Is this a Business? If so, What’s the Story? 1

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Tuesday, March 8th, 2016
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The Australian construction industry is abuzz with new construction enterprises putting their hand up as examples of modern construction, and many of them fit the bill.

The challenge for most is to determine what problem are they solving and how will the industry’s customers get a better deal.

Many of these businesses are at a point where they need fresh capital to grow. The obvious question then becomes: is this a business?

is this a business

There are more than 200,000 Australian construction enterprises. The perennial challenge for these businesses is their viability in a market where there is little differentiation amongst the players, and in the end, sales often turn on lowest price and preparedness to take on risks that are often unquantifiable, unmanageable and simply beyond the technical or financial capability of the business involved. Movement up construction’s food chain is seen as one way of starting to assert some control over the diminished standing most have in the construction transaction process. Unfortunately for many, their ascendancy is short-lived.

I have been following a number of the new construction offerings as they have sprung up over the last five years. The market’s interest in moves off-site following the end of the mining boom has in part mobilised the rise of off-site construction as the suppliers of modular buildings looked for a new problem to solve. Everyone is looking for a niche and how they may create a sustainable competitive advantage. There are conferences almost weekly around the world about modular and prefab. There is one in Sydney this month.

The 2016 Modular Construction and Prefabrication ANZ Conference promotes itself as an industry-leading event unlocking the potential of off-site construction through insightful discussions on how modern methods of construction can achieve productivity breakthrough and accelerate project delivery. It will present the views from industry first-movers on the changing landscape of Australia’s construction sector, point to high-growth sectors that can be tapped into, showcase how to build a compelling business case to gain financiers’ buy-in and discover international case studies on how to utilize DfMA and BIM. The conference aims to enable the exchange of ideas on how to overcome barriers and change industry-wide mindsets on prefabrication.

I am not sure the construction industry needs any more convincing that change is on. There is now little contest to the idea that the industry’s current pre-order and on-site fabrication inefficiencies and poor productivity can be improved by the incorporation of value added components and sub-assemblies sourced off-site and, increasingly off-shore.

The promotional material for this conference describes five advantages of off-site construction that every AEC professional should know about. They include:

  • Driving productivity breakthroughs to accelerate project delivery and reduce overall costs by adopting proven techniques used in modern methods of construction and prefabrication
  • Overcoming transportation and logistics challenges associated with modular construction and prefabrication for smooth installation
  • Establishing stakeholder engagement plans and building a compelling business case to convince key stakeholders of the need to modularize and prefabricate
  • Leveraging the use of intelligent building materials to achieve sustainability and breakthrough in construction capability

PrefabAUS is a shopfront for the emerging modular and prefabrication sector in Australia. It sprung from its more sophisticated counterpart in New Zealand.

PrefabAUS has suffered from being perceived as Melbourne-centric and in its early days, overly promoting the Unitised Building Systems business and the Nonda Katsalidis EKCO patent for manufacturing modularised building boxes and pods. On the face of it, the system was pretty impressive at the time, but I sensed that the huge investment made by the owners lacked a business plan and a long-term strategy for growth. That seems to be the case, as the factory now sits idle and the equipment appears not to have found a home even after an extensive sale program.

PrefabAUS has just called for expressions of interest from members who may be able to supply off-site elements including intelligent materials, prefabricated components, subassemblies and modules – ‘pieces and parts’ – suitable for mid and high-rise residential/hotel/hospital projects on behalf of US-based prefabrication expert Amy Marks’ XSite Modular, which is currently working with several Australian clients.  Marks is looking to identify vendors of:

  • Off-site structures and structural elements (hot and/or cold rolled steel, concrete/precast, wood, advanced materials)
  • Panelised wall systems
  • Roofing and flooring systems/cassettes
  • Electrical pre-wire kits
  • Prefabricated stairs
  • Modular lifts and lift shafts
  • Bathroom pods
  • Service pods (mechanical, electrical, plant rooms)
  • Any other suitable off-site elements or intelligent materials that reduce drying time, curing time, waiting or on-site processing

Project delivery is anticipated to be Australia-wide and possibly beyond. I am a big fan of Amy Marks and feel what she says makes a lot of sense, but in the Australian context, I am unsure of how these essentially commodity like vendors are going to create enterprise value.

Gaining financial buy-in remains the fundamental challenge for this burgeoning sector. In my view, there are at least three key questions to be answered here.

Firstly, what’s in it for construction’s customers? Will off-site deliver measurably ‘better, smarter, faster, safer, cheaper and more risk free’ projects, or can traditional construction just be done better with a bit of tweaking?

