As construction technology startups aim to revolutionize the construction industry, the alarming realization for many is that disrupting construction may be riskier than construction itself. The disruptive model, where quickly gaining critical mass would ideally fade out construction's deficiencies in favor of tech's better way, has been met with resistance amongst its fragmented stakeholders, burdensome regulations and operational complexities.

Unable to break through and dominate, it resulted in numerous defunct startups where construction has instead disrupted the disruptor. It begs the question: Is tech the answer?

In what remains the second-least digitized industry in the world, the answer is a resounding yes. Tech is critical to future-proofing a contractor's business. Only digital transformation is key, not disruption.

Con versus Tech

Contractor adoption remains a significant challenge going into the future. In the SME/SMB contractor space, legacy systems take reign. Even if that system is simply a gut feeling and a pencil behind the ear.

From a contractor's view, since the tech sector doesn't know construction as intimately, its ability to solve construction problems is limited. The switching cost and potential integration setbacks are far too great in a risk-laden industry with paper-thin margins.

On the contrary, the tech industry thrives on deconstructing a problem and digitally reconstructing a better way to solve it. Successful startup founders are often ranging, non-experts who challenge the status quo of an industry that its insiders take for granted.

However, with construction's high degree of complexity, it can't simply be forced to adapt or else shutter as has occurred in other industries. While tech often creates a better way, today's construction executives—corporate and of the 700,000 SME/SMB contractors amassing the industry—paved the way.

Therefore, it's critical for startup management and boards to bring on executives with mud on their boots.

Contech startups that take on a partnering approach, bringing contractors in as influential stakeholders increase success probabilities versus disrupting from the outside in. Contractors are more inclined to trust and adopt from founding teams with specialized construction expertise, developing products with a specific use case that addresses a significant problem.

Often making headlines are various technological developments around BIM, drones, "Internet of Things" and robotics.

As the contractor universe is diverse, the areas above have varying degrees of impact depending on contractor specialization. Making tech adoption of varying priority.

Unless it’s motivated by a universal priority: cash flow. Creating more of it and protecting it. A challenge for most contractors as their balance sheet determines viability to operate, and liquidity remains at the heart of that.

Working (Smarter, not Harder) Capital

Liquidity is the lifeblood of any business, particularly construction firms, on a never-ending see-saw of managing negative working capital cycles. Contractors are subject to purchasing supplies and materials upfront, while it takes on average 51 days to receive payment, according to Rabbet's 2021 Construction Report. Slow payments resulted in $136 billion in additional costs and increased work stoppage. How is this still possible in 2022’s digital age?

Cash Flow

The bottleneck is the approval chain. Beginning with the draw request, sorting through a pay app of hundreds of pages of paper and electronic documents to prove a milestone demands a heavy admin load. Next, further negotiations of actual payment based on owner verification of milestones against contract documents are endured. Then, the loan drawdown request is made against the estimated percent complete. It's a costly cycle of bottlenecking people and process.

Payment management startups are a foundational iteration in addressing inefficiencies. Offering alternatives to limited contractor financing, invoice factoring and cumbersome pay apps.

Further efficiencies through blockchain smart contracts will allow faster work verification. Leading to an expedited approval process where digitized financial management tools communicate with milestones embedded in the smart contract. A flow of real-time project data triggers approvals at each stage, leading to faster payment remittance and, ideally, working capital balance.

Credit and Bonding

When even longer retainage cycles are factored in alongside slow payments and limited access to conventional funding sources, dependence on credit further complicates the working capital balancing act. Nearly 50% of contractors rely on credit lines for liquidity, and financing costs eat into margin.

Construction is a risky business. Secured lenders find it difficult to assess a contractor's credit risk with so much uncertainty around a project, their ability to perform and numerous unknowns outside their control.

Surety bond companies, typically unsecured creditors, often are experts at assessing contractor risk and lean toward a lender-based credit model, globally. One that emphasizes net worth in making risk-on decisions and applying lesser weight to the project and contractor's ability to perform.

