This week on Practical Nerds:

We observe that construction firms are increasing software budgets, bucking the trend seen in other B2B sectors over the last 2-3 years

Utilization and margins are driving the need for process improvements and new software

Supply chain management and working capital financing software are of high interest right now

Industry events and conferences often fall short in providing real value, with some exceptions

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"Construction is a project type business... So I'm not fussing with a running project. But now, I don't have my people at full utilization anymore unlike 2 years ago, so now I am looking for new software."

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Construction bucks trend with increased software budgets

Many folks are surprised when we remind them: The construction industry is going against the grain in terms of software budgets these last two years. While many B2B sectors are reportedly cutting software budgets, we're seeing a different story unfold in our part of the world - AECS.

Our conversations with industry insiders have revealed an intriguing trend: construction firms are actually increasing their software spending. This comes at a time when, according to many pundits and generalist VCs, other B2B markets are tightening their belts and consolidating their software stacks.

But why is construction swimming against the current? The answer is in the unique nature of our industry, and how the post-2021 post-hype post-ZIRP economy has influenced construction.

First, let's consider the fundamental difference between construction and other sectors, like manufacturing. In manufacturing, you're dealing with a serial process - a continuous production line that's highly repeatable and standardized. Adjustments are made on the fly, and the focus is on maximizing volume, throughput, and stability.

Construction, on the other hand, is a different beast altogether. It's a project-based business, where each job is unique and has its own timeline. As Patric points out, "I made an offer as a contractor, for example, on the project I'm currently running and that offer I made just to use a random number two years ago. And now the project is maybe in full swing and it's going to go on for a few more months, years."

This project-based nature means that construction firms can't easily make adjustments or implement new processes mid-project. They're focused on minimizing errors, defects, and delays, which can kill their margins. And when one project ends and another begins, there's often no breathing room to reassess and make changes.

So, when do construction firms have the opportunity to innovate and improve their processes? The answer: now.

Utilization and margins driving need for process improvements and new software

For the first time in a decade or longer, we're seeing a shift in the industry. Order books are decreasing, and utilization is going down. This means that the time between projects for certain staff members is becoming longer. It's creating a unique window of opportunity for construction firms to dedicate resources to rethinking their processes and software stacks without disrupting ongoing projects.

This timing is crucial. As Shubhankar notes, there's a growing sense of "paranoia" or "fear" in the industry. Many stakeholders feel they're likely to be disrupted and need to be more active in leveling up their game. This mindset shift is driving firms to seek out new technologies and processes that can give them a competitive edge.

But it's not just about staying ahead of potential disruption. The increased software spending we're seeing is focused on tools that can directly impact the bottom line. Firms are looking for software that helps generate margin, improve cash flow, and secure new orders. In an industry where margins can be tight and cash flow is king, these kinds of tools can make a real difference.

The project-based nature of construction also lends itself well to testing and adopting new software. Unlike in manufacturing, where changing one part of the process can have ripple effects throughout the entire production line, construction firms can apply new technology to one project and optimize it without necessarily having to roll it out across their entire portfolio immediately.

This ability to test and prove the value of new software on a project-by-project basis is a significant advantage. It allows firms to be more agile in their adoption of new technologies and to see real results before committing to a company-wide rollout.

However, this increased spending on software doesn't come without its challenges. There's a risk that some firms might fall into the trap of throwing money at the problem without a clear strategy. As Patric warns, "That's my biggest fear is that this increase in allocation of software spending in the construction value chain... is ending up in SAP style projects. Okay. So now let's throw money at our problem by doing another ERP upgrade and that's going to make us a real different firm."

The key then is to approach this increased software spending strategically. It's about finding the right tools that can make a real difference to the business, proving their value on specific projects, and then scaling them across the organization.

Supply chain and working capital financing software of HIGH interest right now

So, what kinds of software are construction firms most interested in the last year or so? Based on our conversations and observations, two areas (among many others !) catch our attention and worth elevating here: supply chain management and working capital financing.

On the supply chain front, there's a lot of interest in software that can help manage the chaos and daily ad hoc requests that come with supply chain disruptions. As Patric mentions, he's excited about a company that's "trying to help supply chain managers handle all the chaos and the daily ad hoc management requests in order to deal with supply chain disruptions." This software uses semantic AI to help structure and manage these complex operations, which is particularly valuable in an industry where supply chain issues can cause significant project delays and cost overruns.

The other hot area is working capital financing. Patric describes a company he's looking at as "very, very close to a true arbitrage model in working capital financing between small construction contractors and the basically the developer of the project." This kind of solution is particularly timely given the current economic climate. With many firms facing cash flow challenges, tools that can help optimize working capital can be a real lifeline.

These areas of focus reflect the broader trends we're seeing in the industry. Firms are looking for software that can help them navigate the complexities of modern construction projects, from managing supply chains to optimizing cash flow. They're seeking out tools that can give them a competitive edge in a challenging market.

But it's not just about the software itself. It's about how it's implemented and used. As we discussed earlier, the ability to test and prove the value of new software on specific projects is a key advantage in construction. This allows firms to see real results and build a case for wider adoption across the organization.

It's also worth noting that these trends aren't happening in isolation. They're part of a broader shift in the industry towards digital transformation. As construction firms become more tech-savvy and open to innovation, we're likely to see even more interesting developments in the coming years.

The increased focus on software in construction is a positive sign for the industry. It shows that firms are taking proactive steps to improve their operations and stay competitive. And for those of us in the construction tech space, it's an exciting time to be involved.

As we continue to monitor these trends, we're keen to see how they develop. Will we see a new wave of innovative construction tech startups emerging to meet these needs? How will the established players in the industry respond? And most importantly, how will these technological advancements translate into improved productivity and profitability for construction firms?

These are questions we'll be keeping a close eye on in the coming months and years. And as always, we'll be here to share our insights and observations with you.

But before we wrap up, there's one more topic from our conversation that's worth touching on: the role of industry events and conferences in all of this.

Bonus topic: The value (or lack thereof) in industry events and conferences

As the construction industry becomes more tech-focused, we're seeing a proliferation of events and conferences aimed at this space.

Shubhankar points out that some of these events can feel like echo chambers. "You think you're making a point because you're hearing the voice, and it's quite loud and amplified. But all you're doing is talking or maybe screaming into a small enclosed space, which reflects your own voice back to you."

This echo chamber effect can be particularly problematic in a relatively new space like construction tech. With a smaller group of players and opinions often formed in certain "cliques" or "tribes," there's a risk of the same ideas being amplified without much critical examination.

Patric raises another important point about these events: the lack of fact-checking. Unlike content published online, where there's opportunity for community curation and fact-checking, statements made at conferences often go unchallenged. This can lead to the spread of misinformation or overly optimistic projections, which can be particularly harmful in an industry that's still finding its footing with new technologies.

So, should construction firms and tech companies avoid these events altogether? Not necessarily. But they should be selective.

The events that our hosts find valuable are those that are highly curated, focused on specific topics, and feature speakers with real authority and expertise. As Patric puts it, "If it's event, small curated down to a topic with those people, that I find amazing."

For construction firms looking to navigate the new world of increased software spending, these more focused, high-quality events can be valuable sources of information and networking opportunities. They can provide insights into best practices for software implementation, offer case studies of successful digital transformations, and facilitate connections with potential technology partners.

However, the onus is on event organizers to create these valuable experiences. As the construction tech space matures, we hope to see more events that prioritize substance over style, that facilitate genuine knowledge sharing rather than just PR opportunities.

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