Construction Industry Due for a Remodel as Disrupters Eye Profits in Vast Sector

The construction industry will “radically change” as it undergoes nine specific shifts, and the COVID-19 pandemic could catalyze the makeover, according to a new report from McKinsey & Co.

Titled “The next normal in construction” and written by Maria João Ribeirinho, Jan Mischke, Gernot Strube, Erik Sjödin, Jose Luis Blanco, Rob Palter, Jonas Biörck, David Rockhill and Timmy Andersson, the report details how “disruption is reshaping the world’s largest ecosystem.”

“Construction is responsible for a wide range of impressive accomplishments, from stunning cityscapes and foundational infrastructure on a massive scale to sustained innovation,” the authors wrote. “However, in the past couple of decades, it also has been plagued by dismal performance.”

Construction accounts for 13% of global gross domestic product, according to the report, but growth is 1% per year this century. Its annual profit pool of $265 billion, however, appears ripe for disrupters to come in and renovate the industry.

They’ll be part of the nine shifts the authors say “will radically change the way construction projects are delivered.” Those shifts are a product-based approach, specialization, value-chain control and integration with industrial-grade supply chains, consolidation, customer-centricity and branding, investment in technology and facilities, investment in human resources, internationalization and sustainability.

“Our research suggests that the industry will look radically different five to ten years from now,” the authors wrote.

Those shifts mean where money goes in the construction ecosystem will change, according to the report. Software companies will take a bigger piece of the profits, though they don’t take much of them now, only 1-2%. As the use of prefabricated components increases, more money will go to facilities that make them rather than to job sites where bespoke buildings rise.

The dynamic at work between offsite prefabrication facilities and job sites would see general and specialized contractors, who work at job sites, lose a bigger portion of the profit pool.

“The generalist and specialist contracting sector faces some of the most imminent threats to their [business model] as work shifts from [job sites] to off-site facilities,” the report says.

Change in the construction industry began before the COVID-19 pandemic rattled the global economy, but the outbreak is giving it a push, according to the report. In a survey of 400 global construction leaders accompanying the report, 62% of respondents said the pandemic “will accelerate the overall transformation of the construction industry.” However, the pandemic could be keeping some disrupters from entering the market, the report says.

Already seeing significant change are the retail and industrial areas of construction. As brick-and-mortar physical shopping locations shut down temporarily or permanently, they face continuing disruption from e-commerce. E-commerce, though, has a voracious appetite for warehouses.