{"id":642648,"date":"2023-04-28T22:05:59","date_gmt":"2023-04-29T03:05:59","guid":{"rendered":"https:\/\/news.sellorbuyhomefast.com\/index.php\/2023\/04\/28\/sums-of-the-parts-how-to-make-money-from-modular\/"},"modified":"2023-04-28T22:05:59","modified_gmt":"2023-04-29T03:05:59","slug":"sums-of-the-parts-how-to-make-money-from-modular","status":"publish","type":"post","link":"https:\/\/newsycanuse.com\/index.php\/2023\/04\/28\/sums-of-the-parts-how-to-make-money-from-modular\/","title":{"rendered":"Sums of the parts: How to make money from modular"},"content":{"rendered":"
\n

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?\u00a0<\/b><\/span><\/em><\/p>\n

In the 1989 Hollywood movie Field of Dreams<\/i>, a ghostly voice whispering \u201cIf you build it, they will come\u201d inspired Kevin Costner\u2019s 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.<\/p>\n

In the UK\u2019s current economic climate, and with narrow construction-industry margins, taking a similar approach to modular construction \u2013 \u201cIf you build a factory, the business will come\u201d \u2013 is more risky.<\/p>\n

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 \u201cdedicated management team\u201d in-country, and the firm plans to secure offsite-manufacturing capabilities.<\/p>\n

\n

\u201cA specialist offsite contractor\u2019s plan needs to be disruptive and needs to deliver a significant increase in productivity\u201d <\/span><\/p>\n

Tony Wells, Merit<\/b><\/span><\/h4>\n<\/blockquote>\n

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.<\/span><\/p>\n

Meanwhile, Caledonian Modular entered administration in March last year before being bought out by JRL Group, while fellow specialist Mid Group collapsed last July.<\/p>\n

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?<\/p>\n

Start-up costs<\/span><\/h3>\n

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<\/i> that \u201csignificant investment in R&D and platform development\u201d is also necessary, as well as outlay on software development, staff training, and recruiting engineering and automation graduates.<\/p>\n

Recouping that initial spending is reliant on a sustained flow of business and revenue, and a return on investment may happen \u201cfairly quickly\u201d if demand and activity are strong, says Construction Products Association (CPA) head
\nof research Rebecca Larkin.<\/p>\n

Upfront cost \u201cis more than matched by savings in the speed of delivery that modular allows\u201d, says David Hartley, managing director of modular construction firm MTX. \u201cBringing the building into service more quickly generates a more rapid return on investment.\u201d <\/span><\/p>\n

\n

\u201cTier ones are increasingly moving towards offsite fabrication, platform design and construction industrialisation\u201d <\/span><\/p>\n

Dirk Vennix, Buildoffsite<\/b><\/span><\/h4>\n<\/blockquote>\n

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. \u201cThe sector needs scale so that factories can be processing multiple projects in parallel and smooth out demand,\u201d he says. <\/span><\/p>\n

\u201cThis means offsite-construction systems have to be configurable for a wide range of client needs.\u201d<\/span><\/p>\n

Vennix says a steady return on investment from day one is essential. \u201cSignificant costs are incurred in advance of construction work and it may be weeks or months before payments are processed,\u201d he says. \u201cAny slowdown in production is likely to increase the cost of the modules because
\nfixed overheads will be a bigger percentage of
\nthe unit cost.\u201d <\/span><\/p>\n

Alternative strategies should be adopted for different market conditions, Vennix argues. One option is to \u201cgo for a high fixed-cost approach with automation, applying lean-manufacturing principles\u201d, he says.<\/p>\n

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. \u201cThese may be fixed or pop-up factories that can be mothballed if necessary if the project flow dries up temporarily,\u201d according to Vennix.<\/p>\n

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 \u201cas little as \u00a3350,000\u201d, enabling the company to \u201cmore easily ride the normal peaks and troughs of production in the industry\u201d.<\/p>\n

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: \u201cWe believe this can only be achieved when the manufacturer is in control of all of the design and interfaces.\u201d<\/p>\n

Commercial arrangements need to recognise the different cashflow implications for different construction methods, says Vennix, who adds: \u201cAny investment needs to be aimed at meeting market needs, which should inform strategy development.\u201d<\/span><\/p>\n

Wells notes that previous modular-business failures show \u201cit is self-evidently not as simple as just borrowing money and entering the modular market, and being patient for the profit to finally appear\u201d \u2013 the Field of Dreams<\/i> approach. Merit\u2019s growth has been financed by self-generated profit \u201csince large early finance was not readily available to us\u201d, he explains.<\/p>\n

Modular construction operations are \u201cinherently 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\u201d, the CPA\u2019s <\/span>Larkin notes.<\/p>\n

Larkin argues that traditional housing developers have become very adept at weathering market volatility and adjusting build rates and land purchases, \u201cwhich cannot be replicated on a manufacturing\/production line\u201d.<\/p>\n

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\u2019s 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.<\/p>\n

Meanwhile, standalone modular companies face a different situation, as dealing with clients means having less control over projects. They have \u201clittle 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\u201d, she says.<\/p>\n