Secondly, how will the industry deal with the valuation and payment of the off-site (and often off-shore) sourced ‘pieces and parts’ which clients and financiers struggle to accept until they are physically and compliantly embedded on-site?

Thirdly, how do those businesses trying to carve out a future in the off-site space demonstrate that they have a value creating investment proposition that will be supported by their banks and insurers and attract the essential investment capital they will need to scale up, to develop competitive market advantage and quality earnings?

A better deal must involve all of the measurables I have listed. Measurably better must be independently verified against established benchmarks, and risk-free must be about a modern solution to the industry’s shortcomings in providing customers with a better ‘risk wrap’ than its current insurance and warranty offerings.

Changing the payment and compliance metrics will turn on more meaningful performance underwrites and re-calibration of the standards and compliance landscape. Fundamental to this will be the realization that construction is now part of a global, multi-jurisdictional marketplace, of which Australia only makes up a small part. The world will not bend to suit the local market.

The UBSystems may in time be a case study for future insights into this conversation, but there are others. I see them regularly. Its here that the tough questions start to pile up. Here are a few:

  • What is your market and will it exist in five years?
  • What research underpins your view of the market?
  • What part of construction’s problems is your product going to solve?
  • Who will be your closest competitors?
  • How many people power this business and what experience do they have?
  • What’s unique and competitive about what you have come up with?
  • How does it fit into the value chain?
  • How is the product performance underwritten?
  • What are the measurable benefits to the end customer?
  • How many will you sell this year, next year and five years from now?
  • What is your marketing strategy and how are you measuring cost of sales?
  • What was your company’s earnings last year (audited), and projected this year (management accounts) and projected next year (evidence based)?
  • What is your enterprise’s investment strategy?
  • Describe a ‘way-in’, ‘stay-in’ and ‘way-out’ investor proposition.

Often, its at this point an enthusiastic business proprietor will become crestfallen at my lack of interest in what they wanted to show me, and even have me publicly endorse. Their immediate reaction is to close down and push back from the impertinence of my questions, almost as if I should assume they have this covered, and its none of my business.

They are probably right, but the reality is these are the questions tomorrow’s insurance underwriters, financiers and potential investors will want credible answers to. And a lack of considered answers before they are asked is what has historically eroded the potential of Australia’s 200,000 construction enterprises. The bar for the quality of these answers is rising as the forces of a digital, industrialized and global construction market increase competition and the rate of change. This game will not play out on home soil.

Its not the case that I do not get excited by the better products and innovations that are shown to me. I am just disappointed that these enterprises lack a realizable strategy to capitalize on what they have done and to advance in the main game. I expect that these questions or testimonials may not be shared at a conference any time soon. That’s the industry’s next barrier to progress; sharing important pre-competitive information is not natural for an industry that competes at the margin for every scrap on the table. I am not sure that Amy Marks’ customers will do more than bid shop those who register interest to PrefabAUS’ well-intended efforts to expose their members to a wider market. We will see.

Apart from being measurement resistant, the construction industry has yet to come to terms with the reality that modern construction projects will only reach their potential if they are led by modern construction enterprises.

These are hurdles that the established Tier 1 and Tier 2 construction businesses find equally challenging as the questions I have posed to the businesses described above. I believe that the industry’s customers are becoming sufficiently dissatisfied with the existing institutions of construction that there is now potential for disruptors to emerge. I believe this disruption will start with Tier 4 and Tier 3 construction enterprises, but they will need to be first schooled and prepared for the dynamics of a modern construction industry. They will be the modern constructors.

In this discussion, ‘constructors’ is a pejorative term that includes designers, surveyors, project managers, construction managers, sub-contractors, manufacturers and suppliers.

I am convinced that universities must be the fertile ground where the seeds of modern construction enterprises and projects are sown. It is in this setting that the pre-competitive insights that tomorrow’s constructors will need, can be gathered and shared. It’s here that tomorrow’s MC innovators and entrepreneurs will be propagated amongst peers who are more enthusiastic about discovery than squirreling their early innovations and ideas.

It’s at universities that the networks of a digital, industrialised and global construction market will be built. It’s from here that construction’s future leaders will graduate. It’s to universities specializing in these subjects that post-graduate executives will return to accelerate their insights to an industry that will dramatically transform over the next 10 years. It will be these experiences that allow those constructors to unburden their traditional collaborative constraints and realise that there are so many things happening outside of their day today.

This in my view involves more than briefly exercising the technologies that are presented at conferences where the main goal is to take advantage from a perceived free kick to show off new widgets absent the hard enterprise questions of “is this a business?”

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  1. Lee

    Hello David,

    Low level tier here…. need your contact details, we can share what we are just to launch. and no we aren t a start up….