Construction Technology is Poised for Takeoff in 2023 and Beyond. Here’s Why.

With a set of industry challenges tailor-made for technology solutions and historically low adoption rates, we see a massive greenfield opportunity in construction tech.

LLR has been actively investing in construction tech for nearly two decades. Here’s why we think the industry is poised for massive growth, and where we think the biggest opportunities lie.

Construction technology spans the full industry lifecycle, helping general contractors, architects, engineers, and building owners participate in the broader construction ecosystem before, during and after construction and on and off the jobsite.

LLR made its first investment in construction technology in 2006. Our partnership with Maxwell Systems, a company providing construction business management and ERP software, lasted until 2014, when the company was acquired by Viewpoint (now Trimble). Much has changed in the intervening years, but our stance on construction technology has not. In fact, our lengthy involvement in this industry has given us a valuable perspective and informs our thesis that its growth should accelerate in 2023 and beyond.

Greenfield opportunities await

Construction has historically seen very low technology adoption rates. Nearly 20 years ago, contractors were primarily relying on pens, paper and spreadsheets to plan and manage projects. Today, they are still clinging to these outdated tools, but the pressure to replace them is that much greater. We believe single-digit margins are being eroded by lack of visibility and unchecked inefficiencies, with the result that a staggering 98% of construction projects are still affected by cost overruns or significant delays.¹

With a set of industry challenges tailor-made for technology solutions and historically low adoption rates, we see a massive greenfield opportunity in construction tech. After estimating the total construction software market at ~$10-12 billion, we believe there’s a potential unvended market of $6-8 billion.

Industry pressures multiply

Adding to the long-standing issues the construction industry has endured for decades, new challenges are piling up and adding further pressure to seek out technology solutions.

Labor scarcity. The scarcity of skilled labor is acute and will only worsen, with 41% of the current U.S. construction workforce expected to retire by 2031.²

Worksite safety. Stricter worksite safety rules add to the operational burden and place new restrictions on workers’ available hours.

Institutional investment. The increase in construction projects financed by investors is creating deeper visibility and accountability to budgets, timelines and total cost of ownership.

Adoption accelerators. A younger, digitally native generation are taking their place as construction industry leaders and decision-makers, while the hardware used to access technology on the jobsite is becoming more affordable, reliable, durable and powerful.

The downturn should drive adoption

Because our involvement with the construction technology industry, we’ve been able to observe the way macroeconomic factors impact technology adoption in this industry, which showed us two things.

First, it’s always during a downturn that contractors have the time and motivation to start thinking about improving processes and evaluating technology. During bull periods, they appear to be solely focused on completing the projects in the pipeline, but once the pipeline shrinks, contractors switch their focus to improving field operations and protecting (or even increasing) their margins.

Second, because of the timeframes for typical projects, the downturn for construction lags the economic downturn by a year or two. As a result, we believe the current uneasiness of inflation, high interest rates, and potential recession will potentially hit the construction industry in 2024 and beyond, which we expect to result in renewed interest in software/technology solutions that have the potential to improve the bottom line.

Where we’re putting our focus

While we see numerous pockets of opportunity in construction technology, there are a few that we find especially interesting.

The back office segment that we initially backed with our investment in Maxwell Systems has since evolved into a well-established category populated by multibillion-dollar leaders such as Trimble, Bentley, Autodesk and Procore. Looking ahead, we are particularly interested in (i) estimation and takeoff solutions – incorporating accurate and up to date material and labor data into the planning stages is essential to create transitions between construction phases, (ii) compliance/safety – we see an unmet need here from larger platforms, and (iii) offsite manufacturing – modular construction is capable of reducing costs, increasing margins, and delivering value.

Here’s the bottom line.

Historically a slow-moving sector with constituents who are resistant to change, the construction industry is primed for digital transformation. While software adoption has increased tremendously since our first investment in 2006, we at LLR are seeing the opportunistic market conditions for an even bigger growth phase: mounting industry pressures, an appetite for change and improvement, and a downturn to give the industry time to explore better ways to get the job done.

Learn more about our investment thesis, experience and team focused on Construction Technology.