Modular construction is not a novel concept, but it is experiencing a new wave of attention and investment. Changing technologies, economic demands, and mindsets suggest it may have renewed staying power. If it takes hold, modular construction could radically reshape the infrastructure value chain, deliver much-needed housing, and unlock cost savings of $22 billion per year.
On September24th, 2019, McKinsey’s Global Infrastructure Initiative (GII) hosted a roundtable discussion with senior engineering and construction (E&C) leaders, project owners, real estate executives, investors, architects and technological innovators from across North America. The discussion explored the potential impact of modular construction, where success is happening today, and what is needed for modular construction to realistically deliver the cost and schedule benefits at stake.
The event featured a site visit to a new advanced manufacturing facility opened by Skender, a vertically integrated design, construction, and manufacturing firm, where participants observed the modular manufacturing process and heard the CEO describe the process of pivoting his traditional construction firm to modular.
The following eight recommendations emerged from the roundtable:
- Explore new contracting models to solve the supply-demand challenge. Improving the contractual environment will give traditional E&C companies the confidence to invest in a pivot to modular offerings; encourage investors to finance modular projects; and prompt owners to commit to the new methods. The model of long-lead procurement with pre-award commitments, a standard practice in large industrial projects, was cited as one example of a contract structure that would enable modular development if applied in the construction sector. Another was multi-year offtake agreements between developers and manufacturers.
- Long-term stakeholders need to create incentives. Stakeholders whose interest will span individual ownerships are poised to see tremendous gains from an advancement of modular construction and thus have reason to help it get established. Insurance companies could offer preferred rates since project risk is reduced. Large franchisers could create incentives for owners who implement modern construction methods that advance corporate objectives. And, recognizing that modular projects are typically lower-emission in delivery and have lower energy costs, public sector entities could set minimum standards for new projects delivered. One public-sector owner even suggested adding an escalating “disruption charge” tied to the project’s duration as a way of incentivizing faster project delivery.
- Harmonize manufacturing standards. Unlike cars that are easily produced at a central factory and shipped worldwide, modular construction will be easier if production is local. This will require interoperability standards that allow global design firms to deliver plans to any number of independent factories around the world. Greater market penetration will be possible if the industry can align on these types of standards – not only in physical design requirements, but also the data format in which plans are communicated and delivered.
- Reskill the workforce for new techniques. Across every sector represented in the discussion, interest in pursuing modular construction was largely being driven by conditions of the labor market. Factory production creates a consistent workforce that maintains productivity year-round. And, since it also will reduce the physical demands on a body and provide predictable, long-term, year-round income, ageing tradespeople might be attracted to jobs in modular factories. But applying their mastery in a new environment and process will require retraining.
- Start training engineers differently now. What architecture, engineering, and construction will look like in 20 years is unknown. Yet, it is almost assured that those all sectors will need to start thinking more like manufacturers. The architects present noted that modular encourages inside-out design by constraining the exterior design. As such, education for future engineers and architects should incorporate skills like process engineering and industrial design to prepare them for their careers.
- Prepare municipalities for mass adoption of modular projects. Because the process and methods of modular construction are so unlike what municipalities are currently set up to deal with, many are uncertain how to work with modular projects – from permitting to inspection. Not only do developers and contractors need to engage municipalities in understanding the benefits modular construction will bring, they also need to help them understand how code and inspection processes must adapt for these types of projects.
- Embrace the full potential of digital to create new value pools. Similar to partnerships between service providers and car manufacturers (e.g. Sirius XM Radio, OnStar, or Apple Car Play), modular constructors can find synergies within the proptech sector. New partnership and revenue models will emerge as OEMs offer building owners subscriptions and service level agreements for technology that improves their asset value.
- Expect modular to upend traditional operating models. Roundtable participants predicted that today’s business models could potentially be replaced as follows: General contractors as we know it will be replaced by developer-employed construction managers that oversee the complex logistics operations of assembly; developers and modular manufacturers will converge as each further explores the benefits of vertical integration; and sub-contractors will need to become suppliers as manufacturers demand components instead of labor.