Prefabrication and MMC in Canada

Is this a case of missed opportunity?

 

The Origine green condo project in Québec 

 

Canada is a globally significant producer and exporter of wood products. Its main market is the US (61% of forest product exports), but Japan (9%), and China (18%) are important. In 2022 the sector generated 56,120 jobs, CAN$6.4 billion in GDP, $1.9 billion in provincial government revenue, 26% of provincial manufacturing sales and 24% of B.C.’s total commodity export value. Between 2013 and 2022 the value of Veneer, plywood and engineered wood product manufacturing increased from $1.4 billion to $3.2 billion (to 21% of total forest product sales).

 

Canada has policies at both the national and provincial (state) level that have supported increased use of wood products and Modern Methods of Construction (MMC.) The National Building Code was revised in 2009 to allow light frame construction up to 6 stories, and allowance for mass timber use in 7-12 story buildings was added in the 2020 building code. Many case studies of mass timber buildings are now available.

 

Conventional light-frame wood construction makes up the bulk of construction. Typical light-frame construction has repetitive wood framing to form rafters or trusses using standard dimension lumber. Mass timber products are thick, compressed layers of wood that serve as the load-bearing structure of a building. Because these products are lighter than other construction materials, they are used for prefabricated wood building systems. 

 

Although a major producer of wood products a comprehensive 2021 State of Prefabrication in Canada report found: 

There are three primary forms of wood prefabrication here in Canada – Mass Timber, Panels, and Volumetric Modular construction. Of these methods of prefabrication, mass timber is currently receiving significant attention due to the sustainability benefits it offers and the technical and market development efforts to encourage its use. While there are many different types of mass timber, the focus for this study is on cross-laminated timber (CLT) and Glulam structural systems. From a production capacity and market penetration perspective, mass timber in Canada still has a long way to go to reach the maturity of its European counterparts.

 

The report found 20 mass timber manufacturing facilities in Canada: British Columbia had 8 and 40% of total Canadian production; and Quebec had 5 facilities and 25% of overall production. Only two companies are integrated operations that harvest, mill, and offer full engineering, design, and production of mass timber structures; Kalesnikoff Lumber and Nordic Structures both transitioned to mass timber out of their milling operations. Up to 2021, 550 projects had been completed, almost half were institutional and public projects (232), the others commercial (141) and recreational projects (66). Of these 85% were 1-2 storeys, and 10% 3-6 storeys. Only 23 residential projects had been completed with the majority in southern British Columbia.

 

The report then looked at three types of prefabricated panels:

1. Open panels for standard Light Wood Frame construction with or without sheathing;

2. Closed panels with One Side Closed for standard light wood frame construction, with sheathing, exterior cladding, insulation, windows; and 

3. Both Sides Closed for standard light wood frame construction, with sheathing, exterior cladding, insulation, windows, electrical or conduit, plumbing, heating components and interior boarding. 

 

The open panel sector was found to be low-tech but there were several semi-automated panelized companies employing more digitization and automation using 3D modelling, automated nailing machines and conveyors and framing tables. These are used in residential building with 74% of panelized systems used for multi-family and 23% used for single-family buildings.  The adoption of closed panel systems are ‘still in their infancy’, with only two large companies employing full automation in construction closed panels and most of the companies ‘small and are low-tech operations utilizing framing tables and overhead cranes within warehouses.’ Leveraging their experience and technical expertise several European and Japanese companies have entered the market and become established producers of these panels.

 

On modular building, the report found the residential modular market had varied between 10% and 15% of single-family residential starts in Canada, or 11,000 to 17,000 annual starts, and had approximately 30,000 full time jobs with $6bn in total economic activity (direct and indirect activity). The largest regions for demand are Quebec and the Prairies. There were an estimated 26 modular manufacturers, operating in approximately 50 locations that were typically low-tech with little automation.

 

The commercial industry is divided relocatable buildings and permanent modular construction (PMC) and includes industrial, hospitality, education, healthcare and multi-family buildings. It was estimated that there are 100,000 relocatable structures such as job site office trailers, classroom portables, and remote workforce accommodation in use. 

 

Commercial PMC modular manufacturers in Canada build a variety of building types, mainly low-rise buildings under 6 stories using light wood frame volumetric construction. The main markets were portable classrooms for education and public sector multi-family buildings for affordable housing. The report noted ‘Over the past 20 years there have been many regional modular business failures, that have created pockets of reluctance from stakeholders and owners to try modular again after having seen their projects left unfinished or tied up in bankruptcy proceedings. A BC university recently completed two modular projects by two different manufacturers within a year only to see both companies unable to complete their warranty period due to bankruptcy.’ 

 

The State of Prefabrication in Canada report found a low level of automation and little investment in new technology by industry. The barriers of standardisation, acceptance by clients, procurement methods, access to finance and insurance, and the lack of a skilled workforce were identified. The eight recommendations addressed those barriers. 

 

 

Policy Measures

 

The Government of Canada invested $5 million between 2013 and 2017 to support two demonstration projects under the Tall Wood Building Demonstration Initiative, which resulted in the construction of the world’s then tallest hybrid wood building at 18 storeys, the Brock Commons Tallwood House at the University of British Columbia in Vancouver, and the Origine green condo project in Québec (pictured above). 

