RAPID DIGITAL TRANSFORMATION IN THE CONSTRUCTION INDUSTRY IS CRITICAL
Builders have traditionally been at the forefront of innovation. Each generation of structures, from ancient pyramids to 20th-century skyscrapers, arises from more-sophisticated construction techniques. Over the past 20 years, however, the industry has fallen behind. In fact, a recent McKinsey Global Institute (MGI) analysis of 22 major industries showed that construction was second to last for overall digitization rates, ranking above only hunting and agriculture. With construction clinging to manual processes as other industries advance, the sector’s productivity is now about half that of the total economy.
INDUSTRY IS HESITATING
Many Engineering and Construction (E&C) organizations may hesitate to use digital tools because of the nature of the construction industry. The landscape is fragmented, with multiple public- and private-sector owners, investors, contractors, and subcontractors. These organizations often differ starkly in terms of capabilities and management approach. With each project following a bespoke model, it is difficult to establish universal standards and processes. Industry fragmentation also makes it difficult for stakeholders to share information for data analysis.
DISPROPORTIONATE SHARE OF RISK
Another problem is that the current contract model burdens some companies with a disproportionate share of risk. Such players have little incentive to introduce untested tools or processes, fearing that they might delay timelines or otherwise jeopardize their ability to fulfill their contractual obligations. They do not think about the many benefits they could lose by holding back. Digital tools may also decrease the frequency of change orders and claims—often a major component of engineering and construction (E&C) companies’ profitability— by providing real-time performance insights, improving planning, and minimizing project alterations.
For capital projects in the public sector, regulatory issues may also discourage digitization. Government agencies have long required companies to follow standard procedures when responding to a request for a proposal, and these leave little room to introduce innovative strategies. Several leading E&C companies have begun to digitize, but their efforts are often limited to pilots or become bogged down in complexity, especially when dealing with the vast stores of information that digital tools provide.
PROJECT COSTS REDUCTION
With great value at stake, companies must transform rapidly as construction-technology solutions begin to disrupt the industry, companies that do not innovate will find themselves at a disadvantage. A recent McKinsey analysis suggests that existing digital technologies, when applied comprehensively and efficiently, can reduce overall project costs by as much as 45 percent. Although this will not eliminate construction’s productivity gap with other industries, digital solutions will produce more improvement than will any other lever. For E&C companies, the stakes are particularly high, since these cost reductions will soon determine whether they capture solid margins or experience financial struggles as competition intensifies. For owners, digital cost savings will be essential to completing projects more rapidly and within or below budget.
RAPID DIGITAL TRANSFORMATION IS REQUIRED
For incumbents in the E&C industry, rapid transformation is critical to stay ahead. These firms are facing increased competition from technology companies, both established ones and start-ups, that have recently expressed interest in infrastructure projects, viewing them as ripe for disruption and a logical extension of their existing portfolios. Although incumbents have the advantages of market share and brand recognition, they could lose ground to digital natives unless they move now. There may be even bigger gains for companies that are first to market with new platforms, such as those for project management or material supply. Just as Amazon changed retail, Netflix changed entertainment, and Tesla is changing the auto sector, the digital leaders in construction could put the industry on a new path and set the standards to which others aspire. The real question is not if this will occur, but when.
This article was compiled using the Mckinsey & Global Report titled: Navigating the digital future: The disruption of capital projects