Voices on Infrastructure

Breaking the mold: The construction players of the future

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Digital technologies have transformed industries, from automotive to transportation to banking. Even agriculture, which has historically been slow to transform, has taken a huge leap toward digitalization.1How digital innovation is transforming agriculture: Lessons from India,” May 2019, McKinsey.com; David Fiocco, Liz Harrison, and Candace Lun Plotkin, “Cultivating the omnichannel farmer,” February 2019, McKinsey.com; Kevin Laczkowski, Asutosh Padhi, Niranjana Rajagopal, and Paolo Sandrone, “How OEMs can seize the high-tech future in agriculture and construction,” March 2018, McKinsey.com. For a long time, the engineering and construction (E&C) industry was seen as less vulnerable to disruption. Industry fragmentation, a one-off approach to design-and-build projects, and a ready supply of manual labor kept the need for productivity improvement below that of other industries. This is changing fast: incumbents, new entrants, and investors alike are realizing the potential of technology to accelerate projects, reduce costs, and improve safety in a $10-trillion-a-year industry.

Contributing 13 percent of global GDP, construction is the largest industry in the world—and is primed to unlock significant value through productivity improvements. We already see new archetypes of successful players emerging, seeking to capture those benefits. Now is the time for E&C companies to make bold decisions on how and where to play in this exciting era.

How disruption in engineering and construction is playing out

The disruption of the E&C industry is exemplified by five movements:

Decoding digital transformation in construction

Decoding digital transformation in construction

Technological advancement alone is not causing disruption

There are broader factors at play in the disruption of the industry besides the new wave of technologies.

  • Many developed economies are facing skills shortages, with E&C companies struggling to find skilled workers. At the same time, demand is growing, particularly in housing. For example, the United Kingdom needs about 300,000 new homes a year, underpinning demand for new building methods such as modular.7Modular construction: From projects to products, June 2019, McKinsey.com.
  • Fast-evolving owner and customer needs, which make future-proofing harder. Customers and other stakeholders are increasingly demanding flexibility of space (as exemplified by the likes of WeWork), lower-carbon construction, and smart infrastructure, for example.
  • Pressure on traditional engineering and construction company business models, which are prone to lower margins and unforeseen issues such as write-offs. This pressure can raise the stakes on strategic bets, such as diversifying into services and development or taking on debt. When these strategic bets businesses fail, they create ripples throughout the economy. For example, several recent failures of major contractors in the United Kingdom have put large public projects at risk.
  • The prospect of slowing economic growth, which will increase pressure to better manage costs and fluctuating demand.

New engineering and construction archetypes are emerging

All these developments are helping the industry unlock some of the $1.6 trillion of productivity gains that we identified in our 2016 report.8Reinventing construction through a productivity revolution, McKinsey Global Institute, February 2017, McKinsey.com. In fact, first movers are already saving money, compressing schedules, and lowering asset lifecycle expenses.9Decoding digital transformation in construction,” August 2019, McKinsey.com.

Despite the encouraging signs, much work remains to fulfill this enormous potential. Many firms are still in “pilot purgatory” and have not achieved any a significant competitive edge. Even some bold companies never make it past the pilot phase. Some companies are unable to launch their productivity programs at scale and struggle to establish organizational capabilities and governance, develop a data and analytics technology blueprint, or improve data quality and data life cycle management processes.

Players are experimenting with new archetypes to move forward and seize the rapidly expanding value (see box). These archetypes contrast with the traditional models of architect, engineer, specialist contractor, and design-and-build contractor. They are illustrative, and while there will be variants, the key question for incumbents is whether the traditional models will survive alongside the new archetypes—and, if so, in what form?

Disruption in the E&C industry is no longer coming—it is here. New E&C archetypes are emerging, but it is not clear how the industry will look in the future and what companies will win. What is clear is that the opportunity to capture value through gains in productivity are enormous, and incumbents and start-ups alike should consider where and how they can capture a slice of that value.

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