Modular construction: From projects to products

For decades, construction has lagged behind other sectors in productivity. Modular construction offers the industry an opportunity to make a step change: shifting many aspects of building activity away from traditional construction sites and into factories with off-site, manufacturing-style production.

Modular (or prefabricated) construction is not a new concept, but technological improvements, economic demands, and changing mind-sets mean it is attracting an unprecedented wave of interest and investment. If it takes hold, it could give the industry a huge productivity boost, help solve housing crises in many markets, and significantly reshape the way we build today. Our new report, Modular construction: From projects to products, dives deeper into the issues.

The modular approach also has the potential to yield significant cost savings, although that is still more the exception than the norm today. As supply-chain players advance along the learning curve, we believe that leading real-estate players that are prepared to make the shift and optimize for scale can realize more than 20 percent in construction-cost savings, with additional potential gains in full-life costs (for instance, through reducing running costs via energy and maintenance savings). Under moderate assumptions of penetration, the market value for modular construction in new real-estate construction alone could reach $130 billion in Europe and the United States by 2030.

Pockets of promise especially where unmet demand coincides with labour shortages

To date, prefabricated housing has achieved a sustainable foothold in only a few places, including Japan and Scandinavia. In markets such as the United Kingdom and the United States, it has been in and out of favour since the post-war era. However, modular construction in European and US markets has the potential to deliver annual savings of up to $22 billion, and there is reason to believe the current revival could be different. The industry is adopting new, lighter-weight materials as well as digital technologies that enhance design capabilities and variability, improve precision and productivity in manufacturing, and facilitate logistics. Countering the old reputation of prefabricated housing as an unattractive, cheap, poor-quality option, some builders are focused on sustainability, aesthetics, and the higher end of the market. New entrants and first movers that are unwilling to tolerate the industry’s fragmentation and lagging productivity are starting to disrupt the market and change the mind-sets of incumbents.

A real-estate disruption in the making

Capturing the full cost and productivity benefits of modular construction is not a straightforward proposition. It requires carefully optimizing the choice of materials; finding the right mix of 2-D panels, 3-D modules, and hybrid designs; and mastering challenges in design, manufacturing, technology, logistics, and assembly. It also depends on whether builders operate in a market where they can achieve scale and repeatability.

In many countries, modular construction is still very much an outlier. But there are strong signs of what could be a genuine broad-scale disruption in the making. It is already drawing in new competitors and it will most likely create new winners and losers across the entire construction ecosystem. Different stakeholders face a series of choices.

Modular construction in European and US markets has the potential to deliver annual savings of up to $22 billion.

Public-sector entities, like private-sector developers, will be able to capture cost savings and productivity benefits by taking a modular approach with any large-scale publicly funded projects that have repeatable elements, such as schools and affordable housing. At the same time, the public sector has an additional role to play in facilitating modular adoption by modernizing building codes which dovetails with the goal of removing barriers to more housing. Approval processes can be faster and more efficient if product designs and production processes can be approved in factories rather than on each individual project site, thus reducing the on-site inspection burden solely to assembly verification.

Finally, engineering and construction companies should consider pre-empting the trend that will see on-site construction becoming a smaller and more commoditized part of the value chain. Today, general contractors manage complex on-site projects with many subcontracted trades involved, but they may risk being cut out of a value chain focused on simple module assembly that brings with it a high degree of cost and schedule certainty.