Business models in the construction industry are changing; here’s how
A few weeks ago, I got up on the main stage at Digital Construction Week to share my thoughts on the title of this blog. The audience that morning was full of construction professionals , half of whom thought I was crazy and the other half left having learnt something new. I had achieved my goal — to throw a cat amongst the pigeons, to catalyse discussion about the way we deliver projects today.. Here is what I shared:
The construction industry has been the same for a very long time, in some alarming ways. For one, projects consistently are unable to deliver to time or budget, which also means we’re not getting better at keeping promises. This long-standing statistic of failure has etched a lack of trust into stakeholders. We simply don’t believe one another when we think of project delivery, and this applies from building your home to building a nuclear power station.
To understand this in more detail, let’s start by taking a view of how construction projects come about and how they are then delivered. Construction projects originate by Clients (of construction) as concepts of public or private utility, from increasing passenger capacity on an overloaded rail line to building a Liquified Natural Gas plant to monetise a newly discovered gas field. The organisations that conceive these projects are seldom the ones to actually deliver them. During the evaluation phase of a project, Clients assess the business case of the investment and will ask Contractors to bid for the opportunity to perform the work. To understand this in more detail, let’s step into the perspective of the Client first, and then look at it from the Contractor’s viewpoint.
What are Clients looking for?
Clients are looking for the most economically feasible proposal, which is beyond who is cheapest and fastest on paper. They need to know and understand whether the bid they have received is deliverable. Clients are looking at tell tale symbols that show the proposal from the Contractor is flawed, which would therefore lead to inflation in the cost estimate and deflation in the business case. Clients need certainty, but how or where do they get this? Most often, it’s from the most experienced set of hands they can find internally or externally, with consultancies playing a role in augmenting knowledge and experience. More advanced projects will use benchmarking, such as that provided by IPA (Independent Project Analysts LLC). Arguably, if these methods were sufficient, our long standing record of failures would have seen improvement.
What are Contractors looking for?
Contractors are looking to make a sustainable and predictable margin on the work they perform for Clients. It may sound like a low bar to cross for readers not native to the construction industry, but I promise you, this is a gargantuan change to achieve. When bidding on work, Contractors will make an assessment of the scope to be executed, balancing engineering effort with the risk of not winning the bid (these costs can sometimes be in the millions!). Should the Contractor realise that the scope to be delivered will probably take longer and/or cost more than what the Client is expecting, the Contractor has two choices: either inform the Client of the most realistic outcome of the project with the bid, or remain “competitive” in the bid, committing to the unrealistic expectations of the client. The risk in the former option is that a competitor may bid low, resulting in a failed bid by the Contractor, giving no recourse to recover the sunk engineering effort consumed to realise the deliverability of the project. The latter option relies on the Contractor employing underhanded commercial tactics to recover the costs of inevitable delay, resulting in a rampant lack of trust in the construction industry.
A key challenge is that none of the options available to gain trust and assurance are truly objective, systematic or scalable. This is where intelligent software will eat the world. Just like how software ate it 25 years ago, the internet did 15 years ago and mobile did 10 years ago. Intelligent software (that which learns and adapts with data) can truly overturn the deadlock with these traits:
- Software can learn from past data to reflect the likely future
- The learning process is objective and reliable; spurious or false data can be detected and removed
- The corpus of knowledge created is virtual, independent and accessible 24/7 by a near infinite number of consumers
- Learning limits are near infinite (as long as there is data available in the world)
- Software remains impartial and humble about what is known and unknown
- The information and insight is accessible and available to scrutiny (in a way that most humans would find personally unacceptable)
- The information presented cannot be altered to tell a different story. It is trustworthy.
The construction is particularly special and fortunate, thanks to the waterfall model of planning. For decades, the industry has been measuring what was planned to happen on projects, and more crucially, what actually happened. In the case of nPlan, this becomes our feed source for our algorithms to learn.
What does it mean for Contractors?
The availability of intelligent software to Contractors means they now have a scalable method to understand and quantify risk on projects, before that risk materialises into a disaster. We now see Contractors leveraging the insights derived from past data to negotiate with Clients, thereby opening the conversation to reward the Contractor based upon the highly probable outcome of the project. This is fundamentally aligned to the Contractor’s objectives described earlier in the article. It means Contractors only bid on work they can deliver, and that bid has a higher likelihood of being won because it has independent assurance. The work done and delivered to time therefore achieves the target margins, which goes to the bottom line of a Contractor balance sheet.
What does it mean for Clients?
We now see Clients making smarter contracting and procurement decisions. At first, this appears as the bitter truth of what the most realistic delivery of the proposed project will look like, but on second view, this ensures the project’s business case remains valid. Over time, this increases confidence to invest further capital as the risks are known and quantified. Clients can now change the way they engage with Contractors and have a way of understanding risks in proposed work. Intelligent software arbitrates between Clients and Contractors on the most likely outcome and negates subjective opinion.
What does it mean for the construction Industry?
Intelligent software will change some of the fundamentals of the industry, re-aligning them to improve outcomes for all stakeholders. But there is more to this. Using data to systematically quantify risk invites new stakeholders to the industry, namely Insurers and Financiers. These institutions inject capital in exchange for a commercial upside in the trade of risk. Insurers are stepping forward to offer liquidated damages insurance to Contractors, which releases financial burden and increases their competitiveness in the market. Investors are able to make more informed decisions on equity swaps on construction projects. This creates additional liquidity and competition from investors, leading to better terms for Clients, which leads to larger volumes of quality work for Contractors. If you combine these, which is the inclusion of financial institutions to carry risk to enable to core of the industry to operate more productively, we have a vision we can look forward to. It’s one where projects are consistently delivered to time and budget, with all stakeholders benefiting from the built environment.
To the sceptics reading this, I understand where you are coming from. I was just as sceptical about change, and in my past life I resisted it. Without sounding cliché, this change is different and it’s real. This change works because it operates in favour of all parties exposed to it — everyone is better off.
When I began my journey with nPlan, I wanted to build something that would break the deadlock I found myself in, as a young Project Manager. I wanted to build something that would change the industry, by creating markets that are based on trust rather than subjective opinions of a few. Seeing these changes coming to life through the work we’re doing at nPlan is deeply exciting and I welcome you to join us.
If you’d like to know more, or would like to share your thoughts and feedback, I’d love to hear it. This story is constantly evolving as we learn more about nPlan’s impact, so stay tuned for updates.