 

The Green Construction through Wood (GCWood) program was started in 2017 as a 4-year, $40mn program aimed at increasing the use of wood in construction projects and supporting Canada’s commitment to greenhouse gas emissions reduction targets under the Paris Agreement. As of March 2023, this had funded 4 tall wood building projects, 10 low-rise non-residential building projects, and 2 timber bridge projects. GCWood also facilitated the revisions to the 2020 National Building Code of Canada to allow wood buildings up to 12 storeys. 

 

Also at the federal level, the Canada Mortgage and Housing Corporation (CMHC) announced the Rapid Housing Initiative (RHI) in 2020 which funded affordable housing and required the use of prefabricated systems to complete a funded project within 12 months. The RHI started in 2020 with $1 billion in funding, a second round of funding had another $1.5bn for 2021-22 and the third round in 2022-23 added another $1.5bn, for a program total of $4bn that delivered 15,539 units/beds. 

 

Several provinces have a Wood Charter that promotes the use of wood in construction. Québec mandated for wood use in public buildings in 2013, and updated their Wood Charter in 2017. The share of wood-framed non-residential buildings of 4 stories or less increased from 28% to 34% between 2016 and 2020, and there is now a Policy for the Use of Wood in Construction. Alberta also has a Wood Charter, and New Brunswick a Wood First policy for public buildings. Between 2017 and 2020 Ontario had a $4.8mn demonstration program. The provinces also have started setting up training programs for timber construction with an emphasis on digital skills, Design for Manufacture and Assembly (DfMA) and Building Information Modelling (BIM).

 

British Columbia

 

The province of British Columbia (B.C.) has a large forest products industry worth $15bn in 2022, with the sawmill share well over 50% and a growing share of engineered wood products of around 20.  The 2022 review of the Economic State of the British Columbia Forest Sector is here. As a result of the changes to the building code in 2009 and 2020 building code, over 90% of 1-6 storey new residential construction in B.C. is built in wood, a greater share than in any other jurisdiction in the world. In 2011 North America’s first CLT plant opened in B.C, and around 350 mass timber structures have since been built, more than half of all mass timber buildings in Canada. There is now a local cluster of experienced designers and builders that work in both domestic and export markets for mass timber. 

 

An important policy for MMC in B.C. is the Wood First program, which promotes innovation in manufacturing, building design and construction. The Forestry Innovation Investment (FII) agency provides overall management and administration of the program and the focus areas of research, education, marketing and value-added capacity building. The FII 2023-2026 Strategic Plan is here. 

 

Funding comes from the Ministry of Jobs, Economic Recovery and Innovation, but the activities of the Wood First program are delivered primarily by third-party organizations under a cost-sharing framework with contributions from industry. There is an annual call for proposals reviewed by an Advisory Committee, with a focus on sustainability, advanced wood technologies and building systems, and industrialization of construction through prefabrication using DfMA and BIM. As a result the FII has an extensive library of case studies and technical manuals, the current recipients are listed here. 

 

There are two other programs that supported use of MMC. With the Rapid Response to Homelessnessprogram B.C. invested $291mn between 2016 and 2021 to build over 2,000 modular housing units for people who are homeless or at risk of homelessness. And between 2020 and 2023 B.C.’s Mass Timber Demonstration Program invested almost $11 million to help with costs associated with the design and construction of 20 building projects and 8 research projects that demonstrated emerging or new mass timber building systems and construction processes.

 

Ontario

 

The Ontario government started the Accelerated Build Pilot Program in 2020 to address capacity issues in the province’s health and long-term care (LTC) system. Infrastructure Ontario (IO) collaborated with industry to develop an innovative program for rapid procurement and modular construction. IO’s first accelerated build projects were completed in 2022. The Lakeridge Gardens LTC home was completed in February 2022, after 13 months of construction. In September 2022, the Thunder Bay Correctional Centre and Kenora Jail projects were completed. In May 2023, the Humber Meadows LTC was completed and in July 2023 Wellbrook Place with two LTC homes was completed.

 

There is a short documentary from PCL Construction on the Lakeridge Gardens project and the innovation involved, and Bird Construction has a short video  of the Kenora and Thunder Bay correctional facility modular build projects.

 

 

Conclusion

 

Canada has built some of the tallest mass timber buildings in the world and most residential buildings are wood framed. There are eight producers of CLT and Glulam, however they are mainly restricted to the local market and have not developed an export market in the US, where they compete with American and European producers. In 2020 only two companies were integrated operations that harvest and mill wood, and offer full engineering, design, and production of mass timber structures. The growth in mass timber demand has been largely driven by sustainability initiatives and public policy for carbon reduction.

 

Revisions to the building code since 2009 increased the use of wood framing and mass timber for both residential and non-residential building, with its use now required for many publicly funded projects. There is a significant wood truss industry across the country, and light wood framing is used for most residential construction, but the industry is based on traditional trades and not highly automated, with a few exceptions. 

 

The public sector programs by both national and province governments to use prefabricated buildings for housing and education have been important on the demand side, but much of has been low tech panelized construction or simple standardized modular buildings on the supply side. Several European and Japanese companies have entered the market and become established producers of closed panels, based on their experience and technical expertise. There is a well-established residential modular building industry for both relocatable and permanent buildings, but the cyclical nature of construction has led to the failure of many modular building companies, and this has affected private sector commercial and industrial demand.

