Construction Technology Market Map: 3 Opportunities Ahead
By: Lauren Weston
Tags: Construction, Venture Capital, Construction Technology, Real Estate Tech, Proptech

Today we are pleased to release our construction technology market map. This market map follows our previously published housing market map and commercial real estate market map. A high-resolution version of the map is available here and the full list of companies is available here. This market map includes more than 150 technology companies operating across every aspect of the construction process, ranging from seed stage businesses to public companies.

At Thomvest, we are interested in the supply side dynamics of the real estate industry. We believe that the adoption of technology in construction can meaningfully impact the supply of real estate by breaking down silos in data, providing purpose-built tools for key stakeholders, and eliminating inefficiencies in the fragmented value chain.

While we have surveyed the broader construction technology landscape in our market map, we cover only a few areas of the value chain in this blog.

We see three key opportunities ahead for SaaS and tech-enabled companies:

1. Collaboration software that provides insights around workforce management: In a world in which labor supply is tight and skilled work is invaluable, workforce management becomes a must-have tool for operations teams to forecast costs and drive employee retention.

2. Materials management software that is built purpose-built for subcontractors: The pandemic has disrupted global supply chains and exacerbated the fragmented process of procuring materials — forcing the burden of responsibility to largely fall on subcontractors.

3. Platforms that address the construction payment chain from lenders → title companies → owners/developers → general contractors → subcontractors & suppliers. There are massive inefficiencies involved in the exchange of both information and capital, beginning with the construction loan draw process and ending with subcontractors receiving earned payments.

Setting the Stage: The Construction Industry in 2020

The structural challenges of the construction industry are well documented: The industry is highly cyclical and fragmented, and suffers from a chronic labor shortage. Underinvestment in technology has resulted in poor on-site coordination and execution. All of this has contributed to a massive labor productivity problem. While the construction industry is one of the largest contributors to the U.S. economy, representing $1.5 trillion or 5% of annual GDP, productivity growth has averaged only 1% annually over the past two decades.

The Covid-19 pandemic has exacerbated the productivity crisis in many sectors of the construction industry. The industry has suffered from a confluence of factors: 1) government shutdowns resulting in project delays and layoffs, 2) the disruption in global supply chains, 3) the shift to remote work, 4) enhanced safety protocols in the field, and 5) tightened lending conditions.

At the same time, construction tech investment reached $1.3Bn in 2020, increasing 56% YoY. However, VC investment has tended to flow to similar parts of the value chain: 1) software platforms for managing the field, 2) reality capture and analytics tools that leverage drones, computer vision, and robotics, and 3) vertically-integrated companies that provide a full-stack approach to onsite homebuilding, general contracting, or prefabricated and modular construction.

Below, we take a closer look at a few of the most pressing challenges facing the industry today, as well as the 3 key opportunities for startups to address these pain points.

3 Opportunities Ahead: Workforce Management, Materials Supply Chain, and The Payment Chain

Workforce Management

Government shutdowns, the shift to remote work environments, and enhanced safety protocols surrounding Covid-19 have significantly impacted project schedules. According to a survey conducted by the Association of General Contractors in September 2020, 60% of GC firms report that at least 1 future project has been canceled or delayed and since the start of the pandemic. As a result, over 400,000 workers have been laid off as demand for future projects has stalled.

This has created a greater need for collaboration tools that bridge the field to the office, and provide insights around labor force staffing and utilization. Companies such as Bridgit, help teams answer key questions around which skilled tradesperson is best suited for a particular project or which staff members are over or under-allocated? In a world in which labor supply is tight and skilled work is invaluable, workforce management becomes a must-have tool that allows operations teams to understand their workforce costs and drive employee retention. We believe that this reflects a broader shift from field management to project management, specifically focused on the labor force or “workforce labor management.”

Materials Supply Chain

The pandemic has disrupted global supply chains and exacerbated the fragmented process of procuring materials and building parts. Construction firms have seen material delays, supply shortages, and rising shipping costs. On top of this, the burden of responsibility largely falls on subcontractors.

