By Jay Snyder
Like most sweeping generalizations, “the construction industry is slow to adopt technology” can’t possibly reflect an entire, complex industry.
When it comes construction, tech providers historically have favored only the largest builders — but digital technology is maturing and becoming more accessible across the industry which has forced providers into reevaluating how they price and package the tech.
This article will discuss current SaaS pricing structures and packaging, and discuss why more flexibility for both is needed for the construction industry. Hear from industry peers and SaaS providers about how they view the highly segmented construction market. The good news for small- to medium-sized builders is that there is now more flexibility than ever in how to acquire technology.
SaaS TRENDS
Though digital transformation is broadly discussed in the construction industry, technology has only penetrated the top of the market because providers have been motivated to target solutions for large contractors. Most solutions are designed, packaged, and priced for contractors with larger budgets and the internal structure to roll out sometimes complex new technology successfully. Smaller GCs and trade specialists, many of which eagerly embrace the idea of digital transformation, simply can’t afford enterprise-level pricing structures.
“Tech companies rarely see the up-and-coming contractors as an opportunity for growth,” said Peyton Kringlie, a business analyst who leads technology and innovation at LS Black, a midwest-based GC. “The smaller construction firms are forced to commit to long-term contracts at sometimes prohibitive costs. Even if a smaller contractor expects to grow, that’s risky. These decisions make the margin for error thin for smaller companies.”
CHANGE IS ON THE WAY
Change is coming, though, largely due to growing opportunities for software companies to reach small- to medium-sized contractors.
A small portion of construction companies have a significant impact on the industry, including the technology that is leveraged and scaled across the industry. This places a great responsibility on these large firms to be deliberate about the technology they deploy on projects and require others to also use. It has also encouraged technology companies to spend a disproportionate amount of time on the needs and preferences of a very small part of the construction industry.
Current SaaS Pricing & Packaging
The needs between a large specialty contractor and a small general contractor are so vast they may as well be in completely different industries.”
— Bill Wagner, President of Penta Technologies.
Early adopters of new technology tend to be mature companies/enterprises with large budgets and scale. They have the infrastructure to pilot new tech with minimal risk. If it doesn’t work out, they move on to other tech. And successful pilots, often subsidized by tech startups hungry for new customers, later lead to bigger, full-priced implementations.
Eventually, those winning solutions mature, evolve, and take on different forms or packages. The tech companies eventually develop new pricing schemes or add new features that extend their appeal to different segments and, eventually, become accessible to companies of all sizes that want the same benefits as their larger competitors.
Predominantly, there have been three ways construction technology has been offered: unlimited enterprise use, per-user, and per-project pricing, each of which has limited many contractors from adopting appropriate technology for their businesses.
UNLIMITED ENTERPRISE USE
In this model, SaaS is available for use across an organization with minimal restrictions. Usually an annual or multiyear subscription, this model is intended for large enterprise power users, where there is no need to actively manage user licenses or costs. It’s a fixed and predictable annual fee; however, fewer rigid variations of this model have emerged in recent years.
The disadvantage of this pricing model is that it lacks flexibility for companies to easily adjust or negotiate their subscription to accommodate a state of rapid growth where more seats, service, and functionality are needed. The rigidity also prevents companies from reducing costs and responding to unexpected contraction during a down year.
Also, a SaaS offering may have several features that appeal across diverse functions in a larger company. While a smaller firm may only use a subset of those features, it still would need to pay for the whole suite. For example, a large trade contractor might want a SaaS solution to provide accounting, payroll, timekeeping, and resources management, but a small trade contractor might not need timekeeping and resources management.
“In order for any pricing model to be efficient, it needs to align value with price,” said Jimmy Suppelsa, chief revenue officer at Touchplan, a construction planning software designed to help align project outcomes with costs. “In an all-you-can-eat model, a small customer pays a big fee for unlimited usage, and they are overpaying relative to other customers. But if they grow beyond the average usage, they are paying less than other customers. I would argue that neither extreme is good for the long-term relationship between a SaaS vendor and customer.”
