Simon Clements

Constructing a revolution

Simon Clements

Contructing a revolution

Over the course of the average large construction project, there are 2000-3000 design errors that cost a total of $43m to fix. This is a clear example of inefficiency in industry and we continue to see opportunities in companies working to improve this within our Improving industrial processes theme.

One area of exciting growth is Building Information Modelling (BIM), which effectively creates project management systems for the construction industry. BIM is the process of managing information over the life of a construction project, creating a central collaborative digital platform for all the individuals involved from initial design to final build.

Everyone can update the system, with the aim of reducing errors throughout the process. A project may be designed by one architect, for example, but is subsequently reviewed and amended by many more: with a centralised, cloud-based platform, this becomes much simpler to do.

On large-scale construction projects, you often also have several architectural and engineering teams involved, responsible for areas such as heating, ventilation, and air conditioning (HVAC), electrical, plumbing and so on, and while these sometimes work together, they often operate independently. When the final building model is aggregated, clashes can arise, where a pipe and a beam run into each other for example.

According to the Association of Construction and Development, the average clash costs $17,000 to fix and, as stated, there are often thousands of such incidents on a large build.

Lack of technological innovation is clear in the construction industry, particularly when compared to other sectors: globally, the manufacturing industry spends around $19bn on software versus $4.3bn for construction.

BIM can be split into two key end markets, namely architecture, engineering and construction (AEC) and manufacturing and, as per the figures quoted, manufacturing is currently a much larger market for software vendors in terms of spending. Super-normal growth and, for us, the real opportunity to adopt technology to improve efficiency lies in the AEC space. Growth rates for BIM in manufacturing are expected to be around 7% to 8% a year for the medium term, whereas in construction this rate is expected to rise to 20%.

Explaining BIM

BIM can take various forms, ranging from using 3D drawings to design a house and sharing documents in excel, to full process automation.

  • 3D is the first genuine stage and we have seen a major development from old-style 2D in recent years: models become more detailed and create a more accurate plan to hand over in later stages of the construction process. Collaboration across various parties on a single platform becomes the driver of higher value and leaders in this area include Autodesk with its Revit system (which we hold across our Global and Managed Funds) and Nemetescheck with Vectorworks and Graphisoft.
  • 4D involves a three-dimensional model as per the above with the addition of time, so schedules are digitally created according to the model. The software can relay information on lead times for each part of the process, digitally illustrating the installation and construction sequence.
  • With 5D, we believe technology adoption from AI, big data and the cloud converge to create a product that can create genuine change. 5D is the integration of 4D with the added dimension of cost, so you have a centralised platform combining the entire construction process and workflow. When a change is made at any point, the model, budget and schedule all update automatically. Berenberg estimates the shift from 3D to 5D can save 30% in both cost and time.
  • 6D is the final stage for BIM, adding the information required for services related to facilities management.

Sigma Estimeates Building 

Source: Sigma Estimates

We see a number of reasons within the AEC industry why growth and adoption rates are expected to accelerate over the medium term.

We have discussed low penetration of technology in this space, but estimates suggest the addressable market of 4.3 million users could expand five-fold in the near future. The construction industry operates at a low margin, with wages already high and outpacing the overall economy and it is also a sector that has struggled to improve productivity.

In addition, there is a regulatory push across the UK, US and Europe to have BIM implementation as standard. The UK is considered at the forefront here, with Level 2 BIM a minimum requirement for any government tender from 2016. The government estimated the 2011 initiative that incentivised Level 2 BIM saved £1.2 billion in 2014/15 and politicians are now talking about Level 3.

This is mirrored across Europe: Spain has set up an initiative that will have BIM requirements for all public projects by 2018 and all infrastructure projects by 2019, while, in Germany, BIM will be required for all public projects by 2020. In the US, adoption is driven by pragmatism, rather than government, but the US is considered closer to the UK than Europe in terms of progress.

A key part of our process is identifying where the wider market is underestimating structural change and while these drivers have been in place for years, the evolution of technology is now resulting in a step change in adoption.

Low technology penetration has an obvious through-line to productivity: analysis from McKinsey shows that the average worker adds $37 to the global economy per hour but this drops to just $25 in construction and a large part of that disparity is due to lack of technology adoption. This has resulted in a $1.6 trillion productivity gap that could be closed by raising construction efficiency.

Growth rates for these companies continue to accelerate, but with such a huge addressable market, these structural growth opportunities are bound well into the next economic cycle.

We see Autodesk as the clear leader in BIM, with the company boasting the five leading products across the different spheres and accounting for more than half the market. Other names in the space include Trimble Navigation (which we also hold in our portfolios) and Nemetescheck.

 Autodesk share of BIM software

Source: JBKnowledge 2017 Construction Technology Report

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Disclaimer

The information and opinions provided should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing. 

Thursday, September 20, 2018, 1:48 PM