Unless construction becomes more predictable and trackable, allowing creditors to gain higher visibility into tracking progress, contractors will continue to be at the mercy of a limited underwriting toolbox.

But contractors sit on a treasure trove of data and good data is a valuable asset. Throughout the site's construction, a wealth of information about project completion, compliance and potential risks are generated but not accessible to all stakeholders. It's uncaptured and unharvested. Or, if harvested, it is often flawed or unusable. According to an Autodesk study, insufficient data and errors contributed to $1.8 trillion in worldwide losses and $88 billion in avoidable rework. Adopting the right technology into workflows allows for scaled efficiencies and reduces the chance of human error tainting the good data generated and captured.

Data is the gasoline to the algorithmic engine for lenders and surety firms, leading to better-calculated outcomes. As data pools get broader and deeper (through technology) and clearer in terms of quality (no garbage in equals no garbage out), underwriting models become more intelligent. Further enhanced by bringing in complementary data sets (open-source and private) that underwriters typically wouldn't factor in due to unavailability or resource constraints.

Valuable data insights follow, allowing for de-risking of creditors and other stakeholders. Enabling more informed data-driven lending decisions, where it serves as a leading KPI rather than a lagging benchmark.

The result is a more robust credit profile and decision-making framework leading to better risk identification, competitive rates and capacity. Project risk and contractor risk become more individualized versus industry categorized.

Cyber Hygiene

With the proliferation of tech comes increased threats. As a firm's attack surface increases so does its vulnerability. However, the analog construction industry is subject to threats just as severe. Construction has been a top targeted industry for ransomware attacks since 2020.

Cyber attackers view construction firms as low-hanging fruit with less mature cyber defenses. As easier targets, it requires less effort to breach and cause business disruption, force project delays and inflict financial harm. Reputational damage follows as does the exposure of clients and subcontractors to potential harm when the victim holds sensitive data or is a conduit to access it.

Cybercriminals tend to target entry points involving vulnerable data or the email of those in a payment function through phishing and spoofing. Taking control of and impersonating the account and sending emails to vendors, clients or internally using falsified invoices that include their payment remittance details.

Supply chains are bracing for increasing cyber threats as the White House calls for stringent critical infrastructure protection. The construction supply chain ecosystem lacks standardized controls and measures that protect confidentiality and integrity. As the ecosystem moves to digitized and automated systems reliant on cloud-based technologies, it leaves vulnerable holes throughout. A single heavy civil contractor may be targeted, yet that attack may compromise the integrity of the bridge they are building should their systems get breached. The attacker remains undetected, causing havoc of greater magnitude.

The cyber hygiene of construction firms must be the number-one priority. For protecting cash flow and beyond.

Future-Proofing

Construction is in the early stages of digitization, overhauling manual processes, gaining efficiencies in workflows and data gathering. This first layer of tech adoption across departments is essential, and now.

Primarily since many construction outfits are owned by a generation approaching retirement with limited exit options. Family succession is fading as next in line generations opt out of the industry in favor of others, often more tech advanced or along a similar career trajectory.

Contractors can create more optionality for themselves by taking steps to adopt technology, thereby making their business more attractive.

1. Succession: The makeover of a traditional construction outfit to a tech-forward, tech-enabled firm allows the next generation to have a direct hand in its transformation. Positioning the organization's future in alignment with tech career characteristics sought elsewhere.
2. Acquisition: A tech-advanced construction outfit closes the transformation gap a new acquirer would need to fill. This helps de-risk the acquisition, especially for stable-yield-seeking private equity buying construction firms that have been increasingly active acquirers in recent years.

Futureproofing the construction business is essential to its longevity. Time and money invested now toward adapting to technological advancements will seem inconsequential over time. At the current pace of change, the benefits will likely be realized sooner than expected. Today’s outlay isn’t a cost, it's an investment.