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E10: Changes to Major Infrastructure Delivery
69 Plays2 years ago
In this episode, Carlos & Jason discuss how Infrastructure is changing, and spend a bit of time talking about QFlow securing Series A funding.
Opening up the infrastructure bids to a broader pool could be the breath of fresh air that the industry needs, and how economies of scale play a role, and whether clients should take ownership of purchasing.
Qflow (qualis flow) enables people to make informed decisions on cost, carbon and quality, by collecting real-time material and waste data for construction teams. Their recent funding round is huge news, and Jason & Carlos chat about what they love most about the Qflow mission.
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Transcript
Introduction: Hosts and Podcast Focus
00:00:00
Speaker
Hey everyone, and welcome to Episode 9 of the Offsite Podcast, where we chat all things construction and technology. My name's Carlos, and I spend most of my days talking to construction teams about how they deliver projects. And I'm Jason, and I build software that construction teams use to deliver their projects. Sorry about how... ...excellently tanned I'm looking at the moment. It's kind of making you look a bit like a ghost to my side at the moment.
00:00:28
Speaker
You've got obviously the studio lighting set up. So for those not actually watching any video, Carlos looks like he's a professional podcast host with lighting, very tan, perfect. And I look like I've never left a basement the last four years. That's just showing you the power dynamic, I think. That intro is just a complete flex from Carlos. How's your week going, Carlos?
Infrastructure Spending: Cancellations and New Announcements
00:00:55
Speaker
Yeah, not too bad. Not too bad.
00:00:58
Speaker
Yeah, there seems to be a lot of movement in the market here at the moment. So we obviously have the news recently of a few schemes being canned. But oddly, at the same time, Rishi's saying to G7 that we're going to be doing an extra 35 billion worth of infrastructure over the next few years. So exciting as to where that's going to go. But it's a bit weird to cancel schemes and then promise to spend even more. But hey, that's the government.
00:01:26
Speaker
Yeah, just shuffling the deck kind of thing, isn't it? Yeah, exactly.
00:01:32
Speaker
Right. So today we're going to be chatting about a potential sort of shift in how we deliver infrastructure projects or major infrastructure projects. And then later on, we're going to talk a little bit about a company called Keyflow, which is the latest sort of British startup in our space to secure Series A funding. So infrastructure project contracts, I should say, most
00:01:57
Speaker
sort of infrastructure contracts that obviously we discuss in the news. They're pretty mega. So we're talking billion plus pound contracts or dollar contracts. And this ultimately means we've got a relatively small sort of crowd of elite contractors who actually have the sort of capacity or capability to actually bid and win these contracts.
Shifting Contracts: More Competition or Complexity?
00:02:20
Speaker
which ultimately means it's kind of anti-competitive. We're excluding a lot of the market from the ability to actually go for these things because of the sheer scale. And there's a bit of a movement at the moment led by some sort of smaller tier one contractors and tier twos where they want clients to think about breaking up these contracts.
00:02:42
Speaker
If we have a series of smaller contracts that make up these schemes, it opens up competition, it gives opportunities to smaller, maybe more specialist or local firms to win work who have obviously the capacity to do so, rather than what we always see is in Australia, an Italian contractor coming in, in the UK, American contractors. And I guess it's because that pool of contractors is actually quite small.
00:03:09
Speaker
So quite an interesting angle. It opens up a lot of opportunities, trying to think about, I guess, is it actually healthy for the industry as a whole? And I think the first thing that sprung to my mind, and I think this is a bit of an old school view, is buying ability. So if you think from a procurement point of view,
00:03:33
Speaker
Large contracts means you're buying things like materials at volume. So there's suddenly that economies of scale sort of argument that works. And I say it's an old school view because I haven't actually looked at the numbers to see that like the price of steel goes down by a significant percent if you're buying loads of it. It's probably relatively marginal.
00:03:52
Speaker
But I guess there's a reason we shop in supermarkets and not boutique shops, right? It's cheaper because you're buying from large organizations. So that seems like a natural sort of potential barrier to these smaller companies competing from a price point of view. They're going to be naturally slightly more expensive. But we actually discussed the other day about potentially clients taking ownership of purchasing to some extent. So Jason, we had the chat the other day.
