The Future of Construction Supply Chains

At a recent panel discussion, one of my colleagues was asked how about a new and improved construction industry could deal with the global challenges of uncertainties in costs, and uncertainties with….you know…the Coronavirus situation (Sure, why not?)

As Tech-VCs are wont to do when presented with such a question, I resorted to the #vclogic approach of bringing up obvious facts that have happened in the immediate past, and which most of you are probably already familiar with — That while most public market indices and stocks took a beating over the last month, Slack & Zoom gained ~50%.

This prompted the totally original and groundbreaking thought that the construction industry ought to be run on an open network, transparently connecting the world’s supply chain.

I know, you are probably thinking…

But to what extent are supply chains in Construction truly connected?

The truth, almost without exception in construction, is that the “supply chain” more closely resembles clusters of disconnected ecosystems that comprise players as distinct as owners, builders, material producers, logistics firms, equipment suppliers and workers & labour suppliers being held together in a state of delicate equilibrium.

What keeps these firms functioning as a cohesive supply chain? An under-appreciated set of companies, typically referred to as Contractors.

As might be apparent from the above illustration, Contractors often don’t employ their own staff on projects and therefore, as a corollary, don’t actually “do” most of the tasks they have been hired for.

They instead hire firms, suppliers, and workers often for specific projects and engagements and “manage” the project.

You are probably thinking “Why hire a Contractor if subcontractors and suppliers do all the work ?“- A question that’s particularly relevant when reminding ourselves that the top 250 global contractors reported $1.5 Trillion in revenues in 2017.

Contractors play much the same role as wedding planners. Wedding planners are hired, not to cook the food, bake the cake, prepare the flowers, or play the music, but to make sure everything comes together to make the event successful.

In a very similar way, Contractors provide their project management expertise, their knowledge of building materials and methods, and their expertise in choosing subcontractors and workers.

But a Contractor’s greatest value-proposition, without question, is the promise of being responsible for the quality of work delivered, or the promise of delivering peace of mind.

And for the most part, Contractors do a great job in maintaining a semblance of order, in coordinating processes and stakeholder relationships.

However, as tends to be the case with so many industries and business models ripe for disruption (Threw that word in there for good measure), the strengths that traditional contractors represent (Locally/hyper-locally strong relationships and focus on execution/hustle) also expose just how fragile the supply chain in construction is.

It might surprise you to learn that most Contractors continue to rely on “low-tech” methods such as :

• Microsoft Excel or other spreadsheet tools
• Material and services orders are typically awarded from within a small group of trusted suppliers, subcontractors and vendors, rather than through an open marketplace that allows for transparent price & capacity discovery
• Phone calls and WhatsApp/text messages for real-time scheduling and coordination
• Drawings, checklists, inspection reports, approval requests etc. primarily exist as paper-based documentation

From our in-house research, we have identified the following pain-points in the traditional Contractor model that point to a pent-up demand for an alternative.

What if a new and emerging genre of firms is capable of operating with a different playbook that allows them to orchestrate construction supply chains?

Before answering the question of what those firms might look like, lets take a look at the image below that describes the opportunities McKinsey & Co. identified for technology use-cases in the construction industry:

At Foundamental, we believe that a new archetype of firm will emerge in Construction to either directly solve the above use-cases, or effectively plug into other solution providers, one that we like to call “Digital Contractor”.

A Digital Contractor is a unique fusion of three very different business models, that have typically been thought to occupy three entirely distinct market opportunities:

1. Project Management & Collaboration software
2. [Curated] B2B & B2C Marketplaces for materials, equipment, services and labour
3. End-to-end design & building services

We believe, and are seeing early evidence in multiple markets, that Digital Contractors “work” for the following reasons :

• Linkage to a marketplace-backed supply chain provides price transparency
• Curated marketplaces provide levers to vet and control quality on the supply-side
• Adoption of a unified project-management layer through the supply chain allows for real-time visibility of project progress, fulfillment and quality issues [To reduce time & cost overruns]
• Being able to assess and predict demand allows for efficient asset & labour sourcing utilisation (by the material and service-providers)
• End-customers can be given greater security over service delivery and payments as the Digital Contractor is able to take responsibility for a supply chain that has become far more transparent and controllable
• The connected and open supply chain allows the Digital Contractor to always choose the best supplier/vendor/subcontractor in real-time, thereby eliminating failures causes due to over-dependence on certain stakeholders

While the jury is still out on how our thesis on Digital Contractors will play out, we are very bullish on the model and its ability to (finally!) solve pain-points that have saddled the construction industry for far too long.

If you are a Founder building a Digital Contractor or want to create a firm that orchestrates the construction supply chains of the future, we at Foundamental would be grateful to hear your story!

• This article was only possible because of the excellent research led by the Foundamental insights group, especially my colleagues Sebastien and Dominik
• Our in-house research and insights were also built upon information collected from the stellar founders we have had the privilege to invest in, and/or have had inspiring conversations with.
• For more of such posts, head to Foundamental.comand follow us on LinkedIn

Thanks to Foundamental.