The construction industry is in the midst of a digital transformation boom, but how can businesses adopt new tools in a sustainable way while watching out for their ROI?
Embracing digital transformation in construction is rarely cheap. From implementation costs to ongoing maintenance and training, expenses can begin to multiply.
Because of the high outlay that’s typically associated with utilizing digital transformation tools, we’ve long associated emerging technologies with industry leaders that are resource-rich.
In fact, McKinsey data shows that the top 10% of companies with the largest digital revenue account for up to 80% of the digital revenue generated within their sector and that these ‘superstar’ businesses have allocated significant resources towards digitization in terms of buying into digital tools and building a digital workforce.
From a return on investment (ROI) perspective, the data also shows that these heavy tech investments have paid off, with a positive correlation recorded between digitization and profitability.
But what about smaller construction businesses looking to bootstrap their growth by adopting new technologies in a cost-effective way? Decision-makers must care for their ROI in a more nuanced way when it comes to digital transformation, and by tracking the right metrics, it’s possible to assess whether an investment is justified.
Digital Transformation in Data
Quantifying the ROI of digital tools in construction is complicated, given the wide range of digitization opportunities that exist for businesses.
Generally speaking, construction companies allocated a percentage of between 1% to 5% of their annual revenue to technology investments, covering areas such as project management software, customer relationship management (CRM) systems, enterprise resource planning (ERP), and various other digital tools.
According to the RICS Digitalization in Construction Report 2024, which is built on a survey of international construction managers, the majority of respondents still list cost concerns as the biggest blocker to digitalization in design and construction processes and practices. However, this number is gradually falling year over year.
While 56% of respondents claimed that the associated cost, effort, and changes needed to accommodate digitalization were a key concern in both 2021 and 2022, 2023 figures fell to 53%, suggesting that more construction firms are beginning to discover more optimism for the ROI potential of digitalization tools.
How to Calculate ROI
The easiest way for decision-makers to assess the return on investment of digital tools in construction is to measure the benefit versus cost. However, it’s not always straightforward to assess these criteria as values.
While it might seem a little complicated to work out ROI, the formula is fairly simple and merely involves dividing the technology’s benefits by its costs:
Technology benefits ÷ technology costs = ROI
To make matters even more straightforward, if the result of the calculation is greater than 1, you have a positive ROI, and if it’s lower than 1, you have a negative ROI.
This means that you can get a tangible figure to tell you whether your technology is profitable or not. However, putting a number on your technology benefits and costs isn’t always so easy.
To get an accurate measure of cost, it’s important to include key details like software licensing fees, hardware purchases, and time spent on upskilling staff and troubleshooting issues.
Getting a clear understanding of your benefits can be trickier, but estimating the time staff saved by using software is a good starting point. Additionally, metrics like labor savings and improvements to collaboration and communication are important considerations to add.
Pricing Intangible Benefits
The ROI of digital tools comes down to intangible qualities like improved accuracy and reduced instances of human error.
It’s difficult to anticipate when digital tools have prevented a moment that would’ve resulted in human error or just how much money has been saved by accurately measuring out locations without the need to rely on a tape measure, but these should all be factored into ROI calculations for a clearer picture.
In instances where digitalization can identify construction issues early, firms could save tens of thousands of dollars on corrective work before it becomes a major challenge and source of delay in projects.
Other digital tools, such as automated accounting technology, can be responsible for a far greater ROI due to their role in improving cash flow and managing budgets.
Adopting construction accounting software can not only help to manage financials but also track project margins with accurate, real-time insights that would otherwise be impossible for humans to take stock of. The ability to automate workflows and shape data-driven decisions is another example of intangible benefits that businesses would need to keep in mind when assessing ROI for a clearer picture.
Total Cost of Ownership
The best way to analyze the ROI of adopting digital tools in construction is to prioritize the total cost of ownership (TCO). This helps to provide an understanding of the long-term savings opportunities generated by adopting the technology.
This consideration means that decision-makers can accurately weigh up cost estimates like upfront investment, maintenance costs, and upskilling against long-term savings.
Here, it’s important to look at the technology costs associated with the software, hardware, and infrastructure expenses, and the implementation costs such as consulting, training, and onboarding. Then, these measures should be contrasted with the estimated savings over a specific period. The longer the duration, the better the accuracy, but one to two years can be a good measure.
By running a TCO assessment at regular intervals, it’s possible to see whether ROI is falling, remaining stagnant, or increasing. This will speak volumes about the sustainability of adopting digital tools.
Embracing Digitalization
Digitalization in the construction industry is continuing to grow, and negative perceptions about the costs of adoption are showing signs of dissipating. For decision-makers keen to protect the cash flow of a small business, operating an accurate ROI is imperative for the long-term sustainability of their digital transformation efforts.
By adopting a long-term, focused, and measured approach that factors in all the positive aspects associated with the technology, it’s easier to assess ROI with greater accuracy. The future of construction is digital, and embracing the technology in a sustainable way is the key to longevity for ambitious firms.