To illustrate this point, it is important to first understand the unique dynamics of the industry, which are shaped by contractual agreements among a hierarchy of stakeholders. Construction projects involve multiple stakeholders (owners, to developers, to general contractors, to subcontractors) and importantly, a transfer of risk and responsibility from top to bottom. This risk has only increased as projects have become larger and more complex over time, involving subcontractors who, in turn, subcontract work to other subs.

Subcontractors are responsible for ordering and paying for materials, as well as managing their materials once they arrive onsite. As a result of supply chain disruptions, materials have had to be shipped earlier and handled with care to prevent materials from being damaged, misplaced, or stolen onsite. Put simply, the mandate to procure and manage materials has become more challenging amidst tightening supply chains and interrupted project schedules.

We see a clear catalyst for materials management software that is built around the workflow of subcontractors. Materials management is largely handled on pen and paper or antiquated software that tacks on materials management as an ancillary product that is not tailored to the specific pain points of subs. Agora and StructShare stand out as solutions that are purpose-built for subs and address a gap that we see among the existing landscape: while many solutions address field management, there is a disconnect between the solutions that are purpose-built to manage the field and the solutions that are purpose-built to be used by the field. Given the increasing burden of risk that flows from owners to subs, we see the importance of software tools that have bottoms-up engagement, garnering momentum from the bottom of the value chain and expanding to the top over time.

The Construction Payment Chain

The construction payment chain refers to the flow of capital from lenders → title company → owner/developer → general contractor → subcontractors and suppliers. There are massive inefficiencies involved in the exchange of both information and capital, beginning with the construction loan draw process and ending with subcontractors receiving earned payments.

Perhaps the most overlooked, but critical aspect of the payment chain is that financial strain impacts all stakeholders because the financial burdens absorbed by subcontractors in turn drive higher costs for developers and lenders. Why?

Subcontractors must pay wages on a weekly or biweekly basis and materials are purchased on 30-day invoice terms. However, the majority of subcontractors are forced to wait more than 30 days to receive payments from the general contractor. As a result, subcontractors turn to a variety of sources of financing, including lines of credit, credit cards, and retirement savings to fund their working capital needs. Thus, delayed payments from general contractors actually increase financing costs for subcontractors, and increased financing costs drive up total project costs for developers and lenders. In fact, a survey conducted by Rabbet found that this extra cost of floating payments adds an average of 4.5% to total project costs, representing $61Bn in excess cost that is passed through to developers.

As it stands today, several tech platforms are creating purpose-built tools for lenders or purpose-built tools for subcontractors. Built Technologies and Rabbet offer cloud-based SaaS for lenders and developers, streamlining the draw and inspection process. At the other end of the payment chain, a number of startups serve subcontractors, suppliers, and GCs — offering supply chain financing or facilitating speedier, digital payments. Both approaches are critical in closing the gaps in the construction payments cycle.

In addition to these purpose-built platforms, there is an opportunity for horizontally integrated platforms that integrate all stakeholders and provide value across the ecosystem. Platforms such as Vertical focus on document collection and compliance management, and ultimately address a core bottleneck in construction payments: compliance issues stemming from incorrect and manually processed construction documentation. Inviting all participants onto the platform to manage documentation enhances transparency and reduces risk, allowing a more efficient flow of both data and capital from lenders → owners/developers → general contractors → subcontractors, and suppliers.

Conclusion

Looking ahead, there is a seismic opportunity to increase productivity growth in the construction industry and meaningfully impact the supply side of real estate. Workforce management, materials supply chain, and the payment value chain are just 3 key areas that are critical to driving growth by 1) breaking down silos in data, 2) providing purpose-built tools for key stakeholders, and 3) eliminating inefficiencies in the fragmented value chain. We all share in the responsibility of staying on top of the most important needs of the market today and in the future. Now is the time to build and invest.

If you are building in the construction technology space or working to solve some of the major pain points in the construction industry, I’d love to chat! I am always reachable at lauren@thomvest.com.