McKinsey released an outstanding report in June 2020 that’s well worth a read, called The Next Normal in Construction: How Disruption is Reshaping the World’s Largest Ecosystem. It’s thorough, at 90 data-packed pages, but we recommend setting aside some time to take it in because it offers some powerful insights into the future of construction that you need to understand.
Much of the data McKinsey is publishing was collected via survey prior to the rise of the COVID-19 pandemic and its unprecedented impact on our industry. But, with months to analyze and recalibrate, the indications are that the near-term and extended ramifications of the pandemic will only serve to accelerate the trends that the survey data brings to light.
The heart of the report involves seven key disrupters impacting the construction industry and nine trends for the future that those disruptions have put into motion. While your company may not be seeing all seven disrupting influences affecting your local market just yet, they’re definitely coming.
So, the wise course is to view the list of trends as a loose roadmap for future planning and investment. As the McKinsey report points out, “A refusal to adapt to this upheaval will only worsen performance, while developing new business and operating models could allow companies to generate more value and profit. The new characteristics will combine to erect higher barriers to entry, which will be positive for companies that manage to strengthen their market position and to invest.”
7 Sources of Disruption in the Construction Industry
The construction industry was already experiencing an unprecedented rate of disruption before the COVID-19 pandemic changed everything in early 2020. In the coming years, changes in market characteristics and emerging disruptions will continue to drive changes in how we do business and how building is accomplished. The COVID-19 crisis will not delay these changes but will amplify them.
The following evolving market characteristics will challenge construction companies to accept the heightened need for change and to move quickly to implement the necessary changes.
1. Rising customer sophistication and TCO
With a significant increase in investment from private equity firms and institutional investors, the level of customer sophistication is rising dramatically. In 2019 alone, these sources raised over $100 billion in infrastructure investment, a 24 percent increase from 2018. The disruption comes from the fact that these customers have very different expectations in terms of delivery times, budget, and the level of engagement they receive from their construction companies.
Smart building technologies, energy and operational efficiency, and the flexibility of built structures are much higher priorities for this savvier customer as total cost of ownership (TCO) begins to take precedence over choosing the lowest initial investment. Survey results indicate 90 percent of respondents believe that the shift toward TCO will impact their day-to-day operations within the next 10 years.
2. Scarcity of skilled labor and changes in logistics
The labor shortage has long been a challenge for construction companies, and more than half of the survey respondents expect it to only get worse over the next 20 years. About 41 percent of the current U.S. construction workforce will likely be retired by 2031, although it’s currently unclear whether fallout from the pandemic will impact those numbers.
3. Updated regulations for safety, sustainability, and building code standardization
Regulations around the use of more sustainable construction materials and processes are constantly being updated, often becoming stricter over time. And, they vary widely based on location. 90 percent of respondents see these regulations impacting their work within the next decade, while nearly ⅕ of respondents expect to see an impact far sooner — perhaps in 2021.
At the same time, health and safety regulations are evolving as well. During the COVID-19 pandemic, the need for social distancing and appropriate safety equipment and supplies has required some significant changes to how many crews operate, and there’s an added cost. In all likelihood, many of those requirements will remain after the current pandemic has passed.
4. Widespread industrialization
The move toward an offsite, product-based approach to building has been going on for years now. But, the more controlled factory environment of offsite facilities has proved far more manageable during the pandemic, highlighting many of the benefits of prefabrication. As a result, many construction companies are investing in their own offsite manufacturing facilities, or in long-term contracts with established factories. For example, 40 percent of homebuilders in the UK confirmed their current or planned future investment in proprietary manufacturing facilities back in 2018.
Going forward, ongoing advancements in automation, machine learning, and AI will continue to enhance the quality and efficiency of these facilities. Robotic automation, drone technology, and robotic imaging technologies will likewise have an impact on cost control and efficiency on the job site in the years to come.
Prefab mechanical assemblies using the Trimble XR10 mixed reality headset.
5. Development of new materials
One of the key improvements in construction materials in recent years include lightweight materials like light-gauge steel frames, cross-laminated timber, and ethylene tetrafluoroethylene (ETFE), a glass alternative that’s 99 percent lighter and stronger while being more eco-friendly, more flexible, and better and transmitting light. All of these lighter, stronger materials will impact cost as well as the logistics of transporting materials to a site.
6. Digitalization of products and processes
The widespread impact of the digital revolution in construction can be summed up in four main categories:
Smart products and operations - by integrating smart components and sensors with the internet-of-things (IoT), buildings can become highly automated and operations become data-driven. Combined with advanced building information management (BIM), this can greatly reduce operational and maintenance costs over time.
Design - the most advanced BIM technology allows for a complete “digital twin” of a structure to be created before ground is even broken. With full reliance on this technology, designs can be integrated into the rest of the value chain, optimizing the entire construction process.
Construction and production processes - by utilizing advanced digital technology, onsite collaboration is greatly enhanced, reducing costly rework and improving efficiency at every stage of construction. These improvements can be seen in the actual building process, as well as in peripheral activities like job site security and access control, asset management, and workforce management.
Channels - online marketplaces, which have seen incredible growth over the last two years, can transform interactions for buying and selling goods across the value chain, disrupt distribution, and reshape construction logistics. About 40 percent of the venture capital invested in online marketplaces since 2018 has gone to construction-based startups.
