In the next 14 years, the construction market will nearly double, growing from $8 trillion to $15 trillion by 2030. Rapid infrastructure expansion is fueling this growth. In fact, an astounding 75% of the infrastructure that will exist by 2050 has yet to be built.
“Construction is likely to be one of the most dynamic industrial sectors in the next 15 years and is utterly crucial to the evolution of prosperous societies around the world,” says Fernando A. González, chief executive of global building materials company CEMEX.
But it’s not all good news for the construction industry. The industry is also facing serious challenges. Projects are more complex than ever before. Inefficient, wasteful practices are reducing already razor-thin profit margins. As long as companies persist with the ineffective design-bid-build delivery method, they will continue to face these problems.
The digitization of intercompany collaboration creates a unique opportunity window for construction companies to improve efficiency, optimize performance, and increase profits. To do so successfully, construction companies must move from a design-bid-build delivery method to an integrated project delivery contract system with outcome-based success measurements.
From design-bid-build to integrated project delivery
The move from design-bid-build delivery method to integrated project delivery contracts and outcome-based success measurements will help overcome historic productivity challenges in construction.
Much of the poor productivity in the construction industry can be traced to the design-bid-build (DBB) delivery method. Traditionally, an owner contracts directly with a designer and a contractor. The design firms delivers 100% complete design documents. The owner then solicits price bids from contractors to perform the work. Designers and contractors have no contractual obligation to one another for the project’s success. The owner, in turn, bears all risk associated with the completeness of the design documents and their successful execution.
Rather than fostering collaboration, the DBB method drives an adversarial relationship that causes information to be “siloed.” Each party keeps vital information to themselves in an effort to protect against litigation. The result: projects are expensive, experience cost overruns, and are rarely completed within the original time frame.
Integrated project delivery, also known as design/build (DB), is different. Under this collaborative arrangement, design and construction contractually work together in the best interest of the project. DB teams have the greatest potential for achieving goals in schedule maintenance, construction speed, and intensity. Rather than pitting teams against each other, integrated project delivery creates a single team with a sole purpose: achieving what’s best for the project. Participants are evaluated based on the outcome of the project, rather than just their particular piece.
How integrated product delivery is changing construction
Re-imagined business models fundamentally change how contractors perform, work together and retain their workforce. This shift is good for productivity and the bottom line. A study from the University of Texas at Austin comparing DB and DBB projects found that DB projects “take less time, had less cost growth, and were less expensive to build in comparison to DBB projects.” A study by Penn State found a similar positive outcome for DB projects. Compared to DBB, DB projects had a six percent reduction in change orders, were delivered 33% faster, and cost six percent less.
Beyond design build: New contract models and extensive verticalization driving change
Extensive verticalization and new contract models are forcing construction companies, contractors, and architects to reimagine their working relationships. This is an extension of the DB concept that allows contractors to reduce overall project risk and, also importantly, the owner’s perception of construction risk.
As use of integrated project delivery contracts accelerate and collaboration technology is adopted, true vertical integration of projects will expand. In turn, customer-perceived risk will diminish. The implications for supply chain simplification and cost reduction are significant, with a single entity controlling all aspects of the project from design to prefabrication and construction.
Integrated project delivery contracts are also reshaping the end delivery process. Traditionally, contractors have delivered their end product to an owner to operate and maintain. Now, to improve margins in this low-margin industry, some contractors are financing and operating what they construct. This allows construction companies to deliver facilities- and assets-as-a-service. One of the earliest examples of this model are the public-private partnerships for transportation.
It is increasingly common for transportation departments to employ public-private methodologies to construct new roads or bridges. The contractor provides the financing and construction of the asset, performs maintenance on it for 20 to 30 years, and receives payment over time, often via collection of tolls. For example, Fluor is not just building the new Tappan Zee Bridge over the Hudson River in New York, but will also operate the bridge.
Together with integrated project delivery, expect this new construction business model to make inroads in commercial, industrial, and residential construction.
Next steps: Digital solutions for new business models
As construction companies adapt to new business models like integrated project delivery, they must do so in conjunction with new digital strategies. Construction companies must digitize to grow profits and simplify operations to reduce risk. This starts with bringing together business processes, project controls, visualization, and analytics in real time to work smarter, faster, and simpler. SAP is powering this transition with digital solutions for enhanced workforce engagement, supplier optimization, and project optimization.
To find out more about digital transformation in construction, see Building a Sustainable World, How to Survive and Thrive in a Digital Construction Economy.