Construction sector: technology and risk management
March 2020 | TALKINGPOINT | SECTOR ANALYSIS
Financier Worldwide Magazine
March 2020 Issue
FW discusses technology and risk management issues in the construction sector with Erin Patrick Roberts at EY.
FW: Based on your experience, could you provide an overview of some of the major risks facing the construction sector today?
Roberts: Many of the risks that face construction companies today are the same as they have always been. Worker health and safety will always be the most important risk, though there are other timeless challenges, such as managing the risk of the portfolio by only bidding on projects that can be successfully executed, achieving productivity goals with a scarcity of qualified labour and the risks associated with an economic slowdown where companies need to decide whether to play it safe or double down. New challenges are emerging, however. The convergence of technology, demographics and globalisation are driving trends across all sectors of the economy, which will fundamentally change our working world. Human augmentation will be at the centre of this transformation, changing how we work, what we build and how we will build it. Companies that are not able to keep pace with this evolution will be disrupted.
FW: How would you describe the sector’s general ability to manage these risks?
Roberts: Historically, the construction sector has been able to manage the traditional risks highlighted above, but emerging risks require an altogether different response, such as a reliance on innovation and investment in technology – things that traditionally have been very difficult for construction companies to employ. In large part, this is a function of two related characteristics of construction companies: low barriers to entry due to low capital investment and low profit margins. As a result, companies are left with little room for research and development. Based on our 2019 ‘Global Construction and Engineering Digital Readiness Survey’, historical spending on research & development (R&D) indicated that the average was only 1 percent of turnover. In the major developed nations like the US and across the EU, this was much lower – close to 0.5 percent – while Asian countries had much higher investment levels, with China and Japan leading the way with over 2 percent of turnover. While these countries averaged higher, this compares to the broader industrials industry which averaged over 10 percent of turnover. The industry needs to find a way to close this gap, and we believe that innovation will be the answer.
FW: To what extent are construction companies utilising new technology to assist with their risk management efforts? What kinds of technology are proving most effective and what benefits do they offer?
Roberts: If you relate back to the core traditional risks, you will see that the use of emerging technologies has followed from the top down. The easiest investments made were the ones that improved the health and safety of workers on the job site. Things like biometric wearables not only tracked the location of employees in potentially dangerous areas of the job site, but also measured temperatures, heart rates and signs of fatigue, including self-alert buttons to indicate the need for assistance. Other job site tech deployed to take over repetitive tasks include exoskeletons to help workers lift heavy objects and robots that can tie off rebar. These technologies have the follow-on impact of improving worker productivity, which aligns to the significant need to improve productivity in an industry that has significantly lagged other sectors. While this productivity gap is much publicised, it is worth remembering that construction is one of the world’s most dangerous industries and the observable lack of progress is largely due to increasing regulation aimed at improving job site conditions and resulting worker health and safety. These emerging technologies are allowing for improved safety and productivity at the same time. What we are seeing now is a move toward technology that improves the economic outcome of construction projects. Building information management (BIM) systems can improve the constructability of the design – especially when paired with geospatial mapping systems that can track progress and quality against the BIM model down to 1cm, such as those solutions offered by Scaled Robotics. The convergence of six key technologies including enterprise resource planning (ERP), BIM, geospatial mapping, the cloud, the Internet of Things (IoT) sensors and 5G, allows the use of data analytics and machine learning to collect vast amounts of data to spot risks early and mitigate those risk in real time. Companies like Briq are helping design and deploy these systems. Lastly, there is the use of technology as a business model to disrupt traditional construction methods. Companies like Katerra and Skender have invested large sums in an attempt to reimagine how construction is done through the control of the design and consolidating the supply chain in order to maximise the use of modularisation to improve the efficiency and cost effectiveness of building projects.
“One of the most interesting applications of technology that we foresee is the wide use of blockchain to execute a construction project.”
FW: With the construction sector subject to significant regulation, how can technology be integrated into existing systems to help maintain compliance?