 

Canada could be a classic example of aligning industry development with competitive advantage. With the natural endowments of climate and space a large and established forest products industry has developed, which exports timber to the US and Asia, and this could have been used to develop an advanced prefabricated building industry based on wood construction, creating a comparative advantage based on R&D and technical expertise. However, on the evidence available this has so far not happened. There have been demonstration projects and provinces have Wood First policies for public buildings, but prefabrication and MMC is not established as an alternative to traditional construction. 

 

 

UK MMC and Manufactured Housing Failures

How not to promote Modern Methods of Construction 

In Australia, Canada, the UK and parts of the US there are problems associated with low levels of new house construction, high prices, rising rents and decreasing affordability. Although modern methods of construction (MMC) cannot solve these problems on its own, it could make a significant contribution if restrictions on its use were relaxed, and governments developed effective policies to expand the market and promote its use. 

 

The UK Government has been a leading producer of industry policies for construction since the 2011 launch of the construction industry strategy, with an updated version following in 2016. Some parts of the strategy have been successful, developing the BIM Framework and BS 19650 standards and increasing the use of BIM with a public sector mandate (discussed in a previous post here) in particular. Also, between 2019 and 2022 the Transforming Construction Challenge completed 68 projects.

 

In contrast, the UK policy to promote manufactured affordable housing has been a notable failure. Over 2022-23 MMC companies that collapsed were Ilke, House by Urban Splash and Modulous, and L&G closed its housing factory (in image above). In late 2023 the UK House of Lords Built Environment Committee started an inquiry into manufactured housing, and this post is based on the report from the inquiry and transcripts of evidence given. The report (in the form of a letter to the Secretary of State for Levelling Up, Housing and Communities) provides some insight into an agency that has not published any data on the twin policy objectives of increased supply of affordable housing and increased use of MMC. 

 

Background

 

In 2017 the Government committed to increased housing supply using MMC by supporting the growth of the industry. MMC describes a wide range of non-traditional building systems and in the UK is divided into seven categories, from completely built offsite (Category 1) to completely built onsite with some automation (Categories 6 and 7). The policy to promote MMC was supported by the Construction Innovation Hub and the Advanced Industrialised Methods for the Construction of Homes (AIMCH) project, which both ran for three years over 2020-22 funded by UK Research and Innovation through the Industrial Strategy Challenge Fund.

 

The agency responsible for increasing use of MMC was Homes England, established in 2018 to fund new affordable housing (replacing the Homes and Communities Agency set up in 2008). The Strategic Plan 2018-23 described Homes England as ‘a new non-departmental public body, sponsored by the Ministry of Housing, Communities and Local Government … to accelerate the delivery of housing across England, except in London’ and explained ‘Our mission is to intervene in the market to ensure more homes are built in areas of greatest need, to improve affordability. We’ll make this sustainable by creating a more resilient and diverse housing market.’ There were six objectives in the Strategic Plan, the third of which was to improve construction productivity by supporting MMC:

 

We must embrace change to improve productivity and reduce the impact of the declining workforce. MMC has the potential to be significantly more productive than traditional methods of construction and greatly increase the pace of delivery. It can also improve the quality of construction, address labour and materials shortages and deliver a number of additional benefits such as improved energy efficiency and health and safety. As a result, developers are already introducing MMC. However, the MMC industry is currently immature with limited production capacity and supply chains. It requires stimulus if it is to evolve further.

 

We will support the uptake and development of MMC through a range of interventions. We’ll incorporate MMC into our building lease disposals to demonstrate a range of MMC products by supporting pilot projects on Homes England land. We’ll also encourage partners to use MMC through our provision of development finance to developers. Our Local Authority Accelerated Construction programme will also encourage more widespread use of MMC to help increase the speed of construction and build out.

 

 

Inquiry Report

 

After the collapse and closure of the two major Category 1 MMC businesses, Ilke Homes and House by Urban Splash, in late 2023 the UK House of Lords Built Environment Committee started an inquiry into MMC in housing ‘to explore the potential reasons for these failures, especially considering the support provided by the Government to the industry.’ 

 

The inquiry made some pointed observations. Homes England could not provide data on the extent of MMC across its portfolio, despite that being its measure of success, and has not developed an evidence base or published research on MMC as promised. An MMC Taskforce, which was expected to work on data and standards, has never met. Some key points from the report were:

 

‘we have been told … Category 1 housing is, or could be, more expensive than homes built using traditional construction methods … we heard that MMC homes are cheaper. These two statements cannot both be true’ (p. 3).

 

‘We have limited confidence that a coherent plan to encourage the use of MMC is in place and, owing to the absence of its publication, have found it challenging to scrutinise the Governments activity and spending’ (p. 4) 

 

‘It remains unclear both how Homes England is assuring itself that Affordable Homes Programme (AHP) providers in receipt of grant are meeting the pre-manufactured value (PMV) requirements and when this data will be published’ (p. 7). PMV measures how much of a project’s gross construction cost is derived from pre-manufacturing with all seven MMC categories contributing to a higher PMV. 

 

‘The current approach taken through the AHP does not stipulate the use of Category 1 and 2 MMC. The requirement for 55 per cent of the PMV of the home to be MMC allows many housing associations to use MMC from Categories 3 to 7 … the majority of MMC delivery has a low pre-manufactured value’ (p. 8)

 

‘We were particularly disappointed by the attitude of insurance providers and the warranty providers towards MMC. The extensive time periods it can take to obtain warranties and the reticence of insurance providers to accept compliance with building regulations as sufficient is having a detrimental impact on the delivery of MMC homes’ (p. 13).

