In a decade defined by the massive disruption of one industry after another, thanks to Airbnb, Spotify, Uber, and other inventive startups, one space that managed to evade big change was construction. Would-be innovators were up against a pervasive old-school mentality and a highly fragmented and complex industry ecosystem that includes little technology, dense regulation, rising costs, and plummeting productivity.
Still, the potential rewards of an upheaval loomed large: According to one report, construction inefficiency cost the global economy a staggering $1.6 trillion a year—and solving the entrenched problems would boost the entire global economy by 2%.
In 2015, a team of entrepreneurs with decades of experience in electronics, manufacturing, and real estate took on this challenge. Combining their expertise, they founded Katerra, a new kind of construction startup. The Menlo Park, California–based company has since developed an entirely new process, rethinking everything from designing buildings as repeatable products to global supply-chain efficiencies to the technological infrastructure that stitches it all together.
The heart of Katerra is its “full-stack” (read: comprehensive) model. Unlike segmented operations that cost legacy design and construction firms—and their clients—time and money, Katerra’s vertically integrated operation gives it control over the entire end-to-end construction cycle. The company is the rare one-stop shop for design, sourcing of materials, and construction.
Investors and clients have been quick to embrace the new approach. By January of this year, the startup had raised more than $1 billion in funding, established a global team of more than 1,500 employees, and launched dozens of design and construction projects.
When Ash Bhardwaj and the rest of Katerra’s founding executive team began researching the construction industry, they were struck by processes riddled with inefficiency and waste. The problems were there at the very start, bloating projects with unnecessary costs and prolonged timelines.
“In talking to developers, they tell me that the same projects that used to take a year and a half or two years to do, now take three-plus years to complete,” says Bhardwaj, head of Katerra’s software and sales divisions. “It’s like designing a new car every time you go to the assembly line—that’s what this industry has done. They wind up designing everything from scratch.”
Architects and engineers involved in designing new buildings have also traditionally set their fees as percentages of the total project cost, which creates disincentives for them to reduce expenditures.
Katerra’s model addresses these problems head-on. Its in-house architects and engineers now partner with computer scientists to design buildings in a fraction of the time that developers are accustomed to. Design processes that used to require 15 months now take as little as four to five months. Predesigned and pre-engineered models for multifamily buildings, for example, have 90% of the work completed beforehand, while still retaining the ability to adjust to fit the geographical, budgetary, and practical circumstances of an individual project.
Controlling The Supply Chain
Of all the inefficiencies to target, the financial waste in material supply chains was an area where Bhardwaj and his team believed they could make the biggest difference. Historically, he says, “once developers have plans for a building, they’ll hand the project off to a general contractor for construction. The GC goes out and subs the project out to electrical subcontracting, plumbing subcontracting, cabinetry subcontracting—you name it, everything gets subcontracted out. And the subcontractors want to buy the materials themselves, because they want to make money on a markup. All of these extra costs eventually roll back to the customer.”
By establishing a global network of high-quality suppliers to buy from directly, Katerra avoids those padded costs. For instance, the company can buy a door for less than half of what a subcontractor would charge—$24 versus $55. Apply the principle to the purchase of thousands of components across a project, and the budget drops significantly—with the savings passed along to the client. “We were completely shocked with how much savings we could get on the table just from shortening the supply chain,” says Bhardwaj.
Katerra also manufactures many of its own building components in its factories, including placement of plumbing and electrical systems in factory-made wall panels, all of which other construction firms traditionally leave to subcontractors to perform on-site. That saves time and money as well, and ensures that on-site construction will go as smoothly as possible.
“You want good and fast design from the start,” says Bhardwaj. “By the time you get to the final stage of the project, it’s not a construction site—it’s an assembly site.”
Changing The World
Looking ahead, as the industry streamlines and excess costs are wrung out of the equation, the opportunity opens up to address social issues like the affordable housing crisis in new and meaningful ways. Jordan Moss, cofounder of affordable housing investment and development firm Catalyst Housing, is one convert to this new approach to building. Moss says that the savings Catalyst generates through working with Katerra are fundamental to its business model.
“Construction is a $10 trillion industry that’s been cemented in the Stone Age,” says Moss. “Unfortunately, the affordable housing world is rife with backwards incentives and misaligned interests. While we’ve done our best to deliver innovative capital structures to the industry, the only at-scale solution to solving our nation’s affordable housing crisis is to bend the cost curve so construction is less costly. We feel that models like Katerra’s will prove to be a key piece of that puzzle.”
The impact of this industry overhaul could be far-reaching. The world’s 20 largest cities alone will require 36 million new housing units by 2025, according to one estimate. The opportunity to solve such a serious problem on a global scale is a compelling draw for forward-looking companies.
“The world needs affordable housing,” says Bhardwaj. “So far, the world has only built for the top 10% of the population. The rest of the world is pretty much neglected, unable to own a house or own a property. We have that long-term goal of making a big difference in society.”
This story was created for and commissioned by Katerra.