00:04:22
Speaker
And we were talking about the low cement, low carbon cement, the concrete, nearly got that wrong again. Why don't client organizations say, right, we're going to purchase all of this type of material because
00:04:37
Speaker
to help with our carbon agenda, we'll take the risk on that price. That model could work really well with these smaller contracts, where the client's going to pay for the materials anyway. Why can't they essentially purchase, have the buying power or ability of a larger organization, but actually let these smaller companies be part of the process and aren't just a subcontractor to the traditional contractor? That was a lot of words.
00:05:05
Speaker
Do you think it's healthy? Do you think this sort of model would work? I don't know. I am on the fence. So like there's definitely an argument to be made to go away from the bigger projects. Like there's competing trends, right? There's a trend over the last, let's say decade or probably more average, like the size of infrastructure projects has gone up as one of the leaders from a contractor I spoke to recently.
00:05:33
Speaker
said when he was trying to remember how much the value of a project was. He was like, oh, everything's a billion these days. So it's probably a billion or two billion or something. The projects are definitely getting bigger. And at the same time, there's like a ton of research about how inefficient it is to deliver megaprojects. And megaprojects are like basically things over a billion. So if everything's a billion and everything that's over a billion is inefficient, then you don't have to be a genius to put the math together and say all of our infrastructure projects are
00:06:02
Speaker
pending towards inefficiency. So I think your argument around like buying power and stuff is probably true, but I just wonder whether, uh, it's like, um, let's use an Australian saying like pissing in the ocean because you probably do get some leverage from buying. Um, and we, you know, we saw attempts at that, like I'm not like successful attempts at that. Like I'm cross trial with the escalators package was good, uh, centrally contractors.
00:06:31
Speaker
But whatever you do, it adds more complexity to the whole process of the design and the contracting model. And that just adds more inefficiency on top of it. So I think that there is probably an aspect of buying power. But I think it's on the margin compared to what's really driving the efficiency of the project.
Mega Projects: Inefficiency and Market Impact
00:06:53
Speaker
So I think there's a strong argument from the perspective of,
00:07:00
Speaker
from the proven track record of the poor performance of mega projects in terms of on time and budget delivery. There's also a really strong argument, in my view, from the market forces, right? Let's say if every project's over a billion, and especially with government clients, every project has to, every contract that it's bidding has to prove that they have the financial capacity to deliver that project. There's normally some,
00:07:29
Speaker
ratios of liquidity to fund the project. And that rules out a lot of these sort of mid-size contractors. And so the pool of people bidding for the jobs is naturally smaller. So traditional economics would say you're probably getting less value for money. Yeah.
00:07:54
Speaker
If we think about those sort of specialists, so if we really did split contracts up into individual contracts that all are directly with the client, your risk is pretty high because I guess it's like investing in a fund. You can invest in a fund that has a hundred different shares. If one of them tanks, the other 99, prop it up. If you go to these specialists, if that package of work goes, that could really kill off a contractor. If you haven't got the broader sort of scope of works to sort of give you that security,
00:08:24
Speaker
So do you think that risk is actually quite- You mean if like a smaller contractor takes on like a big large contract and it has the ability to knock them over? Yeah, exactly. So if there's no, you're putting up a steel frame and you're a contractor that's just erecting a steel frame, so manufacturing materials and erecting the structure itself.
00:08:49
Speaker
If the price of steel goes crazy, your entire contract, if you want to say a fixed cost, like you're done. Whereas if that steel frame was part like 1 million of 100 million pound piece of scope, you could soak up the loss on that and be aiming obviously to make elsewhere. So I guess you're a little more vulnerable to peaks and troughs of the cost of materials or whatever that aspect is.
00:09:15
Speaker
Yeah, that argument is precisely why most of those large infrastructure contracts have the financial capacity that contractors have to pass to bid. But I wonder if that example's a particularly sensitive example. So I wonder whether the contractor should be the one taking the risk on that element, like the inflation of the materials.
00:09:40
Speaker
But I think the argument from the articles we looked at, I don't think the argument is to break up a billion dollar contract into 20, $50 million contract. It's like, just break a billion into three, $300 million contract. These sort of mid-tier contractors could deliver fees at a low hundreds of million.
00:10:02
Speaker
Or at least if you do that, you open it up to a whole, a whole new range
Client Involvement in Smaller Contracts
00:10:06
Speaker
of. The pool is way bigger if you're doing like two, 300 million pound contracts, then a billion. And yeah, if you actually went all the way down to splitting it up in a way that a contractor would to let their works, you'd then have a nightmare for the client organization because you've got.
