The Building Blocks of the Construction Tech Wave
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Background
The first circular saw was invented in 1813 by Tabitha Babbit when she saw that workers were wasting half of their energy with the inefficient motions while using the two-person whipsaw. The first nail gun was invented in 1954 when three New York construction workers saw how machine guns were used in WW2 and saw a clear way to improve the nail insertion process.
Figure 1: Two-man whipsaw (top left), circular saw (top right), hammer and nail (bottom left), nail gun (bottom right)
Much like the apparent inefficiencies with the two-person whipsaw and manual nail insertion, multiple areas in the construction industry today are ripe for disruption. Similar to how the advent of the nail gun and the circular saw each dramatically simplified construction processes, I believe we will see another wave of tools that similarly propel the industry forward many years. Some of the critical areas for improvement in the industry seem to lie within fundamental functions like proper timelining of projects and staying within budget. These structural problems are quantified through a study done by Plug & Play TC, which shows some staggering facts in that 80% of big construction projects are over-budget, and 61% are over-schedule.
I believe that the construction industry struggles with the problems mentioned above because it is a legacy sector inundated with excel sheets and paper documents making it challenging to figure out the right entry point for entrepreneurs. McKinsey corroborates this through one of their research papers, where they explain that
“the [construction] industry is in deadlock—to break it will require movement from all players. Owners should be the main beneficiaries of a move to a more productive model that will eventually reward them with higher schedule reliability and lower costs. But they are generally risk-averse and not sufficiently experienced to navigate an opaque market.”
With this in mind, I think there are a lot of apparent problems in the industry that startups can work on, and the market will become less opaque as more people start building in this industry.
Market Overview
According to Mckinsey & Co, construction technology firms have received around $18B in investment funding from 2013 to early 2018. To put this in perspective, industry-wide investment in financial technology companies has increased over 13 times in the past 10 years from $8B in 2010 to over $110B in 2019. It’s no surprise that with such a significant difference in capital allocation, there are natural opportunities in construction technology that has yet to be explored.
The global construction software total addressable market (TAM) in 2019 was sitting at $1.6B and is estimated to grow at a CAGR of 9.76% and be at around $2.8B by the end of 2025. In recent years, there has been more activity in the construction space, and that’s evidenced by the table below, which highlights some of the exciting startups being built.
Table 1: List of well-known construction technology companies
I believe that we are going to start seeing an increase in building and capital allocation for construction-focused software offerings sooner rather than later. We already see examples of this with companies like Cover, the full-stack homebuilder, or Siteline, the company looking to digitize data for billing/legal/documentation. The company that I’m most interested in is Punch List. Punch List is exciting because it’s doing what practically no other company has done in construction. It is creating an end-to-end experience for contractors and homeowners that includes seamless communication, full timeline transparency, and frictionless payments.v
Overview: What is Punch List?
Punch List is a mobile app that acts as an interface for homeowners and contractors to manage everything they need about their current remodel.
If a homeowner is in the market for a remodel and has a contractor, here is what the relationship would look like if they used Punch List:
Discuss needs for remodeling
Contractor sits with a Punch List specialist and maps out the details of the home remodel in the app (see Figure 2)
From this point onwards, the contractor and homeowner can keep constant communication through the app through its chatting feature.
The contractor and homeowner both have access to the timeline to make sure the phases of the project are completed on time.
The homeowners can request changes to the set plan and alert the contractors who can make the appropriate changes and issue invoices accordingly at any time (see Figure 2)
The contractor can ask for specific approvals on certain actions so that there are fewer chances for irreversible mistakes (see Figure 2)
The relationship mentioned above is not something that currently exists in the construction industry. If I were a contractor working on this remodel without Punch List I would need:
A way to communicate (text, email, phone calls)
A way to convey timeline and manage tasks within the project (Procore, excel sheets)
A way to get paid (invoices, PayPal/Venmo)
As you can see, Punch List has created a solution that includes all of this and more. The impacts of Punch List are threefold: (1) timelines are met, and the problem of 61% of projects being over-schedule is slowly being mitigated, (2) budgets are entirely transparent and the challenge of 80% of projects being over-budget is also slowly being fixed, and (3) there is full transparency and therefore trust between the homeowner and the contractor. When the homeowner trusts that they will get what they paid for and conversely, the contractor knows they’ll get paid promptly, this will result in a happier outcome.
