Tariffs, Tools ⎟ How Economic Headwinds Reshape Construction Technology

April 24, 2025

US economy contracts while tariffs impact material costs. Autodesk faces big tech threats. AI needs "bathtubs" not "faucets." Construction tech failures reveal hard lessons. We explore how economic forces reshape our industry.

Patric Hellermann

Tariffs, Tools ⎟ How Economic Headwinds Reshape Construction Technology

tl;dr

Economic contraction and tariffs create uncertainty for construction businesses

Price surge issues make project planning difficult with higher input costs

AI needs contained systems ("bathtubs") rather than standalone features ("faucets")

Autodesk remains dominant but faces potential disruption from tech giants

Construction tech failures follow patterns - modular/prefab concepts top the list

Pre-construction software adapts to economic volatility by enabling better planning

When you have the third largest employer of the workforce contracting, you will see GDP pull back.

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Economic contraction and tariffs create uncertainty for construction businesses

We're watching economic shifts that could significantly impact construction. The US economy contracted by 0.3% in Q1 2025 - the first decline since 2022. While this might sound alarming, the underlying data shows some nuance. Real final sales to private domestic purchases (a measure excluding trade and government spending) increased by 3%, suggesting consumer and business activity remains somewhat robust.

The primary driver of this contraction was companies pulling forward imports to get ahead of tariffs. This wasn't the most concerning indicator - what's more worrying was the rise in unemployment benefits applications, which came in higher than expected at around 275,000 when projections were closer to 225,000.

Dustin DeVan pointed out that the job market feels softer, with more layoffs and an increased focus on gross margins and efficiencies. And while many central banks worldwide have begun lowering interest rates, the US Federal Reserve under Powell has been slower to act, preferring to wait until they're very confident before making adjustments.

This cautious approach becomes problematic for construction when combined with tariffs that increase input costs. Projects were already struggling with high borrowing costs, and now the materials themselves are becoming more expensive. The result? Construction companies can't provide price certainty to clients, and guaranteed maximum prices (GMPs) are coming in higher than clients are willing to pay.

Pre-construction timelines typically last two to three years, so projects with earmarked funding expecting to break ground this year or early next might face significant delays. Dustin suggested we might be overbuilding in some sectors like data centers for AI computation, and any slowdown there would further impact construction activity.

Since construction directly employs a massive portion of the workforce (the third largest by some counts), any contraction ripples through the entire economy. With consumer spending representing about 70% of GDP, a construction slowdown could force the Fed to eventually lower rates more aggressively than their current cautious approach suggests.

Price surge issues make project planning difficult with higher input costs

The tariff situation creates particular challenges for construction materials. About 10% of building materials used in US construction are imported, but this percentage varies significantly across different product categories. Raw materials tend to have a lower import share, while finished products like windows (many imported from Mexico) represent a higher percentage.

We've seen this scenario before. Europe experienced similar supply chain disruptions during COVID, particularly with construction wood sourced from Scandinavia and the Baltics. The result was wild price swings and even instances where building materials were traded like commodities while still in transit - similar to how generic pharmaceuticals are sometimes bought and sold before reaching their destination.

Dustin shared a similar experience from his time running a hardware company during COVID's supply chain crunch. Chinese brokers would buy up electronic components in bulk and mark them up, creating additional market distortions.

What's happening now in the US resembles that pattern - companies stockpiling materials in advance of tariffs, creating artificial shortages and price volatility. The question remains whether this "reshoring" strategy will provide long-term benefits despite the short-term pain.

Patric Hellermann made an excellent point about the investment framework - when there's uncertainty about how policies will unfold, it's difficult for companies to make significant capital investments. The conversation highlighted China's ability to make and sustain long-term plans versus the US political system that operates on four-year cycles.

As Dustin put it: "Anyone who says that they have an answer of how this is going to end up is delusional." Reorganizing global supply chains is a monumental task that can't reasonably be compressed into a 3-12 month timeframe. This uncertainty leads many businesses to adopt a wait-and-see approach rather than making major investments.

The conversation revealed regional differences in construction activity - while the UK market has slowed considerably since January, Germany and France are experiencing the opposite trend. The Indian construction market remains strong with consistent infrastructure investment of around $150 billion annually, though recent geopolitical tensions have introduced some uncertainty.

AI needs contained systems ("bathtubs") rather than standalone features ("faucets")

Patric shared a powerful metaphor for thinking about AI in construction technology. AI is like running water coming from a faucet - it's essential, but you need a vessel to contain it and make it useful. You can cup your hands under the faucet, but you'll lose most of the water. If you don't contain it at all, your apartment floods.

The "bathtub" metaphor represents the systems that can effectively contain and leverage AI capabilities - authoring tools, systems of record, ERPs, data infrastructures, and process mining companies. These are the platforms where AI functionality can be most effectively integrated and utilized.

By contrast, standalone AI features without integration into broader systems are like water flowing from a faucet with nowhere to go - useful for a moment but ultimately wasted. As Patric put it: "Every software company in 2000 had to be an internet company. Today, every software company needs to be an AI company." But that doesn't mean starting with AI and looking for problems to solve.

Dustin expressed frustration with companies that start with technology rather than problems: "We've lost touch with what is the fundamental reason for why you want to start a business. You want to start a business to solve a problem." He compared the current AI trend to the blockchain hype cycle where everyone wanted to "sprinkle blockchain" on everything without clear use cases.

The group discussed which companies represent "bathtubs" in the design space. Incumbents like Revit qualify, while newer players like Motiv, SnapTru, Rayon, Tesfit, and Kionic are positioning themselves similarly. The challenge for these companies isn't just creating better tools but overcoming the network effects of established platforms.

