What will a modern Australian construction industry look like? What will the enterprises and organizations that shape the future of construction in a global economy look like?
The evidence is piling up that points to an industry looking radically different to even its recent past by 2030. While readers are considering this conversation, there are two very significant industry transformation games being played out. One involves constructors who have given up trying to lower their costs locally, now having major procurement offices off-shore to buy smarter and cheaper. The second involves others exploring how they can modernise. A challenge for Australian constructors and developers is that they still imagine that these improvements can be achieved from within their old traditional business models.
While the industry talks of sector transformation and disruption, most do not envision this changing the status quo much. The reality is, that many in construction today will not be there within the next 7 to 10-years. They will be displaced by adaptive smarter domestic start-ups and off-shore alternates. I believe it is time to stand back and put the bigger global picture into perspective. My suggestion is to consider the evolving role of the ‘Take, Make and Deliver’ (TMD) functions of construction as it mirrors other progressive industries.
For the hey! I objectors’, there is no intent on my part to devalue some of the amazing innovations and capabilities that are observable in construction today. My concern is that most in the Make and Deliver spheres have not fully grasped how the future Take driven eco-system will redefine our industry. The transformations now evolving across the global construction eco-system are seeing the traditional industry hierarchy shift from the ‘master-servant/ craft’ based model to one that puts the Makers on a level or higher footing than the Deliverers (former constructors). This is inevitable as the Makers realise that they have failed to leverage their balance sheets and value propositions for too long. Good news for their shareholders.
For the greater part, the industry can anticipate that anyone with an eye for staying in the game has already worked out that a modern construction industry will involve;
· Projects being completed at least 40-percent faster
· Over 40-percent of previous on-site fabrication workforce in-puts going off-site
· At least a 40-percent productivity lift in the off-site performance over on-site
· At least an 80-percent reduction in on-site fabrication generated waste
· An 80-percent reduction in onsite injuries and or lost time due to accidents
The rising cost of on-site labour and uncertain performance outcomes are no longer viable.
The residential sector has always been a bell-weather indicator of long term industry trends. It is here the global transformation wave reshaping construction is most observable. The consistency and scale of residential markets across the world makes this sector the ripest for disruption, innovation and value creation. The foundation of Australia’s construction industry has often been traceable to capabilities that were built in a residential context.
Nevertheless, the global transformation of modern construction Makers is picking up such momentum that this can now be observed beyond residential into education, health, commercial, transport infrastructure and commercial building and engineering projects world-wide. It is quite astounding to observe how the Makers have repositioned in such a short timeframe.
In this context, the traditional role of the first specifiers or scopers of projects are changing. To get the most of what the modern Makers of construction can offer requires clients these days to limit advancing design development of their projects to not much more than concept stage. It is the Makers who introduce the technologies and knowhow into the equation that will lead to better, smarter, faster and less expensive construction. One should not be surprised that when as much as 60-percent of a modern project is made off site, as little as 40-percent of future value-add will occur on the delivery or assemble side.
Questions are already being asked by some clients, that as this shift in value-add occurs why the Makers should not assume the head contractor role and engage their own installers to fulfil the delivery side of the equation. The smart designers have already started to jump ship from their former high stations. They realise that there will be fewer jobs for conceptual designers and more in demand careers for those who can embed themselves in the Make value chain to design and engineer the implementation of the next generation of smartly made, smart buildings in a more compliant and resilient built-world.
In my view, there has never been a more exciting time to be part of modern construction’s seismic shift, as new customer facing built-world solutions take over from old norms of variable quality, slow delivery, waste and out of control rising costs. But playing in this apace will require a commitment to the Make + Deliver equation being measurably better.
Irrespective of how much of this conversation you buy, the inescapable reality is that if the same mayhem that defined the construction industry’s past continues, we can expect the same chaotic results and worse. It’s now time to have a better look at the evidence of fundamental changes occurring to construction’s traditional business model. Failure to act shortly is likely realise consequences that have been swept under the mat for too long.
If the current momentum of overseas acquisition of Australian constructors continues, as the acquirers seize the potential to disrupt the industry’s inefficiency and translate this into a distribution platform for imported off-site value-add, the consequences will be drastic. This will eventually lead to making Australian construction dependent on a majority of off-shore supply. In this scenario it is possible that over 200,000 domestic construction jobs will go off-shore. For designers the story is grimmer. The future of design value will become lost in translation. However, this intel is not about a forlorn inevitability that just says, give up.
