I have always believed in the power of technology to disrupt industries and I have seen this at work firsthand in construction. But even though it has been 20 years since Rob Phillpot and I founded Aconex, I have no doubt that we are still to see the full impact of technology on the construction industry.
That conviction has driven Rob and me to invest in numerous construction tech businesses, including Buildxact, Zuuse, Versatile AI, Matrak, AoS, Felix and Maast. I will write about the attractions of these companies, and the sectors they operate in, in a future post. But first, what is it that makes construction tech such a high-potential sector?
Construction is a huge industry with significant problems to solve. While it sits at the bottom of the rankings of technology adoption, my experience is that people in the industry – builders both large and small, consultants and subbies – are incredibly pragmatic. They embrace technology when they can see a clear benefit, as we saw when construction was one of the fastest adopters of mobile phones over 25 years ago.
That’s why I believe that construction represents a massive digitisation opportunity and is ripe for disruption. I also believe that Australia is proving itself as an ideal place to build the construction tech businesses that are enabling this global, industry-wide transformation.
The four reasons why construction tech has such high potential:
1. Construction is the biggest industry in the world.
The construction industry – including residential and commercial development, infrastructure and engineering – is the largest industry in the global economy. It accounts for 13 per cent of world GDP and 7 per cent of the global workforce. And it is far from being a mature industry. According to the McKinsey Global Institute, construction spend is expected to grow to USD 15 trillion by 2025.
2. Many critical problems remain to be solved.
In a low margin and competitive industry with so many players, those who respond best to common challenges will win. This creates strong demand for technology solutions that deliver clear value throughout the asset lifecycle – through planning, design, project delivery and asset management.
Challenges fall into the familiar categories of project safety, time, cost and quality:
Safety – there is increased focus on the safety of workers on construction projects in all parts of the world, often driven by governments lifting liability and regulatory standards.
Project schedules and budgets – with about 90% of construction projects delayed and 40% incurring cost overruns, the industry lives with high risk and low efficiency. In fact, the average cost of rework on a project is 5%, or over USD 600 billion annually in avoidable cost.
Quality – all of the moving parts on a project must combine to enable delivery of a functional and hopefully beautiful asset that performs for its owners and for the community over the long term.
Another way of understanding the problems the industry faces – and the scale of the opportunity if they can be solved – is to look at productivity improvements over the last 20 years. The record is poor. At just 1% p.a., construction lags manufacturing (3.6%) and industry overall (2.8%) in productivity growth. (Source: McKinsey Global Institute)
3. Construction is complex and fragmented, but highly collaborative.
The construction industry is becoming ever more complex, as projects become larger and involve a growing number of specialised consultants and trades. The trends towards specialisation, subcontracting and an international supplier base provide real, addressable opportunities to reduce inefficiency through streamlining and supply chain automation.
While there are examples of successful, fully integrated construction businesses, specialisation and low barriers to entry mean that fragmentation will remain the norm. Dozens, and sometimes hundreds, of companies must coordinate, requiring collaboration between thousands of people in design and construction teams.
This collaboration is highly fluid, as a company works closely with partners on a project, before moving to another project that will include a new set of players.
For tech companies, this deep, evolving collaboration and highly connected supply chain provide the opportunity to create network-based business models with strongly reinforcing network effects.
4. Digital under-adoption presents a catchup investment tailwind for technology entrants.
Construction ranks well behind other industries in embracing technology. In fact, it lies near the bottom of the digital transformation curve. During the Aconex IPO roadshow investors were surprised – and a little bemused – that construction sat just above hunting and fishing in terms of IT adoption.IT spend as a percentage of revenue is less than half the average for all industries, at 1.5% compared to 3.3%. Banking (at 7.2%) and professional services and education (each at 5.8%) invest 4-5 times as much in technology as does construction. (Source: Deloitte 2016-17 Global CIO survey)
But for me, this technology laggard status is pure opportunity. I believe construction will move towards the mean and over time adopt technology to a similar spend level as other sectors. For early adopters within construction, this is also a chance to steal a march on their peers – to win more work against their competitors and deliver it at lower cost and higher margin.
As the construction sector closes its technology investment deficit, the move from investing 1.5% of revenue to that more typical figure of 3.3% represents additional potential spending of USD 270 billion on information technology every year.
Australia is the Silicon Valley of construction technology.
I mentioned my belief that Australian tech businesses are strongly positioned to both drive and benefit from the changes that are underway in global construction.
Just as Aconex benefited in its early days, the next wave of Australian construction technology startups is helped by the fact that construction companies in Australia tend to be relatively innovative and agile, and are early adopters of technology. Australia is a global leader in construction productivity, developing disruptive delivery structures, such as design/construct approaches and public private partnerships, and has built sophisticated global material supply chains, particularly from Asia. The industry has led the way in the use of project collaboration platforms, site mobility applications and Building Information Modelling (BIM).
As a result, dozens of innovative construction tech companies, some hopefully encouraged by the success of Aconex, are disrupting and helping to reinvent the construction market in Australia and overseas. Many are backed by supportive investors who see the size of the opportunity and are providing essential access to capital to fuel growth.
While I am excited by the massive opportunity for construction technology, I have always been equally motivated by seeing first-hand the real-world impact it has on the built environment.
At Aconex, I always got a buzz from visiting projects that used the platform: starting with Melbourne’s Eureka Tower and Adelaide’s Lyell McEwin Hospital in the early days; Hong Kong Airport, the Venetian Macau and the Marina Bay Sands in Singapore as we got traction in Asia; Wembley Stadium and the Battersea Power Station redevelopment in central London; Dubai Light Rail, Dubai Airport, and the mega Yas Island development in Abu Dhabi; and on to New York City Hall, Denver Airport, Denver Light Rail and the once-in-a century Panama Canal expansion as we built the company in the Americas.
These were some of the most iconic global construction and infrastructure projects of the last 20 years – and we got to play our part. Spreadsheets, metrics and ROI aside – and speaking as a construction tech founder – that was the true excitement about driving disruptive change in industry!