Kenny Ingram: IFS Global Industry Director for Engineering, Construction & Infrastructure
In 2020, we will see a continuation of last year's move towards radically more efficient construction operations. Some of this will be due to digitalization of business processes, but real gains will have to do with technology used to change the business processes themselves. And we are not talking about small, incremental changes in efficiency.
Construction productivity lags so far behind other industries that to catch up, the industry must adopt, for the first time, enterprise-wide technology that will reduce timeline and budget failures, eliminate non-value-added work, compress timelines and let contractors deliver more value to asset owners with fewer resources.
If contractors fail to adapt, the industry will still be ripe for innovation and contractors will be at risk of competition from new entrants to the market. It is therefore reasonable to forecast that other entrants, including net-new construction players, manufacturing companies, or major corporations like Amazon or IKEA, will carve out market share in the business, ousting apparently secure incumbents.
Prediction 1: Those industry challengers that embrace digital change will enjoy increased productivity through 2025
First the good news: the productivity of construction companies is set to increase 20 percent between 2020 and 2025. Now the bad: this is only going to apply to businesses that embrace new technologies and use them to substantially increase productivity.
For a lot of major construction contractors, this may look daunting. Tell a construction company they will need to use virtual reality and 4D planning in the design stage, mobility in the field and that procurement and manufacturing are going to involve 3D printing with an element of the internet of things (IoT), and that they must deliver building information modelling (BIM) data on the project, they are likely to balk at that much technology and change. Tell them robotics and drones will become central to construction and operations and that maintenance will involve laser scanning and they may not believe you. It is certainly a lot to get your head around. But the most important thing to note is that this doesn't all have to be done at once.
The whole process becomes visible
Contractors today must implement the business systems to proactively monitor and manage the entire lifecycle of a construction project from contract award through to commissioning, and even provide maintenance and facilities management services after handover. This requires a move away from spreadsheet-driven project management unconnected to the accounting system of record and towards true enterprise resource planning (ERP) software.
When major construction companies like the UK's Carillion go bankrupt, a lack of visibility and control are probably not only contributing factors, but more or less ensured that the people involved did not even know how much trouble they were in until it was much too late. Contractors need to move towards integrated applications to ensure proper governance, allowing the business, for the first time, to be managed properly. This centralized software environment can facilitate processes like building information modeling (BIM), which require that all data on a project be housed in a centralized data structure. An enterprise software environment can also be extended with new technologies, including data from the IoT-enabled assets and drones. In fact, construction already uses more drones than any other sector, with usage increasing 239 percent year on year, even surpassing mining, which has increased by 198 percent.
Contractors may use bits and pieces of transformational technology in their business today. But what is often missing is the right software environment to knit these technology elements together to drive real value. A drone used in construction inspection is a great thing as long as it's able to report its findings to a project or asset structure easily and smoothly. Scanning for damage using laser technology works only if the information is going somewhere and analytics are being applied to ascertain underlying trends and issue work orders to resolve immediate problems found. Data from these exciting technologies only become valuable once they are introduced into the transactional system-ERP.
A centralized ERP system can also facilitate business processes common in other industries, including lean approaches to fabrication, inventory and labor scheduling. For 2019, I predicted a surge in offsite manufacturing in a number of disciplines, which I will echo in our second prediction. But offsite construction success is dependent on software with the built-in process flows of a shop environment-from shop orders, bills of materials to streamlined approaches to work center and equipment utilization.
Prediction 2: Offsite manufacturing will grow by 50% between 2020-2023
In the 1940s and 1950s in the UK, there was a surge in prefabricated homes, or "prefabs" as they were known. A necessity as the nation recovered from war damage, they were notoriously flimsy and low-quality, but many survived until the 1970s and did their job of housing people. The walls, roofs and other components were built offsite-hence "prefabricated"-and assembled onsite.
Contractors are returning to the practice of fabricating building or asset subassemblies offsite and then assembling them onsite. Unlike the prefabs of post-war England, the quality of the build is uncompromised, and the schedule is compressed and more reliable than standard construction methods. This is why McKinsey believes modular construction can increase the speed of construction by as much as 50 percent with cost reductions, assuming the right environment should fall by 20 percent. The obstacle for the established incumbent is their existing business models, systems and skill sets do not include these new methods.