7. New entrants to the construction industry
Finally, the emergence of new entrants in the industry is bound to disrupt the status quo. For one example, Katerra raised $1.2 billion for a business model that controls the value chain, including design, engineering, and offsite manufacturing. Who will be the next Katerra? No one knows.
In addition, the economic fallout from the COVID-19 is likely to result in a wave of corporate restructuring and merger/acquisition activity over the next year or two. That, too, will create new entrants into the industry that you’ll want to keep a close eye on.
9 Resulting Construction Industry Trends You Can Ignore at Your Peril
As noted in the introduction, these industry trends are supported by significant data and analysis. Ignoring them can be detrimental to your company’s continued success and relevance in the industry and, more importantly, in your local market.
Action Item: While it may not be practical to attack all of these areas at once, we recommend analyzing your current situation through this lens, then mapping out a prioritized list of actions you can take over the next one or two years that will put you in a better position to weather the changes that are coming and optimize your responses.
Trend #1: A product-based approach
Going forward, it will become increasingly vital to incorporate modular designs and offsite prefabrication into the design and building workflow. As automation technology and supporting regulations evolve, greater efficiencies will drive higher customer expectations. Highly repeatable processes and consistent quality control will rule, with a balance forming between standardized, modular components and custom-designed facets of the finished product.
Digital technologies are absolutely essential to this new reality, with the company that owns the digital model calling the shots, able to price products based on TCO rather than the common cost-plus approach used today.
Trend #2: Specialization
As opposed to the general contractor/subcontractor model that’s ruled the industry for decades, a new paradigm will be hitting the construction industry as companies improve margin and levels of differentiation by establishing specialties in niche projects where they can build competitive advantage. This may be specific project types (like hospitals or manufacturing facilities) or in specific material usage or methods of construction.
Recruiting and retaining skilled personnel obviously plays a large role in successfully moving to a specialized business model.
Trend #3: Value-chain control
The future of construction will look more like standard manufacturing (see “a product-based approach” above) in that construction companies will look to control more of the value and supply chains in order to control costs, create efficiencies, and offer value to their customers. This may involve vertical integration — owning the prefab facilities and onsite installation — or strategic partnerships with established providers that can offer fast, reliable, cost-effective services as needed.
Adoption of the most advanced BIM technology can greatly enhance a company’s success in this area, as the entire construction process can be unified in one 5D BIM model.
Examples of 2D, 3D, 4D and 5D BIM-based workflows in Trimble's Vico Office software.
Trend #4: Consolidation
Many of the trends discussed above lead naturally to the increase in consolidation and economies of scale. For small construction companies, the best option for future success may be to court larger competitors in preparation for a strategic acquisition or merger. For larger companies, keeping your eyes out for smaller players that fill crucial gaps in your strategic playbook could mean the difference between success and failure in the next reality.
Trend #5: Customer-centricity and branding
Having a strong company brand and exceptional customer experience can be the deciding factor in whether or not your company will attract the attention of larger acquisition interest, or whether smaller companies will want to become part of your organization. As specialization and consolidation drive the evolution of the construction industry, the companies that ignored their own branding will likely be left behind.
Trend #6: Investment in technology and facilities
All across the value chain, the evolution of digital technology is inevitable. The COVID-19 crisis has accelerated what was already a foregone conclusion among construction technology experts: the future of construction lies in digital tools that enhance every aspect of the construction workflow.
From BIM to automated prefabrication, from augmented reality to drone-powered scanning technology, every tool you acquire that improves quality, efficiency, and collaboration, will translate to enhanced profit and productivity in the “new normal”.
The B1M channel walks us through autonomous vehicles, exoskeletons, robots, and other construction technologies.
Trend #7: Investment in human resources
As you digest all the above trends, it’s likely clear how vital it is to find and keep skilled personnel who can support the recommended strategies. For example, moving from a generalized to specialized business model would require staffing with experts at every level within that specialty. Likewise, adoption of digital technologies to support future growth will require a staff that you can rely on to make the most of those tools in the new environment you’re preparing to dominate.
In many cases, attracting the appropriate talent will require thinking outside the standard “box” most construction companies have used when seeking skilled labor. In many cases, the key members of your future team may be computer programmers and data scientists rather than carpenters or masons.
Trend #8: Internationalization
The combination of increased standardization and scaling through mergers and acquisitions will remove many of the barriers currently preventing smaller construction companies from bidding on jobs outside their country of origin. As companies develop specialized brands and processes, it will become easier to bid on projects that would currently appear non-cost-effective. But, only if your company is prepared to handle the intricacies of cross-border business.
Unlike many of the trends listed here, the economic impact of the COVID-19 pandemic may very well slow the emergence of this trend.
Trend #9: Sustainability
As time goes on, the issue of climate change will continue to escalate as a driving force behind construction decisions. Companies will need to consider the environmental impact of materials sourcing, manufacturing, and supply chains as well as resilience. Safety and sustainable practices on the job site will also factor into the necessary changes, along with water consumption, dust, noise, and waste.
What should you do right now?
According to an additional McKinsey survey conducted in light of the Covid-19 outbreak, around two-thirds of respondents expect the industry’s impending changes and transformation to accelerate as a result of the pandemic. 53 percent of the respondents have also started to invest more to adjust to the “new normal” they see coming.
Are you among the construction companies riding the wave into a successful “new normal”?