 

'Homes England made significant investments from the £4.5 billion 2015 Home Building Fund which directly supported Ilke Homes (£60mn) and House by Urban Splash (debt facility of £26.9mn and equity of £3.1mn). Homes England expects limited recovery of its investment into Ilke Homes and full recovery of its loan to House by Urban Splash, though not the equity’ …  'it is still unclear why Homes England chose these two companies and what its selection criteria and objectives were’ (p. 15).

 

‘It is also unclear why the Government is not allowing experienced international MMC companies to apply for procurement processes and stipulations. Volumetric MMC housing is successfully delivered in other countries. The Government should ensure that its procurement practices do not limit the ability of successful MMC companies from around the world in moving into the UK market’ (p. 16).

 

‘we came away from our inquiry with the impression that the Government had too easily accepted that undirected and nonstrategic investment of public money was the obvious way of providing this assistance. We say that because the Government has not set out clear objectives for the investments and funding it provided. Nor did Homes England give us any clear metrics as to how success (however defined) was to be measured and over what timescale’ (p. 18).

 

The report also pointed out that ‘MMC has been commercially successful in other sectors and blocks of flats, as illustrated by build to rent and student housing’ (p. 3). In evidence given by industry to the inquiry affordable housing is not a viable market segment for MMC because traditional methods are cheaper in some parts of the country and volume manufacturing requires an  sustained high level of demand, so for the failed companies the ‘level of investment expended relative to the demand was the fundamental flaw’. Examples given of successful MMC projects in the UK were medium and high-rise buildings, hospitals, prisons, detention centres and defence housing. 

 

Conclusion

 

What does this tell us about Homes England’s MMC policy and implementation? There are a few basic principles for industry policy. The first is to be technology agnostic, meaning the funding should be allocated on the basis of meeting the policy objectives, not on the basis of a preferred technological solution. In this case there was no good reason to prefer Category I MMC builders over Categories 2 – 5, and there was no evidence that the final cost of Category I volumetric buildings were cheaper that alternative MMC builds. 

 

The second basic principle is to avoid picking winners. If funding is to be provided it should be available to any firm that can meet the criteria set and policy objectives. Making equity investments in firms, as Homes England did, is not appropriate and has a long history of failure. Typically, industry policy funding is through either credit support or incentives, rarely a combination of both, as many studies of policies in different countries for specific industries have shown.

 

Finally, industry policy funding will be most effective when used to stimulate demand. Homes England contracted a total of £137mn to local authorities to deliver 9,969 homes using MMC in Categories 1 to 5, although the inquiry was unable to establish how many had been delivered. The Affordable Homes Programme made funding available to housing associations using MMC through strategic partnerships, long-term deals under which partners must build at least 1,500 homes and deliver 25 per cent of those homes using MMC. However, the inquiry found the majority of AHP houses had a low PMV with a lot due to Categories 6 and 7. Here the objective of increasing offsite manufacturing was undermined by accepting onsite work as MMC. 

 

UK manufactured housing provides a good example of how not to do industry policy for construction. The ‘undirected and nonstrategic investment of public money’ was both wasteful and probably ineffective (given the lack of data on outcomes). Homes England did not develop standards or provide data that would have encouraged insurance and warranty providers to support MMC, and excluded international firms with experience with MMC from entering the market that could ‘help improve the maturity of the market, and provide the data and evidence called for by warranty and insurance providers’. 

 

The concluding paragraph of the inquiry’s report pointed to the complex interplay of factors involved in unblocking supply of housing in general and increased use of MMC in particular:

 

It is possible that real barriers exist in the form of resistance by planning officers and undue risk aversion on the part of warranty providers, insurance companies and banks. Our short inquiry did not establish clear evidence to make that case, but we believe the Government should look more carefully at how these parts of the housebuilding ecology are working, as well as taking a greater interest in overseas examples of success with modular construction. 

 

This situation is not unique to the UK. Australia, Canada and parts of the US all have similar problems associated with low levels of new house construction, high prices, rising rents and decreasing affordability. Although MMC cannot solve these problems on its own, it could make a significant contribution if restrictions on its use were relaxed. Demonstration sites where examples of modular building are on show could be established. Some publicly owned sites could be recycled and reserved for modular buildings to create a market. An independent agency could collect data on costs and performance. Lending and valuation guidelines could incorporate energy savings from modular buildings. Local governments could be given incentives for allowing new modular buildings and/or extensions to existing houses. Social housing could be required to use MMC. A levy on embodied carbon in building materials would favour modular building, which typically has less waste and lower use of cement and concrete. 

 

MMC is not only Category 1 3D buildings. It includes panellised and structural systems, pre-assembled floor and wall cassettes, kitchen and bathroom pods, and manufactured components such as facades and windows. Many of these are already widely used outside residential construction, and given the opportunity can be used to increase the supply of new housing that is so urgently needed in many places. The focus in the UK on failures of manufacturers of single houses has obscured the success of MMC in medium and high-rise residential buildings and for a wide range of commercial and institutional buildings. 

 

 

Note. Homes England lost another £9mn invested in Stewart Milne, a house builder that failed in January. 

