Capital Projects & Infrastructure Practice

Decoding digital
transformation
in construction
Few engineering and construction companies have captured the full
benefit of digital. Five practices can help E&C companies move beyond
isolated pilots and unlock digital’s value across their enterprises.
by Jan Koeleman, Maria João Ribeirinho, David Rockhill, Erik Sjödin, and Gernot Strube

© From2015/Getty Images

August 2019
 After spending five years and countless sums on —— Focus on fixing pain points, not installing
trialing new software platforms and ways of working, IT solutions.
the executive team at a large contractor was nearly
ready to call an end to its digital-transformation —— Implement digital use cases that
program. Dozens of attempts to streamline projects promote collaboration.
with digital solutions, such as 5D BIM, had failed to
deliver. A few had succeeded in the pilot phase, but —— Reskill and restructure engineering teams.
the company had struggled to apply those solutions
at scale. Site and office workers grumbled about —— Adjust project baselines to capture value.
having to adopt yet more new technologies—before
abandoning them and returning to their old ways —— Connect projects to unlock impact across
of working. Overall, projects hit delays and ran over the enterprise.
budget as frequently as before, and productivity had
barely budged upward. For a digital transformation to be successful,
executives and managers must start with a
Scenarios such as this remain all too common in the clear definition of how digital will create value
engineering and construction (E&C) sector, which is for the business (see sidebar, “Defining digital
one of the world’s least digitized.1 The difficulties are transformation in engineering and construction”).
understandable. The typical construction project During the transformation, they must spend as
involves a multitude of independent subcontractors much time, if not more, on operational change as
and suppliers, which have little incentive to embrace they spend on technology. Those that do stand to
new methods during the brief periods when they are realize a significant productivity payoff. Research
on the job. Projects vary greatly, so E&C companies by the McKinsey Global Institute indicates that
often struggle to develop tools and methods digital transformation can result in productivity
they can apply repeatedly. Limited R&D budgets gains of 14 to 15 percent and cost reductions of
prevent E&C businesses from spending as much 4 to 6 percent.2 In this article, we offer a closer
on digital as companies in other sectors do. And look at how E&C companies can realize benefits
construction work often takes place in remote, like these.
harsh environments that are not well suited to
hardware and software developed for the office. It is
no wonder, then, that many E&C businesses end up Why construction is stuck in the
with little to show for their technology investments. analog era
Outside individual major projects, few construction
Yet we are also seeing an increasing number of E&C companies have fully digitized their operations.
companies overcome these challenges to transform They aren’t alone. Companies in all industries
projects or even business divisions digitally. report that digital transformations often fall short
When we assessed construction companies that of expectations. In one McKinsey survey, just 16
successfully implemented digital technologies and percent of respondents said their organizations’
ways of working, we found that, despite differing digital transformations had delivered sustainable
conditions, their transformations had five practices performance improvements. Common challenges
in common, from which other E&C companies include unclear definitions of what digital means, an
embarking on similar transformations may learn: indistinct idea about what the transformation should
accomplish, and poor integration of digital tools with
business processes. 3

1
“Reinventing construction through a productivity revolution,” McKinsey Global Institute, February 2017, McKinsey.com.
2
Ibid.
3
For more on cross-industry challenges, see Jacques Bughin, Tanguy Catlin, Martin Hirt, and Paul Willmott, “Why digital strategies fail,”
January 2018; “Unlocking success in digital transformations,” October 2018; “How the implementation of organizational change is evolving,”
February 2018; and “Can IT rise to the digital challenge?,” October 2018; on McKinsey.com.

