Are high upfront costs and a lack of clarity on work pipelines behind a recent spate of high-profile setbacks in the modular construction sector?
In the 1989 Hollywood movie Field of Dreams, a ghostly voice whispering “If you build it, they will come” inspired Kevin Costner’s character to turn his cornfield into a baseball diamond. In typical Hollywood style, the protagonist beats the odds to prove the doubters wrong, with tearjerking results.
In the UK’s current economic climate, and with narrow construction-industry margins, taking a similar approach to modular construction – “If you build a factory, the business will come” – is more risky.
Plenty of firms are entering the market. In February, Berkeley Homes submitted plans to build a modular factory in Hoo, Kent, capable of turning out 1,000 homes per year. And last November, US-based Volumetric Building Companies announced an expansion into the UK with a “dedicated management team” in-country, and the firm plans to secure offsite-manufacturing capabilities.
“A specialist offsite contractor’s plan needs to be disruptive and needs to deliver a significant increase in productivity”
Tony Wells, Merit
Not all recent sailing has been smooth, though. In May last year, modular construction firm US House Group fell into administration due to underuse of its factory, with up to 160 jobs lost. Two months later, Countryside announced that it would close its offsite factory in Bardon, Leicestershire, which only opened in 2021, after its profit plummeted. Countryside was subsequently acquired by Vistry, which pledged in January this year to keep the factory open.
Meanwhile, Caledonian Modular entered administration in March last year before being bought out by JRL Group, while fellow specialist Mid Group collapsed last July.
So what are the pitfalls that must be avoided in such a turbulent operating climate to increase the chances of success for firms investing in modular construction?
Start-up costs
Industry insiders say that companies entering the modular market face significant upfront costs. Tony Wells, chief executive of Northumberland-based modular specialist Merit, lists capital investment in large factory space, automation equipment, IT infrastructure and prototyping/product development. He tells Construction News that “significant investment in R&D and platform development” is also necessary, as well as outlay on software development, staff training, and recruiting engineering and automation graduates.
Recouping that initial spending is reliant on a sustained flow of business and revenue, and a return on investment may happen “fairly quickly” if demand and activity are strong, says Construction Products Association (CPA) head
of research Rebecca Larkin.
Upfront cost “is more than matched by savings in the speed of delivery that modular allows”, says David Hartley, managing director of modular construction firm MTX. “Bringing the building into service more quickly generates a more rapid return on investment.”
“Tier ones are increasingly moving towards offsite fabrication, platform design and construction industrialisation”
Dirk Vennix, Buildoffsite
But if the project pipeline shrinks, or confidence to proceed with a planned project dwindles, a modular factory can quickly become a white elephant. Limiting start-up costs and winning a range of diverse clients are therefore crucial ingredients for contractors to become commercially sustainable in the modular field, says Dirk Vennix, executive director of industry body Buildoffsite. “The sector needs scale so that factories can be processing multiple projects in parallel and smooth out demand,” he says.
“This means offsite-construction systems have to be configurable for a wide range of client needs.”
Vennix says a steady return on investment from day one is essential. “Significant costs are incurred in advance of construction work and it may be weeks or months before payments are processed,” he says. “Any slowdown in production is likely to increase the cost of the modules because
fixed overheads will be a bigger percentage of
the unit cost.”
Alternative strategies should be adopted for different market conditions, Vennix argues. One option is to “go for a high fixed-cost approach with automation, applying lean-manufacturing principles”, he says.
Another approach is to go for a low fixed-cost or low break-even point, with more manual input but very short set-up times. “These may be fixed or pop-up factories that can be mothballed if necessary if the project flow dries up temporarily,” according to Vennix.
Norwich-based Beattie Passive uses pop-ups on certain projects. Managing director Ron Beattie says this approach helps to ensure low production start-up costs of “as little as £350,000”, enabling the company to “more easily ride the normal peaks and troughs of production in the industry”.
Wells says that integrated digital manufacturing delivers productivity gains, which may more than offset investment costs, as long as the product can be designed for productive automated manufacture and assembly. He adds: “We believe this can only be achieved when the manufacturer is in control of all of the design and interfaces.”
Commercial arrangements need to recognise the different cashflow implications for different construction methods, says Vennix, who adds: “Any investment needs to be aimed at meeting market needs, which should inform strategy development.”
Wells notes that previous modular-business failures show “it is self-evidently not as simple as just borrowing money and entering the modular market, and being patient for the profit to finally appear” – the Field of Dreams approach. Merit’s growth has been financed by self-generated profit “since large early finance was not readily available to us”, he explains.
Modular construction operations are “inherently easier to manage if the modular operation is an arm of an existing builder or contractor that has sight of demand, through a stream of planning permissions and sites across the country that can be phased in to provide that steady flow of demand”, the CPA’s Larkin notes.
