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Examining the opportunities & risks involved with prefab project

Industrialized or manufactured construction is a familiar concept. The industry has been building with components and even whole wall panels for years. However, with a heightened focus on efficiency due to skilled labor shortages and tighter project margins, industrialized construction is accelerating around the globe.

Modular and prefabricated building accounted for approximately $237 billion of construction activity in 2019, according to market research. This industrialized (“prefabrication,” “prefab” or “modular”) approach shifts many activities away from the construction jobsite and into a factory. Prefabricated building components are then shipped from the factory to the construction site for assembly.

While this technique has been around for centuries, recent success stories and market conditions have compelled more developers and contractors to apply prefabrication to their projects. Utilizing this approach can present new opportunities, but it introduces additional risk as well. This research explores the opportunities and risks of industrialized construction in relation to the four core dimensions of project management: scope, time, cost and quality.

 

 

Industrialization realizes benefits from standardized designs that are repeatedly applied and executed in a controlled environment. Factories are typically set up using these designs to mass produce a product or limited selection of products. Similarly, with industrialized construction, it is more feasible and efficient to build the same product repetitively.

1. Scope

Opportunity

Given the increasing demand of projects that could be built using prefabricated components, there has never been a better time to adopt industrialized construction. There is no limit to where industrialized methods can be applied.

New opportunities in the commercial sector are being explored. Asset classes, such as office and retail, are being added to the usual candidates of multifamily—hotels, mixed-use structures and hospitals—all of which have building components that can be standardized for replicated application. This doesn’t mean that all of the buildings have to look the same. The structural and foundational components of walls, floors, ceilings and roofs of the buildings can be constructed using industrialized methods while still allowing for customized finishes.

Risk

Historically, design standardization has led to declining interest from home buyers and high-end commercial developers. Project owners often want a unique product that showcases aesthetics. Commercial developments attract customers with customized features that enhance the user experience. In many cases, construction projects require a certain amount of customization. Predefined conditions are unique to a project’s location.

When constructing tenant improvements, designers and contractors must work within the confined interior build-out. Likewise, inherited projects are typically predesigned or partially built at the time of acquisition.

 

Many developers often require additional customized options and finishes. These situations can be challenging when applying industrialized methods. Limited design options are often not fully context- or user-specific and can lack the ability for customization.

2. Time

Opportunity

Industrialized designs can be reapplied to multiple projects, saving time in planning, procurement, manufacturing and deployment. With similar products repetitively being built in one factory, production time is reduced. As processes become more standardized, workflows and efficiencies become optimized. Workers have predictable schedules because they perform the same activities continuously on a daily basis. Sequential production lines are established that alleviate crowded workspace and allow mobility. Enhanced coordination enables less rework to be performed.

Building inspectors can perform approximately 90% of their inspections within the factory, alleviating the need to schedule multiple jobsite inspections. With inspectors coming to factories on a daily basis, consistent relationships and expectations are established that further enhance productivity.

Risk

While there is increasing demand for construction, productivity in the industry has lagged far behind that of general manufacturing. This is due to many factors, including increasing design complexity, more regulation and reduced availability of labor and materials. Whereas general manufacturing has seen increased automation, industrialized construction is still reliant upon field labor.

Due to this, accurately estimating productivity in modular projects carries risk. New industrialized methods do not have years of project data for analysis. Additionally, productivity assumptions are highly sensitive. As each module is built in the production line, underestimating the time to build one component can impact the entire project.

 

As site work and building components in a factory occur simultaneously, it introduces another risk. Delay of jobsite or factory work may impact the other. Contingency plans for such instances should be established for every project.

3. Cost

Opportunity

Reducing schedule duration through repetition leads to lower construction costs. With most industrialized designs repeatedly used for multiple projects, design costs can be allocated proportionally. In addition to cost savings, this presents an opportunity for further revenue diversification.

As industrialization continues to gain efficiency, investors and contractors can realize a quicker payback period due to a compressed schedule, leading to less interest cost. This also allows for the scope of general conditions to decrease.

Monthly costs therefore become much lower. Cost savings are found in the factory setting as well. Factories reduce waste by controlling inventory and protecting building materials.

 

Industrialization also provides cost savings in labor. Jobsite labor often requires subcontractors that charge a markup. Much of this trade work is moved in-house and can be conducted by lower-skilled labor.

Risk

Industrialized construction faces financing challenges unlike the traditional industry norm. New methods of industrialized construction have a limited track record, resulting in many lenders hesitant to commit. If a developer secures initial financing, underbidding could require additional capital.

When lenders do approve, a significant upfront payment and higher interest rate are often required. Typically, lenders allocate monthly loan draws based on percentage of on-site work complete. With industrialized construction occurring in the factory, the off-site prefabricated components do not add value to the construction site.

Industrialized firms may have significant up-front costs. Architectural designs and manufacturing processes must be developed as well. These capital expenses and any operational costs should be included in return-on-investment calculations of the supported projects. Whereas prefabrication work is executed in a predictable factory environment, transporting equipment and modules to the construction site can be challenging. Robust project, supply chain and logistical controls are required for timely and effective deliveries.

4. Quality

Opportunity

Standardizing factory processes can vastly improve production quality. Repetitively performing distinct tasks enables specified skill sets to be gained. Standard operating procedures help confirm accuracy and consistency. Increased production quality can have a significant impact on building operations. It can help alleviate the regular maintenance program and prolong the useful life of the asset.

As the industry transitions to the use of robotics, exact specifications will be met on a routine basis. The arrival of 3D printing, machine learning, artificial intelligence, the internet of things and other technologies are expected to provide additional quality enhancements. Completely integrating automation can eventually eliminate errors, enhancing the user experience. Many contractors are now applying digitization to the built modules as well.

Enhanced construction and building operations also mitigate global warming. As the prefabricated structures are also built much quicker, less energy is expended than traditional construction.

Risk

Industrialized construction products have a poor industry perception as being cheaply constructed with low-quality material. Unfortunately, this is based on the mobile and modular home industry of the past, where this has been historically accurate.

While this perception is a barrier for new entrants, it is improving for most users who have experienced the newer prefab and modular products. With enhanced technology constructing higher quality products, this historical market perception is no longer accurate. Nevertheless, it will require substantial marketing and years of success to build industry trust.
 

While industrialized construction is gaining momentum, a “household brand name” has not yet been established. To achieve this, many firms are focusing on digitization and new strategies in prefabrication and modularization. Technology is a dominant theme.

As innovation continues to influence industrialized methods, demand will rise for expedited schedules, lower costs and greater quality. This will help meet the rising need of affordable housing and sustainable infrastructure. With market forces aligned to substantiate economic activity, the construction industry will continue to drive industrialization.

A dominant set of players capitalizing on this opportunity will likely emerge in the next 5 years. They will focus exclusively on industrialized construction and will bring design, supply, manufacturing, construction and assembly all under one roof. It is unlikely that any of these dominant players will be traditional construction companies. Such disruption and opportunity have expanded interest of investors and capital markets.

As more capital enters the sector, there will be increasing scope for lines between traditional and alternative structures to merge. With technology driving market acceptance and growth, new financial models will be developed. Different mathematics will be applied to understand cost, time and quality factors.

As componentization becomes commonplace and transferrable, financers will be able to evaluate the modules while still in the factory. This will help lift lending restrictions and make capital more accessible. Efficiency levers will further lower the cost of capital. Additional profits will be captured and cost savings shared between contractors and customers. This will enable industrialized growth to begin approaching an exponential upward trend in regard to the global construction industry at large.

The views reflected in this article are those of the authors and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.