00:10:23
Speaker
Shit loads of contracts to administer. So yeah, definitely the slightly bigger pool, slightly smaller contract size makes sense.
00:10:33
Speaker
Well, that touches on like the argument not to do it, which is the, which is why I'm on the fence generally because smaller contracts pushes more responsibility to the actual project management of the, of the project to the client. And that makes them need to be more expert in delivery and more collaborative. So you think about some of the kinds that we've worked with like informal roles. If you've got.
00:10:58
Speaker
two three times as many contracts you're managing and you're trying to take like a combative approach as a client like you're just going to get overwhelmed the project will just grind to a complete halt yeah yeah so it does push clients to be more project managers in their own
00:11:21
Speaker
Right. Yeah. Also pushes these, what were potentially sort of tier two contractors to be more commercially and sort of program aware. So you can imagine the drafts of consultants coming in because you're suddenly administering a contract with a client organization and you're battling, yeah, just things like CEs and program acceptance. When you've got that many moving parts, you're gonna need some, yeah, some force behind that.
00:11:51
Speaker
Yeah. And does it fundamentally change the culture of those mid-tier contractors? Once you take those bigger jobs, then you end up having to hire people from the bigger contractors or have done those jobs before. And then does your culture just become more like the bigger contractor culture? Yeah. Yeah. It's really interesting.
00:12:14
Speaker
I think there are some projects that lend themselves to it for sure. Like there's the example in Australia of the poster child for this is like the level crossing removal schemes, where I don't know, it's like, I think it's like, and let in, in a progressive way, a couple of different alliances, where it's let in like,
00:12:39
Speaker
a couple of packages at a time to oversimplify how they do it. And that allows this set of teams to build up a skill set delivering a certain part of a project and then roll that team one after another onto these kind of similar elements. And that's a big scheme, but it's really just a collection of smaller things.
00:13:01
Speaker
I don't know that that model, we talked about, we had dinner a while ago, Carlos, where we talked about this, where it was like, yeah, that model seems attractive, but does it make sense when you're building a tunnel from Denmark to Germany? How do you break a tunnel up? So there are contracts or there are types of projects where it's just really not feasible. I think
00:13:28
Speaker
my gut feeling is like, if it's, if the, if the, it should be something for clients to maybe keep in mind and strive for, but the actual like logistics and the reality of the project probably dictate whether or not it's feasible. Yeah. Yeah. Yeah. I think it's clients being just a little bit more conscious about
00:13:52
Speaker
learning a massive package with it, which then has like serious size packages within because it's also bad money, very funny for them, which is fee on top of fee. So if you're going to let a billion pound contract, one of the subcontractors is 200 million. There's a good, strong case to say that 200 million pound contract within could be dealt with separately or independently.
00:14:13
Speaker
For sure, just to give anyone in the UK a bit of context to a 20 billion pound level crossing removal program. Not level crossings like in the UK, we got two barriers that are a bit of black and white paint across a train track. These are serious, like they build flyovers and stuff to replace what were level crossings, right? They're like, quite large structures.
00:14:34
Speaker
Yeah, so once you've got your two lines of paint and your boom gates, and you build a city around that, at some point, and you try to remove it, it's kind of difficult. You either have to take the road under or the rail over. There's a range of different solutions. But basically, yeah, each one's a bit of a job on its own. Yeah.
Innovation Spotlight: Kubeflow's Expansion
00:15:00
Speaker
Right, so next up, Kubeflow. So Kubeflow is a British startup. They just raised, I think, $9 million to fund expansion into the US and Australia. So I thought we'd have a bit of a chat around them. Now, in terms of the product itself, it's an application that allows us to sort of collect and track real time material and waste data. So
00:15:27
Speaker
I feel like it's tackling a real problem. And I say that because there's lots of startups that try to create problems that aren't really problems to try and sell at all into a space. But this is actually digitizing material delivery ticket collection process and actually tracking waste data. And then they've got aspects of carbon. So how do we actually think about what we're doing in terms of waste products on site? And everything is in a system with Dashboard and everything else that you would expect.
00:15:55
Speaker
So yeah, it feels like a real problem. There doesn't seem to be much competition. So I couldn't find many other vendors that sort of do it. Some of them have workflows, which are just digitized forms like a Microsoft, whatever they call it. There's no real product tackling this space. So do you think it's an emerging category? I guess is my question to you, Jason, but at the same time, it's
00:16:17
Speaker
why isn't it already quite a substantial category given that it's an issue you're going to have on every site? Yeah. I love this, to be honest. It's tremendous for them and Jayden. As a team, I think they probably pivoted around what the core product is a few times. It was very much about the ESG thing very early. And if you look at their positioning now, it's largely about tracking materials and dockets.
