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Tier one extinction: Is modular really a threat?

The Autumn Budget announced that government departments will favour offsite construction from next year. But are main contractors ready – and willing – to embrace this modular revolution? 

Thumb your way to page 53 of the government’s 2017 Autumn Budget, and you’ll find a seven-line paragraph that could revolutionise the way the construction industry operates.

“The government will use its purchasing power to drive adoption of modern methods of construction, such as offsite manufacturing,” the document reads.

Five departments are listed as those that will favour offsite construction from 2019 onwards: defence, education, health, justice and transport.

However, talk of a move towards offsite construction is nothing new. Back in the early 2000s, the then-deputy prime minister John Prescott pushed for more prefabricated housing in order to boost the supply of affordable homes. And in 2008, Laing O’Rourke took the plunge into the offsite market when it developed an advanced manufacturing facility at Steetley and acquired (though subsequently sold) its precast concrete manufacturing arm Bison Manufacturing.

But offsite construction has so far failed to truly take off, with only pockets of the industry investing in developing their own offsite products. So what’s different this time around?

Cast Consultancy chief executive Mark Farmer says the critical issue now is “we haven’t got a choice” but to develop offsite construction. The government’s Budget announcement came 12 months after Mr Farmer called for new approaches to construction – including greater use of offsite – in his damning Modernise of Die report on the industry.

The demand and the need for modular construction is there. But are contractors willing to commit to this offsite revolution – or does it pose too much of a threat to the status quo?

Irrelevant tier ones?

In the aftermath of the Second World War, a quick-fix to Britain’s housing crisis was needed after many homes were destroyed during the Blitz.

“Many of the main contractors don’t understand enough about offsite manufacturing to reflect the de-risking it brings”

Mark Farmer, Cast

The solution was prefabricated housing. However, these homes were seen as cheap, low-quality and undesirable places to live.

This stigma has stuck to modular construction ever since. But over the past 12-18 months, there has been an acceleration in this market largely driven by public sector demand, according to IFS global director for construction Kenny Ingram.

“Until a couple of years ago, the decision to build offsite was mostly down to individual councils and their preference for modular build,” he says. “But the government is now starting to drive this in certain sectors […] assets like schools, hospitals and prisons are good examples where the modular agenda is being driven.”

The public sector may have a growing appetite for offsite, but what about the construction industry?

According to Mr Farmer, getting the industry to embrace offsite is like trying to turn around an old tanker. One reason why the industry is hesitant to develop offsite, he suggests, is the threat it poses to the traditional main contractor role.

Mark Farmer CEO Cast Consultancy

Mark Farmer CEO Cast Consultancy

Cast’s Mark Farmer: “It calls into question the role of the tier one”

“It [offsite construction] challenges the contractual structures we operate under,” Mr Farmer says. “It reduces work needed on site, which reduces the number of subcontractors needed and calls into question the role of the tier one contractor.”

Tier ones’ failure to grasp the modular agenda could see the main contractor role become increasingly irrelevant, Mr Farmer argues, unless contractors choose to change.

“Many of the main contractors don’t understand enough about offsite manufacturing to reflect the de-risking it brings,” Mr Farmer says. “Contractors will put risk money into their lump-sum contracts where it involves offsite manufacturing – it becomes expensive and it doesn’t work.

“Therefore you have to re-order the supply chain, which creates a risk to tier one contractors […] Those who don’t start thinking about changing these processes will become irrelevant over time.”

Mr Ingram predicts the industry will shrink as offsite construction develops. “This industry needs to be flattened and we need fewer people,” he says. “Modular construction forces this: if you are building a house, for example, you have all the trades under one roof in a factory and you don’t need as many organisations involved in the construction process.”

Challenges to the main contractor

As the industry continues to hesitate over the move to offsite, new entrants to the market have emerged – some not even from the construction sector.

Consultant Aecom will be delivering 3,000 modular homes as part of a £3.5bn regeneration of Silvertown Quays in east London; developer Urban Splash says it aims to be an industry leader in delivering offsite products; and financial giant Legal and General moved into the offsite housebuilding space back in 2016 (see box).

“If one organisation offers an integrated service, this will provide better co-ordination and a cheaper and quicker product”

Kenny Ingram, IFS

With different sectors of construction and other industries in the wider economy tapping into offsite, new entrants could challenge the way the supply chain has traditionally been organised, according to Urban Splash chairman Tom Bloxham.

“It could be anyone in charge of a traditional construction site,” he says. “It could be a traditional contractor like Laing O’Rourke, it could be a financial institution, it could be a developer like ourselves, or a supply company.”

This outsider interest in offsite construction could seriously shake up the sector, Mr Ingram argues. “I think new entrants will pose a threat to main and subcontractors,” he says. “There are so many organisations involved in building an asset, but if one organisation offers an integrated service then this will provide better co-ordination and provide a cheaper and quicker product.”

Clients have a role to play in pushing for a more joined-up delivery of projects. Traditionally, clients have sought a specialist for each job, but a greater focus on requesting offsite construction could force the industry into meeting these demands.

Mr Ingram says modular construction is a major driver for change and will force the industry to work differently, becoming smarter and more professional in delivering schemes.

One way in which contractors should consider developing offsite is by forming partnerships with these entrepreneurial companies from different industries who spot the opportunities, Mr Ingram suggests. “I think joint ventures are a good option to think about,” he says.

