more regulated, digitised and data-based, market intelligence data on competitors, trends, government policies and analytics is becoming increasingly critical. Most companies in this category were not founded solely for the construction industry but have since built arms dedicated to the sector. Companies in this space feature CRM and dashboard integrations.
Most workflow collaboration tools claim to be able to apply data science to the data they own. These claims are not always accurate, as disparate data formats influence the reliability of this kind of analysis. Some of these data points should feed back into the project — although, that’s not always possible as stakeholders sometimes struggle to communicate efficiently.
Procurement & Supply Chain
Identifying and tracking materials across the supply chain helps to adhere to environmental regulations, as well as manage stock and inventory. The construction industry is responsible for 11% of global CO2 emissions, so becoming more sustainable is key for the industry. Environmental mistakes can also result in claims that can heavily affect a company’s cashflow and reputation.
Companies in this space are focusing on making sure that the right materials are being used and highlighting any environmental risks a company might be running. Material management innovation is also strictly linked to interconnecting the different players involved in a project, as well as giving the construction company insight and data on their suppliers to inform better decisions.
Tracking & Field Productivity
This vertical looks at tracking projects by fostering digital collaboration on site and off site and managing the overall construction project — with the aim of maximising field productivity and cost efficiency.
Construction productivity hasn’t improved for decades, due to disjointed and siloed processes as well as the uniqueness of each construction site. As outlined in Fed Nikolov’s post on the hidden barriers to innovation in construction, productivity is a great indicator of an industry’s technological progress. Throughout the 2000s, output per employee in the construction industry in the US actually declined.
If productivity were to catch up with that of the total economy — and it can — the sector’s value add would increase by an estimated $1.6 trillion, adding about 2% to the global economy. Such a gain is equivalent to about half of the world’s annual infrastructure needs. (2)
Innovation in this space is focused on using on-site 2D or 3D imagery against construction plans to track progress, spot deviations and improve overall productivity. 3D models can directly integrate with BIM, reducing decision-making time from days to hours, as they aim to substitute the traditional surveyor on site, who is prone to human error.
As previously outlined, construction projects run with massive delays and increased costs, so solutions like this are of the upmost importance and can have huge impact on budgets. This type of information can also feed back into design management and can update the original plan in a short amount of time, should a deviation be tolerated, or a change be required.
Machine learning and advanced statistical analysis might also allow predictive insights on construction risks and progresses. The main challenge here is the uniqueness of each construction site. As sites are not standardised, this can cause complexity around training machine learning algorithms. Some innovation comes also from the fields of IoT and autonomous vehicle technologies, as companies are looking to monitor and track their fleet and equipment.
Safety & Risk Management
This vertical looks at managing construction workers’ safety on site, and refining quality control and claims management.
As workers’ safety is paramount — and is very well regulated in the industry — innovation in this space is mostly focused on monitoring procedures and preventing risks. Companies are also innovating the risk assessment and methods statements space. We’re seeing IoT integrations as well as visual monitoring being used, as well as interesting applications from claims management companies where AI can be used in order to help assess the likelihood that a contractor or subcontractor will file a claim. This enables owners and firms to proactively allocate contingencies and deploy targeted mitigation plans.
The claims management market has seen the emergence of dedicated AI discovery tools in order to spot responsibilities related to legal claims. This is particularly relevant for the construction industry, given the average value of a project dispute in 2018 was $33m with an average length of 17 months. (13)
Interesting companies to watch: Lili.ai
A construction project doesn’t end when the building is completed. In the absence of precise tracking tools during the construction phase, facility managers often lack a single source of truth on the building they are managing, which has a ripple effect on the proptech sector. It is therefore of the utmost importance that the project tracking feeds into this segment. Data created during the design and execution phases needs to transit to facility management in order to effectively run the building.
Verticals in the management phase include real-estate management software, integrated workspace management systems, smart-building IoT solutions, and maintenance planning software. Real-estate management software is used by asset owners or managers and is essentially an ERP software for real estate. it includes functionality such as accounting, controlling, contract and tenancy management, and maintenance of real estate. An integrated workspace management system (IWMS) is not only used for facility management and maintenance but also to optimise space occupancy, energy usage and the financial performance. Smart building IoT solutions use information from sensors spread across a building to optimise the usage of space and resources, and to monitor comfort (humidity and temperature). Finally, maintenance software optimises the long-term maintenance costs of buildings. Features include the assessment of the current condition of the building, long-term maintenance cost estimates, planning and budgeting, scenario analysis, and financial planning.
Interesting companies to watch: this subsegment falls into the proptech sector
This mapping only really scratches the surface of the industry, with more innovation coming from sectors such as modular housing (nHouse, Connect Homes), new sustainable materials (Arqlite), robotics (Boston Dynamics), among others. The industry is behind the curve when it comes to artificial intelligence solutions, most of which have been caused by the complexity of the stakeholders involved in the process, the uniqueness of construction sites, and by the fact that hardware was very pricey only until recently.
If you’ve been overwhelmed by this article, I’d like you to walk away with these few insights:
- The industry is large, stakeholders uncoordinated, sites disperse, and all parties are lacking technology tools that can boost efficiency
- There is a tremendous opportunity now given the advances in hardware, the proliferation of mobile phones on site, and the push to innovate that the coronavirus pandemic has brought onto the sector
- We are looking for founders who are creating a new atomic unit in construction, and disrupting the sector end to end bridging the gap between information silos
- At Talis, we believe the first subsegment to be successful will be one most closely linked to ROI and productivity, and the one where AI has the clearest applicability in the short to medium term. We believe these companies will be in the Field Productivity area and will then expand to the other subsegment of the industry and become vertically integrated
- The innovation we’ve seen in just the past couple of years suggests that we’ll be seeing increased investment and huge change in the construction sector over the next decade.
I would love to hear thoughts, opinions, dissents, and more companies I might have missed! You can find me at firstname.lastname@example.org