Modular Construction Poised for Global Takeoff

It may be time for the $12 trillion global construction industry to automate. An opportunity exists to make the industry more efficient through modular construction to put the industry on the assembly line—an approach where companies make prefabricated building elements and ship them to sites. New startups are entering the space with a variety of prefabricated approaches. If significant challenges and failed business models can be overcome, modular homes could have a disruptive impact in the construction industry.

An Industry Ripe for Change

The construction industry faces both high costs and inefficiencies. Materials prices have hit all-time highs during the pandemic, and labor productivity has largely stagnated since the housing market crash between 2007 and 2010, particularly in single-family construction, according to the US Bureau of Labor Statistics. Material transport costs remain high and supplier risk can limit subcontractor productivity. There is a need for innovative business models that can reduce transaction costs and overall resource intensity across the value chain.

New Startups Aim to Learn from Past Mistakes

Modular construction companies solve some of these issues using automated factory production of fully or partially fabricated buildings, which are then transported to sites. However, companies in this space have struggled to become profitable in the past, notably Katerra, which narrowly avoided bankruptcy in January 2021. As a result, the market opportunity remains largely untapped. A new JV aims to succeed where others have failed. The venture is called the Modular Initiative and is spearheaded by MiTek, a Berkshire Hathaway-controlled construction technology company that is joining with architecture firm Danny Forster & Architecture. The two companies plan to take a novel approach to factory-based modular construction and use it to manufacture rooms for multifamily residential buildings, hotels, and other industries including healthcare and education.

Software Will Be Key

While a diversified market strategy will help MiTek, the core business improvement will likely be in MiTek’s software. Here the bar is high. This software will need to simplify constructing a modular building enough to reduce the builder learning curve, which has restricted adoption in the past. Modular software will also run up against common overengineering practices in construction, which lead to overuse of cement, concrete, and steel. However, if successful, modular approaches can save half the time in site assembly, reducing associated energy costs by 67%. 

Modular software will also need to update the project business model. Here, there may be fewer obstacles to MiTek’s success. Theoretically, in an industry with very small margins (2% is considered a healthy construction project margin for engineering firms), a shift of attention away from materials and toward design could increase profits. This could be especially true if modular software simplifies the proposal specification process. In the bidding phase, engineers often need to perform weeks of preliminary work to design several proposals that meet spec and there is no guarantee that they will get the contract. Software that makes it easier for engineers to submit proposals to specifications without compromising quality will likely gain adoption.

There are many examples of companies that entered established markets, improved on existing practices, and emerged as winners. Software will likely be a key differentiator if MiTek is to repeat this story. For the construction industry’s efficiency and its efforts to reduce greenhouse gas emissions, it would be good if MiTek managed to do so.