 

 See also https://gerard-de-valence.blogspot.com/2022/09/comparisons-of-construction-to.html 

Construction Innovation: Venture Capital and Contech Funding

What do we know given definition and measurement Issues?

Construction is often seen as a low R&D industry, with a low expenditure on R&D to revenue ratio compared to other industries. While that may be true for the many small and medium sized firms that make up the majority of the industry, many of the large firms do invest in R&D. A 2023 McKinsey report on construction technology (Contech) that ‘includes design software, robotics, and tools for the planning, scheduling, budgeting, and performance management of projects’ found USD$50 billion had been invested between 2020 and 2022. Their estimate based on Pitchbook data includes incumbents as well as startups and new entrants.

Incumbents like Project Frog (US), Balfour Beatty (UK) and Mirvac (Australia) have developed platforms, and there are many established offsite manufacturing and modular building Firms. There are partnerships between Trimble and Microsoft and Laing O’Rourke and Lenovo. Other examples are Autodesk’s recent integration of design and manufacturing systems, Skanska embedding wireless sensors in buildings, Holcim’s green cement, ARUP’s data collection systems, remote-controlled excavators from Caterpillar and Komatsu, the Hilti Jaibot, and software from OracleAconex and Procore. There are many more.

As those examples show, contractors are not the only firms doing R&D, so estimates for the industry are unreliable. R&D by professional service firms, and the construction materials, component and equipment manufacturing industries will not be included, although they have been responsible for many technical advances and the introduction of new products and equipment, such as drywall, plastic pipes, excavators, cranes, facades and lifts. This is a well-known problem when measuring construction R&D, and is a result of the industry classification system used by national statistical agencies.

This measurement problem is becoming more acute because, for the construction industry, a cycle of innovation has begun with new entrants attracting substantial R&D investment from outside the industry. Investment in construction R&D and innovation is now coming from private equity and venture capital (VC) funds such as Fifth Wall, Brick & Mortar, WND Ventures, Ironspring, Building Ventures, Dynamo, Foundamental and Australia’s Taronga Ventures.  

How much of the expenditure on R&D by incumbents is likely to be included in VC funding estimates? Although this expenditure should be taken into account for overall industry investment in Contech, many incumbents do not participate in VC. In fact, it is hard if not impossible to get a good estimate of Contech investment because it includes so many different areas associated in some way with the built environment, such as property and real estate, transport, energy and waste management, materials manufacturing and so on. Then there are areas associated with decarbonisation, such as measuring embodied carbon, the energy transition, retrofitting buildings etc. How to draw a boundary around such diverse topics is a major issue.

The table below demonstrates the extent of the measurement problem. It collects the latest estimates and total investment from the three sources reviewed in this post for the different time periods they cover, plus the 2023 McKinsey report that was not restricted to VC funding. There are a few key points to note. First, there are similar trends in their data with considerable variation but, second, wide differences are seen in the yearly figures, and third, the totals indicate significant cumulative investment.

Comparing the Foundamental ($25.4bn) and Kabri ($22.4bn) data for the same time period of 2017 to 2022 as McKinsey ($77bn), there may be something like a 60/40 split between VC and incumbent funding of Contech. That can only be a guesstimate because of the different sources used and the severe definitional and boundary issues around what is and is not included in these estimates of Contech.

Table 1. Estimates of Contech VC funding by year and totals USD$billion

This significant level of VC investment is a new development, before 2017 there was little interest in construction innovation from investors. Then a Californian start-up called Katerra reached a USD$1 billion valuation in 2017 followed by a $865mn investment in 2018 from Softbank. The company’s goal was complete vertical integration of design and construction, building factories to manufacturing cross laminated timber panels and then delivering and assembling the building onsite. Over five years Katerra went through four different business models as they sought to achieve sufficient scale to keep their factories busy, but in June 2021 filed for Chapter 11 bankruptcy and the factories were sold. The Katerra story was covered in a previous post here. 

Despite the failure of Katerra, and many other firms attempting to make the economics of manufactured housing work, there has been a rapid increase in VC investment in Contech since 2018. Venture capital funding is a significant metric because investment in startups is a proxy for innovation, and the development of IP and other forms of intangible capital. This post looks at three recent reports on VC investment in Contech.

Cemex Ventures Top 50

In January Cemex Ventures released their Top 50 Contech Startups 2024, the 5^th edition of their Top 50 list. Cemex Ventures is the VC and innovation unit of Cemex, a global supplier of building materials. The 2019, 2020 and 2021 reports were only lists of companies, but the 2022 and 2023 reports have VC totals and other details like deal size and numbers. The source of their data is the Traxn VC database.

Their estimate for 2023 is USD$3.03bn, compared to $5.38bn in 2022, significantly higher than the Foundamental estimates below, particularly for 2023, no doubt due to differences in their data sets. Cemex found half (49.5%) was in initial seed rounds for early stage startups, and 23.3% was for Series A funding rounds for more mature companies. In 2023 nearly 90% of funding went to the US (44%) Canada (11%) and Europe (32%, including the UK with almost 10%).

Cemex Ventures divided funding into four ‘focus areas’:

1. Green Construction: Processes, products and services that offset negative environmental impacts raised $1.06bn.

2. Enhanced Productivity: Digital solutions aimed to increase efficiency through technical, data-driven solutions got $701mn.