McKinsey’s recent report on the next act for private equity in US residential building products pretty well sums up the global market. The report predicts that “amid growing confidence in the US building products industry, players across the value chain face increasing pressure on growth and margins and will need to develop new value-creation strategies. To continue creating value, industry leaders—whether public or private equity owned—will need to expand their value-creation playbook beyond consolidation and operational improvement.” To maintain sustained momentum in total return to shareholders, leaders across the value chain will need to grow more strategically.
These indicators suggest a major reshuffle of construction’s deck chairs. The early features of the industry’s TMD transformation framework is showing how the battle over who will own the direct end customer relationship is already playing out. Nightingale in Melbourne is responding to a market sector where housing customers are looking for more personalised solutions than the traditional developer model has dictated. Nightingale claims over 2000 customers (Takers) registered for upcoming dwellings. This business model redefines the Take side of the business for the architect founders who saw a better seat at the table by disrupting the traditional developer role and having more control over their future.
There are other compelling indicators. Flush with venture capital, the start-up Katerra wants to revolutionize the construction industry. Silicon Valley has noticed. On May 30, a Menlo Park company called Katerra announced that it had acquired Michael Green Architecture, a 25-person architecture firm in Vancouver, British Columbia. On June 12, the company revealed that it had bought another, larger architecture firm, Atlanta-based Lord Aeck Sargent. This comes five months after Katerra raised $865 million in venture capital from funders led by SoftBank’s Vision Fund, which has also invested heavily in the co-working start-up WeWork. The built-world of construction is now demanding new strategic plays.
And if this is not enough to convince those imagining business as usual as a viable option have a read of CB-Insights report on ‘The Future of Housing: From Home Building to City Planning, how Tech Giants & Startups are reimagining Where & How we Live.’ Major US technology companies are constructing their own corporate housing, self-sufficient towns, and even entire urban neighbourhoods. While the primary focus is on expanding access to housing for employees, there are a few projects with a broader residential focus. Although Apple has stayed clear of residential development for now, other technology companies are starting to build out housing on their campuses. The strategy is an effort to improve their relationship with their communities while improving their employees’ access to housing.
Imagine this shift for public educators and human services providers here in Australia.
And it’s not just techcos getting into the Take and Make space. In the UK, Legal & General have moved into the mass fabrication of off-site housing through L&G Modular Homes. Now home purchasers have a new choice in housing, and for the first-time construction warranty insurance for up to 40-years. It seems clear that L&G (the Takers agent) will control both the Make and the Deliver deal as new possibilities open up. Unsurprisingly Legal and General have moved into the Build to Rent market. Why not? Both the owner and renter challenge needed a connected solution. Why not be the asset owner of new quality assured housing.
So, what happens when the construction industry’s elusive single point accountability genie turns up? What happens when in-full, on-time and 20 to 30-percent lower cost is a reality?
Clearly the TMD bargain will need to be rewritten. The possibilities that come with the Makers repositioning in the market may be the missing ingredient. They have mature supply chain business models. They have been in the B2B transaction space for a while. The Makers understand supply chain assurance, but they have always lost this control when their goods left the factory. The Makers seem less sentimental about sustaining inefficient business practices in the face of new technologies and business tools. One would suspect they will be very interested in taking control of construction cash flows and payment certainty.
McKinsey’s report on the next act for private equity in US residential building products should become compulsory bed time reading for those who want to stay in the game. For low value off-site manufacturers who continue to feed low-value on-site construction fabricators, imagine the possibility of constructors adopting the Amazon or fast food delivery model where they are scored by customers via social media.
When players like L&G, Amazon, Katerra and a raft of emerging others show what’s possible it might be too late for many of the slow-movers. But even for the more agile a new construction landscape is opening. Aggregation possibilities across the TMD eco-system, is in a sunrise industry phase where smarter modern construction alignments transform to a future-self. This is where the new capital into construction is going. And, these possibilities will not be a one-size fits all as they have been in construction’s rigid transaction past. The variations will be endless. For sure, the most efficient customer facing enterprises will win-out. Fancy a formula like the Amazon + Deliveroo genies helping to redefine our industry.