Reinsurance
Product Family
Cheri Hanes

By

Risk Engineer, North America Construction

Previously published as an Expert Commentary on IRMI.com

What is modular construction? A modular building is one that consists (at least in part) of repeated sections called modules which are constructed away from the building site, then delivered for installation.

It is true that modular construction is prefabricated, but not all prefabricated components are modular. To be considered modular, there must be a volumetric component; a module encloses a space. Examples of prefabricated components that are not considered modular would include roof, wall, or floor sections; process piping; rebar assemblies; etc. which are prefabricated prior to arrival on site, but do not have a volumetric aspect. Examples of modular construction would be bathroom pods, whole individual apartments or hotel rooms that get stacked together in a structure, or - to really bring it home – job site trailers.

State of the Modular Construction Market
Advancements in manufacturing technology have enabled a boom in modular construction globally. According to a report published by Fortune Business Insights, the modular construction market is expected to reach USD 107.21 Billion by 2026, up from USD 64.85 Billion in 2018.

Modular technology is most frequently used in commercial construction, hospitality, healthcare, and education/institutional, but may be considered anywhere there is a lot of repetition within a structure – which is a common theme among the construction types listed above.

What is driving this growth in Modular building? The benefits of modular construction may include:

  • Quality: Modular construction is known for consistency, quality, and precision. Fabrication in indoor facilities out of the weather, in climate-controlled, and well-lighted facilities is positive. The use of engineered jigs and layouts reduces the technical requirements for workers and can simultaneously improve quality and worker safety.
    Additionally, modular manufacturing may have robust in-house quality controls, allow for onsite jurisdictional code inspections, and in-house engineers to test and approve the product. Both structural and mechanical inspections are built into the process in a way they may not be feasible on a job site.
  • Safety: Modular construction is considered safer than site-built construction, because it requires fewer workers to place and there is ultimately less activity on site. However, it requires increased use of cranes and any unfamiliar methods may increase risk. Overall it appears positive from the safety standpoint.
  • Sustainability: Modular construction is considered “greener” than traditional site-built construction. The controlled factory environment allows for more accurate, repetitive production of the units, resulting in less over-ordering and cut-off waste. Modular also allows for tighter seals, joints, and air filtration, resulting in higher energy efficiency.
  • Efficient from a labor standpoint: Because of the “manufacturing” approach involved in modular production and the lower number of moving parts in the field, skilled labor needs are reduced. This is especially important considering the skilled labor shortages that continue to plague some markets. This is particularly concerning as the construction of new infrastructure and healthcare facilities increases, while we face a shortage of qualified workforce combined with an aging workforce. Projects are getting larger and more complex, while experienced workers have continued to retire or otherwise leave the industry.
  • Speed: There is no doubt that modular construction can result in shorter on-site project schedules. This speed of construction is especially important for healthcare projects that are seeing pressure from the COVID 19 pandemic, driving demand in this space.
  • Potentially less expensive: The potential for lower cost is due to efficiencies in the process – but this has not been conclusively demonstrated. Where there are cost savings, they may have more to do with a shorter time to revenue, lower general conditions costs, and possibly lower financing costs – though financing for the projects remains a challenge overall due to the more aggressive curve of procurement and progress in the life-cycle of these projects.

In modular, “plan the build and build the plan” is not just something to aspire to; it is absolutely crucial.

What are the challenges with modular construction?

The primary concerns appear to be:

  • Partnership: Construction of modular buildings requires the right partners for the project. Extend your prequalification practices to all involved parties as part of your project pursuit decision. If not, you may find yourself involved in a major education effort for project designers, engineers, consultants, lenders, municipalities (fire, build dept, planning/zoning), and owners who are intent on delivering projects in this modality without an understanding of what it entails.
  • Design Risks: In modular, “plan the build and build the plan” is not just something to aspire to; it is absolutely crucial. Once manufacturing is underway, any revisions to the design will have a significant impact on the schedule and potentially cost. All parties need to understand this, and details must be settled in advance.
  • Manufacturer Selection: It is important that the capability, capacity, experience, and maturity of the manufacturer is considered closely. Some may have the capability, but not the capacity for a given project. Some just won’t have as much experience as you want; as new manufacturers enter this field; you will need a consistent approach to decide if you can get comfortable partnering with them. The manufacturer’s location is also an important consideration. If a detail is unclear, a connection is not aligned, or there is a quality problem, you may need manufacturer personnel to come to the site, or you may need to go to the plant. This could present a challenge if the plant is across the country – or the globe.
  • Transportation: Understanding the logistics of getting the modules to your site, including who owns the materials at any given time, and the adequacy of the transporters’ insurance are important considerations. Considerations should be made regarding size, shape, and weight of the materials, as it may impact the routing trucks take and time for delivery.
  • Quality Management: While Quality may be expected to be higher, as detailed above, you cannot just trust that the quality of your modules will be managed. You should verify it. This may involve embedded quality personnel, frequent plant visits, etc. Repetition of defects during production is a common quality concern. Your strong QA/QC management practices must be implemented in modular construction just as robustly as they would be in site-built work.
  • Subcontractor Selection: For this work, you need crews experienced with offsite construction, and that is a rare thing. How will you assess and get comfortable with subcontractors’ abilities to place this work in the absence of experienced crews? Will manufacturers’ representatives be available to oversee the work in that case? And beyond the crew’s ability to place the work, you must consider their ability to participate robustly in the BIM process. This is a critical success factor in modular work.
  • Insurance and Legal Risks: There are many factors to understand around insurance and legal risks in modular construction. Consult the appropriate experts to ensure that materials are adequately insured at each step, with a strong focus on transportation and logistics; that you have a clear understanding and definition of work vs. product in contracts; and a thorough understanding of what might constitute an “Occurrence”. These are all important discussions to have with your insurance and legal teams.
  • Financing: Owners may find it harder to get financing that fits the tempo of this type of construction, as the procurement and progress curves are completely different when compared to traditional construction. This gives some lenders pause and has proven a challenge for some projects.

Summary
Modular construction continues to increase in market share and will serve as a compliment to stick built construction. Successful projects are those with robust, open collaboration between all parties, clear understanding of potential risks, and a consistent approach to addressing them. Asking and answering the right questions will help you make solid risks decisions where modular work is involved.

 

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