Lego The Future of Construction
July 1, 2020
COVID-19 will fundamentally reshape the global economy, particularly how and where we work. While some industries can comfortably accommodate working remotely, others don't have that luxury. A great example: construction.
Working in construction means working in close proximity to others. There’s simply no getting around it. Any opportunity to shift toward a model that provides more flexibility, control and safety for those on the front line is well worth considering. It’s time to reevaluate modular construction.
Building with Legos
Modular construction means the offsite manufacturing of prefabricated units that then get assembled onsite. More simply put, boxes are made somewhere else, transported, and assembled onsite like Lego. These prefab units come in all shapes, sizes, and materials. You can get full 3-D units, an entire room or part of a room, made and shipped to the location to get stacked together. There are 2-D panels that ship to the site flat and put together at the destination, with relevant components like plumbing, electrical, and HVAC via standard connectors. As with Lego, the combinations are endless. When you're staying in a Marriott it's more likely than not the room was built offsite. Rapid hospital construction in response to COVID-19 has used modular construction techniques. Universities are building dorms quickly with prefabricated units. This approach has a few common benefits for developers and manufacturers alike. Up to 80% of the modular construction process can take place away from the construction site, resulting in a potential 60% cost savings, not to mention the ability to manage worker health and safety more tightly given the manufacturing is done in a contained, factory environment. It also opens up a construction site to new labor pools - a Bay Area construction site can get fitted in Bloomington, IN - which offers additional cost savings. In addition to cost, modular construction saves time. According to one report by McKinsey, "modular construction can cut schedule by 20–50 percent and construction costs by 20 percent."
The idea of pre-fabricated homes and modular construction is not new. Frank Lloyd Wright, arguably America's most well-known architect, had a dream to build attractive, affordable housing through this approach and tried to do it in Milwaukee back in the early 20th century. Given all the benefits associated with modular construction, why are only 2% of homes in the U.S. utilizing the method today despite being mainstream in other parts of the world, including Sweden, Germany, and Japan (where over 15% of new homes are pre-fabricated)?
It's all about the money (among other things)
Construction is a massive driver of the global economy. In the U.S. alone, it accounts for almost $700 billion in GDP, employing 7 million people building over $1.3 trillion worth of structures every year. Globally, construction is an $11 trillion industry. Unsurprisingly, given its size and relative importance - a society's power has always been defined by the majesty of its structures - a lot of players, from governments to developers, labor unions to lenders, are involved. With so many parties intricately involved, any disruptive change is viewed as unnecessarily rocking the boat. The consequence: construction has not seen an increase in productivity (labor output) in almost 80 years which, according to one study, has cost the global economy $1.6 trillion a year.
As an example, building a single-family home will employ an average of 22 trades ranging from electrician to plumber to stone worker and roofer, working in close proximity in a process that reflects the latest and greatest in Industrial Revolution technology. Modular construction is certainly a leap forward, but faces significant challenges from the construction establishment.
Construction today largely relies on lenders providing loans to finance projects. Funds get paid on an as-you-go basis, which also means interest payments grow over time as more progress occurs on the site. With modular construction, builders need funds upfront to pay for module manufacturing. If logistics costs end up being higher than expected, or materials end up costing more than projected, the opportunity for savings goes right out the window. Modular construction also relies on efficient manufacturing, which depends on consistent and predictable demand, not typical in the fickle world of real estate. Savings are heavily dependent on streamlined logistics processes, and at this point in a post-COVID world, logistics are anything but streamlined. Financiers, developers, and manufacturers need to agree on a scalable financing mechanism that satisfies the need for certainty on the lender’s part and scalability on the developer and manufacturers, perhaps by focusing modular development on rental developments where revenues are more consistent. Unfortunately, a financing model that allows companies to build a run of modules is critical and still largely lacking.
In addition to financing and logistics challenges, labor unions can, understandably, present resistance to modular development. More work offsite means less work for local construction workers, which means fewer dues for the labor union. Given the significant political capital that labor unions still hold, the historical opposition to modular makes sense. That said, COVID-19 might serve as a turning point for the industry.
This lack of progress in construction labor productivity has meaningful consequences. In 2018 the U.S. fell 400,000 homes short of the number needed to keep pace with population growth. Low-income families feel the pain more acutely, with a shortage of seven million affordable and available rental homes.
Regulation and building codes are a major contributing factor to this lack of productivity. Maintaining a safe, COVID-free workspace will only add to the complexity. The lack of skilled workers presents an equally significant hurdle, (one that may have, interestingly enough, started in the 1970s when shop classes were cut). In residential construction alone, the labor force has fallen by almost 25% since 2006.
Fewer people + same processes + more work + close proximity = big problem. The more the status quo is maintained, the larger the problem will be going forward. The current state is not sustainable, resulting in the need for alternative approaches to building like prefabrication that are safer, healthier, and more cost effective.
The challenges with construction are known and there is desire for change. A recent survey of contractors and manufacturers showed over 70% with plans to use offsite/prefab construction on projects, with almost 50% saying they would apply this technique to a majority, or all, their projects. Some estimates have the market for prefab reaching $130 billion in Europe and the United States by 2030, the most significant driving factors being the demand for real estate, and availability and cost of skilled labor. However, transitioning a behemoth as large and complex as construction to a new paradigm typically requires unique circumstances like war and depression. The current crisis might be the opportune time to accelerate the transition. Success will depend on new technology enabling real-time project management and spend management. The industry’s powers that be should do what they can to emerge from this crisis equipped for a post-COVID world, and address the underlying challenges while they’re at it.
Time-lapse video of the modular construction process for the Courtyard Pullman in Washington.
This post was originally posted at rishitaparia.com.