Rethinking Modular vs. Conventional Construction Risk
Updated: Mar 31, 2021
The perception that modular construction is a far riskier alternative to conventional construction is no doubt a contributing factor as to why, despite so much interest in the use of alternative means of construction, modular construction is currently being suppressed to only 4% of the construction industry in the U.S. However, as an industry, do we really highlight the risks with conventional construction or have those risks simply been baked in and accepted?
If we look at the trusty Construction Risk Triangle (Time, Quality, Cost), the industry certainly appears to accept that while you can aim to achieve all three goals, you are fortunate to check off only two. COVID aside, I would argue that in recent years the vast majority of conventional construction projects come in over budget (depending on how inflated the GMP budget was initially set) and behind schedule, leaving Quality as the only box checked. Risk factors are hard at work on conventional construction projects and are eroding the corners of the Construction Risk Triangle.
In many major cities throughout the U.S., construction projects (multi-family in particular) are simply not penciling as financially viable developments due to the rising conventional construction costs. The supply chain of affordable housing is being significantly impacted and the homeless crisis worsens. Waiting 24-30 months for an apartment building to be constructed certainly isn’t ideal. As such, the industry is tuning into modular construction, which claims to be able to deliver high Quality units, in a fraction of the Time and with Cost savings thrown in too!
Unfortunately, there is no such thing as “risk-free” real estate development and modular construction does have its unique risks. Spending 15 years of my 25-year career identifying, mitigating and managing both modular and conventional construction risk for risk-averse lenders and investors throughout the U.S. has helped to constantly remind me of the risks associated with both methods of construction. I identified all potential risks at the start of each and every project – no risks were accepted and buried.
So let’s attempt to compare how different forms of risk impact Time, Quality and Cost on modular vs. conventional construction projects. We’ll take a typical mid-rise urban infill multi-family project with subterranean parking, one podium level and conventionally-built Type III residential or volumetric modular above. We should assume (dangerous, I know) that both project types will be adequately designed, managed, and constructed and also understand that unforeseen issues will always occur on any project.
Risk will be viewed differently by different project participants but overall, this analysis appears to indicate that modular construction projects currently carry slightly less risk to Time, Quality and Cost compared to conventional construction.
So let’s now look at the respective High Risk factors and whether there is potential to mitigate them. If we take “Change in market conditions (best overall schedule duration” for example, there is no way to guarantee market conditions so the sooner you can complete the project, the better chance you have of avoiding market downturns. Conversely, “Onsite/offsite coordination”, “Cost of Plan B (if modular company defaults)” and “Ability to obtain construction financing” are all modular risks that can be mitigated. These are exactly the types of challenges that Optimum Modular Solutions focusses on and works hard to address.
The conventional construction industry has had centuries to address the risks that impact Time, Quality and Cost, and while certain improvements have been achieved, many of these risks remain in play and appear to be widely accepted. By focusing on resolving the fewer risks associated with modular construction (many of which relate to the unfamiliarity of a newer construction method), the construction industry is set to experience a scenario where modular construction is viewed as a significantly less risky alternative to conventional construction where meeting Time, Quality and Cost goals are considered the norm.
Darren Seary, FRICS is the Founder & Principal at Optimum Modular Solutions, a specialist modular construction consulting, project management and risk mitigation company. By combining decades of conventional and modular construction experience with a vast risk management background, he has embarked on a journey to help address the challenges relating to modular construction to facilitate lower construction costs and project timelines while ultimately helping address the ongoing affordable housing crisis in the U.S.