The SME opportunity in construction
Karim Dakki, chief financial officer, ProTenders, explains how technology is opening doors for SME firms
Technology has transformed the vast majority of industries, with some embracing change faster than others. According to a McKinsey report, construction – an industry worth $10 trillion – remains a glaring exception. Despite accounting for 13% of global GDP, construction is still one of the least digitised sectors in the world.
While other industries have modernised, adopting the latest IoT (Internet of Things) solutions, construction is sporadically moving towards integrating technology, at a snail’s pace. The construction sector remains the most stagnant, continuing to practise the 19th-century method of manual tendering, contracts, payments and the like.
As a result, transactional delays have increased over the years, causing over 65% of projects to fail. Two other significant factors are shortage of workforce and lack of trust, while there is still an increase in demand. Studies show that construction projects take on average 20% longer to finish and experience 80% cost overrun. While these are a few of the many reasons for the construction sector remaining stagnant, the core is a lack of technology investment to improve efficiency and productivity.
Typically, for construction projects, payments are made as a combination of advances against bank guarantees (obtained beforehand and tracked during the project) and milestone payments upon delivery. These payment streams, while well documented in the initial agreements, are normally released after an acceptance certificate signed off on by many stakeholders.
Payment and its systematic delays in general are a major concern for the whole construction value chain, not only in the Middle East but globally. There is little transparency in the process of approving work done for a milestone, and the release of the payment involves several approvals at various stages. First, the site construction team validates the work that has been delivered to actually qualify for a milestone payment. Then the project management team that oversees the entire project is supposed to approve the milestone. Finally, the finance project accountant does their part before payment is released by the treasury team.
The process might seem fairly sequenced here, but on average it takes about 123 days – and can take up to six months – for payments to be processed. During this time, contractors are caught up collecting the payment instead of building.
Because the industry relies heavily on paper to manage its processes and deliverables such as blueprints, design drawings, procurement and supply chain orders, equipment logs, daily progress reports and punch lists, information sharing is delayed and may not be universal, making the acceptance process very lengthy and complex.
Paper documents going back and forth from the field to the project office and from the project office to the central finance teams are sometimes lost in drawers. When milestone payments are claimed by subcontractors, the payment ballet starts, sometimes putting the project at risk when the subcontractor is cash-trapped.
New technology start-ups like ProTenders are actively looking at solving these problems, which cause billions of dollars of productivity loss globally. Construction companies have historically underinvested in technology. In 2016, 70% of construction firms dedicated 1% or less of their revenue to technology. However, things are shifting, and recently in the US we have seen a surge in investments and M&A activities in PropTech.
Digitisation is on the rise
According to TechCrunch, “Investors are taking notice. Funding in US-based construction technology start-ups surged by 324% to nearly $3.1bn in 2018, compared with $731m in 2017, according to CrunchBase data.”
Many start-ups and construction technology firms outside the Middle East have seized the opportunity to develop new solutions and tools that address some of the challenges that have dogged the construction industry for decades. In 2016, just 44% of construction leaders reported that their organisations had adopted digital technology, a number they expect to reach 70% by the end of 2019.
The Middle East has already started to implement blockchain solutions and cryptocurrency. The UAE and Saudi Arabia launched a first-of-its-kind joint Saudi-Emirati joint pilot cryptocurrency early this year and have also implemented the solution for other initiatives. More companies have developed software solutions aimed at streamlining processes and increasing productivity, and we are confident that the construction industry, while slow-paced, will catch up with technology very soon.