Role of government<\/span><\/h3>\n

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 \u00a310bn Offsite Construction Solutions framework, issued in February, involving major players such as Bowmer + Kirkland, Kier and Laing O\u2019Rourke. Other measures, such as its Construction Playbook guidance, updated in 2022 with a note on modern methods of construction (MMC), \u201chave helped create the optimum market conditions, and government or publicly funded projects represent a very significant proportion of the UK modular construction market\u201d, says Buildoffsite\u2019s Vennix.<\/p>\n

Large frameworks are a godsend for MMC factories, with economies of scale optimising efficiency. Frameworks \u201creduce the risk and reduce the price per unit\u201d, says Chris Goodier, professor of construction engineering and materials at Loughborough University, although he adds \u201cit goes slightly against the free market, to a degree. But it does give people consistency of order book, which is massive.\u201d<\/p>\n

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, \u201cprovided they do progress as promised\u201d.<\/p>\n

This is an important caveat, especially at a time when the government is delaying capital projects. And a place on a \u00a33bn modular framework from the Department for Education did not save Caledonian from going under.<\/p>\n

\u201cWith 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,\u201d Larkin says.<\/p>\n

But the construction industry also has a part to play by embracing cultural change. Wells paints a picture of a sector \u201cthat is vested in maintaining the status quo and not investing to deliver it\u201d. He adds that \u201cindustrialised construction requires a complete rethink of the construction business model\u201d. <\/span><\/p>\n

Some tier one contractors do appear to be making progress, though. Laing O\u2019Rourke has used modular for over a decade and invested \u00a3200m to create a Centre of Excellence for Modern Construction in Nottinghamshire. Sir Robert McAlpine\u2019s joint venture with Mace is delivering the Forge office block in London Bridge using standardised modular components, and Kier\u2019s Choice Factory built modules for the 10 Lewis Cubitt Square mixed-use building in King\u2019s Cross, London.<\/p>\n

All these contractors supported Buildoffsite in developing a guide to offsite construction design, which CN<\/i> understands will be published in May. \u201cTier ones are increasingly moving towards offsite fabrication, platform design and construction industrialisation,\u201d Vennix says, while Beattie believes near-term economic factors are shifting large contractors towards modular. \u201cAs cost, quality and speed of delivering traditional methods become more unpredictable,\u201d he says, \u201cwe are seeing the main contractors now looking at this as a real option.\u201d<\/p>\n

Cultural change<\/span><\/h3>\n

Despite this, Wells criticises the big established players\u2019 efforts as lacking \u201ctangible and demonstrable productivity growth\u201d. He adds: \u201cThey have had decades, centuries, to demonstrate productivity improvement and have self-evidently failed. It\u2019s time for them to move aside and make way for new technology and business models.\u201d<\/p>\n

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. \u201cRisk 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,\u201d he says.<\/p>\n

Simon Cross, MMC advisory director of digital ventures at Mott MacDonald, advocates a more nuanced approach from contractors. \u201cNot every project should go MMC \u2013 it\u2019s about looking at what performance a client wants from that building,\u201d he says.<\/p>\n

Cross adds: \u201cThere are many reasons why you should go traditional \u2013 you have to take a case-by-case approach [\u2026] What we consider to be a \u2018traditional project\u2019 could have 30-40 per cent MMC-manufactured components in there.\u201d<\/p>\n

He warns contractors against \u201ctrying to shoehorn MMC into existing ways of doing things, rather than thinking that it\u2019s a different contractual model, a different delivery model\u201d.<\/p>\n

Whatever the economic pros and cons of modular, the construction industry faces the need for change. \u201cThere is no medium- or long-term economic or productivity advantage to [be gained from] fragmented traditional design and construction,\u201d Wells says. \u201cA site-based, manually intensive industry with low productivity and low profitability, continually reinventing the wheel with unnecessary prototype designs, is self-evidently unattractive.\u201d<\/span><\/p>\n

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.<\/p>\n<\/p><\/div>\n

Read More<\/a>
\n Ben Vogel<\/p>\n","protected":false},"excerpt":{"rendered":"

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?\u00a0 In the 1989 Hollywood movie Field of Dreams, a ghostly voice whispering \u201cIf you build it, they will come\u201d inspired Kevin Costner\u2019s character to turn his cornfield into a baseball diamond.<\/p>\n","protected":false},"author":1,"featured_media":642649,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1410,22006],"tags":[],"class_list":{"0":"post-642648","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-money","8":"category-parts"},"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/newsycanuse.com\/index.php\/wp-json\/wp\/v2\/posts\/642648","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/newsycanuse.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/newsycanuse.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/newsycanuse.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/newsycanuse.com\/index.php\/wp-json\/wp\/v2\/comments?post=642648"}],"version-history":[{"count":0,"href":"https:\/\/newsycanuse.com\/index.php\/wp-json\/wp\/v2\/posts\/642648\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/newsycanuse.com\/index.php\/wp-json\/wp\/v2\/media\/642649"}],"wp:attachment":[{"href":"https:\/\/newsycanuse.com\/index.php\/wp-json\/wp\/v2\/media?parent=642648"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/newsycanuse.com\/index.php\/wp-json\/wp\/v2\/categories?post=642648"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/newsycanuse.com\/index.php\/wp-json\/wp\/v2\/tags?post=642648"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}