Anticipation has been rapidly building around the Biden Administration’s ambitious infrastructure plan that will potentially see more than a trillion dollars invested into a wide variety of initiatives to upgrade and modernize the country’s infrastructure. While the highest profile hurdles to making the plan a reality are galvanizing the necessary political support to bring the proposal to pass, there is another, potentially more perilous, challenge that could hamper the implementation of any bold undertaking on infrastructure: the capacity of the construction industry to complete the work.
The construction industry has long faced a myriad of troubles with reports that the average profit margins for contractors run in the single digits. The root of these challenges hasn’t been a shortage of projects, but rather logistical difficulties that are inherent in the construction business model. The industry has been slow to adapt to technology solutions that could help fix that, but with a historic infrastructure plan poised to put an unprecedented number of people to work, one construction-tech firm argues that now is the time for the industry to embrace the technology that will bring it into the 21st century. Briq provides the leading business management platform specifically tailored to the needs of the construction industry and has seen a surge in clients seeking their help in managing the influx of new projects. Briq’s CEO, Basseem Hamdy, gave us deeper insight into how the readiness of the construction industry could help or hinder infrastructure improvements.
Why is construction potentially facing an inflection point in rising to the challenge of US infrastructure?
Bassem Hamdy: There may be political and financial capital behind a US infrastructure boost, but when it comes to actual shovels in the ground, the success of this plan will come down to the construction industry. There are two main inflection points that will test the success of US infrastructure.
The first is labor shortages. Much of the trade labor providers consistently struggle to meet labor requirements and to forecast how much labor will be needed on a project. The most common result of labor shortages here is that projects are delayed and do not meet schedule requirements. If Federal funding were to be released for a number of “shovel-ready” projects, those projects may never get completed if labor is not available.
The second challenge facing US infrastructure is that despite the financial support behind these projects, contractors have such financial pressure with 1-3% profit margins that taking on new work in new markets could be devastating to even the most cost-conscious businesses. Most of the funding on these projects go towards pre-development and development activities, and once funds filter through owners and developers, contractors see a very small percentage of that money. Even if an infrastructure bill creates a substantial amount of new work, contractors that have never worked for Federal or State governments would have little incentive to take on the risk of new projects outside of their zones of expertise.
What is the tech that construction needs to adopt to ensure they are up to the task?
Bassem Hamdy: Anything related to the management of dollars in construction needs to be automated and improved. From how revenues and costs are forecasted and how budgets are managed, all the way to how funds are spent, and cash is managed. Today, this process is very manual and is still largely dealt on paper. Emerging financial technologies has a promising future in the construction industry. The early waves of digitization largely affected the operations and project-oriented side of construction. The financial side of the business, however, has not seen major innovations in 20 years. The financials for many large projects still count on Excel spreadsheets to act as financial databases. This means that there is little historical data and information on which to make investment decisions.
There has historically been a lack of software options available in the market due to the uniqueness of the construction business model. In the modern construction business model, general contractors (GCs) act as middlemen between the owners of projects and those that perform the labor. Each project has its own profit and loss statement, its own cashflow statement, and effectively acts as its own business. This means that each construction company is effectively running up 100s of subsidiaries at once and must manage dozens or even hundreds of separate P&Ls. As a result, contractors are constantly under financial pressure and must work hard to maintain positive cash positions. It is not uncommon for even a $100 million contractor to only have 30 days of cash in the bank, and the most successful technology in construction will be one that solves this crucial issue.
Why has the industry historically been slower to embrace change?
Bassem Hamdy: There are several reasons that construction has been slower to digitize than other industries, but two stand out as primary drivers. One, the construction business model is wholly unlike other industries that have been fast to absorb new innovations such as manufacturing or retail. Every new project in construction is a new product (such as a home, a hospital, etc.) and is custom designed, engineered, and built. Compare this to the manufacture of automobiles, for example, which benefit from one design phase and the economies of scale at the assembly line. Construction benefits from no such economies. Second, because of this uniqueness, much of the technology developed in manufacturing or transportation does not translate well to construction. In fact, one could argue that it isn’t construction that has been slow to adopt technology, but rather technology has not understood how to build great software for the construction industry.
What are the consequences of maintaining the status quo?
Bassem Hamdy: Construction represents 3% of the national GDP, which is higher than the Agriculture, Mining, Utilities, and Transportation industries. It also accounts for over 10 million jobs in the U.S., more than those in the Financial Services, Oil and Gas, Agriculture, and Public Administration sectors.
As long as the builders of our economy are running on financial fumes, so too will the efforts to improve our infrastructure. The inability for many builders to scale their operations is directly correlated to their inability to scale financially. Furthermore, the lack of infrastructure development in many areas may be attributed to the bottlenecks existing in construction. Financial technology (fintech), data analytics, machine learning, and automation will provide a major boost to GCs’ ability to better forecast and plan their financials and will eliminate enormous amounts of waste in the accounting and financial management of construction companies.
What actions should a construction firm be taking right now to prepare for the influx of infrastructure business?
Bassem Hamdy: Contractors should seek out opportunities that fit their expertise, but most contractors don’t truly know their strengths or weaknesses. As older generations of builders start to retire and age out of the industry, younger generations are increasingly being given more responsibility. Much of this responsibility, however, is happening without significant knowledge transfer. In order to prepare themselves not only for an influx in infrastructure work, but also for the next decade of construction, builders must commit to using their own financial data to paint a picture of where they’ve been and where they want to go. This means embracing the tools and technology that allows them to truly reap the benefits of a digital revolution. In other words, the industry has spent hundreds of millions of dollars over the last decade digitizing their business, but how are they using that financial data and where it’s being stored? If contractors want to be prepared for an increase in infrastructure work, taking care of their own house is the best first step.