2 Decoding digital transformation in construction

Defining digital transformation in engineering and construction

Digital transformation can mean different and services, and operational improvement, must recognize that digital transformation
things to different stakeholders, so starting whereby companies apply advanced tech- is about more than adopting tech solu-
with a shared definition can help execu- nologies and ways of working to enhance tions. The success of a transformation will
tives and managers to agree on a transfor- the development and delivery of projects. depend greatly on how well a company
mation’s goals. Broadly, a digital trans- institutes the new ways of working that
formation involves two types of change: This article focuses on the latter type technologies enable. To ensure sustained
business-model innovation, whereby com- of change. In effecting such changes, success, companies must also prioritize
panies introduce digitally enabled products engineering and construction executives efforts to define new products and services
as well as digitize their operating models.

But these factors don’t explain entirely why digital project and company levels makes it difficult for
transformation in the E&C industry is so hard. The E&C companies and their subconsultants and
following characteristics of the construction industry subcontractors to establish new ways of working
make digital transformation particularly challenging: and build capabilities that carry over from one
project to the next.
—— Fragmentation. Construction projects are
typically fragmented along the value chain, with —— Decentralization. Large E&C companies tend
specialists generally operating in one or a small to be highly federated, with business units and
number of disciplines. And each step in the value divisions following their own processes rather
chain involves multiple layers of contractors and than standardized ones, not least because many
subcontractors. Implementing digital solutions have grown by acquiring smaller firms. Individual
across a project thus requires coordinating projects take place at sites that are far from a
changes among organizations—a task that is company office. And few sites are conducive to
especially hard, given the short-term and often teaching workers how to work in new ways or
adversarial nature of construction contracts. use advanced technology.

—— Lack of replication. Construction projects are These characteristics of the E&C industry make it
nearly always one-of-a-kind endeavors, with harder for companies to develop digital solutions that
unique requirements that necessitate bespoke they can apply to multiple projects. More commonly,
design and delivery approaches. Since these individual teams and business units will develop
approaches are seldom repeated, it is harder to their own digital solutions, without coordinating with
introduce changes across numerous projects, others. The result is a proliferation of subscale, often
as full-scale transformation requires. The competing tools within a single company.
exceptions are multiyear major projects, on
which companies can establish processes and
reinforce them over time. Five practices that successful digital
transformations have in common
—— Transience. Ordinarily, a new construction To counter the challenges described above,
project will involve a new set of organizations E&C companies must be thoughtful in the ways
working together. Project teams, too, are they approach their digital transformations. Our
rarely consistent. Contractors face similar experience in the industry suggests that adopting
challenges at the enterprise level, at which five practices will increase the likelihood of success
workforce turnover is high. Transience at the and enable companies to capture greater value
from digital.