Larkin argues that traditional housing developers have become very adept at weathering market volatility and adjusting build rates and land purchases, “which cannot be replicated on a manufacturing/production line”.
In theory, developers and homebuilders producing their own modular homes have greater control and visibility of their pipeline, as they own and apply for planning permission on the land they want to build on. However, due to the housing sector’s vulnerability to economic turbulence, things are not always so straightforward. For instance, 2022 ended on a sour note for modular when Swan Housing announced it was closing both its factories after struggling to make a profit.
Meanwhile, standalone modular companies face a different situation, as dealing with clients means having less control over projects. They have “little control over managing the flow of demand, with targeted projects perhaps held up or refused in planning, or not going ahead due to market conditions”, she says.
Role of government
With a solid pipeline of work crucial to making the sums stack up for modular builders, the government has a key role to play. National policy regards offsite as a means of reaching the ambitious 2050 net-zero target while also encouraging productivity improvements and innovation. Government initiatives include a £10bn Offsite Construction Solutions framework, issued in February, involving major players such as Bowmer + Kirkland, Kier and Laing O’Rourke. Other measures, such as its Construction Playbook guidance, updated in 2022 with a note on modern methods of construction (MMC), “have helped create the optimum market conditions, and government or publicly funded projects represent a very significant proportion of the UK modular construction market”, says Buildoffsite’s Vennix.
Large frameworks are a godsend for MMC factories, with economies of scale optimising efficiency. Frameworks “reduce the risk and reduce the price per unit”, says Chris Goodier, professor of construction engineering and materials at Loughborough University, although he adds “it goes slightly against the free market, to a degree. But it does give people consistency of order book, which is massive.”
Larkin notes that public infrastructure projects such as HS2, schools, hospitals and prisons provide a multi-year pipeline of demand and a high level of predictability to justify investment in an offsite factory, “provided they do progress as promised”.
This is an important caveat, especially at a time when the government is delaying capital projects. And a place on a £3bn modular framework from the Department for Education did not save Caledonian from going under.
“With high rates of inflation stalling decision-making and activity, even longer-term government construction programmes can suffer volatility which, as a cyclical element, is much more difficult to solve for business and operations that need a straight or upward-sloping line,” Larkin says.
But the construction industry also has a part to play by embracing cultural change. Wells paints a picture of a sector “that is vested in maintaining the status quo and not investing to deliver it”. He adds that “industrialised construction requires a complete rethink of the construction business model”.
Some tier one contractors do appear to be making progress, though. Laing O’Rourke has used modular for over a decade and invested £200m to create a Centre of Excellence for Modern Construction in Nottinghamshire. Sir Robert McAlpine’s joint venture with Mace is delivering the Forge office block in London Bridge using standardised modular components, and Kier’s Choice Factory built modules for the 10 Lewis Cubitt Square mixed-use building in King’s Cross, London.
All these contractors supported Buildoffsite in developing a guide to offsite construction design, which CN understands will be published in May. “Tier ones are increasingly moving towards offsite fabrication, platform design and construction industrialisation,” Vennix says, while Beattie believes near-term economic factors are shifting large contractors towards modular. “As cost, quality and speed of delivering traditional methods become more unpredictable,” he says, “we are seeing the main contractors now looking at this as a real option.”
Cultural change
Despite this, Wells criticises the big established players’ efforts as lacking “tangible and demonstrable productivity growth”. He adds: “They have had decades, centuries, to demonstrate productivity improvement and have self-evidently failed. It’s time for them to move aside and make way for new technology and business models.”
Wells also calls for cultural change from clients, arguing that contracts should not be weighted so heavily in their favour and that they should bear a share of the risk involved in offsite construction. “Risk should be fairly proportioned between customer and manufacturer and customers should not heavily modify standardised forms of contract in order to pass unrealistic risk to the construction industry,” he says.
Simon Cross, MMC advisory director of digital ventures at Mott MacDonald, advocates a more nuanced approach from contractors. “Not every project should go MMC – it’s about looking at what performance a client wants from that building,” he says.
Cross adds: “There are many reasons why you should go traditional – you have to take a case-by-case approach […] What we consider to be a ‘traditional project’ could have 30-40 per cent MMC-manufactured components in there.”
He warns contractors against “trying to shoehorn MMC into existing ways of doing things, rather than thinking that it’s a different contractual model, a different delivery model”.
Whatever the economic pros and cons of modular, the construction industry faces the need for change. “There is no medium- or long-term economic or productivity advantage to [be gained from] fragmented traditional design and construction,” Wells says. “A site-based, manually intensive industry with low productivity and low profitability, continually reinventing the wheel with unnecessary prototype designs, is self-evidently unattractive.”
And before shifting to modular, contractors must carefully assess the likelihood of a steady pipeline and whether they can afford the upfront investment in facilities.
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Ben Vogel