Had a chat with a founding team last week who provided a sharp observation:
“Construction is full of these hidden billion-dollar problems”.
I’ve made the same observation over the past years of investing in early-stage ventures with Foundamental.
But these opportunities are only hidden to construction-outsiders, not to the insiders. That makes them tougher to access for stellar founders without years of working on a site.
Get the slide deck
One common fix is when second-time founders – after they had made significant splash with a first exit – take 1-2 years and spend time on construction projects and in the supply chains themselves. This happens more often than you might think, for example:
- Digital Ocean founders >>> Welcome Homes
- Privalia founders >>> 011h
- OfBusiness founder >>> Zetwerk
- Silk founders >>> Monumental
- ServicePartnerOne founders >>> stealth construction startup
- etc.
Hence, want to focus this week’s post on some of the most unexpected and large hidden truths in construction I’ve learnt about as an outsider myself over the past years to give y’all a headstart of where to dig deeper. Not meant to be an exhaustive list, nor to provide the in-depth. Just to mark an X on your map, not going to do the digging for you. Below are some of my more favorite hidden opportunities I learnt about over time:
The mess on construction sites can be really that bad
1/ Document controllers
A lot of project sites still rely on offline paper to record information, allocate work, and keep an audit trail. Documents get wet, damaged, lost, confused. From customer invoices and signoffs to fuel expenses, site risk forms, and everything in between.
Did you know that there is a job (in larger projects) called a Document Controller? This person’s task is to make sure that the thousands of documents flying around the site are properly collected and distributed among the other members of the team, eg. for signatures, approval and validations, and get returned on time and with the proper input. This role exists because of the crazy amount of paper you need to run an auditable construction site.
2/ Thousands of versions of a project schedule
A construction schedule is the planned sequencing and timeline of tasks and milestones in a project. It can easily have tens of thousands of line items in larger projects. It’s not a secret anymore that optimizing schedules is a billion dollar opportunity, with several startups active in this opportunity space but with different angles and approaches. (eg. Alice, Nodes & Links, Foresight, nPlan).
What is less of a known fact to outsiders is that there are thousands and thousands of version of a schedule, because changes happen all the time, which requires all subsequent dependencies to change as well. The amount of files and documentation for collaboration around the schedule therefore is a nightmare.
3/ Estimators for materials take-offs
“Take-off” is an Americanized expression for assessing material volumes (the bill of materials, BOM) and the associated cost of those volumes for a construction or renovation project.
In the US market specifically, it’s quite common to have an (often external) “estimator” look at the blueprints or models of a project and conduct the estimation of volumes, and provide researched or experienced-based cost estimates.
This process is ultra tedious, easily taking a lot of man-days from a professional estimator.
Construction = supply chains + working capital
4/ Sub-contractors deliver materials early
Let’s continue with one of my craziest favorites. Sub-contractors around the world very often offer the materials associated with their labor in their quote to the general contractors. This allows them to choose materials most comfortable with (within specs), and most importantly, skim some materials margin as additional income.
I’ve learnt that in some of the European low/mid/high-rise markets, sub-contractors have a habit of delivering their quoted materials weeks earlier than their labor starts.
Why? Because it allows them to invoice the material to the general contractor and get paid for it earlier than their cash clock for their labor starts. I would not be surprised if they also try to receive more favorable payment terms for their distributors or manufacturers, thus optimizing their cash cycle. I can’t blame them, since sub-contractors get squeezed constantly for cash from both sides.
5/ Applications for payment
In many markets around the globe – especially Anglo-American markets – applications for payment (AFP) documents are a standard with which a (sub-)contractor provides an overview of (partial) labor and material that has been rendered. With this document, the contractor requests to be paid.
The customer (eg. a general contractor) passes the AFP around internally to the colleagues best suited to provide judgment whether the work has been rendered satisfactorily.
There are hundreds of millions and millions of AFPs flying around the construction markets every year. Its significance is so high because it not only expedites payment – it enables an important quality assurance workflow through which the client is forced to judge acceptance of work and material.
While there are several standard forms for an AFP, reality is: millions of documents fly around.
6/ Payroll companies and crew leaders
This is a UK special, but might be happening in other markets, too.
In the UK, it’s quite common for construction companies to hire flexible construction labor, often entire crews who keep working and roaming together.
The UK has recognized this many years ago and implemented CIS – the Construction Industry Scheme that regulates how payments, payroll and taxes in construction ought to be made.
To run such payroll creates a headache for construction firms who employ roaming crews. One common practice has therefore become to have specialized construction payroll firms. For example this one (among many others in the UK).
Now here’s where it gets really interesting: Among such roaming crews, often times a crew leader (sometimes called a “baron”) can emerge who markets “their” crew to contractors and their projects. In the payroll processing, they take a cut of the entire payroll (regularly 10-20% of the entire net payroll) and have the remainder paid out to “their” crew. Interesting, huh…?
7/ We speak not enough about aggregates
You might have heard that the world’s consumption of raw materials is set to double by 2060.
But when you hear “raw materials”, you might think oil & gas, metals, coal, wood, or even agricultural products.
Very few people think of sand, gravel and crushed rock – the so called “aggregates”.
55% of the entire world’s raw material consumption in 2060 will be sand, gravel and crushed rock. A material heavily used in concrete, bedrocks and other construction applications.
And we are running out of supply fast.
8/ Truck drivers and access keys
The construction supply chains would not work without third-party trucks and drivers. Since I mentioned about aggregates above, let’s use that as an example:
- Customer orders aggregates from a quarry
- Quarries and 1 and 2 says “sorry all sold out right now”
- Quarry 3 says “yep send a truck, he can load up”
- Customer orders an external truck – often via a local broker
- The broker and truck driver know all the quarries around the town
- But to get onto the quarry, you need to get through a gate
- The gate has physical access keys in cheque-card-format
- And guess what: That’s what the truck drivers have under their sunscreen – 10-20 access keys to all the quarries in town they drive regularly to
- And who keeps track of these keys? Hell if I know…
Construction is ultra-relevant – even before considering CO2
9/ The #1 reason for fatalities are falls
Falls are the leading cause of deaths among construction workers. Not electrocutions, not being struck by or caught between objects. Falls.
Consider this crazy stat: According to Safety & Health Magazine “over a 45-year career, a construction worker has a 75% likelihood of experiencing a disabling injury and a one in 200 chance of being fatally injured in the job.”
10/ 220 million people work in construction worldwide
Leaving this here feels a good way to end this list. Construction is insanely relevant. Not just in terms of its share of GDP (between 10-13% worldwide) or its total market size (somewhere between $10-16 trillion). But for the employed lives it impacts. You want to have impact as founder, don’t look beyond the construction sector.
Sources
OSHA | International Labor Organization and World Bank | Proest | Gov.uk | OECD | Safety & Health Magazine