Decoding digital transformation in construction 3

 Focus on fixing pain points, not installing “reduce losses from unrecoverable rework on steel-
IT solutions concrete connections by 10 percent by visualizing
Around the world, E&C companies are upgrading fabrication details with 3-D models” is easier to
and replacing legacy back-office systems while comprehend and act on than a use case defined as
also implementing new systems and software “provide access to 3-D models from all devices.”
to increase engineering and field productivity.
However, companies can focus too much on IT, Implement digital use cases that
pursuing improvements to systems and software as promote collaboration
ends in themselves. We often see E&C companies We know many E&C companies that cherry-pick
deploy cutting-edge technology tools before they digital use cases that apply to just one activity
have figured out whether and how those tools can or trade. One reason they do this is to avoid the
improve their operations. This tech-first approach complexity of working across multiple organizations
can lead to digital “organ rejection,” whereby a in the fragmented value chain. But developing
solution fails to deliver visible benefits, and the narrowly targeted use cases usually means that
workforce, noticing this, does not adopt it. E&C companies miss out on a valuable opportunity:
stemming the large efficiency losses that can occur
E&C companies can increase the likelihood that because information isn’t transmitted effectively
digital technologies will make a positive difference during handoffs between trades and functions.
by first identifying operational changes that will
improve performance, then defining digital use E&C companies should therefore devote special
cases that will enable those operational changes. attention to activities that involve multiple
This process-centered approach helps focus each disciplines and groups and design digital use
use case on a real business need while suppressing cases that smooth the interactions among
the impulse to chase technology trends. Use them. For example, real-time progress reporting
cases defined in this way deliver greater benefits from the construction site can help ensure that
while building the understanding and conviction subcontractors raise invoices promptly and
of the workforce, from the CEO to managers and accurately. Of course, use cases can be more
frontline workers in various functional groups and difficult to implement when they involve numerous
decentralized business units. Such use cases are designers, subcontractors, and specialists. But if
also easier to replicate on multiple projects and to E&C companies put compelling incentives in place,
introduce to new workers. then cross-cutting use cases can unlock significant
value despite the industry’s fragmentation.
Concentrating on business processes must not stop
after the first wave of use cases. The creation of use One contractor’s experience showed why it is
cases is an ongoing effort, and new opportunities so important to implement digital solutions that
for improvement often emerge once first-wave use promote and support collaboration among different
cases are in place. For example, one contractor parties. Historically, site workers hadn’t sent
developed an app to allow supervisors to sign feedback to a supplier on all defects in the elements
completion certificates digitally. After the app was that the supplier was making. When they did send
developed, the team defined a new use case to feedback, it was anecdotal, unstructured, and
push safety briefings and alerts through the app so difficult to act on. Defects persisted, so workers
supervisors could disseminate them to teams. needed either to fix defective products or to wait
for replacements. This unplanned rework increased
A good process-centered use case should specify labor costs and caused delays.
three things: a process change, the required
enablers (data and technology tools, capabilities, The company saw an opportunity to correct the
changes in mandates and responsibilities, legal problem by improving the mechanism for passing
and contractual requirements, and others), and the feedback between the site team and the supplier.
expected benefit. For example, a use case defined as The site team used a mobile app to tag defects

4 Decoding digital transformation in construction

To realize the full bottom-line benefit
from digital use cases, managers
must adjust baselines to eliminate
unproductive time.

against specific elements in the BIM model and to a more agile approach that consists of faster
store them in a common data environment (CDE), a iteration in short test-and-refine loops. Such a
single repository for information about the project. change requires that designers adopt a new mind-
The supplier monitored defect reports in the CDE, set, using their experience to validate model results
then ran root-cause analyses with its factory team and to look for opportunities for standardization and
to diagnose and reduce defects. The resulting repetition. This way of working will create capacity
improvement, a 12 percent reduction in rework for designers to focus on more intellectually
hours at the contractor’s job site, demonstrated the challenging problems, such as reviewing and
benefit of smoothing communication between these refining generative designs, for which engineering
previously disconnected organizations. brainpower is irreplaceable.

Reskill and restructure engineering teams Adjust project baselines to capture value
Digital technologies have introduced profound Many of the E&C executives we speak to say their
changes to engineering design. For example, gen- companies have seen some productivity gains
erative design tools, which automatically propose from digitization but little impact on the bottom line
a range of design options in accordance with user- because the savings from added productivity don’t
defined specifications, can radically reduce the time make up for the cost of implementing new software
it takes to develop designs. The ability to examine and systems. This can occur when productivity-
and optimize a product of generative design is boosting use cases create float during the execution
arguably becoming as important as the ability to phase and managers neglect to remove this float
conceive an original design. In addition, the uptake from the project baseline. To realize the full bottom-
of modular construction methods has placed more line benefit from digital use cases, managers must
importance on standardizing design elements and adjust baselines to eliminate unproductive time and
storing them in design libraries so they can be used generate value.
over and over.
For example, there is little to gain from compressing
Applying these new techniques requires designers the time taken to survey a site if excavators are not
not only to learn technical skills but also to design in place for employees to start earthworks as soon
in new ways. E&C companies with internal design as the survey is complete. Similarly, digital tools can
functions should equip themselves with new help accelerate construction by reducing defects
technical skills—for example, by hiring developers and thereby reducing rework. But if the labor force
to build standard libraries of design elements and isn’t streamlined or reassigned to other activities,
automate certain parts of the design process. They then workers will end up waiting during the time
should also start to adopt digital ways of working, they would have spent on rework, and the costs
shifting from a traditional, linear design process will still accrue.

