Modular construction is a method of construction that involves building a project in small “modular pods” at an offsite factory and then shipping these pods to the building site for assembly. Often, these factories are located hundreds of miles away from the actual site, and in some cases, several states away from the site.
How Does it Work?
Modular construction is most often seen in hospitality and multifamily construction. These project types are easily adaptable to modular construction with one apartment unit or one hotel room serving as a single “modular pod.” These pods are built within a large manufacturing facility in a controlled environment at commercial scale. Upon completion of a pod, it is then secured to a semi-truck and delivered to the site where it is installed by the on-site general contractor.
The modular builder, along with the general contractor and architect, create a design and installation plan for the pods. The general contractor will make the site ready ahead of the delivery of the pods so that when the pods arrive the general contractor can begin installing and attaching the pods to one another. In addition to site work, the contractor will use conventional construction methods to build other portions of a project, if necessary, which could include things like a common area clubhouse, pool, leasing office, etc.
The modular pods are delivered to the site from the factory in the order of their installation cadence to reduce pod storage and project downtime. Upon installation of the wet and dry utility stubs to the pods, the general contractor can then complete the roof tiling, stucco, and landscaping. Upon completion of the installation of the utilities, the general contractor can complete any and all remaining finish work.
Why Would a Developer Choose to Build a Project with Modular Construction?
- Cost Savings: Anecdotal evidence suggests +/-20% savings on the cost of construction when compared to on-site building. The most significant cost savings come from the reduction of on-site labor and reduction of change orders. Due to the design nature and process for constructing modular buildings, change orders are often reduced or eliminated. The design is finalized before construction of modular units takes place.
- Time Savings: Likely, the most significant benefit to modular construction is the reduction in time related to the construction of the units. It is estimated by some sources that up to a 50% reduction in the overall construction period. This is due to the fact that developers can dual-track site work with the construction of the modular units so that once the site is ready, the units can begin to be put together.
- Labor: Modular manufacturing facilities are often located in lower cost states, so the cost of labor pales in comparison to high labor cost states like California. For example, there are several manufacturing facilities located in Boise, ID which has a lower overall cost of living and wages as compared to local contractors in states like California.
- Quality Control: Another important advantage is highly sophisticated quality control. Modern manufacturing facilities have independent quality control to ensure that the construction of the units is meeting the design specs of the developer and local and state requirements.
- Site Impact: Another advantage to modular construction is the reduction of noise and dust pollution that occurs at a conventional construction site. Since the modular units come to the site pre fabricated, there is less noise and dust created which benefits the neighbors and community at large. Traffic is also reduced to the general area due to the fact that the typical array of sub-contractors are not continuously visiting the site thus reducing the amount of traffic in and out of the construction site.
Financing Challenges with Modular Projects
Financing a modular project poses several challenges. These can include:
- Perfecting a lenders lien on stored materials and work-in-process that is not being completed on the project site. To mitigate this challenge, lenders typically send their construction monitoring staff to the manufacturing facility for regular visits and inspections. Another mitigant for this risk is financing upfront payments to the manufacturer with project equity rather than debt.
- Upfront payments required for bulk material purchases. It’s typical for a manufacturer to require a payment structure similar to the following, which can be challenging for development teams to fund.
- 5% due at contract signing to secure manufacturing schedule
- 25% due within 90 days of production commencement
- 25% due at the start of production
- 40% progress payments during production
- 5% at completion and acceptance at factory, prior to shipment
- Transportation, logistics and insurance challenges associated with transporting the pods to the project site. To mitigate this challenge, manufacturers often recommend specific 3rd party vendors that have worked with them in the past. These companies are typically large specialty transportation firms that are fully insured and take responsibility for delivery to the site.
Although some of these challenges appear difficult to overcome, modular construction projects have been successfully financed by some of the nation’s largest lenders and institutional investors.