We may be (finally) (truly) learning to adjust to the ways the pandemic has changed our lives. (Yeah. Jinx.) And moving forward through an event that destroyed our ability to use near-term historical data to forecast the future, economists, strategists, and businesses across industries are doing analysis with the burden of significant ambiguity.
However, examining the macroeconomic trends that will most likely affect organizations for the next three to five years, we’ve identified four things savvy owners can do to future-proof their capital projects and effectively support their core businesses.
1. Build Sustainably
Sustainable building will be a significant driver of transformation in the global construction industry and has ramifications across the entire lifecycle of a capital project. Building sustainably requires a joint effort across the value chain. To build sustainably and effectively organizations must operate in a collaborative ecosystem. Therefore, companies can first ask, “Do we have processes and tools that create an ecosystem where we can collaborate? Or are we fragmented across our project lifecycle?”
A recent IDC survey shows that collaboration optimizes results. And yes, this is a complex, major undertaking.
Now what? Well, now start thinking about ESG (Environmental, Social, and Corporate Governance) over the full lifecycle of your PP&E. According to McKinsey, construction and maintenance of capital projects accounts for 25% of global greenhouse gas emissions (GHG) with 30% of that coming from the processing of raw materials and 70% coming from building operations.
While we’ve seen momentum around understanding embodied carbon and a shift to more sustainable materials, it’s clear that owners of capital projects can support sustainability most effectively by planning for more efficient operations. In a McKinsey study of the European market, commissioning better insulated buildings and spaces powered by solar energy can reduce emissions from building operations by 72%. And bonus, this is cost effective. The investment in better thermal insulation for your buildings actually yields positive NPV. And that supports your core-business bottom line.
Consumer demand for sustainable building will increase at least through 2025. It is also likely that capital markets will shift to more favorable terms for positive-ESG projects. Failure to align your organization’s capital projects to sustainable building best practices could result in regulatory penalties, more limited access to capital and higher cost of capital.
2. Unlock Capital
Let’s talk about an additional way to ensure your capital is available––be more efficient with your existing capital. This requires a shift from optimizing the up-front cost of a project to optimizing the cost of a project over its lifetime. If you’re focused on ESG, congrats, you’re already on this path. However, it’s critical that you also shift the way project risk is recognized and funded.
Project owners struggle to estimate costs. And more complexity (and issues like supply chain uncertainty introduce more complexity) introduces more risk to the budget and the timeline. When evaluating risk at the project level, particularly with bottom-up estimating, capital becomes trapped in contingency funds at the project level and overrun funds at the business unit level to cover budget and schedule uncertainty.
Shifting to evaluating risk at the portfolio level allows the leveraging of multiple data sets for estimating and forecasting. Optimization at the business unit level frees up capital trapped in contingency at the project level.
Macroeconomic risk (like supply chain uncertainty) is better managed as a shared risk across the portfolio. With an understanding of your entire portfolio, your organization can more effectively manage this type of risk to free up capital previously locked in an overrun fund.
A technology platform that allows you to manage capital projects at this level of complexity also allows you to…
3. Maximize Infrastructure Bill Opportunities
There is a lot to say about the Infrastructure Bill. We can slice and dice what it means for different sectors and geographies, or talk about the funding mechanisms, and all of these areas are critical to understand. That said, one of the most compelling features of the bill is its investment in digital transformation.
According to McKinsey, the construction industry has failed to embrace new digital technologies that need up-front investment, even if the long-term benefits are significant. It’s also among the least digitized industries. In an effort to address this and encourage the adoption of technology solutions, the Infrastructure Investment and Jobs Act (IIJA) includes $100 million in funding for advanced digital construction management systems and related technologies over five years.
Not only does this ensure infrastructure dollars are utilized as efficiently as possible as a result of improved project delivery but it emphasizes the critical role of technology in the construction industry. In addition, this huge infusion of capital into the public sector through 2027 will create opportunities for the private sector as well. Public-private partnerships will be essential to rebuilding our nation’s infrastructure and complementary industries will also experience increased demand for their products and services.
Until recently, embracing new technology may have seemed impractical, however the complex nature of infrastructure projects demands standardized processes, streamlined communication, and real-time insights into your projects and programs. Technology is a necessary tool that allows you to collaboratively address and successfully manage through obstacles (like, for example, supply chain uncertainty).
Implement technology or get left behind as others leverage the increased capability a construction software platform provides to secure funding and rebuild our nation’s infrastructure. And right now you’re saying to yourself, “Infrastructure is a significant driver of job creation across many industries BUT, we all know that the industry is already dealing with a crippling labor shortage….”
4. Address Social Inequality for Profit
Hire women. In five years of working at a general contractor that ran $500M a year in project volume, only twice did I see a (lone) woman on the jobsite as labor. What we are really saying when we say there is a labor shortage is that there are no more men to hire.
Social inequality has been exacerbated by the inequity of recovery post-pandemic. Higher-earning jobs are recovering quickly. Lower-earning jobs are not. Those lower-earning jobs are largely in the service sector, which employs a disproportionate number of women. Put another way, the she-succession of the pandemic means there are many women available to hire. These women become even more available with $400B in childcare subsidies and universal pre-K funding from the federal government’s Build Back Better plan.
So you’re thinking this is a front-line problem because specialty contractors hire the labor. Yes. And savvy owners can help fix this “labor shortage” by funding the job training necessary to bring women into the skilled labor force. And funding the Diversity, Inclusion and Belonging training necessary to create a working environment that keeps them there. Sure, that adds a cost to the capital projects budget. The alternative is endless schedule delays due to crew unavailability. Run the cost analysis and see which way the numbers pencil.
Ok, how does addressing gender-based inequity drive profit? Equity means equal access to opportunity. Gaps in that access mean an under-utilization of resources. In one study, better allocation of opportunities and jobs led to a 40% increase in total growth output. Taking down barriers for some leads to improved outcomes for all.
To illustrate the point in dollars with an analogous study done by Mary C. Daly, President and CEO, Federal Reserve Bank of San Francisco in conjunction with the Brookings Institution, which looked at lack of access by race, if we in the United States had addressed gaps in access to opportunity created by racial inequity since 1990, the U.S. would have seen a $23T output gain in that 30-year period. Again, taking down barriers for some leads to improved outcomes for all.
The current administration is focused on making legacy infrastructure in disenfranchised areas resilient and sustainable. Bringing equity to the disenfranchised is a trend currently affecting macroeconomics.
If you aren’t working to address inequity of human capital and education as it pertains to your capital projects, you risk challenges from entrants into your markets who don’t have the labor shortage problem you do. Another manufacturer will beat you to the market because if you can’t build plants to manufacture inventory, you can’t ship it to customers. You will be unable to leverage public sector funding to keep your community vibrant and your citizens will move elsewhere. Moreover, you’re missing out on an exponential opportunity for growth.
Recently we’ve experienced both major dilemmas and much-needed evolutions across the industry. While labor shortages and supply chain issues have plagued the construction industry and the world at large, macroeconomic trends point to significant bright spots. Much needed infrastructure spending is on the way, sustainability and social inequality have moved to the forefront, and digital transformation is no longer a dream but an imperative.
Right now will set the tone for the next five years, and owners have an incredible opportunity to rise up to the challenge and either lead the way or stay in the past.