Decoding digital transformation in construction 5

 Managers can capture the benefits of increased value as the company standardizes its digital tools
productivity in several ways: compressing on-site and platforms across its various business units
schedules, reducing noncritical resources, and even and shares more data from projects. Common
restricting overtime. This approach requires close enterprise-wide use cases for E&C companies
collaboration among the organizations working on include the following:
the project as well as clear communication about
the project plan, especially with new workers who —— consolidating cost and schedule data from
are accustomed to a slower pace of execution. multiple projects and business units to increase
Companies can also change contracts and incen- the accuracy of bids for future tenders, thereby
tives to share benefits and risks appropriately increasing the margin
across the value chain.
—— gaining an enterprise-wide view of resources to
Teams need not take a leap of faith when adjusting optimize resource loading and respond quickly
baselines. They should closely monitor the effects when project demands change
of each use case while it’s being tested on a pilot
project to understand how much they can adjust —— creating central repositories for designs at the
baselines without jeopardizing subsequent projects. element, package, and project levels so those
This might involve observing site works and tracking designs can be repurposed on future projects
downtime before and after implementing a use case.
Knowing how much downtime is created will help A company must pick the right time to start
inform future adjustments to resource levels and developing enterprise-wide use cases. This will
schedules. Adjustments could also involve stopping often be after it has scaled the project-level use
work one or two hours early each day to constrain cases developed in the first pilots and stabilized
the schedule deliberately and show that higher them across the business.
productivity is possible. Whatever the findings
are from these efforts, project managers should One E&C company embraced the potential of
document them so future projects can replicate enterprise-wide use cases by standardizing the
effective methods of adjusting baselines. specifications for its insulation panels. Previously,
the company had sourced similar products from
Connect projects to unlock impact across different suppliers. Why? The products were not
the enterprise coded or classified in a standard way, so designers
At a typical decentralized E&C company, it is easy could not determine that the elements were similar,
for business-unit leaders to focus on optimizing which would have enabled them to use just a
projects—while overlooking the enterprise-wide few products in place of the many different ones
use cases that could unlock a whole new wave of ordered previously. By digitizing and standardizing

One company achieved an enterprise-

wide view of element volumes, which
allowed it to standardize specifications
and aggregate purchase orders to
obtain savings.

6 Decoding digital transformation in construction

element data, the company gained an enterprise- despite good intentions and determined efforts
wide view of element volumes, which allowed it to to embed digital technologies in operations, E&C
standardize specifications and aggregate purchase companies rank among some of the least digitized
orders to obtain savings. businesses. There are reasons for this, but
companies can overcome them. Our experience
In another example, an E&C company used shows that adopting the five practices described
advanced analytical techniques to analyze past in this article improves the odds that a digital
tender data and identify ways of optimizing tender transformation will yield tangible benefits. What
selection and pricing. As a direct result of that is more, E&C companies that scale up their digital
effort, the company improved its project margins transformations before their rivals do stand to
by 3 to 5 percent. reap the most gains: McKinsey research on digital
competition shows that companies that are first
to make bold moves, or quickly follow the leads of
those that do, create advantages that slower-acting
Most E&C companies have embraced the idea companies find it difficult to overcome. For E&C
of implementing digital technologies and are companies that have struggled to do more than
determined to see their efforts bear fruit. But experiment with tech solutions, the time to redouble
their efforts is now.

Jan Koeleman is a partner in McKinsey’s Amsterdam office, Maria João Ribeirinho is a partner in the Lisbon and Madrid
offices, David Rockhill is an associate partner in the London office, Erik Sjödin is a partner in the Stockholm office, and
Gernot Strube is a senior partner in the Munich office.

The authors wish to thank Shankar Chandrasekaran and Garo Hovnanian for their contributions to this article.

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Decoding digital transformation in construction 7