Construction tech startups are poised to shake up a $1.3-trillion-dollar industry

In the wake of COVID-19 this spring, construction sites across the nation emptied out alongside neighboring restaurants, retail stores, offices and other commercial establishments. Debates ensued over whether the construction industry’s seven million employees should be considered “essential,” while regulations continued to shift on the operation of job sites. Meanwhile, project demand steadily shrank.

Amidst the chaos, construction firms faced an existential question: How will they survive? This question is as relevant today as it was in April. As one of the least-digitized sectors of our economy, construction is ripe for technology disruption.

Construction is a massive, $1.3 trillion industry in the United States — a complex ecosystem of lenders, owners, developers, architects, general contractors, subcontractors and more. While each construction project has a combination of these key roles, the construction process itself is highly variable depending on the asset type. Roughly 41% of domestic construction value is in residential property, 25% in commercial property and 34% in industrial projects. Because each asset type, and even subassets within these classes, tends to involve a different set of stakeholders and processes, most construction firms specialize in one or a few asset groups.

Regardless of asset type, there are four key challenges across construction projects:

High fragmentation: Beyond the developer, architect, engineer and general contractor, projects could involve hundreds of subcontractors with specialized expertise. As the scope of the project increases, coordination among parties becomes increasingly difficult and decision-making slows.

Poor communication: With so many different parties both in the field and in the office, it is often difficult to relay information from one party to the next. Miscommunication and poor project data accounts for 48% of all rework on U.S. construction job sites, costing the industry over $31 billion annually according to FMI research.

Lack of data transparency: Manual data collection and data entry are still common on construction sites. On top of being laborious and error-prone, the lack of real-time data is extremely limited, therefore decision-making is often based on outdated information.

Skilled labor shortage: The construction workforce is aging faster than the younger population that joins it, resulting in a shortage of labor particularly for skilled trades that may require years of training and certifications. The shortage drives up labor costs across the industry, particularly in the residential sector, which traditionally sees higher attrition due to its more variable project demand.

A construction tech boom

Too many of the key processes involved in managing multimillion-dollar construction projects are carried out on Excel or even with pen and paper. The lack of tech sophistication on construction sites materially contributes to job delays, missed budgets and increased job site safety risk. Technology startups are emerging to help solve these problems.

Here are the main categories in which we’re seeing construction tech startups emerge.

1. Project conception

• How it works today: During a project’s conception, asset owners and/or developers develop site proposals and may work with lenders to manage the project financing.
• Key challenges: Processes for managing construction loans are cumbersome and time intensive today given the complexity of the loan draw process.
• How technology can address challenges: Design software such as Spacemaker AI can help developers create site proposals, while construction loan financing software such as Built Technologies and Rabbet are helping lenders and developers manage the draw process in a more efficient manner.

2. Design and engineering

• How it works today: Developers work with design, architect and engineering teams to turn ideas into blueprints.
• Key challenges: Because the design and engineering teams are often siloed from the contractors, it’s hard for designers and engineers to know the real-time impact of their decisions on the ultimate cost or timing of the project. Lack of coordination with construction teams can lead to time-consuming changes.
• How technology can address challenges: Of all the elements of the construction process, the design and engineering process itself is the most technologically sophisticated today, with relatively high adoption of software like Autodesk to help with design documentation, specification development, quality assurance and more. Autodesk is moving downstream to offer a suite of solutions that includes construction management, providing more connectivity between the teams.

3. Pre-construction

• How it works today: Pre-construction is the translation of designs into highly detailed, executable construction plans. This includes many subprocesses such as finding labor, bid management, takeoff estimation and scheduling.
• Key challenges: The pre-construction process is highly complex, yet one of the least digitized elements of the construction process. Subjective decision-making and Excel sheets still drive most of pre-construction, which makes it both time-consuming and difficult to update with new requests or changes.
• How technology can address challenges: Marketplaces like Sweeten help connect contractors to projects, while digital workflow platforms like SmartBid and Building Connected help general contractors reduce the time and administrative burden of managing complex bid processes. Solutions like Alice Technologies take a predictive approach, using machine learning to optimize productivity.

WoHo wants to make constructing buildings fast, flexible and green with reusable ‘components’

4. Construction execution

• How it works today: The execution of a construction project is usually performed by a combination of a general contractor’s in-house labor and/or trade-specific subcontractors. Even simple builds may require dozens of contractors.
• Key challenges: With so much complexity on the physical job site, it is difficult for contractors to get a sense of real-time progress. Decision-making is more often reactionary than proactive, and it is hard for contractors to assess the full downstream impacts of each decision.
• How technology can address challenges: There are several software-led approaches to managing execution complexity, including field management tools like Rhumbix, on-site safety management software like Safesite, or site-visualization tools like Openspace, OnSiteIQ or Smartvid.io. Other companies have taken a full-stack approach to disrupting the construction process. Mosaic, for example, uses proprietary software to turn construction plans into detailed manuals that allow a build to be performed with fewer, less specialized laborers.