Offsite construction is a true game changer. It increases productivity because things can happen concurrently when they would previously have been sequential. It prevents weather-related delays. It enables more efficient use of human capital because productivity in a central shop environment is higher than on a construction site. Overall, timelines will be shorter and more predictable, quality will be higher and cost to the owner may be lower.
The results have been striking. In China, the mini Sky City was erected in 19 days. The modular approach works not only for residential and multifamily properties but for infrastructure, government assets, mining, maritime and commercial projects. Considering the current state and rapid development of this methodology, I predict that in five years, 50 percent of all construction projects will use offsite and modular manufacturing or 3D printing, leading to a 40 percent drop in project delivery timescales and a 20 percent reduction in cost.
To get the most value and to truly disrupt the market with offsite construction, however, contractors will need to reduce the unique, one-off nature of their projects and pursue greater standardization. This will enable them to reduce time and cost of design and engineering, re-use standard design elements and subassemblies and deliver finished projects that are higher in quality and perform better. Standardization may also make robotization of the offsite construction shop environment more feasible, as described in this article in Wired. According to a 2017 study by the Associated General Contractors of America, 70 percent of contractors in the US struggle to hire skilled craft workers. Given that hiring needs in the industry will grow 12 percent by 2026, the option to duplicate human skills with robotic welders and other forms of automation in a shop environment is pretty attractive.
If existing contractors don't adopt this digitalized way of working, then they run the risk that new businesses will appear to take their place. Flat-pack specialist IKEA has been able to set up a joint venture with Skanska and secure a contract to make 162 residences in the UK. In other words...
Prediction 3: The challengers are coming and existing market positions will see a shake up
IKEA is not the only non-construction specialist getting into the act. Last year, I speculated that Amazon might enter the construction market and it's doing so in the US, with prefabricated design company Plant Prefab. Amazon's idea of selling a smart home is simpler if the cabling, sensors and other equipment that make a building responsive and intelligent can be built in rather than added on later. Amazon is also selling prefabricated hospital rooms, again, taking advantage of efficient mechanicals and technology trades in a shop environment.
This is only one area of innovation; it looks likely that there is disruption on the way. According to a report from Oliver Wyman, technology will not only change construction, but the expectations of project owners in consumer expectations around connectivity, energy efficiency, and security. Not only will technology address challenges like the fact that large capital projects typically take 20 percent longer to complete than forecast and frequently end up 80 percent over budget. But the report states that enhanced building technology will become a growth market, reaching $600 billion by 2025-all of that representing net-new investment in IoT, building automation systems, and smart services.
Many of the budget and timeline problems in construction can be fixed by better project governance and financial control-which are contingent on implementation of enterprise software that eliminates the many blind spots found in a typical construction contracting business. The question is whether established construction industry giants will lead the charge towards more effective enterprise technology that fixes these historic problems, or more progressive firms from outside the industry will play the role of the usurper. McKinsey asked over 300 senior construction leaders where they felt their next competition was coming from, and 90 percent of respondents felt they would be encountering new competition at different levels of the value chain:
- 46 percent thought this new competition would be from the tech and software giants
- 37 percent thought it would be from start-ups
- 23 percent saw it coming from China and other emerging market players
- Only 19 percent thought other current incumbents would be their biggest source of competition
One other observation from the UK Construction market is that, in 2018, the top 10 companies made a pre-tax margin of 1.1 percent and the top 50 made 2.6 percent. While neither number is good, it may, however, suggest that the largest companies are less efficient and perhaps the winners in the future maybe the more agile, smaller businesses or new entrants. Offsite construction will be the biggest game changer, and this is why I feel confident in saying that to survive, construction companies must diversify and become manufacturers as well as builders. They need enterprise software and processes that encompass both in a single approach to the project and asset lifecycle. And they should also become service companies, using their knowledge of the asset to sell aftermarket facilities management and services contracts, ensuring long-tail revenue long after project commissioning and handover.
In 2020, we find ourselves at a crossroads. Contractors have important decisions to make. How many of ENR's Top 400 Contractors this year will still be on that list-or even in business-in five or 10 years? The investments in technology and business process re-engineering they make in 2020 will be the determining factors in whether they are still on top in 2025.