By David Brian Ward

From the outside looking in, the construction industry appears ripe for tech innovation. The industry represents  6.3% of the U.S. GDP. There are close to 1 million general contractors (GCs) in the country, and anywhere between 3 million and 5 million workers on job sites every day.

Meanwhile, there’s a common (if somewhat justified) belief that construction firms are slow to adopt technology and are behind the digital curve.

Success in construction tech will come down to proving the need for the technology, delivering immediate ROI, and ensuring workers know how to use it on the first try.

But not every construction company is a technology laggard. While GCs are historically slower to adopt new technologies, this doesn’t necessarily make them behind the times. About 60% of construction companies have R&D departments for new technology, and the largest construction firms have substantial R&D budgets. Yet 35.9% of employees are hesitant to try new technology, according to JB Knowledge.

One way to interpret this is that there is a strong interest and need to take advantage of newer construction-centric technologies, but only if they’re easy to use, easy to deploy or access while on a job site, and improve productivity almost immediately.

These factors have made construction tech appealing to investors, who have poured  at least $3 billion into the sector. Is construction tech the “it” place right now? Is it ripe for disruption, the way VC investors find attractive? If that’s true, what went  wrong at Katerra? Is Procore justified in  losing $1 for every $4 in revenue? And why does so little investment go into improving productivity at the job site where GC money is made — or lost — compared to back-office operations?

My experience to date says that construction is different from other sectors because of the significant variation among projects that originates in the way projects are financed, how risks are managed and the factors that drive variation among projects. Construction’s differences are not easily mitigated via data processing, as compared to fintech, for example, where all money is data-amenable to software processing. Addressing project variations will be key to succeeding in construction tech beyond the back office. Here are the critical factors to consider.

Project financing makes capital investment more difficult. While the Commerce Department reported that construction spending in the U.S. reached a record high of $1.459 trillion in November 2020, this doesn’t mean there are unlimited opportunities for construction tech. The reality is that GCs make few capital investments because they must fund investments in technology out of operating cash flow.

Construction projects are typically funded incrementally in phases as the project demonstrates progress. Delays or accidents can have a huge effect on cash flow. Overhead and G&A cost burdens are hated. Asking a GC to license technology as a capital purchase doesn’t always make sense.

GC ownership and business structure also make large capital investment more difficult. Most GC firms were founded by tradespeople and either started as, or remain, family-owned firms. Borrowing what’s considered the “family’s money” is a much more risk-averse decision compared to the way larger corporations evaluate productivity investments and put assets at risk.

How to pay for construction tech matters a lot. Construction tech solutions, no matter the technology, need to offer “pay as you go” offers that can be passed through to the project. High-capital technologies are best consumed as rentals, just like cranes and other special tools and equipment.

For software technology, SaaS subscriptions and user pricing that can be expensed per project are ideal. For that reason, Procore charges a percentage of project revenues in exchange for its substantial automation benefits. But even that strategy has proved a tough sell because Procore’s benefits require a big investment in training that cannot be immediately recouped.

Success requires accounting for local variability. There are multiple dimensions to local variation, including:

Market segment: What type of building you build matters a lot, obviously, and most GCs specialize unless they become very large. Commercial construction obviously differs from single-family residential. Within commercial, hospitals and healthcare differ significantly from offices, and offices differ from retail, and so forth. The same goes for infrastructure — roads versus power — manufacturing, mining, utilities, data centers — the list goes on and on.

Region: Geographic, weather, demographic, regulatory and infrastructure variations all happen at the local level. Areas with earthquakes, hurricanes, floods or tornadoes require unique materials and methods. Building in densely populated cities is different from building in rural areas or locales where space is not at a premium.

Regulation: Construction is regulated at multiple levels, and the level that matters the most is local, where almost all final decisions are made with respect to purchasing, zoning, permitting, inspections, safety, labor management, etc.

Economic infrastructure: The availability of water, electricity, sewer, internet access and transportation also impact the job site and whether certain technologies will be effective.

Job site: The materials, tools and equipment needed on-site vary depending on what is built and its size and complexity. Higher-cost equipment is ideally rented, but rental agencies will only want to rent tried-and-tested technology, not the new stuff, which may not be insurable.

Materials: Buildings are created for people or businesses with wide variations of wealth and income. There are vast differences in materials and methods. As we have seen during the pandemic with lumber, long supply chains affect material availability and price.

Workforce: The nature of the construction workforce also factors into technology adoption. In the field, there are many trades to be managed, and most trade workers are not knowledge workers. Tradespeople want to build, not enter or manipulate data.

A construction site’s workforce can be a highly complicated mix of salaried, hourly, part-time or contract workers, both union and non-union. The prevalence of Spanish speakers on job sites means language matters, not to mention authorized immigration status. For many projects, most of the workforce will be subcontractors specializing in a discipline such as HVAC, metalwork or electrical.

Construction technology users, therefore, are more like general consumers. This means the technology ideally must be easy to use on the first try and be adaptable to a wide variety of job site protocols if it’s to return any value to the GC.

Success requires a wide range of risk management techniques. The list of risks that converge on a GC is long and hard to manage. Workplace safety is a huge concern because a single accident can have devastating financial effects. Project management risks abound. Delays, if the GC can be held liable, can also create huge losses or cancellations. Insurance costs are high — roofers pay the highest workers comp costs in any industry — and conditional limitations on coverage limit insurance effectiveness at risk mitigation. And the industry’s workforce variations make it liable to just about every labor-management risk in existence.

Construction tech success so far has been mostly within HQ. The software companies that have had the most success in construction adoption tend to target larger contractors with substantial back-office and HQ functions. The ideal customer for many construction tech companies is one where business software is used for purposes like sales, marketing, accounting and project management. These functions are more broadly applicable to any business, so the software is more easily built and applied to construction industry differences, no matter a GC’s segment or specialty.

McKinsey has looked at the digital prospects within construction, and not surprisingly, almost all the digital adoption has been at the HQ. Technology at the job site is still largely nondigital. For most GCs, digital time cards for employees are the only data entered on site.

What can we learn from Katerra’s hard-crater and Procore’s IPO? Katerra attempted to solve all of construction’s sources of variation via vertical integration, attempting to own construction projects all the way from property acquisition to architecture and design, then apply modular construction manufacturing, then build and manage. Even with billions of dollars, it’s hard to boil an ocean, especially an ocean as diverse as construction.