PER-USER PRICING
In theory, per-user pricing may be among the fairest of SaaS pricing options. Large contractors with hundreds of potential users would pay the same per-person rate as smaller companies. But often technology providers will negotiate to lower per-user rates for bigger contractors in response to the revenue potential.
However, the more challenging problem is that per-user pricing diminishes the utility of the service by limiting who has access to it. Many SaaS products offer benefits by providing information transparency, and they rely on data input from many key stakeholders to deliver their value proposition.
This can be difficult because it incentivizes companies to have fewer users, and only one user can enter the data. On a construction project, there can be dozens of project stakeholders, including trade contractors.
And that’s an issue that Kringlie has seen first-hand at LS Black. “We are required to limit who receives access to the process and change our process to those requirements,” he said. “We often tell the software company that these terms limit the success of our solutions.”
Another issue is redundancy, especially with subcontractors. Trade contractors usually work on multiple projects concurrently, and with multiple GCs that have their own project management platform, for example. This could burden the trade contractor to pay for user licenses for redundant solutions to effectively collaborate, or to comply with project/contract requirements.
Since this is cost prohibitive, they may simply choose not to use the solution or share a user license across the team or company — and therefore projects have gaps in information, and technology doesn’t deliver its full value.
PROJECT BASED PRICING
For contractors, there are a few benefits to paying for technology on a per-project basis. It’s easier to accept the cost and benefit of a solution when you see its direct impact, and it can help a company avoid long-term commitments on its books.
Perhaps most important, it allows contractors to properly allocate the cost of technology to projects, whether or not it is reimbursed/billable to the project owner. When it is not billable, job costing tech still allows a construction company to accurately understand the direct costs of construction per project — rather than treating project/field technology as overhead or lumped into general conditions.
The challenge with per-project pricing is the additional effort required to negotiate individual agreements for each project since no two projects are the same. Another concern is that project-based pricing can lead to inconsistencies and redundancies in those agreements, both for trade and large contractors.
For example, a middle-market GC recently found that it had more than 20 different per-project subscription contracts for the same solution. Sometimes project managers sign vendor agreements to use the software on a project even though the company already has a master agreement in place.
Since the per-project pricing model could be expensive compared to user licenses, individuals sometimes purchased their own accounts. This further adds to tech expenses, a loss of centralized control over the data, and in some cases information security risks.
These plans also create a challenge for software companies.
“Charging per project creates 100% customer churn,” said Touchplan’s Suppelsa. “That makes it difficult for SaaS companies to (plan and provide) service.”
SaaS Maturation Leads to More Flexibility
“[SaaS] pricing and packaging will continue to evolve, with enterprise packaging remaining a customized all-in-one value proposition based on each customer’s strategic needs and small-firm packaging focusing on solving specific pain points with opportunities to add value through upgrade paths.” — Matt Wheelis, VP of Strategy at Bluebeam.
Enabling digital transformation across the construction industry starts with recognizing the diversity throughout the industry. Engineering News-Record (ENR), which segments and ranks top construction firms, describes their rankings as an attempt “to bring structure to an otherwise huge and chaotic construction industry.”[i]
No doubt, serving that huge and chaotic industry seems like an impossible task for SaaS providers to build and price a single solution that works across segments. The rapidly maturing software companies we spoke to acknowledged the need for a more segmented approach to solutions. “Gone are the days when software vendors provided ‘one-size-fits-all’ solutions,” said Michael Wright, CEO of RedTeam, which makes construction management software.
To penetrate the construction market, SaaS solution providers are starting to roll out more flexible, modular pricing and packaging — specifically for small- to medium-sized contractors.
ALIGNING PRICING WITH VALUE
While each company will have different needs, ultimately each measures the estimated ROI and perceived value of every tech investment differently.
Pricing and packaging models that are more connected with how people are using a service are more likely to lead to success — for both technology companies and contractors. That may mean custom pricing and features for different users.
To get it right, “software companies need to understand job costing, overhead, etc., as it relates to the impact of investment for companies,” said Kringlie.
Wright has found that “usage-based pricing and billing…provides good alignment between usage by our clients and our cost to support them.” Nevertheless, some of our clients still request fixed price subscriptions, perhaps out of uncertainty about how much utilization they might experience or simply for budget planning certainty. In such cases, we do still offer fixed price agreements, but less and less frequently.”