Kenny ingram global director construction ifs

Kenny ingram global director construction ifs

IFS’s Kenny Ingram: ”The same argument is there for modular construction as was there for BIM”

“Different people will come at this from different starting points. If you’re a traditional contractor, you will understand construction and how to manage things on site. But if you take a manufacturing business, for example, it will not know anything about construction business practices, but will know a lot about supply chains.”

Aecom Buildings + Places chief executive Peter Flint says main contractors who choose to develop offsite solutions will reap a range of business benefits.

“If offsite is embraced in the right way, it has to be a better way of building”

Peter Flint, Aecom

“If you can push towards more offsite prefabrication, in theory the project will be faster and easier to finish with fewer defects,” he says. “There’s a lot of lost money in programme overruns and fixing projects at the end. If offsite is embraced in the right way, it has to be a better way of building.”

One sector with a particular demand for offsite construction is housing. Mr Flint says clients are “crying out” for modular construction, where large volumes of homes are needed amidst a housing crisis.

Role of government

There appears to be tension between increasing client demand for offsite construction and resistance from an industry threatened by the challenge this presents to traditional contracting roles.

Mr Ingram believes government has a major role to play in catalysing the development of offsite construction. If departments departments were to mandate the use of offsite, this could drive real change in industry behaviour as construction adapts to meet this demand.

“Looking at BIM, the government drove this agenda by mandating it,” he says. “It made the industry change, as companies knew they wouldn’t win any business unless they conformed. The same argument is there for modular construction.”

Silvertown aerial shot

Silvertown aerial shot

Aecom will deliver 3,000 modular homes at the £3.5bn Silvertown Quays project

However, Mr Farmer questions whether direct intervention from the government is the best way to advance offsite construction. “I’m nervous about government directly stepping in,” he says. “Government should strategically initiate greater demand for modular construction techniques […] and start stimulating demand.”

He says the Autumn Budget’s announcements set the right tone to encourage the industry to develop modular construction for itself, secure in the knowledge there will be enough work on schools, hospitals and defence programmes to underpin a larger offsite supply chain.

However, he feels this will still not be enough to convince main contractors to embrace the offsite agenda. “I don’t think you’ll see many tier ones moving towards integrated supply chains using offsite factories. I think they will continue their modelling of subcontracting and think to themselves, ‘We’ll partner with someone who has their own factory’.”

However, Mr Flint urges the industry to think of modular construction as an opportunity, not a threat. “It’s high time the industry addressed our productivity challenge. We haven’t improved or changed our methods for decades – offsite manufacturing gives us an opportunity to do that.

“I would encourage people not to be fearful. The more players that are participating in this, the more likely that we are going to improve productivity as a whole industry.”

Financial services firm Legal and General is one example of a company from a completely different industry spotting opportunities in the modular construction market.

L&G announced in February 2016 that it would move into offsite housebuilding and launch the largest modular homes factory in the world – a 550,000 sq ft warehouse near Leeds.

It estimates that a move to offsite manufacturing could reduce time spent on site by 70 per cent, and aims to build a pipeline of 70,000 homes over the course of the next decade.

Development of the company’s modular housing arm began to ramp up in summer last year. Essential Living’s Damon Brown was hired as construction portfolio manager in May and Berkeley Group’s David Jones joined as modular integration director the same month.

A month later, Rosie Toogood, previously business development director for Rolls-Royce, joined as CEO of the modular housing business.

Following the appointment, L&G chief executive Nigel Wilson made it clear the company intends to shake up this market. “Almost every other industry has seen radical innovation brought about by digital technology advancements. And yet we continue to build houses the same way the Victorians did,” he said.

“We need more entrants to the sector, new technologies and business models to deliver the 100,000 shortfall of new homes. Just as the car industry was automated, so the UK’s traditional housebuilding sector now needs to step up.”

IIn November 2016 it revealed plans to deliver 1,500 homes in Berkshire after acquiring a 110 ha site in Arborfield, Wokingham.

Following chancellor Philip Hammond’s announcement that major departments would favour offsite from 2019, L&G announced it would accelerate its housebuilding agenda.

 

Readers' comments (4)

  • Brilliant article, balanced and well written.

    I just wonder how many will STILL shrug off / ignore / 'ostritch' and how many will sit up and take note?

    Steve Napper, CEng, IMechE, Director
    MMCEngineer.com
    mess.uk.com

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  • We're committed to offsite and see that the change is already happening. The top contractors are already moving to offsite as are the blue chip clients.
    The current quality and margin issues of "onsite" will be exasperated by labour shortages as we leave the EU.
    The benefits of quality, speed and reliability of offsite are being recognized. The supply chain is growing to meet demand.
    We are at "early adoptor" stage but the next 2-5 years will see huge take-up, which will change the industry.
    Patrick Hayes
    Head of Structures
    Meinhardt UK

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  • Why does change have to be a threat? It's an opportunity! What prefabrication does is change the supply chain, tighten up quality and coordination, and make projects easier and quicker to deliver. All of these are opportunities that the Tier 1's are well placed to take advantage of. What we see in the projects we are helping to deliver is that it brings so many advantages that its wider adoption is inevitable, its not if?, but when?

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  • JOHN ROBERTS

    The construction industry is changing, and indeed must change if it wants to move to the next stage of it's natural evolution. Rest assured, if we don't drive it from here, there are many overseas companies that will be very happy to come to the U.K and take their piece of the action. I am old enough to remember what happened to the British motorcycle industry in the 60's and 70's - all because we were too slow in tooling up for modern requirements and needs!

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