3. Future of Construction: AI, robotics and industrialized construction like 3D printing, BIM and autonomous equipment raised $690mn.

4. Construction Supply Chain: Technologies that secure or track materials and fleets, manage builders’ inventories and material marketplaces got $584mn.

   
   

Figure 1. Four focus area

There is also 2023 data on a number of specific ‘topics’, which are more specific areas of interest.

Figure 2. Specific Contech topics

Where to draw the boundaries around the many and diverse areas of Contech, and how to define those areas, is an important issue because it should be possible to separate different topics or areas, for example Contech from Proptech and carbon accounting from energy efficiency. The Cemex Ventures division into four topics is a good place to start.

Foundamental

Another Contech VC estimate came from Foundamental, which found over USD$30bn was invested in Contech between 2014 and 2023. Their estimate for 2021 was $8.7bn, followed by $4.9bn in 2022, falling to $1.3bn in 2023. Figure 3 shows their data, where they have separated funding for Katerra.

Figure 3. Construction technology funding

 Source

The database Foundamental used is from Wallhack, an open source provider of VC investment in AEC-Tech and ConTech. They provide this explanation:

AEC-Tech contains pure Construction-Tech, but includes more. It is about fixing the building-world. In our definition, besides construction-tech, AEC-Tech also contains design solutions that also help architects and engineers, supply chain solutions that fix problems in the building world, solutions that help with the retrofitting of buildings and infrastructure, and fixes for skilled labor/blue-collar work and installers. It does NOT, however, include building operation, which would often be called Prop-Tech.

There are over 700 companies in the dataset, many of which have less than 10% of their portfolios invested in AEC-Tech. A group of ‘building world specialists’ can be selected. How these ‘building world specialists’ are differentiated from the broader AEC-Tech investors is not clear. This list has 81 companies, with the percentage of their portfolios invested in AEC-Tech ranging between 30% and 100%. Total investment in this group of companies is USD$42.4bn.

The start-ups included in these estimates of VC funding are by definition technology leaders, pushing at the technological frontier through experimentation and development. Frontier firms bring with them radical new production technologies. While these firms are new entrants, some incumbents are also on the frontier. Cemex is not the only incumbent investing in Contech VC, the Wallhack list also includes Bentley, Trimble, Autodesk, CRH and Suffolk among others. There are others not included, like Vinci with their Leonard fund.

Kabri Construction Research

Research by Kabri Construction Research referenced here used publicly available information and they note, as a result, it will underestimate both the number of startups and the amount raised. Kabri found 300 construction startups up to 2022. Their estimate for 2022 is USD$8.9bn, and for 2021 was $5.5bn.

Figure 4. Contech funding

Kabri divided the startups into 13 categories, explained as:

1. Builders/Developers - Startups that are tackling the entire process of constructing a building, either as a builder or as a builder+developer. Many of these startups use prefabricated or modular construction to try to improve the process. Others such as Homebound, are focusing on improving the building experience with software. These startups are almost uniformly devoted towards residential construction. Examples: Veev, Blokable, Prescient

2. Building Materials - Startups trying to develop new types of building materials. This includes things like low-carbon concrete, drywall alternatives, and smart glass. This category also includes what we might call ‘low level components’ - things that we might consider ‘simple parts’ rather than raw materials, such as BAMCore. Examples: View, Carbicrete, Electrasteel

3. ADUs/Office Pods - Companies trying to sell small backyard homes or office units. Examples: Cover, Adobu, Boxabl

4. Energy Use and Management - Startups aimed at improving building energy use. This includes companies like BlocPower (finances and install energy efficiency upgrades), as well as companies like BrainBox AI (which makes software to try to optimize HVAC use.) It also includes startups like Intellihot, which make more efficient water heaters. Examples: Redaptive, Dandelion Energy, Domatic

5. Marketplaces - Startups trying to connect the large number of buyers, sellers, and transaction parties that exist in the hugely fragmented construction industry. These range from workforce sourcing companies like Workrise, to construction equipment marketplaces like EquipmentShare, to companies that help homeowners find renovation contractors like Sweeten. Examples: Amast, BuildZoom

6. Distribution and Logistics - Startups trying to tackle the problem of getting building materials to the jobsite. Examples: RenoRun, Tul, Infra.Market

7. Construction Management Software - Startups that make software for jobsite coordination, progress tracking, task and document management, and other similar tasks. Examples: Procore, Fieldwire, RedTeam

8. Robotics - Startups trying to find ways to introduce robots onto the jobsite, or in other parts of the construction value chain. Examples: Dusty, Canvas, Toggle

9. 3D Printing - Companies trying to use scaled-up 3D printing technology to fabricate entire buildings or building components. Examples: Icon, Mighty Buildings, Branch Technology

10. Fintech - Companies trying to improve the financial plumbing that the construction process uses. Examples: Built Technologies, Rigor.build, Levelset

11. Datacapture and Digital Twins - Companies using some combination of drones, 360 degree cameras, hardhat mounted cameras, and other sensors to record and analyze jobsite data and track construction progress. Often utilize computer vision and machine learning techniques to process this data. Examples: OpenSpace.AI, Doxel.AI, Versatile

12. Renovation/Repair/Maintenance - Companies trying to improve the process of maintaining a building. These range from software companies who offer maintenance subscriptions, to products that can monitor and report water usage and leaks, to companies that make bathroom renovation easier. Examples: Humming Homes, Block Renovation, Made Renovation