Roberts: Construction has evolved in a world of increasing regulation aimed at improving the health and safety of workers. The use of the referenced technologies has improved compliance with these regulations. Other technologies being deployed in this area include the use of robotic process automation (RPA) to improve the efficiency of regulatory compliance matters, such as lien releases, payment application processes and detection of fraud.
FW: How important is it for construction companies to develop a risk management culture throughout their organisation? How can technology solutions support this culture?
Roberts: Most construction companies would say their core business model is risk management. The very use of the word ‘contractors’ means they serve the function of using contracts to transfer risk from owners. Therefore, a risk management culture is paramount. What technology does is enhance the monitoring of emerging risks. For example, a construction company may have thousands of construction projects in process at any one time. Data analytics deployed across the population would allow for a constant monitoring of emerging project risks for executive management. Beyond monitoring, instilling a culture of innovation has been effective at many construction companies. These leading-edge contractors have implemented technologies to digitalise, automate and streamline processing the sheer volume of contracts, invoices, payments and other operational aspects, which better enables their ability to monitor emerging risks coming out of those areas.
FW: What advice would you offer to construction companies seeking to enhance their risk management frameworks and internal control processes through the use of emerging technologies?
Roberts: First, companies should focus on the long term. Invest in the development of a coherent digital strategy. According to our ‘Global Construction and Engineering Digital Readiness Survey’, 98 percent of respondents indicated that digital was going to be critical to the future success of the company, yet only 25 percent of respondents indicated that they have a digital strategy and agenda in place. We would suggest that companies assign someone in their organisation that is empowered to pilot new methods and technologies. Try something new and if it succeeds it will be adopted by others. It is about embedding innovation in your culture. Companies must realise the benefits of system integration quickly. Do not invest in technology for just technology’s sake; instead, focus on integrating existing sources of data across systems before considering new technologies to implement. We find that many companies do not use much of the data that is readily available to them. Companies must identify, attract and retain the right talent. All the technology in the world is useless without people who know how to obtain it and make use of it. This means leaders will need to develop or attract the right talent if they want to fully realise their digital agendas. Companies must also work smart to win trust. The supply chain necessary to construct a major facility is currently built on mistrust – each investor, owner, designer, supplier and contractor has incredible risks to manage, so there are often cases of them shifting risk to other parties. Use technology to build transparency as a business model. While these new technologies can significantly enhance the risk management culture, their deployment also adds new risks to the organisation – in particular, cyber security risks. With the deployment of IoT technologies and collection of unstructured data, the incidents of cyber crime in the construction sector are increasing dramatically. Construction businesses hold a plethora of data, be it customer databases, employee files, financial information or even project-specific contracts, designs, blueprints or correspondence. A cyber attack in the form of a data breach or a ransomware attack can lead to a considerable financial cost. This emerging risk is at the top of the agenda for construction company boards and must be proactively managed.
FW: What technological innovations do you expect to see the construction sector adopt in the years ahead? Do you expect these advancing solutions to become an essential part of the risk management process?
Roberts: One of the most interesting applications of technology that we foresee is the wide use of blockchain to execute a construction project. A construction project brings together on average over 60 different constituents from across the globe. Smart contracts and use of a distributed ledger can bring a single version of the truth to the entire supply chain, bringing transparency and improved quality and reduction of rework. The use case is clear and compelling. I think the integration of blockchain with the other six key technologies is the future of construction. In an industry that is known for significant waste, fraud and abuse, and which contributes over $10 trillion a year to GDP, this can be a real game changer.
Erin Roberts has over 25 years of experience serving public companies in the engineering and construction industries. Throughout his career, he has had a heavy focus on engineering firms, specialty contractors, engineering, procurement, construction (EPC) contractors, oilfield equipment construction and construction materials. Having spent 10 years as the Americas E&C sector leader, he took over the global engineering & construction sector leadership role in January 2019. He can be contacted on +1 (713) 750 1373 or by email: erin.roberts@ey.com.
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