Digitization and Disruption in the Construction Business
By: Rita Gunther Mcgrath
Tags: Disruption, Digitization, Construction, Business, Strategy

$12.7 trillion! That’s the projected size of the global construction industry in 2022, according to one recent analysis. In the US alone, construction employs some 10 million workers. And while it’s a relatively slow-growth sector, it’s been remarkably stable in many of its elements for hundreds of years. That may begin to change.

Construction Tech — A New Focus of Startup Investment

Although construction would not seem to have the sexy profitability of, say, financial services, to prompt investment, the startup scene has discovered the sector. According to one report, construction startups raised $1.27 billion in funding in the first nine months of 2018 alone. Not only that, but incumbents in or adjacent to the sector are spending big on acquisitions. Like other sectors in which incumbents worry that their ability to innovate may be holding them back, we’re seeing them shell out billions for technology-focused startups making what used to be done obsolete. Thus, Autodesk spent $1.5 billion to acquire BuildingConnected and PlanGrid, after previously buying Assemble Systems earlier in the year. Trimble acquired Viewpoint for $1.2 billion in April of 2018 and e-Builder for $500 million. And what are they spending all that construction technology money on?

Drones, equipped with sensors, and virtual reality visualizations are replacing expensive (and ineffective) aerial photography. The construction industry reportedly is the largest buyer for commercial drones even today. Robots are working with humans, eliminating repetitive and potentially dangerous activities with even more reliable quality. Brick-laying robots do the job more rapidly and safely than human beings can. We’re starting to see real 3D printed buildings. And AI is anticipating and deflecting risks that would never have been possible for human beings to catch before.

As with other sectors, digital and other advanced technologies are making new business models possible and potentially making old ones obsolete.

Speaking of New Business Models…

If you wanted to buy a car, you would never dream of hiring one person to design it, another to create the parts, and a third to put it all together. And then find that the car would be delivered very late with a price tag 35 percent higher than the initial estimates! And yet, effectively, that’s the way much of construction works.

But new technologies and modular construction has the potential to bring much-needed industrial scale productivity. Some of that venture money I mentioned earlier is going into a new kind of construction company that handles the whole job under one roof — or even creates the new roofs off-site rather than in the traditional on-site service model. One example is Katerra, which received a Softbank investment of $865 million. Claiming that they have an “ongoing mission to help transform building for the 21st century,” Katerra seeks to use advanced technologies and proprietary software to do in construction what is already done in the automotive and electronics industries — creating products as a unified whole, rather than having each supplier doing only their piece.

In addition to creating a complete service from design through delivery, Katerra is also creating the conditions in which buildings and parts of buildings can be assembled off-site rather than at a typical construction site. Building off-site allows for more economies of scale, more routine operations, and more predictable timing than bespoke construction on a specific site. This in turn promises decreasing cost and complexity. And it can potentially address some of the more challenging social issues, such as a scarcity of affordable housing.

Who’s Going to Do the Work?

Construction executives have been complaining about the difficulty of getting enough workers forever. But now, the challenge has become acute. After the great recession, some 600,000 workers fled the industry, which suffered a drastic drop in demand. But now, with demand expanding, the sector is caught in labor market headwinds. Boomers are retiring. Many young people don’t think of construction as attractive. And those who are trying to get into the industry often don’t have the skills that customers require, such as the ability to operate specialized machinery.

The industry is resorting to some non-traditional practices to recruit and retain skilled people. Starting with offering higher pay and benefits to hiring employees (rather than contractors), the scarcity has created incentives to improve those jobs. Other creative tactics include recruiting ever-younger candidates, reaching out to previously incarcerated people, focusing on veterans, and even — wait for it — making a big push to bring women into the historically male-dominated industry. The gender gap in construction is stunning — women represent only nine percent of the total construction related workforce. But when you look at job site jobs — the actual ones that work at construction sites — there’s only one woman for every 100 men! If the industry wants to address its chronic labor shortages, that might well be a good place to start.

MIT Professor, and my good friend, Zeynep Ton suggests how these trends might all come together to create a major shift in the business of construction. Her work on the Good Jobs Strategy suggests that when you combine excellent operational practices (such as the new technologies being developed) with good jobs that pay well and offer opportunities for advancement, this can lead to significantly higher performance. As she found, the four elements of the Good Jobs strategy are: 1) focus and simplify; 2) standardize and empower; 3) cross-train; and 4) operate with slack.

You can really see the opportunities for major improvement in the construction industry. Focus and simplify is what Katerra is trying to do by bringing all the disparate elements of the system into one place. Standardizing and empowering means that employees can work on similar tasks in multiple locations and substitute for one another in a pinch. Cross-training similarly means that jobs themselves are more rewarding, but also that people can pitch in and substitute for one another. And operating with slack means that there are enough resources in the system that innovation can flourish and people are able to engage in practices that they themselves initiate. It’s an inspiring system.

Perhaps if the construction industry figured all this out, it would no longer be seen as the last resort career option for millennials, but as an attractive sector in which they could thrive.

In other words, construction could be poised for a major positive inflection.