In part one of this two-part series, we reviewed the definition and some advantages related to modular off-site construction. In this part we’ll discuss some of the unique challenges and associated measures developers and real estate investors should take to manage this approach and best achieve the modular benefits on your project.
Challenges of Modular Construction
Modular construction sounds progressive and remarkably advantageous. Yet, as with other construction methods, there are some real and unique challenges that can affect the success or failure of your real estate development project.
1. Mass Production/Limited Variety
First, a modular (think mass production) approach on scale is best when the units and spaces are more uniform and repetitive. Naturally, apartment buildings and hotels make likely candidates if each unit can be standardized and stacked. At this stage of modular technology, trying to create too many distinct or non-repetitive modules reduces, and potentially defeats, the time and cost advantages for both buyers and suppliers. Some manufacturers are using more automation and sub modules (think pre-fab bathroom or kitchen pods) to enable more flexibility but these can add design, supply chain and integration risks.
2. Earlier and More Complex Decisions
Second, modular construction demands that more decisions and greater detailed design and engineering be completed up front in the process. Buyers and owners must commit to layouts, finishes and fixtures essentially upon selection of the modular manufacturer so that the materials can be purchased in time for installation. Architects, engineers, and contractors must be knowledgeable with the intricacies of the modular fabrication and erection stages to properly install and complete their work.
For instance, the taller the overall building (modules stacked higher) the more attention is needed to how they are connected, anchored and aligned, to address the compression from all the weight (as much as several inches) and so that the exterior skin and interior finishes will allow for compression for structural, weatherproofing, and cosmetic goals. And who will accept, transport, stage, protect, and erect the modules should be spelled out in responsibility matrices and respective contracts. While these demand a more intense design and pre-construction period, those of you in the construction business may actually see this as an advantage: changes made late in the traditional field process can be a headache to implement.
3. Approvals Can Be Complicated
Third, the inspection and approvals process can get complicated and reduce the benefits of off-site construction. No matter how they are constructed, all projects must meet applicable federal, state, and local laws and codes. However, the building codes that apply vary based on construction method and location of work. Some states and local jurisdictions are more favorable to modular production than others. Ideally, the modules are made to comply with those state codes where the final structure will reside (e.g., Pennsylvania Industrialized Housing Act) rather than the local building codes, so that completed modules can be manufactured at any location, inspected, and approved while at the factory, requiring only very limited local inspection of connections and work performed on site.
On the contrary, some counties in states like Maryland may require local inspections of systems during the rough-in stages thereby preventing walls from being closed and finishes applied before they leave the factory. This can significantly hamper the benefits of completing modules in the quality-controlled factory rather than on site. Furthermore, in places with strong union influence, how contractors navigate trade relationships can further complicate both the approval and execution phases.
4. Risk is Concentrated
Fourth, modular construction necessitates commitment to one or a few providers thereby concentrating risks for the project. Historically, modular manufacturers mostly focused on making single-family homes as their bread-and-butter products. While the number of companies producing commercial and multi-family products is growing, the market remains very limited in those that are interested, capable, and have the financial capacity to deliver. Buyers, whether they’re owners or general contractors, must perform full diligence on modular companies before entering into an agreement that puts all your eggs into one basket, especially if the modular manufacturer also holds responsibility for transportation and setting up of all modules. Keep in mind, even if the modular contractor is bonded, it would likely have to be a huge disaster to warrant the switch to another manufacturer in the middle of a modular project.
5. Transportation Risks
Fifth, transportation and set risks are also a concern. Since modules are prefabricated in a factory many miles from the job site, they need to be transported either directly to the job site or staged at a place nearby and then set in their final places. The transporters and riggers must be extremely careful with each module as one mishap during transportation and the entire module could need significant repairs or replacement. This could potentially hold up an entire sequence of installation and delay the overall project.
It’s important for the transportation and rigging companies to spend serious advanced effort to trace the roads and plot the logistics of moving the modules throughout their entire journey from factory to jobsite. They can’t get hung up by bridges, tight turns, traffic problems, crane setup, or temporary road closure permits. Module sizes are usually limited first by DOT-allowable size on the respective roads (maybe 10 feet wide by 70 feet long) and capacity of an available crane (to lift as much as 25 tons) across the depth of a project site. Most minor shipping damage, such as dents and movement cracks, are usually easily repairable by the manufacturer at no cost. However it is wise to discuss with a knowledgeable insurance advisor/broker and carrier to understand and purchase insurances appropriate for the property and liability risks unique to off-site construction.
6. Difficult Financing Process
The sixth challenge involves financing. Since modular construction requires purchasing and making things on a faster timeline, the bills are usually much larger earlier in the construction period than investors and lenders are generally used to funding. Therefore, you should take time to work with the manufacturer and contractor to understand the amounts and timing of anticipated funding (create a projection by month) and update it as the project unfolds. This helps make sure that adequate monies are available to keep the job going and prevent mechanic’s liens. A related item is that someone representing the contractor, owner and bank should plan to visit the factory at multiple stages of production to make sure that funds are being invested into your specific modules and not into somebody else’s (this is applicable for any type of funding of stored materials and prefabricated purchases).
7. Reskilling and new processes
Lastly, for modular construction to become mainstream and achieve the many potential benefits to their maximum, the building industry needs a sea change of thinking, competent workers, and automated processes. In addition to the six points made above regarding things that an owner, developer, or investor should manage, a large learning curve exists in terms of better materials, appropriately trained designers and trade workers, the logistics of manufacturing, and then putting all the modules together in the field.
While modular construction is beneficial in certain circumstances, it’s not without challenges and isn’t the answer for every project. However, we’re certain that you’ll see a lot more modular and off-site construction performed into the future. RPL has gained knowledge and experience in this area, and we hope these articles help improve your pathway into modular construction approaches.
If you’re planning a new real estate development or modular construction project, we’d love to discuss the risks and options to help you overcome some of the challenges. Contact us today or call us at 888.357.7342 to discuss how leveraging our knowledge, expertise, and ambition could drive your next project or portfolio to success.
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