Madrid 2020: Modular construction: From projects to products

February 2020

For decades, construction has lagged other sectors in productivity performance. Now there is an opportunity for a step change, shifting many aspects of building activity away from traditional onsite projects to offsite manufacturing-style production.

Recent modular projects have already established a solid track record of accelerating project timelines by 20–50 percent. The construction industry is adopting new materials as well as digital technologies that enhance design capabilities and variability, improve precision and productivity in manufacturing, and facilitate logistics. If these changes takes hold, modular construction could radically reshape the infrastructure value chain, deliver much-needed housing, and unlock cost savings of $22 billion per year. However, capturing the full cost and productivity benefits of modular construction is not a straightforward proposition.

On February 27th, McKinsey’s Global Infrastructure Initiative (GII) hosted a roundtable discussion with senior engineering and construction (E&C) leaders, project owners, real estate executives, investors, and technological innovators from across Iberia. 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.

Eight key themes emerged during the discussion:

  1. Explore new contracting models to solve the supply-demand challenge. Improving the contractual environment will help provide contractors with confidence to invest in modular solutions, encourage investors to finance modular projects, and prompt owners to explore the new methods. Multi-year offtake agreements between developers and manufacturers or pre-award commitments were cited as examples of contract structures that could facilitate traction for the modular industry in Iberia.
  2. Rebalance risk allocation and ensure early involvement of key stakeholders. Alignment of risk-sharing between the owner, contractors and manufacturers will establish a more collaborative and trust-based environment for innovation. Additionally, early involvement of all the key stakeholders to co-develop the most efficient product greatly enhances the probability of success.
  3. Apply modular construction to meet needs for specific situations. Differentiated modular solutions can address a diversity of issues. Highly-optimized light-steel 2-D modules suit affordable housing while specific volumetric components, such as bathroom pods, integrate into highly customizable luxury buildings. Suppliers will have a competitive advantage when they target the segment of the market they can serve best.
  4. Create government incentives to jumpstart modular. Government’s direct and indirect interest in many long-life assets provides reason to support the advancement of modular construction. Setting minimum standards for new projects that help lower energy costs and meet emissions targets will help create conditions for modular solutions to be in demand.
  5. 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 avoids seasonal work-stoppages. And, since it also will reduce the physical demands on a body and provide predictable, long-term, year-round income, ageing tradesmen and women might be attracted to jobs in modular factories. But applying their mastery in a new environment and process will require retraining.
  6. Start training engineers and architects 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 audience noted that modular encourages inside-out design yet constrains 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.
  7. Prepare regulators for mass adoption of modular projects. Because the process and methods of modular construction are so unlike what regulators are currently structured to deal with, many are uncertain how to work with modular projects. Not only do developers and contractors need to engage regulators in understanding the benefits of modular construction, they also need to help regulators understand how code and inspection processes must adapt for these types of projects. One potential way to accomplish this is to create reference modules that can facilitate inspection and quality checks.  
  8. Expect modular to upend traditional operating models. Roundtable participants predicted that today’s business models could be significantly disrupted. General contractors could be partially replaced by developer-employed construction managers that oversee the complex logistics operations of assembly; developers and modular manufacturers could converge as each further explores the benefits of vertical integration; and sub-contractors would need to become suppliers as manufacturers demand components instead of labor.
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