Building a Skyscraper Upside Down

First-hand Frustration

I have experience with painful lags in construction, on a small scale. For the past 8 years, my husband and I have been developing residential property in central Austin. Our company, SAGO Homes, runs the process, from the conception to the sale of each home. 

That means I have some skin in this game. 

You’d think that building is a linear process, each step dependent on the completion of the previous step and availability of supplies, labor, and capital.

But building the same floor plan on a different lot can vary wildly in time and cost for reasons that seem like they should be controllable and stackable.

Being a good consultant, I felt that the lags in the process - and subsequent rise in our interest expense - must be addressed. I mapped the process and academically found parallel paths to remove months from the timeline. 

I even locked my husband in a hotel suite for two days with markers and post-it charts, developing process maps and recommendation slides.

I failed. It still took 20 months to build the next project.

Why? 

The Biggest (and Least Productive?) Industry in the World 

Construction makes up 13% of global GDP, making it the largest industry in the world. 

But industry fundamentals are bleak.

Over the last few decades:

• Productivity grew at 1% annually.

• Average earnings grew at just 5%.

• High Risk, wildly variable reward.

There are many reasons for the industry’s poor performance. According to McKinsey: 

The industry is extensively regulated and highly dependent on public-sector demand; informality and sometimes corruption distort the market. Construction is highly fragmented: contracts have mismatches in risk allocations and rewards; often, inexperienced owners and buyers find it hard to navigate an opaque marketplace. The result is poor project management and execution, insufficient skills, inadequate design processes, and underinvestment in skills development, R&D, and innovation.

Let’s translate. What is holding construction back?

Disruption is Happening - To the Tune of $250 Billion Dollars

McKinsey asserts that almost half of the value in the industry (45%) is about to move to a different place in the value chain. 

According to their survey of over 400 global construction industry leaders, combined with their industry analysis, the evidence is overwhelming: disruption is in motion.

While not visible on the surface, this shift is already reshaping the profit landscape. And, we’re seeing some examples of change, like The Exchange being built upside down in Detroit.

Where is this value migrating? Offsite [read: standardized] manufacturing is emerging as the winning area, creating new opportunities for suppliers, fabricators, and logistics providers who can adapt. 

Almost all other sectors are facing a stark decline as profit shifts away from custom design and on-site construction. 

McKinsey “helpfully” visualizes the value shift in possibly the most confusing chart I’ve ever seen. 

I’ll net it out - look at the red box. Lavender means good.

Cracks in The Glacier 

How does disruption happen? Through innovation and investment. 

Innovation sparks the initial shift, then investment propels it forward, reshaping the landscape of entire industries like a glacier carving down a mountain.

The companies that thrive are the ones who recognize the potential of these innovations and pour resources into them. 

Let’s have a look at a couple of examples of innovation and investment happening today.

Building a Skyscraper Upside Down

The Exchange Tower in Detroit showcases how innovation is driving disruption in the construction industry. By lifting wholly built floors into the air, the project is mostly built on the ground instead of in the sky.

The developers were challenged to build a 16-story condo tower on a small, triangular site with limited crane access. Hovering next to the Detroit People Mover transit, the Exchange had to be built uniquely. 

LIFTbuild, the architect of the new construction method, had completed a similar project and was looking to expand their horizons. 

How it Works

Instead of using cranes and building in the air, floor plates are built on the ground: Each 500-ton, 11,000 sq ft floor is assembled using prefabricated components and lifted into place with strand jacks. 

To ensure precision and eliminate onsite measuring and other time-consuming construction, MEP systems, wall panels, and other building components are pre-measured and labeled for efficient installation.

Safety measures allow work on the next floor to begin before the previous one is fully in place, accelerating the process. And, to make sure it all flows, LIFTBuild involves subcontractors early to make design, engineering, and construction compatible from the start. 

Why it’s Awesome

These methods offer a multitude of benefits, all which lower time and cost.

• Risk & Cost Shrink: Ground-level construction reduces risky high-rise work and associated labor costs. 

• Safety Improves: This translates to a safer environment for workers, reducing the chance of falls and other hazards. 

• It’s Faster: The LIFT approach also boasts faster construction times, as work can progress in parallel within controlled environments.