5. Post-construction

• How it works today: Even before the build is completed, contractors will start preparation of operating manuals, inspections and testing, close-out documentation and other tasks to prepare the asset for turnover.
• Key challenges: Document management, reporting and handover can be time-consuming, as it involves coordination across all parties involved with the build.
• How technology can address challenges: Most commonly, project management tools will offer a module to help manage this process, though some targeted solutions like Pype or Buildr focus on digitizing the closeout process.

6. Construction management and operations

• How it works today: Construction management and operations teams manage the end-to-end project, with functions such as document management, data and insights, accounting, financing, HR/payroll, etc.
• Key challenges: The complexity of the job site translates to highly complex and burdensome paperwork associated with each project. Managing the process requires communication and alignment across many stakeholders.
• How technology can address challenges: The nuances of the multistakeholder construction process merit value in a verticalized approach to managing the project. Construction management tools like Procore, Hyphen Solutions and IngeniousIO have created ways for contractors to coordinate and track the end-to-end process more seamlessly. Other players like Levelset have taken a construction-specific approach to functions like invoice management and payments.

Key barriers holding back construction tech

It’s no secret the construction industry has been slow to innovate. Despite the advancement of heavy machinery, drone technology and computer vision, construction productivity per worker has barely changed for decades. Today, the majority of construction firms spend less than 2% of annual sales volume on IT, according to the 2019 JB Knowledge Construction Technology Report). Yet technology has the potential to help firms save significantly across other cost categories like overhead labor, materials and construction labor, so why have construction firms been so slow to adopt technology?

First, the fragmentation and complexity of so many involved parties creates complexity around the ultimate decision to adopt new solutions. Construction projects are the ultimate example of “too many cooks in the kitchen.” It can be hard to pinpoint a single decision-maker among the owner, general contractor and subcontractors involved. On top of that, there are often misaligned incentives, as a product’s end user is likely different than the party that ultimately bears the cost.

Second, many firms have an aversion toward adopting point solutions, which most existing products are today. With very lean technology teams, it can be burdensome for construction companies to integrate new solutions. Because of this, most construction firms shy away from solutions that only serve one workflow, as potential productivity benefits are often offset by the time and effort required to set up the software and train teams how to use it.

Lastly, many construction firms have a low risk tolerance given the heavy liabilities associated with building projects, therefore they lack a culture of innovation. Some firms, however, are beginning to change this. Firms like Suffolk and Turner Construction have dedicated chief innovation officers to evaluate and implement construction technology.

Turning the corner on tech adoption

Just as incumbents in industries like financial services and real estate came to embrace innovation over time, we believe that now more so than ever, construction companies will begin to embrace construction technology at an accelerated rate — not because they want to, but because they have to. One of the primary problems facing the construction industry is a labor shortage, so firms across the industry must deploy new technologies to increase productivity amid an ever-shrinking workforce.

Recessions of the past have taught us that construction jobs tend to come back much slower than construction volume. This is evident particularly after the 2008 Great Recession. Construction volume (measured by overall project value) returned to its pre-2008 peak in about five years, while construction jobs had still not fully recovered even a decade later. With the rise of the gig economy, construction laborers — both existing and potential — have an increasing number of alternative job options, many with similar pay and more stable hours. For that reason, the construction labor force is aging quickly, with fewer young people joining the industry.

Since COVID-19 took hold in the United States this spring, it reinforced the pressure for construction companies to improve productivity. Mandated shutdowns cut nearly one million construction jobs in April 2020, and while many have returned to work, BLS data shows that September 2020 construction employment is still lower than February 2020 levels by 394,000 jobs. Nearly five years of construction job gains were wiped out in one month, and if the industry behaves anything like prior recessions, it will take many years to fully recover.

To remain competitive, improving productivity is a necessity for construction firm’s long-term survival, and adoption of construction technology solutions is one of the ways to do so. Much like how COVID accelerated tech adoption in industries like retail and banking, we expect to see construction companies accelerate adoption of software that helps them turn manual processes into digital, cloud-based workflows.

While perhaps simple in theory, this shift from pen and paper to mobile devices is a large undertaking that requires retraining entire workforces. Construction workers are extremely skilled in their crafts and learn on the job from their mentors. Skilled laborers are often resistant to change, preferring age-old and tried-and-true methods such as paper, pen, string and tape measures. But almost everyone is now comfortable with mobile applications, so construction workers are likely at a point where they’ll be ready to jump into the digital world. Once construction firms make a digital shift, they will unlock a treasure trove of data and analytics. We’re excited for the next phase of construction technology, where firms can use data-driven insights to make better decisions that reduce costs, improve productivity, streamline projects and increase worker safety.

We already see startups beginning to enable this digital shift across all phases of the construction process. Whether it’s pre-construction plans optimized by Alice Technologies’ predictive intelligence platform, or real-time progress tracking visualized through OpenSpace’s onsite capture images, as investors, we’re bullish on the next wave of construction tech companies.

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