In Construction, Tech Provides The Blueprint To Profits

There is a sudden surge in construction technology startups, and investors have perked up.

Analysts forecasted a 40 percent increase in venture capitalist (VC) funding for construction startups between 2014 and 2017, with investments totaling $375 million last year. This year, that figure has already been eclipsed thanks to SoftBank‘s $865 million investment in Katerra. Other construction firms like Procore and FLUX have earned multimillion dollar funding rounds from big-name VCs, too, as innovators tackle the nuanced complexities of an industry.

Construction is inherently complex, considering how many players can be involved in a single project and how much money is involved (the market is estimated to see a $10.3 trillion global valuation by the end of the decade). The construction sector is also held back by a continued reliance on manual processes and paper, despite the recent attention of tech innovators.

“It’s one of the last massive industries to be disrupted,” said Brick & Mortar Ventures Founder Darren Bechtel in an interview with Wired last November.

JBKnowledge released a staggering figure in 2016: That year, 70 percent of construction companies used 1 percent of less of their revenue to invest in technology. A McKinsey report on the industry highlighted outdated process management, low productivity, high fragmentation and a shrinking workforce as compounding pressures of an industry where demand surpasses supply.

However, this recent surge in tech innovation is helping to forge a new path.

“Construction companies no longer see technology as a cost center, they see it as a profit center,” said Sergey Sundukovskiy, co-founder, CTO and COO of Raken.

His firm, which recently announced $10 million in Series A funding by U.S. Venture Partners, provides an array of services for the construction sector, including daily reporting and time tracking. These two processes may be straightforward in other markets, but, Sundukovskiy explained, the construction space has stumbled over them for years.

“Daily reporting is usually a challenge because there are contractors and subcontractors on the job site that all have their different documentation systems,” he said. “Most of them use pen and paper.”

Journals, PDF files and Excel spreadsheets are also common for professionals to record daily progress on a construction site. It may seem straight-forward, but daily reporting is paramount to risk mitigation as contractors can be sued for up to a decade after the completion of a project. According to Sundukovskiy, if daily reports are inadequate  illegible or incomplete cases will be lost. These types of reports are also key to ensuring projects stay on target, similarly threatening builders with steep financial losses.

“You might have some sort of safety incident, delays with equipment or due to weather and so on,” said Sundukovskiy, adding that the visibility of adequate daily reports enables executives to take the lead on any disruptions like these. “You have to make sure you’re keeping on target throughout the entire project, or else you could be liable for hundreds of thousands of dollars.”

He continued, “It’s a highly dynamic job environment, and things can change very quickly. The more you can document them and analyze it, the better it is.”

Another process that may appear menial, but is often a key point of friction for this sector, is time tracking and payroll.

“Not everyone on a project is there at any give time,” explained Sundukovskiy. “You have a lot of subcontractors coming in and out of the project. The closer you can keep track of who’s there and what they’re doing, the easier it is for them to all get paid.”

Again, traditionally, time-tracking processes are often manual and paper-based, leaving the door wide open for payroll fraud, errors and conflict when compensation disputes arise. There are regulatory implications for these seemingly straight-forward processes, from maintaining compliance to safety mandates, to labor laws. And, though Sundukovskiy noted that daily reporting is not a legal requirement for the construction sector, it’s becoming less common for any project to move forward without it. It’s a symptom of the construction industry’s increasing attraction to technology, he said.

Yet, the market continues to struggle in many ways. With only a fraction of companies’ profits being invested in technology, companies are struggling with a host of issues.

A report in 2015, released by Kroll Global Fraud Report, found the construction industry to have the second-highest rate of fraud across all industries analyzed, with 75 percent of construction, engineering and infrastructure firms experiencing some kind of fraud incident in the last year, including payroll and tax fraud. That same report also found that construction has the highest percentage of compliance breach fraud.

Earlier this year, research from TSheets and zlien found a fifth of construction firms are struggling with cash flow problems, and only 8 percent said they get paid on time. Surveyed construction professionals said these issues hamper business growth and have negatively affected payroll and capital investment.

These are the challenges that make the construction market so appealing to innovators and disruptors (and their investors). According to Sundukovskiy, the eagerness of technology to disrupt the space is a welcome trend for industry players.

“You have a tremendous amount of ferment in the field where virtual and physical is merging,” he said. “There is a lot of tech with AI, AR and VR, Big Data and the cloud they’re now emerging as hybrid solutions with physical and virtual characteristics. That’s tremendously beneficial for the construction industry.”