SCALABILITY
Another way SaaS agreements are evolving is to map them to a company or project’s revenue, with the flexibility to scale up or down.
“The size of a project is often the best indicator of the relative value a firm is getting from a software vendor if their product impacts the relative profitability of their projects,” said Touchplan’s Suppelsa.
As a tech buyer for LS Black, Kringlie agrees. “Per project revenue is a great way to itemize a G&A system to an individual project,” he said, “and the software pricing scales with the project’s scale.”
UNBUNDLED FEATURES & PURPOSE-BUILT SOLUTIONS
To truly deliver value, software firms may also need to tailor more singularly focused offerings to specific uses. At a minimum, this might mean unbundling the enterprise solutions into a la carte-style service menus. This unbundling would allow smaller firms to pay for only what they use — rather than being forced to pay for services they don’t need.
“Overpackaging too much functionality into one suite without segmenting the customers will eventually lead to dissatisfaction, where customers believe they are overpaying for software they do not use,” said Matt Wheelis, VP of strategy for Bluebeam, a construction management and collaboration tool.
The future also promises an increase in custom integrations, where service providers add a layer of consulting on top of SaaS subscriptions.
FLEXIBLE & VARIABLE ACCESS
One of the biggest barriers to the success of any SaaS: user access.
For most SaaS solutions to deliver value, a variety of stakeholders on any given project must have access. One challenge is that GCs often need to onboard trades to their SaaS tools for them to deliver on their intended promise.
There has recently been more focus in this area among software providers – in particular, creating different levels of users, and providing appropriate access for those users. In many cases, that may require different price structures for different users. And that, of course, adds complexity to a product or service — but if our industry is to embrace technology and the benefit of data and collaboration, providing broader access is essential.
Conclusion
“It’s on us to be more flexible and adapt to how various organizations prefer to utilize and pay for technology solutions.” — Michael Wright, RedTeam CEO.
When it comes to digital transformation, there’s a shift happening with how SaaS providers are pricing and packaging their services, which should help construction catch up to other industries. It should also help level the playing field for small- to medium-sized contractors that are trying to compete with larger firms.
KEY TAKEAWAYS FOR SMALL TO MEDIUAM SIZED CONTRACTORS
Change is happening — but might not yet be obvious. As you’re researching SaaS tools that can streamline your operations, you might not see obvious pricing or packaging that is aligned with your business reality. If you’re a smaller firm, don’t hesitate to contact those companies’ sales departments. They may have options and flexibility beyond what’s visible on their websites.
Negotiate. As you begin to engage with a SaaS team, don’t hesitate to negotiate. Determine your ideal agreement, the kind you think would help tech deliver value to your organization — and then ask for it. You may not always get exactly what you’re looking for, but you might get enough to see a solid ROI. And by explaining your needs/ideals, you’ll also push SaaS providers to consider modifying their offerings to better meet the needs of other companies like yours.
Transform — or risk getting left behind. It’s an exciting time. The tools available today can dramatically improve how we work. It is important for firms of all sizes to invest in digital technology — or risk falling behind their competitors. With the fast-changing SaaS landscape, if one provider can’t offer a package that works for your company, you can find another one that will.
If you would like to discuss technology pricing trends, or learn more about specific measures your company can take to manage technology contract terms, conditions and pricing, please reach out to experts such as our team at BBI.
Works Cited
[i] “Engineering News-Record Top Lists.” Engineering News-Record. enr.com/toplists.
JAY SNYDER is President, and Principal of Big Blue Innovations (bigblueinnovations.com), offering advisory services to technology startups, technology consulting to contractors, and mergers and acquisitions planning, headquartered in Cary, NC. Jay has been in the engineering and construction industry for 23 years with experience which includes executing nearly $1 billion of construction as a project manager and executive, participating in the acquisition of tech startups, assisting with venture capital fundraising, advising contractor tech spinouts, and is a published author.
Jay can be reached at 919-692-6129 and jsnyder@bigblueinnovations.com.
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