13. Other - Everything else that doesn’t fit into one of the above categories. This includes AR/VR startups, companies that make AEC design tools, companies that make software to streamline one particular workflow (what we might call “excel replacements”), construction insurance companies, and anything else that doesn’t fit into one of the above. Examples: UpCodes, Toric, Shepherd

Table 2. Funding by category

The post on Kabri concluded with some important points. First, ‘many, perhaps most, innovative building products don’t seem to come out of startups – they’re either small-scale developments from companies that don’t obtain VC … products from large, established suppliers … or from academia’. Second, a few companies have taken the bulk of investment. The top three categories in Table 2 ‘account for more than 50% of construction startup funding. Within each category a single company (Equipmentshare, Katerra and View respectively) accounts for 50-60% of total funding’. Note that Katerra and View have both failed.

Conclusion

Measurement problems are not a new issue in construction, productivity being the prime example. Even so, getting a clear picture of R&D and innovation investment in Contech is particularly challenging. Reports on VC funding come and go, covering different time periods and geographical areas, making comparisons difficult. The Cemex Ventures Top 50 reports for the last two years have annual total funding data included, and if they continue their reports that would be a set of consistent data. Foundamental may also keep their annual data updated, although they only have a grand total and do not have categories or topics.

As well as regular annual data some way of organising it is necessary. The Cemex four topics are probably too broad, while Kabri’s 13 may be too many. Somewhere in the middle would be a useful way of categorising the very diverse range of areas generally accepted as included in Contech. Kabri drew the boundary around things that could not be moved from a building, but included Building maintenance and management and Fintech companies. As Kabri note, including a startup in Contech is often a judgement call because their hardware or software can be used in other industries, drones are a good example.

The project delivery approach taken by Foundamental and McKinsey seems appropriate. This focuses on technology that in some way will (might) improve project creation and delivery, which is the traditional domain of the construction industry. It means property and real estate tech is excluded, but more controversially climate related tech too. That is an important omission because climate change is (IMO) the single biggest issue. However, given the number and variety of climate related tech startups this can be usefully considered a category of its own.

Many startups fail, and usually VC spreads its bets to manage the risk. Contech seems different, the bets are concentrated in construction or related built environment industries. Many funds in the databases used in the reports discussed here seem to be concentrated, with a small number of investments. Some of the biggest bets have already failed. Even Procore, seen as a Contech success story, is finding profitability hard to achieve Finally, there is a very large number of small Contech startups covering a wide range of topics. Unfortunately, numbers and diversity may not lead to success because fragmentation makes achieving scale more difficult, and consolidation only starts to happen when successful innovators emerge.

Figure 5. Innovation and Industry Structure

Review of Richard Langlois' The Corporation and the Twentieth Century

 Langlois, R. 2023. The Corporation and the Twentieth Century: The history of American business enterprise, Princeton University Press. 

 

An exhaustive, detailed history of US business that continues Richard Langlois long-running dialogue with Alfred Chandler’s work on managerial capitalism. Ranging across all major C20 industries like railways, automobiles, aircraft, electrical appliances and computers, and loosely organised into periods of a couple of decades covering pre WW1, pre WW2, post WW2, stagflation and the final decades, each chapter looks at the political context, the development of key industries and the relevant technological innovations that drove the process: ‘It has been a central theme of the book that the large integrated corporation in the twentieth century owed its rise to prominence in significant part to the eclipse of the market and the growth of state power during the Depression and the World wars’ (p. 478). In the 1980s the wheel turned, market forces began to reassert themselves, new corporate structures emerged, and the boundaries of the firm shifted again. 

 

A focus of the book is the effects of regulation on industry. The early contest between Populists and Progressives that played out in anti-trust cases and Supreme Court decisions often led to regulations ‘misaligned’ with technology and market opportunity. In many cases consumer interest was secondary, with lower prices seen as evidence of anti-competitive behaviour as ‘American regulatory policy worked to segment markets, generally along lines of supply technology not market demand’ (p. 466). 

 

The institutional origins of regulators in key industries and their role in creating and maintaining cartels or oligopolies contradicts the view that the US favoured large corporations. In fact, the large, vertically integrated firm was an outcome of legal constraints on contracting that were intended to favour small businesses but had the opposite effect. Many regulated firms then underinvested in maintenance and innovation, leading to spectacular collapses like Penn State Railroad, Chrysler Corp and Pan Am, and the demise of other once great corporations like IT&T, RCA, Westinghouse and US Steel.

 

The role of technological opportunity, R&D and innovation is emphasised, battles over patents and standards discussed, and how disruptive tech eventually overcame regulatory barriers in industries like transport (containerisation and air freight), radio (AM and FM) and TV (broadcast networks and cable). Disruption in computing (transistors and integrated circuits), manufacturing (consolidation and lean production) and the near death experiences of IBM, Apple and GE are detailed: ‘The most disruptive new entry has often come not in the form of a small start-up but a large firm in a related area’ (p. 549). 

Intellectual contests of ideas and the increasing use of economics in regulation get short, non-technical explanations. Important business leaders and given credit when due and their failures dissected. For those interested in regulation and the role of government agencies, business history, and the interplay of technology and industry, this is a great read. 

