Oracle announced Thursday it agreed to acquire Textura, a cloud-based solution for the construction industry with end-to-end capabilities spanning from initial bid estimation and sourcing through to subcontractor management, communication and collaboration, invoicing and payment.
“Textura’s mission is to bring workflow automation and transparency to complex construction projects while improving their financial performance and minimizing risks,” Textura CEO David Habiger said in a statement.
The $633 million transaction values Textura at roughly eight-times trailing revenue and represents an over 30% premium to the previous day’s close, a stiff price for a product that will complement Oracle Primavera, one of Oracle’s existing construction project management lines. While Primavera offers a complete suite of cloud solutions for project, cost, time and risk management, our sister site, Trade Financing Matters, did a quick analysis that showed the combination suggests it will surely add to Oracle’s arsenal with deeper industry and multi-tier engineering and construction (E&C) capability (a significant differentiator for Textura). Moreover, it will also complement other Oracle solutions, such as Project Procurement.
How Do Construction Payments Work?
In layman’s payables terms, the Textura payment mechanism is essentially like a pull-system version of an evaluated receipts settlement approach. Participants in the supply chain are paid when suppliers at other tiers are paid. Who knew construction was more aggressive in its multi-tier working capital management (e.g., VMI + JIT Hubs in the high tech industry) than high tech!
However even with Textura, E&C functional gaps will still remain for Oracle in any project’s lifecycle, including providing the level of subcontractor on-boarding and compliance management capability that software and managed services providers — such as Avetta, formerly PICS Auditing — offer today.
Payments and the E&C Financial Supply Chain
One area that piques our interest about the transaction, is that financial services company Greensill Capital helped develop Textura’s Early Payment Program through a partnership. Payment is one of the biggest problems in the $2 trillion construction industry today. There are many unique challenges involved with providing financing for construction receivables, not limited to:
- Contract terms: Construction contracts often include terms such as “paid when paid” and “paid if paid.” In trying to find skilled lower-tier subcontractors (including members of the trades), prime contractors and larger subs generally face a skill shortage globally. Many contractors do not pay until paid and then sit on the cash. In construction, the subcontractor has already ordered the materials and provided labor for weeks or months, yet the billing cycle starts at the end of the month.
- Progress payments: For larger and longer jobs, most contractors are required to bill as they progress throughout the project and reach certain milestones.
- Retainage — Most general contractors will withhold 5%–10% from each billing until the entire project has been completed.
- Having software that can both manage the end-to-end project lifecycle for all participants in the E&C supply chain, while facilitating a more rapid flow of capital to subcontractors is extremely valuable, including from a supply chain risk management perspective. Moreover, the weighted average cost of capital (WACC) arbitrage opportunity between tiers in the E&C market is significant, indeed. Barry LePatner, a construction lawyer with three decades of experience and author of “Broken Buildings, Busted Budgets,” estimated annual waste in the U.S. Construction at $120 billion a year in 2007.
As background on its solution, Textura rolled out an initiative back in April 2015 with Turner Construction as its launch partner client. The program is now available broadly to general contractors.