Deep Dive
This section will spend time delving into the Punch List features and outlining why its end-to-end solution is so vital for the industry. As mentioned before, Punch List’s main features boil down to:
In-app chatting between the contractor and the homeowner
Accessible timeline of the project and related budgets per part
Ability to add change orders to the project and issue relevant invoices
Ability to get “confirmations” from homeowners before taking specific actions
Ability to initiate payments through the app
Figure 2: Different screens of the Punch List app
The last feature is the most important in this end-to-end solution because it allows the wrap up of the project and helps mitigate a longstanding problem in the construction industry: delayed payments. In a 2020 research report conducted by Levelset, a company that helps contractors and suppliers get paid on time, they found a few startling facts:
The construction industry accepts project & payment delays as the status quo
80% of companies say they spend a significant portion of their workweek chasing down payments
Only half of the construction businesses say they receive payment with 30 days of invoicing (15% regularly way for 60 days or longer to get paid)
These statistics are problematic, but with Punch List contractors and homeowners will never have to worry about missing invoices and late payments again. Digital invoices are always available in the app after every budgeting decision and sent via email. Homeowners should and will always have clarity on what they are paying for, and the contractor will continuously get paid on time.
Competition
I’ve harped on the end-to-end solution a few times already, but the reason this is so important is because I couldn’t find another example of a real end-to-end solution that’s targeting the residential space. Most “competitors” are offering only a subset of what Punch List provides.
Table 2: Feature matrix to compare Punch List v. Competitors
As evidenced by the table above, most of the competitors are all offering project management related features. A real end-to-end solution means a product that a contractor can pick up at the start of a project and continually go to until the completion of the project. An end-to-end solution would include:
Timelines of the entire project
Tasks that are broken down to more actionable items
Associated costs for each action item
Communication features to keep constant communication with the homeowner
A payment interface
A real missing piece in the construction industry today is an application that offers things outside of features related to project management. The real competitive advantage for Punch List is the in-app chatting, the contractor-initiated user confirmation requests, and payment integration. These features are what make Punch List an end-to-end solution versus just a project management solution like some of its competitors.
Figure 3: 2x2 highlighting the difference between project management and E2E
Team
The Punch List team is still currently sitting at seven people. The CEO/Co-Founder has some experience in the real estate market, but more than anything, I don’t think Punch List works because they are a team of experts in residential construction. I think Punch List works because they are offering an elegant technology solution to an industry that is so inundated with excel sheets and paper invoices. They are creating a seamless communication channel between contractors and homeowners that has yet to be done successfully in the market.
Pricing
Punch List has a very affordable offering on both sides. The homeowner incurs no costs when it comes to using the app. The contractor is paying $49/mo—more on pricing in the Risks section.
Risks
Although I’m thrilled with Punch List there are a few potential risks:
Construction industry CAC:
From the McKinsey studies mentioned above, it's clear that there is significant friction for contractors to adopt new technology solutions. Meaning that the customer acquisition cost (CAC) for Punch List is going to be high, at least when they are starting. Punch List charges its contractors $49/monthly, translating to an ACV of $588. The ACV tells us a few things: (1) it will probably be difficult to support an inside sales team for the product (2) a high CAC coupled with that ACV will lead to real issues when trying to scale their business.
Manual onboarding with Punch List specialists:
Punch List’s website says that for more complex projects, contractors can set up a time with Punch List specialists to map out the details of projects and input them into the app. Without having a specific context on “complex” projects, it's hard to understand how often contractors will need Punch List specialists. However, if we operate under an assumption that Punch List specialists are required every 6 out of 10 projects then Punch List will run into scaling problems and will have to either:
Build out a larger onboarding team to take care of these manual processes which will drive up costs
Build out better UX, so it's easier for contractors to break down complex projects on their own
Either way, I think the current solution is prone to scaling issues when faced with 100, 1000, 5000 projects that need onboarding quickly.
Conclusion
Figure 4: Network effects for the construction industry as tech companies keep building
Punch List is championing the effort to build software solutions in a very antiquated industry. Returning to the McKinsey study at the start of the article, “the [construction] industry is in deadlock—to break it will require movement from all players. Owners should be the main beneficiaries of a move to a more productive model that will eventually reward them with higher schedule reliability and lower costs. But they are generally risk-averse and not sufficiently experienced to navigate an opaque market.” As illustrated in Figure 4, I believe we will see that as more companies emerge, contractors and other related positions will be the beneficiaries of these solutions. As more companies enter the mix, there will be natural network effects where users of Punch List will be users of other construction SaaS solutions (i.e., Siteline, Agora, Fieldwire, etc.) and vice versa. Through this ascension of construction software, the market will become less opaque, and it will soon become commonplace to use construction technology solutions.
If you enjoyed this piece and would like to chat more, please reach out through:
Twitter at @bchandras3karan
Email at bala.m.chandrasekaran@gmail.com.
Thank you to John Luttig, Sid Vashist, and Sid Venkateswaran for multiple rounds of edits and recommendations.