Can Construction Adapt to Online Markets?

Commercial construction has the potential to be the poster child for the age of e-business. That is, experts say, if a large number of industry professionals can be convinced to change their traditional, paperbound ways.

"The value proposition is huge," says Matt Sanders, an analyst at Forrester Research. "The construction industry has been wrestling for years for better management tools."

The overall potential of construction e-markets is impressive. Online market trade for the $US3.2 trillion global construction industry will reach $43.7 billion in 2004, and another $97.3 billion will move online via extranets, according to Forrester Research.

Still, it seems that the construction industry hasn't yet completely embraced the Internet, although it's not for lack of investment. Venture capital firms have invested $2.5 billion in 217 dotcom start-ups aimed at the architecture, engineering, and construction markets, estimates Paul Doherty, principal at The Digit Group, a technology consulting group for the building industry, based in the United States.

By serving as a common ground for collaboration and procurement, the Internet could drive out inefficiency and cost, analysts say. A single construction project may involve hundreds of people in ad hoc, far-flung teams linked by FedEx packages, faxes, and bike-riding couriers bearing reams of duplicate blueprints, change orders, and other documents. As a result, industry observers say, many construction projects are late and over budget.

By offering the ability to track projects via browsers, online systems will increase the predictability of results, reduce risk, and bring accountability to all involved parties, supporters say, adding that online services that bring together the many different industry players could hold great sway.

"The winner in this space will be the operating system for the global construction industry," says Daryl Magana, founder of San Francisco-based Bidcom.com, an online service.

But a lack of market acceptance blemishes the rosy picture painted by service providers. Online services still struggle to get building professionals to take advantage of collaboration tools, let alone complete transactions.

"The vast majority of people in the industry don't know what the hell these [online] services are," Doherty says. "It's not a technical question, it's a cultural one. The highest level of IT in the industry is the fax machine."

E-commerce faces several other challenges, notes Paul Levin, a consultant at Navigant Consulting, in Washington. For one, contractors build personal relationships with subcontractors and suppliers, making them reluctant to use companies found online. Also, he said, the lack of standard definitions may make it difficult to specify materials.

Fragmentation also makes the construction industry a hard sell. The top five US construction companies account for less than 2 per cent of the dollars spent on construction, says Chris Bradshaw, vice president of marketing at Buzzsaw.com.

Although these leaders are early adopters of online services, they won't make a great impact unless they require their subcontractors - often the least technically inclined of the building professionals, say observers - to use the online system.

"It's very hard to force the prime [contractor] and the subs to use an Internet system," says Harlan Kelly, chief city engineer for the city of San Francisco, which has used Bidcom.com to track projects.

Eager to cash in on the e-commerce boom, the services that have established Internet beachheads as collaboration tools are expanding to include procurement solutions. Bidcom.com is augmenting its project man-agement service with an online exchange system called AEC Connect from PurchasePro.com, in Las Vegas. Also, San Francisco-based Buzzsaw.com, which was spun out of CAD powerhouse Autodesk, has forged an alliance with US-based e-commerce solution provider Ariba, to create a centralised global marketplace for building materials.

The case for using online collaboration seems strong. More than 10 per cent of the $400 billion spent last year in the United States on commerce construction went to transmitting plans and specifications and making estimates, notes Arol Wolford, president and CEO of the CMD Group, a construction data company in Atlanta. Online collaboration could save a significant percentage of those dollars, he says.

Also, browser-based services work well for construction project teams because users can be added on the fly, supporters say. Cephren's ProjectNet online project management service gives San Francisco-based construction giant Bechtel a way to share information with current business partners - who may be future competitors - without making them privy to the company's network, says John Cunliffe, operations manager for corporate collaboration systems at Bechtel.

Online project management can translate into major savings. By using Bidcom.com's online service, Swinerton & Walberg Builders cut the turnaround time on change-order completion by more than half, says Charlie Kuffner, senior vice president of the San Francisco-based construction management company.

Still, even the construction industry's biggest Internet supporters say it will take time for widespread adoption of online tools.

"It's not going to happen overnight," says Joe Montgomery, president of Purchase Pro's AEC Connect Group. "Large contractors do business with small suppliers and small subcontractors that aren't as technologically sophisticated or ready. It will take some time for these types of companies to buy in to those solutions."

Wiring the Toolbelt Set

By Greg Dalton

Anyone who has remodelled a home or built a new one almost certainly has horror stories about how difficult it is to get the kitchen cabinets, countertops and dishwasher all to arrive at the right time and place.

If the cabinets don't show up on schedule, the countertop can't be installed and the painter can't tickle the trim and so on. One missing part can send a ripple of delay through the entire project.

Venture capitalists smell opportunity in that misery, and several just poured $US160 million into three firms trying to improve the supply chain in the building industry, one of the biggest and most technologically backward areas of the economy. Most recently, NetClerk, which facilitates applications for building permits via the Web, got $10 million from H&Q Venture Associates, Adobe Ventures and Wheatley Partners.

The biggest chunk of money went to BuildNet, which is trying to link suppliers, builders and subcontractors over the Internet. It received $104 million from a group of investors including John Hancock Global Technology Fund, J & W Seligman and Bessemer Trust. That's a big pile of money for an industry that venture capitalists have until now ignored.

BuildNet CEO Nathan Morton says building a home can be an inefficient endeavor because the parties involved don't share information well, causing all sorts of missteps and delays.

He sees all the players synchronised through the Internet so they can march in step toward completing each project. While the sheetrock is being finished, for example, the paint would be delivered, and a few days later the painters would show up to do their thing. In addition to reducing the number of discussions between contractors and homeowners, Morton says using the Net to coordinate home building could result in considerable savings.

"There could be 35 per cent of a cost of a house that is waste," he says. "Will that all come back to consumers? Probably not." But some of it will, and the rest will translate into increased earnings for the building companies, which typically have margins of 1 per cent to 3 per cent.

A similar effort is under way in commercial real estate, where Bidcom is creating a portal designed to help contractors manage all aspects of their construction projects. Bidcom last month received $46 million in venture funding from Internet Capital Group, Oracle, Deutsche Bank and General Electric's real estate division.

The building industry is "a real eclectic mix of people", says Bidcom CEO Daryl Magana, and the Internet provides them with a way to interact through a central medium that is accessible to even your local plumber.

Will that alter the way buildings get built? One indicator will be whether it cuts into the industry's time-honored reliance on relationships to determine who gets what business. Magana believes it will. "The nature of the industry will change," he says. "In a marketplace model you begin to reach out to suppliers you never heard of."

The Net also will visit additional changes on the construction industry. Ron Ross, CEO of Cameron Ashley, a $1.1 billion wholesaler of construction supplies, contends the Internet will accelerate consolidation. The 1000 wholesalers in the construction industry, he says, sell an average of $10 million a year. Many of those firms will not be able to make the investment required to take advantage of the Internet and will be eaten by larger firms.

"It takes millions to play in this arena," Ross says of business-to-business e-commerce. Consequently, he says construction wholesalers that now produce $1 billion a year in revenue may leverage the Internet to make acquisitions and boost annual sales to $10 billion. He foresees an industry shakeout that will mirror those of the food and pharmaceutical industries.

That consolidation may happen at the upper levels of the supply chain, and the Internet will likely make inroads in some areas of project management, but the construction industry is stubbornly local and sceptics doubt it will see the top-to-bottom coordination pitched by BuildNet and Bidcom.

As Ross admits, "It will probably take a long time for our industry to adopt [the Internet]."

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