As Dustin noted, "To significantly impact Revit, you have to build a strategy that isn't just about design authoring, but about how you're going to displace the network effects that Revit and Autodesk have created." This might require building entire suites of products or pursuing strategic partnerships - both lengthy processes that could take 7-15 years even with AI acceleration.

The most promising approach might be focusing on 2D spatial planning first (as Rayon does) and then expanding into more complex 3D modeling as the company builds capital and capacity. Alternatively, we might see smart players acquire modern authoring tools and build ecosystems through M&A rather than organic development.

Autodesk remains dominant but faces potential disruption from tech giants

The conversation turned to whether Autodesk remains a good investment. According to analysis from The Motley Fool, Autodesk has "sticky software" that's ripe for disruption, slightly dented management credibility, strong financials with a growth ceiling, and potentially expensive stock valuation - with big tech threats looming.

Dustin, who previously worked at Autodesk, expressed overall optimism about their market position. They've finally developed a competitive product to challenge Procore in construction management and are winning deals against them. They also have tens of millions of free or pirated software users globally that represent a monetization opportunity.

With recent workforce reductions (10-13% of staff), Autodesk's gross margins should improve. They've historically succeeded at acquiring great companies, though their internal product development can be slow. The recent activist investor involvement from Starboard (who criticized their margin structure) has pushed them to become more efficient.

The group questioned whether tech giants like Google might disrupt Autodesk's dominance. The consensus was that while theoretically possible, it seems unlikely in the near term. As Patric noted, Microsoft and Google have much bigger priorities right now, from integrating AI across their product lines to addressing data center challenges.

For companies like Microsoft with quarterly earnings around $65 billion, acquiring a company of Autodesk's size (market cap around $58-60 billion) would be feasible financially but might not align with their core strategies. A more likely scenario would be a software consolidator like Thoma Bravo attempting to build an Autodesk-like ecosystem through acquiring and integrating multiple point solutions.

Interestingly, Dustin was bearish on Procore's prospects, noting they face challenges with their pricing model (based on customer revenue) now that customers have viable alternatives. Their payment app faces litigation from Oracle, and some of their acquisitions haven't performed well. With rumors that CEO Tooey Courtemanche might be replaced, Dustin suggested they need a product-centric leader who can develop a strategy to compete with Autodesk's entry into their space.

Construction tech failures follow patterns - modular/prefab concepts top the list

The podcast concluded with a discussion of the top construction technology failures according to their community. Katerra topped the list, followed by Veev, Ilke Homes, LNG Modular Homes, House by Urban Splash, Modulus, Top Hat, Connect Homes, Ready Robotics, and Rethink Robotics.

A clear pattern emerged - seven of the top ten failures were modular or prefabricated housing companies, with two robotics firms also making the list. Dustin was particularly critical of Katerra's approach, describing it as consolidating risk across the entire project supply chain without truly understanding the construction industry.

Katerra raised enormous sums of capital but failed spectacularly because they didn't respect the existing systems or try to understand why the industry operated as it did. As Dustin put it: "All they were doing was consolidating risk... If anything goes wrong across any part of the project supply chain, we're screwed."

Patric mentioned that similar companies following the Katerra playbook still exist in Europe - one Austrian firm and one Swiss company have raised hundreds of millions to build factories for modular construction. The Austrian company initially planned to keep the buildings they constructed on their balance sheet and operate them, though they've since abandoned that approach.

European spatial constraints make these business models particularly challenging since they can't build vast housing developments on large land parcels. Instead, they must focus on multifamily buildings with greater complexity (like elevator shafts), making standardization more difficult as a starting point.

The fundamental issue with many failed construction tech companies is attempting to be the best at every aspect of the value chain simultaneously. As Dustin noted, "It's crazy naive to be like, 'I'm going to be the best at every single aspect of this chain'... If you have one link in that chain that you're not top tier, it can all spiral."

The contrast with successful companies like Goldbach is instructive - they've been operating since 1969 and took nearly 50 years to grow from zero to $750 million in revenue, and another 18 years to reach $7 billion. The lesson is clear: construction expertise compounds over time and can't be artificially accelerated just by throwing capital at the problem.

Pre-construction software adapts to economic volatility by enabling better planning

Despite the economic headwinds, some construction tech companies are well-positioned to thrive in volatile conditions. Dustin explained how his company Edify, which focuses on pre-construction software, might actually benefit from the current environment.

When projects aren't penciling out financially, owners want to discuss more options, and pre-construction phases last longer. Companies need more scenario planning, more value engineering, and more design iterations - all processes that Edify's cloud-based collaborative approach is designed to facilitate.

As Dustin put it: "When money's free and everyone's doing well, it's really easy to slap yourself on the back and say, 'I'm a rock star.'" But when conditions tighten, companies become more receptive to solutions that can help them scale efficiently and manage uncertainty.

Edify's approach to parametric estimating allows for much faster option engineering than standard estimates. Rather than just serving estimators, they're positioning their platform to include everyone involved in pre-construction - from business development to project executives, managers, superintendents, and engineers.

This broad approach makes their pricing more palatable while enabling better collaboration across the organization. For early-stage founders thinking about pricing in this environment, Dustin emphasized focusing on product-market fit before revenue growth: "I'd rather have 10 logos that just really love our product."

He cautioned against the common investor pressure to focus on revenue growth before establishing product-market fit with an ideal customer profile. "Revenue growth is the output" of getting the foundations right - a repetitive playbook, resonant messaging, smooth onboarding, and a product that truly solves problems.

The most successful construction tech companies are addressing "hidden in plain sight" problems - challenges obvious to industry insiders but invisible to outsiders. These companies don't start with technology looking for applications; they start with intimate knowledge of specific industry pain points and build solutions around them.