Venture Funding in Construction Tech (Part 1 of 4)
Where does venture funding begin in construction? A deep dive into how venture funding will accelerate the world economy’s largest sector.
Construction is one of the world-economy’s largest sector and has only seen a 1% annual increase in productivity, compared to 2.6% annual increase of the world economy. Over the past 10 years construction, as measured by output per hour, grew on average by 0.7% within the whole UK economy while other sectors averaged 2.1% per year.
Construction technology (ConTech) has the opportunity to boost value by $1.6 trillion adding 2% to the total economy
The construction industry faces 5 key issues:
The construction industry has long been recognised as having problems in its structure, particularly with fragmentation, which has resulted in poor performance. Due to the uncertainty for the
main contractor in obtaining continuous work, subcontracting has been adopted as the dominant approach, resulting in further fragmentation.
- Adversarial Relationships
The industry had become less trusting, more self-interested and adversarial. Increased fragmentation brings increased transaction volumes at lower average values and inevitably higher levels of opportunism, particularly in the context of low barriers to entry.
- Project Uniqueness
Construction is a project-based industry meaning that projects are very often‚ bespoke as the requirements and specifications of technologies for specific clients determine their characteristics.
- Separation Between Design and Production
One of the main problems in construction is the extent to which the industry separates design from production. There have been many calls to bridge the gap between design and planning by creating a seamless supply chain whereby the interface between various phases of the project’s life cycle are integrated with one another.
- Competitive Tendering
Unlike manufacturing, construction projects are not priced and advertised for sale but instead uniquely priced after a negotiation or bidding process. Adopting “low big to win” strategies result in low cost production rather than ‘right first time’ or ‘best value’. Alternatives do exist, but require attitude change within the construction sector and its professions.
Delays are causing the most immediate disruption across the value-chain
Delays are impeding project objectives across all project types.
In the United Kingdom, the National Audit Office found that 70% of government construction projects experienced delay. Delays are the industry’s biggest burden which is encouraging technological innovation. However, identifying delays as a paramount issue is not helpful if the root cause is not understood.
Delays are rooted in fragmentation and adversarial relationships.
Unravelling the value chain, the industry is at odds: each party wishes to optimize time, cost and/or quality through non-legitimate risk transfer (passing risk down to the next level of the supply chain).
Consequently, any error affects all parties’ objectives. The figure below visualizes how this places immense pressure on sub-contractors who effectively inherit low-budgets, short deadlines with the expectation of high- quality products.
As a result, the work-flow operations collapses — sacrificing time, cost, and quality for all parties. To help alleviate these issues, the industry and governments have taken on initiative to adopt building information models (BIM) aiming towards a digital twin.
1. McKinsey Global Institute: Reinventing construction: A route to higher productivity
2. Office for National Statistics