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General Facts About Construction

• It’s a massive market. In Europe, in 2022, the sector contributed to c.10% of the GDP ($1.5tn) and employed 11.1m workers (6.4% of total employment).
• It’s extremely fragmented. There are 3.2m construction companies in Europe including 340k in the UK, 440k in Germany and 424k in France. 94.1% of companies have less than 10 employees and 5.3% companies have between 10 and 50 employees.

Source: European Commission

• It suffers from low productivity growth compared to other sectors. Labor productivity grew by 1.0% per year in the past 2 decades compared to 2.7% for the total economy and 2.7% for the manufacturing sector.

Source: McKinsey

• It’s a low margin business. Large construction companies achieve an EBITDA margin between 8 and 12%, while smaller construction companies typically have an EBITDA margin below 5% (on average 4% for companies between 10 and 50 employees and 1% for companies with less than 10 employees).
• It’s underdigitized. According to the McKinsey Industry Digitalization Index, only the agriculture sector is less digitized than construction. The typical IT spend for construction companies is 1-2% of the revenue, compared with the 3-5% average across industries. Moreover, there are many barriers to digital technology adoption including skill management issues, reluctance to change, lack of budget and time allocated.

Source: Deloitte

• It’s a greenfield market. Most SMBs are being digitally unequipped. Over 50% are still managing their business using pen, paper, and Microsoft Office. 60% of construction companies don’t use a cloud based construction management software.

• There is currently a massive labor shortage. In the US, an estimated 41% of the current US construction workforce is projected to retire by 2031 and there are 440k vacancies in the sector in 2023 (vs. 300k in 2019). Furthermore, the number of individuals entering the construction workforce is declining annually in developed countries.

• In a given construction project, there are often many stakeholders involved, especially in large projects:

  • Owners: They initiate construction projects, working with architects and engineers to design the project. They also hire a general contractor to operationally build the project.
  • General Contractors: They work for owners and are responsible for leading construction projects. They hire and coordinate specialty contractors.
  • Specialty Contractors: Specialty contractors are hired for their specific skills, such as electrical, plumbing, roofing.
  • Architects and Engineers: They collaborate with owners and general contractors in the project's design.
  • Financiers: They fund the project through equity or debt, which is released progressively when milestones are hit.
  • Insurers: Insurers protect the project against unforeseen events, such as injuries, defects, or natural disasters.
  • Materials and Equipment Suppliers: These suppliers provide the necessary materials and equipment to complete the project.

  

  Source: Procore’s 2022 Investor Day

• Construction has a complex value chain involving various tools and stakeholders at each main step.

Trend n°1 - Financial Services for the Construction Industry

Payment delays are longer in construction than in any other industry. More precisely, it takes on average 83 days for a contractor to be paid. Only 12% of construction companies report being consistently paid on time. 83% of companies in the US have already filed liens due to slow payment.In the US, a mechanics lien is a legal instrument that suppliers, subcontractors, and contractors can leverage to recoup their labor and materials costs from the owner of a construction project for delayed payments to stakeholders.

There is a complex payment chain in the construction industry wherein the money has to flow from the top (the owner/the lender) to all the stakeholders involved in the construction project, starting with the General Contractor (GC) and going down to the different tiers of subcontractors and suppliers. Subcontractors often purchase materials upfront with a 30-day delay to pay them and typically pay their workers on a weekly basis. Subcontractors are generally paid weekly or monthly, based on the completed work's percentage. They send an invoice to the GC, who collects these invoices and ensures that the work has been done and that the subcontractor is fully compliant. The GC does the same for all subcontractors and consolidates a single invoice for the owner. The owner then conducts its own due diligence on the project before paying the GC, and then the money flows down the payment chain. GC’s payment can be done directly or done after a draw request to the funding bank. This complex payment chain in the construction industry opens up opportunities to streamline payments for startups.