Markets

The Modular Construction Train Is Picking Up Steam

Modular construction helps address challenges of cost and schedule pressures, labor shortages and a need to maintain safety on-site.
By Eric J. Meier
December 6, 2019
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Markets

Among many nicknames for New York City is the “city of skyscrapers.” Going back to the late 19th century, there has been a consistent push to develop and build bigger and grander buildings while testing out advancements in process, materials and design. The results have provided world renowned structures such as the Empire State Building, St. Patrick’s Cathedral and the Guggenheim Museum. While continuing to add to its impressive skyline (think One World Trade Center) and unique structures (such as the Vessel at Hudson Yards), there is a new construction and design program that is picking up steam in New York City—modular construction.

There have been more than a dozen modular projects either built or launched in New York City over the past few years. One such project is the Pod Hotel, which is located in Times Square. The 249-room hotel consists of steel framed modules made up of two small guest rooms separated by a corridor. Each 100 square foot room came already equipped with its furniture when secured on a grid like façade.

In addition to the hospitality sector, New York City’s Mayor has unveiled a Housing Plan 2.0 plan that is heavily dependent on modular housing addressing the city’s affordable housing challenges. New York City’s Department of Housing Preservation and Development required modular construction in the RFP for plans to develop a 167 unit affordable housing building. While other cities such as Los Angeles have undertaken modular projects for affordable housing, this was noted as the first large-scale endorsement of modular techniques.

Why is there a strong push for permanent modular construction? This process helps to address the well-known challenges of cost and schedule pressures, labor shortages and an ever present need to maintain safety on-site. From a quality standpoint, once the first module is constructed, defects can quickly be identified and corrected prior to replicating defects on other modules. The schedule can often be reduced by a third to a half, in part because modules can be started at the same time site work is being done, there is a lessened need for site staging, which reduces the impact of adverse weather conditions. Cost savings can be achieved by trades being allowed to work concurrently and through the higher usage of generally lower cost shop labor. Finally, modular work is done at a safe and efficient height (ground level) thereby eliminating many of the overhead risks that are otherwise present on-site.

The benefits of modular construction may not be realized though unless challenges are recognized and planned for accordingly. For example, once modular assembly begins, design changes are difficult and costly. Because of the need for a “design freeze,” the design phase will usually be longer than a typical project. The design also has to take into account things such as the location where modules meet and transportation regulations in place between the modular manufacturer and the jobsite, which can affect the size and length of what can be built off-site.

Although by its technical definition, modular construction involves planning, designing, fabricating, transporting and assembling building elements at a location other than their final point of assembly on-site, the work is subject to the codes applicable in the project location. More than half the states have a preemptive statewide program that involves the submittal, review and approval of modular building drawings. Local authorities are obligated to accept the state program’s findings. There are numerous third-party inspection companies that inspect modules at the manufacturing facility for code compliance. If compliant, the modules are affixed with a label, which tells the local building inspector that the module is code compliant.

While usage is up, the pace of adoption for modular construction specific code language has been slow. The same is true for insurance and contract language. This lag in off-the-shelf modular construction products elevates the need for the project team to be mindful of tools that might work in part, and those matters which are best left to create anew. On the insurance side, thought must be given to whether/how existing coverage applies in terms of scope and timing to the off-site work, as well as how the modules should be covered when in transit. For contracts, the standard suite of national organization contracts do not have forms that address modular construction. As a result, matters such as timing of transfer of ownership of the modules, inspection, insurance and termination should be looked at with a critical eye on whether language should be modified to reflect the reality of the relationship among the modular team project members.

In June 2019, McKinsey Company released a report entitled "Modular Construction: From Projects to Products." The Report notes that “[w]hile early modular projects have a mixed track record of cost savings, they have consistently been completed 20–50 percent faster than traditional onsite builds.” The shorter project schedules can be a big financial advantage for developers in being able to collect revenue earlier, “paving the way to higher internal rates of return, improved cash flow, and reduced market cycle risks.” While cost savings from the modular manufactured process do not have the same track record of schedule impact, McKinsey, nonetheless, notes the potential for up to 20% construction cost savings and life cycle benefits through measures such as direct procurement by the factory, optimizing deliveries to reduce logistics costs, economies of scale and reduced waste.

Modular manufacturing capacity is going to need to increase to keep up with the growth in this sector. Companies such as Skender, a Chicago design and construction firm, are making big bets in modular manufacturing facilities. In May 2019, Skender cut the ribbon on a 105,000 square foot “advanced manufacturing” facility in the south-side of Chicago. Skender’s first modular building project is 10 affordable-rate, three flat apartments on Chicago’s west side, while noting that it had other projects in multi-family, healthcare and hospitality in the pipeline.

Various national hotel brands are in the midst of modular construction projects. In addition to all of the benefits previously noted, the hotels are able to ramp up similar projects at once and take advantage of economies of scale. Returning back to New York City, Marriott is moving forward with a large-scale modular construction project and issued a challenge to others to embrace modular work going forward. Below is an excerpt from Marriott’s press release:

The world’s tallest modular hotel – which will carry a brand of Marriott International (NASDAQ:MAR) – is on track to be stacked in late fall in New York City with prefabricated and pre-furnished guestrooms. Once erected over a 90-day period, the 360-foot-tall tower will represent a milestone for Marriott’s ongoing initiative to encourage hotel developers in North America to embrace modular for new construction projects. To be topped with a modular roof and modular rooftop bar, the world’s tallest modular hotel is expected to open in late 2020 as the AC Hotel New York NoMad.

“In North America, the construction process hasn’t changed significantly in 150 years and it’s ripe for innovation,” said Eric Jacobs, Marriott International, Chief Development Officer, North America, Select and Extended Stay Brands. “The world’s tallest modular hotel in one of the world’s greatest destinations will act as a game-changing symbol to ignite even greater interest in modular among the real estate and lending industries.”

The transition to modular construction does not have to be an all or nothing proposition though. For example, the AC Hotel by Mariott in Chapel Hill, North Carolina, is a “hybrid” build consisting of three stories of modular construction over a first floor conventional build. Even if no modules are used, project teams can incorporate off-site prefabrication at smaller levels to achieve similar categories of benefits in terms of schedule, safety, costs and waste reduction.

According to the Modular Building Institute, the U.S. modular construction business has doubled in size to $8 billion over the past five years. McKinsey sees the potential that the market could reach more than $130 billion for the new-build market in Europe and the United States. As the modular construction train continues to pick up steam, it must bring along advancements in insurance/risk management programs and contract language, which addresses the updated roles of project participants and what is done on-site as opposed to off-site.

While much of the project procurement process can remain the same, a well-done modular project must embrace and acknowledge the differences and include a framework that allows for shared success. While Jack Welch was not speaking about modular construction when he famously said, “change before you have to,” it appears to be sage advice for the construction industry as the modular trend marches forward.

by Eric J. Meier
Eric J. Meier is a Milwaukee, Wisconsin-based partner with Husch Blackwell LLP and serves as a leader of the firm’s Construction Academy team. He represents construction and business clients from contracting through litigation and every point in between. 

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