00:16:46
Speaker
I love it because like you said so many companies in the construction space are doing things in like design or there's lots of valuable things to be done in terms of construction technology but the hard bit is like actually like when it's on site these guys are doing something that is like really right at the coal face on site and that's
00:17:10
Speaker
really hard. As we know, that's really hard.
Digitizing Data Collection: Challenges and Solutions
00:17:14
Speaker
I think it's great. There's actually a bunch of competitors that I've come across and seen, but whenever I see people trying to solve this problem of digital dockets and recording, everyone's got the problem where all of their concrete delivery records are on scraps of paper stored in
00:17:34
Speaker
folders or under the front seat of the car and recording that is a bit of a mess and reconciling it. And whenever I see solutions from people trying to solve this, they take like a two-sided solution to the problem. And what I mean by a two-sided solution is obviously you've got the person generating the docket and then you've got the person receiving the docket, like the contractor supplier that's printing a docket out and you've got the
00:18:00
Speaker
You've got the person receiving it being the contractor at the gate. And I've seen so many people try and solve this by getting the supplier to generate digital documents as opposed to physical ones.
00:18:13
Speaker
Um, which seems sensible, like, uh, solve the problem at its source. But like, it's just, it becomes really difficult and infeasible because like, who is your customer? Are you selling to the contractor? Who has the problem of collecting all the dockets? Are you, are you trying to sell to the supplier who doesn't really have the problem?
00:18:30
Speaker
And if you are selling to the contractor, it's a real big lift to get a contractor to convince their supply chain to use an alternate docketing system just for one of their customers. Like which concrete vendor is going to do 90% of their dockers in one thing and 10% and it's just, it's not, it's really solving it in that way is just a
00:18:53
Speaker
It's a big lift. And so, yeah, what I think the QFO solution is, is let them do the dockets. However, they're doing the dockets and we'll scan them and we'll turn that into like meaningful data. Your question was, is this an emerging category?
Tracking and Managing Construction Actuals
00:19:10
Speaker
We talk to teams all the time about how they can use the data out of AFX being this plan, this like real view of what the plan is and use that to correlate or work against what their actuals are. We talk to teams about how they're tracking those actuals and like it's a real mixed bag at the moment and the capturing and tracking of actuals that includes like materials turning up, who turned up on site.
00:19:39
Speaker
Big time emerging category. It's a broad category. It's sensors on site on machines. Tracking of people. Capturing the records of the materials that turn up and leave the site. Big time problem. And yeah. Love that there's a solution that's gaining traction and is being supported.
00:20:02
Speaker
touching on the sort of supplier or contractor side of having a system. I did find a bunch of suppliers that have their own system and then they have these digital tools to actually capture this information. But you then got the other problem of, even if it was full digital, the contractors then got these
00:20:20
Speaker
potentially tens or hundreds of different data sets coming from different vendors and you've got to try and tie them all together. So the fact that they can just scan and it pulls this information into one spot. Obviously they've raised quite a serious sum of cash. So signals that they are pretty successful in their space. They said the cash is to move into US and Australia. Is the same problem in Australia? Is there anyone in that space? If you think about our particular projects over there or the general market.
00:20:49
Speaker
Yeah, short answer, yes. Like I said, I speak to teams all the time about how they capture the actuals. And answers run the gambit from we don't know how we're going to do that. We're thinking of a strategy. We're building some tools internally to do this. Real problem here, I think very similar to what you think earlier in the UK.
Global Relevance of Construction Tracking Issues
00:21:15
Speaker
So I think it's very applicable.
00:21:19
Speaker
US, I don't know. It's a whole different beast. It's hard to imagine it not being an issue.
00:21:33
Speaker
Like it's such a like core part of construction that it just, unless they're doing something completely different, which you just can't imagine is the case. Yeah. Yeah. They still live on planet earth. And so all the same rules of human behavior and how things get built and everything still apply. So it probably is valid. Yeah. You'd bet that it's the same issue in almost every country, sure.
00:22:03
Speaker
Cool. Right. That is all we have time for today. As always, thank you very much for listening.