• It’s Predictable: With prefabrication and components, it’s more accurate and predictable with less waste.

• It Expands Development: Without need for a crane, it opens small and less accessible urban spaces to redevelopment. 

Net net, The Exchange Tower is proof of concept for LIFTbuild's top-down construction method. It will pave the way for wider adoption of this approach, leading to more efficient, safer, and sustainable construction practices in urban areas. 

How to Make a Few Billion Dollars

Now, let’s look at an example of disruptive investment by billionaire Brad Jacobs, founder of United Rentals and United Waste. 

Brad Jacobs isn't just a billionaire, he's a disruption hunter. He shares his method for disruptive investment in his book, How to Make a Few Billion Dollars.

He doesn't wait for trends to emerge - he sniffs them out, identifying the specific parts of the value chain ready for innovation and change. He meticulously analyzes market trends, identifying industry pain points and looking for areas where dollars are starting to flow. 

Brad saw the same opportunity as McKinsey to disrupt the building products supply chain. 

• Opportunity to consolidate the ~7,000 building products distributors in North America and 13,000 in Europe.

• Building products industry revenue has grown 7% YoY for the past five years. 

• Market fundamentals are sound. The U.S. needs ~3 million more homes to meet demand and the government continues to fund upgraded infrastructure.

 After identifying the space to play, he launched a new company, QXO, in 2023.

That’s why he’s a billionaire and I’m not. 

With QXO, he is deploying technology to automate pricing, optimize inventory, and leverage technology for speed, cost efficiency, and safety.

We’re seeing the same type of roll up on a smaller scale with our SAGO projects. For example, Ferguson, a plumbing supply provider, now owns Build.com and is buying up local appliance, electrical, HVAC, and other building suppliers. 

If you want to make a billion dollars, look here:

A Radically Different Industry

How fast, and in what form, do we expect to see the construction industry change? 

History reveals patterns. Let’s look at another heavy industry shift, one that happened in commercial aircraft manufacturing. 

Similar to construction, commercial aircraft manufacturing was a fragmented industry based on custom, project-based manufacturing. These complex, non-standard projects carried a high cost of failure and, as a result, low productivity plagued the industry. 

Scaling up production as demand for commercial aircraft rose also posed a significant challenge. Specialized trades providing manual and on-site labor were scarce. Standardization and repetitive processes were almost non-existent.

Enter the transformative power of consolidation and standardization. Driven by these pressures, the industry embarked on a journey of consolidation, shifting towards assembly-line manufacturing and, eventually, high levels of automation.

However, the story doesn't end there. As efficiency took flight, the supply of critical components became paramount. Often, these components held the key to differentiation. Just like how engines play a crucial role in aircraft performance, so do key materials and technologies in construction.

The industry saw a rise in vertical integration or partnerships along the value chain. While aircraft manufacturers, like Boeing and Airbus, relied on external engine suppliers, they fostered deep integrated partnerships in R&D and testing to ensure superior engine quality and efficiency.

The outcome? A dramatic consolidation of players and aircraft models, leaving us with the dominant duopoly of Airbus and Boeing. More importantly, this transformation led to a significant shift of value to customers, offering safer, more efficient, and, ultimately, more affordable planes.

This journey took roughly 30 years, highlighting the significant barriers to change inherent in complex industries like construction. 

Yet, the lessons from the skies are clear: embracing standardization, strategic partnerships, and technological advancements can unlock a future of increased efficiency, lower costs, and ultimately, greater value for all stakeholders.

Like with commercial aircraft, we should expect the combination of a changing market, new innovations, and disruptive new investments to trigger a major industry overhaul. 

However, there’s a wild card here. Customers want (and seem willing to pay for) custom projects with unique features, designed for their natural environments. This presents a conundrum: how to reconcile these unique needs with a more consolidated, standardized building industry?

With all of the signs of disruption, one thing is clear: the tide of transformation is rising. The question is, how fast will this glacier melt?

Perhaps faster than we think.

Remember, the path to success is paved with continuous learning and embracing fresh perspectives.

Let's stay connected, share ideas, and elevate your consulting business.

Stay curious, friends.

TheConsult.co brought to you by Keenan Reid Strategies

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