Catch 22: Construction Innovation and Procurement

 

Source: https://www.statista.com/statistics/270233/percentage-of-global-rundd-spending-by-industry/

Construction is in a catch-22 situation, where neither industry incumbents nor its clients can rationally commit to significant, expensive investments in innovation for the vast majority of construction projects. Procurement has a significant effect on technological opportunity and innovation because the effects of appropriability of intellectual property (IP), substitutability between suppliers, and risks associated with innovation for clients are mutually reinforcing factors that have worked against innovation in construction. 

 

The development of new technology and increasing productivity requires investment in R&D and IP. If firms cannot capture the benefits of innovation and IP for some reason, because of imitation, piracy or secure supply of materials for example, they will not invest in innovation. Because the traditional tender method does not allow capture of IP and knowledge externalities by contractors, there is a perverse disincentive to innovate. Tendering rules or codes have been developed to maintain the integrity of the bidding process, not to encourage innovation, and a successful tenderer’s scope to be innovative is limited. There is opportunity to maximise profits within the tender price by novel ways of organising work or driving down subcontract prices, but bidders are not asked to put forward design suggestions, there are no criteria for evaluation of novel proposals, and tenderers cannot be treated equally if one is preferred on an alternative tender, which is non-conforming in terms of the original invitation. 

 

The answer often proposed is that the best way to increase innovation lies in changing the methods and systems used to procure building and construction projects. If contractors can make novel proposals to owners, productivity can improve, and society benefits from innovation. With non-traditional procurement methods such as design and construct (D&C), build, own, operate (BOO) or build and maintain (B&M), this disincentive is reduced because contractors can appropriate benefits of innovation and R&D through improved performance. 

 

It may not be that simple. If all firms have access to the same technology, and compete through continual, but gradual, improvement, they are subject to a ‘ratchet effect’. First identified in the 1930s by sociologists studying workers subject to performance pay, they found workers choose to restrict their output because they rationally anticipate that employers will respond to higher output by raising output requirements by cutting piecework pay or worker incentives within firms. It was also an unintended consequence of Soviet planning. If a factory met or exceeded its planned target, the target for subsequent years was increased, thus reducing incentives and effort for the factory manager. 

 

In construction the ratchet effect can be seen in bidding for projects, where tenderers will typically not deviate far from a client’s expected cost for the project, and all tenderers have access to the same information. Because of the ratchet effect, a firm avoids revealing a significant cost advantage on one project that might jeopardise margins on future projects. Importantly, it allows for innovations that improve productivity and efficiency, that are neither disruptive nor expensive to contractors but will deliver a windfall gain if a project comes in well under budget, which will be hidden from the client and competitors as much as possible. This suggests that there will be cost-reducing innovations available to contractors if they decide to invest, but the pressure to find them will be affected by client demands, upfront costs, market conditions and a competitor’s likelihood of using them. [1]

 

Also, clients avoid risk associated with innovation on their projects and do not include it in their budgets. Clients can act as a significant barrier to innovation because they are concerned about both construction costs and operating costs, and do not think they individually will benefit significantly from a successful innovation. Further, clients carry a significant share of innovation risk and as a result do not take on the risks of budget and time overruns or poor building performance, and other costs associated with innovation. This risk minimisation objective also applies to financiers and insurers of construction projects.

 

While this argument might be generally true, exceptions prove the rule. An example is the Heathrow Terminal 5 (T5) project. This project demonstrates the effect a determined client with a clear strategy to encourage innovation in order to improve performance can have. In its role as the client BAA took on all the risk for the ₤4.3 billion project, under the unique T5 Agreement that the 60 first tier contractors signed. In total, 15,000 suppliers were involved. The overall project was divided into 147 sub-projects, with an integrated team led by BAA responsible for each one. Unlike the majority of megaprojects, T5 was delivered on time and on budget. 

 

The key relevant point about T5 was that innovations were actively sought out and rewarded. These included product innovations in offsite fabrication such as the roof structure, technological innovations such as the tunnelling process and equipment, process innovations such as the two logistics centres and management innovations in the industrial relations, insurance provisions and supplier incentives built into the T5 Agreement. 

 

The risk associated with large, complex projects can provide the motivation for clients to pursue and reward innovation by major contractors and suppliers, who on T5 demonstrated a capability for innovation that is left unused under traditional tendering and procurement methods. However, most construction projects are less complex, many are standardized and repetitive, and clients have no reason to support innovations that might marginally affect their project’s delivery or performance but increase the risk of cost overruns. Construction is in a catch-22 situation, where neither industry incumbents nor its clients can rationally commit to significant, expensive investments in innovation for the vast majority of construction projects. 

 

The traditional procurement method does not allow capture of IP and knowledge externalities by tenderers. Therefore, many believe the best way to increase innovation lies in changing the methods and systems used to procure building and construction projects, but while there will be cost-reducing innovations available to contractors if they decide to invest, the pressure to find them will be affected by client demands, upfront costs, market conditions and a competitor’s likelihood of using them. As a result, innovation is difficult, though not absent. 

 

 

[1] Given a variety of locations with different relative prices, there will be a best location for supply of the most productive factor. Therefore, firms can raise productivity by moving to a site with a larger supply and lower relative price of the most productive factor, so for any one location there will be a better technology in use somewhere else (but with different relative prices). However, firms face search and switching costs when looking for new technology, and sunk costs in adopting one.