3 Construction Industry Trends: A Golden Age of Profitability Beckons for Contractors

by Dominic Thasarathar
- Nov 24 2015 - 6 min read
construction_industry_trends
Micke Tong

Construction is a vital global industry. Consider the numbers: It makes up 10 percent of global gross domestic product (GDP) and 12 percent of the world’s workforce, and has an economic value add that averages 150 percent return. Look beyond the numbers and consider the fundamentals: Construction underwrites the residential, social, and economic infrastructure of the global population. Without the construction industry, there would be no shops, offices, roads, factories, schools, hospitals, power plants, oil refineries, tunnels, or homes.

Yet this important sector of the economy has for too long been defined by the phrase “high risk, low margin.” This is an industry too often associated with low productivity, price-driven procurement, stressed supply chains, uncertain work pipelines, limited investment capital, and a labor market routinely compromised by the boom-and-bust cycle.

construction_industry_trends_risk_rewardFaced with such pressures, transforming the construction industry—making it “low-risk, high margin”—seems like an insurmountable task. At the very least, it would take simultaneous, sweeping changes in procurement, client expectations and behaviors, the advisory community, government policy, and the contracting community itself. That’s quite a shopping list.

But what if there were another way? Today, a wave of emerging technology trends is holding open the door to such a possibility. In combination, they might radically disrupt the way the industry operates. For contractors, the result will be a new era of opportunities—greater profits, more resilience, and the ability to capitalize on an increasingly globalized and sophisticated market. Here’s a look at three major construction industry trends ready to set these changes into motion.

1. Production Changes: Infinite Computing, Algorithms, and New Ways of Building. How project teams undertake the planning and design of buildings and infrastructure, and how commercial teams land on the most appropriate commercial strategy and contract terms, is changing.

With cloud computing, contractors can now access vast amounts of processing power on demand to undertake parallel processing (commonly known as “infinite computing”). The result? Even the most complex analytical challenges, be they design or commercial, will become routine, and eventually be seen in near real time. Think about the implications of being able to respond easily to the most complex challenges thrown at you by a client with no increase in required time or labor. Cloud computing will drive down the cost of bidding; analyze masses of market data to identify early signs of stress in your supply chain; and explore all the permutations of commercial risk you’re being asked to carry before you sign on the dotted line.

Take it a step further: Build the rules for a project into an algorithm and let the system harness that computing power to automatically explore the infinite range of design and commercial possibilities and land on the best solution. This is what’s known as generative design. Can you imagine using this capability to level the playing field when given, say, six weeks to submit a response to an aggressive single-stage design-and-build engagement? Punch in the client’s specification and dial in your level of desired margin, contingency, and supply-chain partners, and then watch as the options drop out. Could you wave goodbye to pipeline uncertainty and the overhead “tax” of bidding?

construction_industry_trends_infinite_computing

The means of physical production is also changing, as easier access to complex and offsite production methods is bringing cost down and pushing quality and value up. Prefabrication is becoming easier. Additive manufacturing (3D printing) holds the promise of radically shortening the distance between a design and its real-world counterpart. And the rise of microfactories is democratizing access to manufacturing capability, opening the door to a more efficient, shortened supply chain for contractors, one with more choice, greater quality and, most importantly, less overhead.

2. Changes in Demand for Construction Services: Big Cities, Big Data, and Social Media. The nature of demand for construction services and the nature of those services will be informed by (and in some cases driven by) advances in digital technology.

First the macro level: Most future demand for construction output is going to come from increasingly complex cities and the energy and resource infrastructure to support those cities. Within just 10 years, nearly two-thirds of all global demand will come from today’s emerging economies. But in such a high-stakes industry, where and how should you respond?

Increasingly the answer will be in the data, or rather, in the big data. Trends in population demographics, economic growth, energy requirements, disposable income, and more will be crunched by cloud computing to help companies answer that question. That’s driving the creation of new tools capable of modeling building and infrastructure information at the macro scale, in context.

Now consider the micro level, the individual member of the public. Their preferences are changing, and that impacts your work, whether they’ll be an end consumer of an asset you create—or not. The rise of social media is enabling everyone to have their say in shaping our built environment. Whether it’s the impact of a new highway in a crowded urban neighborhood, or a high-voltage transmission circuit through an area of outstanding natural beauty, technology puts that project in everyone’s living room—and that brings you opportunity.

construction_industry_trends_crowdfunding
“I Make Rotterdam” project in the Netherlands is a prime example of a crowd funded project. Courtesy Zones Urbaines Sensibles.

Your “social license to operate” will be enhanced by engaging with the local community via this medium, to do everything from negotiating the best time for site deliveries, to perhaps offering local apprentice opportunities, to sharing environmental impact studies. More still, your ability to assist your clients in fast-tracking their projects will be helped by using social media to accelerate the consultation process, or perhaps even leveraging crowdsourcing to solve the more intractable problems that internal time and resources alone simply can’t.

Add in developments in crowdfunding, and you’re on the brink of a new era of localism—one where contractor and community will be far more tightly coupled at all levels, including finance, design, construction, and, above all, outcomes.

3. Changes in Products: From Today’s Smartphones to Tomorrow’s Smart Cities. Physical things are now deeply connected to each other and to other systems, and this is opening the door to new ways of adding value to buildings and infrastructure. From the smart home to the smart highway, better alignment of supply and demand across many dimensions—occupancy levels, energy performance, water usage, passenger journeys, refinery throughput, and more—will mean smarter decisions about what and how much to build.

But move beyond the individual asset and seize the opportunity that this will support in building new relationships with your clients based on outcomes rather than on price or even value. Think how this could help you compete in, say, the utilities sector, where your clients are facing a shift to tariffs based on Totex (Total Expenditure) and outcomes-based regulation.

construction_industry_trends_connections_devicesCisco estimates by 2020, there will be 50 billion devices connected to the Internet, and that number will grow by 10 billion a year. Many of those devices will be smartphones, smart TVs, and similar consumer electronics, but many more will be machines and sensors.

Collectively, the data these devices produce, in aggregate, could enable contractors to get better at forecasting future demand patterns at a granular level. Can you imagine how this will help mitigate uncertainty in project pipelines, by identifying demand for services holistically and enabling you to invest in talent and resources with confidence?

From “High-Risk, Low Margin” to “Low-Risk, High Margin.” The net-net of these three trends and disruptions is simply this: The business of construction contracting is going to radically change.

Expect project delivery to shift from today’s “best practical” approach to tomorrow’s “best possible” approach. Expect productivity to reach manufacturing levels and for margins to rise. Expect overheads to drop and the skills pool to broaden and deepen. Expect work pipelines to become more certain, and the ability to take on greater traditional risks to become easier.

But also recognize that these capabilities will be available to any company, regardless of type, size, or location, and the barriers to access will be low. The race is on.

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