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Ralph Montague
Ralph Montague

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The Value of Innovation

Since we started aecHive, we have been talking a lot about the importance of “innovation” for the AEC sector. While we all agree that the AEC sector is an incredibly important, literally “shaping” our built-environment and supporting almost everything we do as a society (live, work, learn, play etc). But we also agree that things don’t work as well as they should. Building is slow, expensive, dangerous, and is having a huge impact on the environment. The sector is one of the least “digitised”, the working environment is “unattractive” to many people, particularly younger high-skilled people, and the sector struggles to retain talent.

So we know we need “innovation” in many areas, to improve the way things work. Innovation in the social dynamic of how people work and interact in this sector. Innovation in the processes and ways in which things work. Innovation in technologies, materials, and construction methods.

But even though we know these things, the investment into formal “innovation”, research and development in the AEC sector remains relatively low. Of course, we should not discount the incredible innovations that often occur in relation to certain projects, however, that is often short-lived, as project teams often get dismantled at the end of the project, and the “innovation” is seldom carried forward to the broader industry.

Why are people not investing more time and money into “innovation” in such an important sector? It seems more money and effort will go into a new computer game, or social media platform, than it would into AEC and the built environment. There are some obvious reasons, like the fragmented nature of the sector, the temporary nature of how people interact and engage, the short timespans of projects, the low profit margins, etc.

This makes me think that we should have more discussions about the “value” of innovation. What is the “return on investment” of making a significant improvement in some area? It has to “stack up” or make commercial or financial sense, for businesses to actively and deliberately engage in systematic “innovation” or R&D (research and development) projects.

To get this discussion going and focus on “Value Creation", I’d like to put forward this interesting Ted Talk by economist Mariana Mazzucato, author of "The Value of Everything", advisor to EU Horizon "Missions", professor at University College London (UCL) in Economics of Innovation and Public Value and founder/director of the UCL Institute for Innovation and Public Purpose.

Discussion (2)

ralph_arcdox profile image
Ralph Montague Author

Here are some initial thoughts. In the talk, Mariana Mazzucato suggest that modern capitalist economies have got to the point where 80% of the economy is now involved in FIRE (finance, insurance, real-estate transactions, which I assume includes all the associated legal costs of transactions), and only 20% is involved in creating real material value. I’m not sure if the same percentages are true for the construction sector? Although, when you look at the number of “contracts” (consultant appointments, sub-contracts etc) that occur on a single project, because of the fragmented nature of the sector, and all the “non-value add” administrative, legal and transaction costs associated with those, then you could imagine this is probably also true in construction.

Let’s say for example it was true. That would mean, for all the overall project cost, only 20% is getting down to the plumbers, electricians, carpenters, fitters, masons, material suppliers etc, that are involved in creating the buildings or infrastructure (creating real value), and 80% is going to “transaction” costs (administration, legal, accounting, insurance, finance etc).

When we think about “innovation”, we tend to think about improving the “construction” costs and time (the 20%) through technologies, processes, new methods and materials etc. But even if we achieve a 20% improvement in construction, that is only 4% improvement overall (20% of 20%). What we need is “innovation” in the transaction costs (the 80%). A 20% improvement in the transaction side, is 16% overall (20% of 80%), almost 4 times more “impactful” than improvements in the construction side. “Integration” of the supply chain, both vertically, and horizontally, with new types of partnerships and agreements, that reduce the number of “transactions”, is something that is going to have a big “impact” on the AEC sector.

miles profile image
Miles Walker

I do see that innovation is very competitive, and lessons learned not always shared in the industry.

Some of the large projects I have worked on or witnessed have shown reduced transactions through better relationships although some were under complex contracts to enable innovations to take place. This has included PFI, Design-Build, Management Contract, and IPD. Good (and fun) projects have been when the AE is working closely with the contractor/sub-contractors to deliver in a more collaborative process – joined-up thinking helps too. Having lowered the contract walls (around the AEC team), the transactions become less and collaboration increases. I have seen great innovation from Ireland, particularly for data center projects – this has ranged from innovation including DFMA where whole platforms of complicated electrical equipment delivered to site on skids and rolled into place into the plant room, soon after being craned off a flatbed lorry – reducing time and transactions as the parts are joined and tested quicker than those old traditional methods of delivery. Other innovations have included bring the parts to site (structure, cladding, MEP) and building adj. to site and moved to location…more like a modern assembly line on the side of the site.

For an ROI on a data center might be how can we deliver the project 3 months earlier, the client invests and challenges, the team develops solutions and is able to procure design and construction to suit and complete with the new end date. During this there will have been a lot of innovation, but can the next project be delivered faster and with better quality? Probably, and that’s where smart innovative companies will create a competitive advantage. It may take a few projects to improve again. The good news is innovation is not static, and in this example, it is constantly evolving (survival of the fittest perhaps). The bad news is I am not sure if the industry can keep up or if enough sharing exists.

So opportunities to share are always welcome and new types of partnerships and agreements to lower contractual silos/walls and encourage collaboration and innovation are always welcome.