The growth of modular construction brings a new risk management landscape
During the past decade, modular construction has become an increasingly popular alternative to traditional stick-built construction for new commercial, industrial, and residential buildings. Today, the use of modular construction is growing especially rapidly due to the increased need for housing in the wake of the COVID-19 pandemic, in addition to other long-term factors.
As this trend takes hold, it brings a number of new risk management implications for builders and others involved in the construction industry—implications that are better understood through a review of the modular construction process and its many differences from traditional construction.
What Is Modular Construction?
Modular construction is increasingly being used for a wide variety of residential and commercial projects, including health care, offices, education facilities, and apartment buildings. Modular construction methods involve individual sections, called modules, that are constructed in a controlled, off-site manufacturing facility and assembled at a building site. Leveraging assembly-line production methods, each module is fabricated with standard building materials such as wood, concrete, and steel. Modular construction methods are often compared to building with blocks: Each building section is constructed to fit perfectly with the next one. Once the pre-built modules are delivered to the construction site, each module is staged in a predetermined order to ensure final assembly is as efficient as possible.
Either a translift or a crane is used to set the modules in place and construct the completed building. As construction of the modules is happening at the manufacturing facility, prep work is often being done at the building site. This includes excavation, grading, foundation work, and utility installation.
Increased use of modular construction is being driven by multiple factors. Rising materials prices and soaring demand are driving builders to look for both alternative materials and new ways of using existing materials more efficiently. In addition, developers and owners are facing new challenges that are fueling the growth of modular construction:
Due to all these factors, the use of modular construction is growing rapidly. The global market for modular and prefabricated construction is expected to increase from $101.7 billion in 2020 to $173.4 billion by 2027, according to a February 2021 report by Fior Markets. All indications are that the construction industry is now poised to more fully embrace the innovation and technology provided by modular construction.
Cost Savings
One reason why modular construction has gained popularity is the increased cost of construction materials, especially as a result of the pandemic. The prices of traditional construction materials such as lumber, steel, aluminum, cement, and rebar have all increased significantly from pre-pandemic prices. According to the National Association of Home Builders, rising lumber prices in 2021 have hit homebuilders, buyers, and renovators hard, pushing up the cost of an average single-family home by approximately $36,000. Given this fact, modular construction—which, like most manufacturing, is geared toward making highly efficient, industrialized use of materials—offers a number of potential cost advantages.
One key factor in project profitability is the availability and cost of on-site labor. In larger urban areas where labor is scarce and/or more expensive, shifting construction to an off-site location can yield significant cost savings. For construction projects that support revenue-generating businesses such as hotels and fast food restaurants, the overall efficiency of the process allows for quicker opening dates. The shortened construction schedule can also advance the occupancy date and reduce the time needed for a construction loan.
Modular construction can also offer the benefit of speed. Traditional construction projects require that all work be completed on-site and from the ground-up. However, the majority of modular construction work occurs off-site, inside a manufacturing facility. Because construc-tion takes place simultaneously at a modular plant and on-site, it can be completed in less time than traditional construction, resulting in construction schedules being reduced by as much as 50%, according to recent analyses (“Multifamily Modular Construction Toolkit,” by Fannie Mae and the National Institute of Building Sciences; and “Modular construction: From Projects to Products,” by McKinsey & Company).
In addition to cost reduction and speed, modular projects also offer greater cost certainty. With 60% or more of construction being completed in a manufacturing plant, the risk of weather delays is mitigated. When buildings are occupied sooner, there is a quicker return on investment. And there are safety considerations: The indoor construction environment likely reduces the risk of work-related accidents and injuries to workers. Removing approximately 80% of the building construction activity from the site location also helps reduce site disruption, vehicular traffic, and construction hazards.
Construction Quality and Performance
Proponents of modular construction argue that building off-site also ensures better construction quality management, because manufacturing plants have stringent QA/QC programs with independent inspection and testing protocols. Modular buildings are promoted as being stronger than site-built construction because each module is engineered independently; and, once attached, the modules become one integrated wall, floor, and roof assembly.
In addition, modular buildings must still meet all the same building codes and requirements as if they were built on-site; and, since they are engineered and fabricated to meet those same codes, industry experts believe they will last as long as a traditional site-built structure, if not longer. As with all construction, the life expectancy of a modular building depends on whether it receives regular maintenance.
Temporary modular buildings typically have a useful life of 20-25 years, according to modular construction company Vanguard Modular, but this can be extended if they are well-maintained and periodically renovated. In addition, all modular buildings (temporary or permanent) can be expanded, remodeled, and updated whenever necessary. Aside from the use of repurposed shipping containers, most modular buildings are indistinguishable from those that are site-built.
The Environment
Modular construction is known for being “greener” than traditional construction. Building in factory conditions allows for more efficient control of inventory and material use, reducing waste. Surplus materials can be recycled for use on other projects. Modular projects can also better utilize technology and provide smarter features with improved performance from climate control systems and the building envelope.
Modular Construction Liability Risks
Modular construction is impacting how projects are insured and is creating evolving liability exposures that builders, brokers, and carriers need to address. With off-site manufacturing, defect exposures typical of on-site construction are anticipated to instead shift to product liability exposures with risks allocated among contractors, modular manufacturers, transporters, and installers. Claims and litigation are expected to move away from a focus on traditional construction defects and toward design errors, improper sequencing, product failures, and faulty installation of building components. Under product liability laws, modular units may potentially be considered products and could be subject to claims of design errors, manufacturing defects, and failure to warn. Notably, product liability laws could provide a different liability standard and different recoverable damages than are applicable to traditional construction-defects claims. Additionally, the claims may be subject to different statutes of limitations.
Modular construction is not immune from faulty workmanship defect claims. For example, these claims might include structural deficiencies such as:
Undoubtedly, defect claims may also target design professionals as well as contractors involved with the modular manufacturing and installation process.
Concerns with Wrap-Up Insurance Programs
Traditionally, large construction projects are insured with wrap-up or owner-controlled policies procured for all contractors working on-site. Such policies typically do not extend coverage to off-site operations but instead limit coverage to work performed on or near the project site.
To adequately insure a modular construction project under a wrap-up program, policy modifications are necessary to avoid gaps in coverage and uninsured losses related to off-site manufactured modular components. Likewise, risk transfer through indemnity agreements and additional-insured endorsements is necessary with all modular manufacturers and transporters that are not covered by a wrap-up or owner-controlled policy.
Project Planning and Collaboration
As modular construction gains popularity, proactive project management and early planning are critical contributors to effective risk management. According to the National Institute of Building Sciences Off-Site Construction Council, planning should include the following:
Looking Ahead
New York City is the home to the tallest modular building in the world: 461 Dean is a 32-story residential tower built from 930 modules placed by cranes and locked together like puzzle pieces. The project developer built 90% of 461 Dean in its factory at the Brooklyn Navy Yard, which allowed the company to save 20% on construction costs, according to Architectural Digest. 461 Dean is an example of the future of modular construction.
Promising improved construction efficiency, shorter building times, and lower costs for developers, modular construction will only continue to gain in popularity. Builders and carriers must be ready to ride this wave of new construction.
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