Modular Construction Report

1 Smart Construction How offsite manufacturing can transform our industry April 2016. Contents Foreword 3. Executive summary 4. Introduction 6. Vision of smarter Construction 6. Economic push' and pull' factors 6. Supplier over-capacity 7. Increasing client demand 7. State of the industry 8. UK Construction Industry 8. An onsite focused industry 8. The offsite manufacturing industry 9. The offsite case for change: KPMG findings 10. Project level value summary 10. Beyond the project level: Portfolio and whole-life 12. Across Construction portfolios 13. Whole-life asset value 13. Overcoming industry challenges 16. Offsite 16. Conclusion 18. Next steps 18. Bibliography 19. Smart Construction : The value in offsite Construction 1. Foreword Many Construction projects have I am grateful to my colleague a reputation for being completed Joshua Southern for his research behind schedule and over budget.

2 And authorship of this Report , which evidences the value of that While these companies have tried predictability to the Construction to improve project time, cost and industry. quality by using technological and commercial industry innovations We call on Construction industry such as Building Information clients to collaborate with suppliers Modelling (BIM) and collaborative across whole portfolios of supplier engagement models. But Construction projects, to invest in they have largely failed to reverse the and then unlock the value of offsite trend of poor productivity and project Construction . uncertainty or counter the growing challenge of industry skills shortages. Richard Threlfall Offsite Construction offers an alternative to this current Partner Construction status-quo by promising UK Head, Infrastructure, Building and transformative improvements across Construction the asset lifecycle in time, cost , quality and health and safety.

3 But KPMG in the UK. most importantly, offsite Construction offers predictability. Smart Construction : The value in offsite Construction 3. Executive summary The challenge This paper provides context and meaning behind current industry data to show;. While the Construction industry is buoyed by predicted growth and expansion, it continues to underperform Where the value of offsite lies;. in four strategic areas: productivity, certainty in Ideas as to how the industry can exploit this value to delivery, skills shortage and data transparency. Offsite drive market growth;. Construction - the prefabrication, modularisation and standardisation of Construction processes and assets How offsite can help overcome some of the wider within controlled factory environments - continues to be industry challenges. quoted across government and industry as a potential catalyst in meeting these challenges.

4 It also has a role to Findings value across the lifecycle play in addressing the UK's housing shortage. Project level: Independent KPMG research found that But if it is so important, why does data show that the in spite of the increased Construction costs associated offsite market only contributes 7% to UK Construction with one-off offsite Construction projects, financial net GDP1. And why don't government and private clients savings of 7%. mandate the consideration of offsite solutions in procurement tenders? were possible as a consequence 7% net financial of the shortened project savings Barriers Construction period. These when applying There are many barriers often cited, including: high cost of entry, requirement for fully front-loaded supplier project savings enabled faster offsite Construction engagment and lack of confidence in the product quality rental revenue income and savings from Construction and certification2.

5 But, as more innovative contractual inflation costs. Together that equated to 36m savings on models become commonplace, offsite products gain a 50-storey central London office building. In reality, the more insurance recognition and quality certification, and saving to a commercial or public sector client is likely to public and private sector companies commit to longer- also include savings on any interest on loans, improved term investment funding, these barriers are slowly project predictability, and improved quality however becoming less inhibitive. these have not been quantified here. KPMG believes a core reason for the slow take-up of Portfolio: Our study did find that offsite project level offsite can be attributed to the lack of any substantive Construction unit costs were greater than an onsite demonstration of the value of offsite at project, portfolio equivalent. However, the economies of scale achieved and asset whole-life levels.

6 Indeed, a 2005 study by applying a standardised product catalogue approach by Loughborough University looking at barriers and mean that significant unit cost savings are possible when opportunities in offsite found that only 51% of client using offsite across a portfolio. respondents considered offsite to increase value (Goodier ). Without that recognition there will be no commercial drive nor any compelling case for change. Anglian Water realised 30%. in efficiency savings by standardising treatment facility modules across their portfolio Whole life value: The current available qualitative data Opportunities suggests that offsite manufactured assets may reduce KPMG believes there may be latent capacity within the whole life cost . The main driver for which is in the UK Modular and prefabrication market, and there are improved manufactured quality - indeed a study (Goodier growing signs that early adopter client and suppliers ) in 2005 found that 77% of all contractor respondents are taking advantage of this by developing strategic recognised the increased quality of offsite products.

7 Partnerships, most recently between Legal and General This improved quality lowers the failure rate of the and Laing O'Rourke. However, we don't have sufficient assets, thereby improving predictability and reducing data to reliably assess the offsite market value and quantum of asset maintenance costs. supplier capacity. Greater transparency of offsite supplier capacity will improve client confidence in it's use, but Offsite manufacturing also enable timely investment of facilities in meeting future offsite demand. offers clear improvement in Offsite itself is not the panacea to all the industry's quality, but as yet no clear ailments. For offsite manufacturing to stimulate a transformation across industry, KPMG believes there is data exists to link this to an onus on clients and suppliers to quantify its longer reduced whole life cost term asset value and start to develop more suitable business cases that include whole-life cost analysis.

8 However, only 41% of all client respondents reported a The industry, and clients in particular, must also look reduced whole life cost after applying offsite. Right now, to re-develop compatible procurement and contractual we don't have enough quantitative data to substantiate strategies to enable more collaborative investments in the value of offsite manufactured assets across the offsite. lifecycle. For an industry progressively more focused on reducing totex costs, finding data sets to demonstrate this whole life value in offsite is crucial to the success of Offsite manufacture of the offsite industry. residential housing is the key to addressing the UK's housing crisis. It means we can build homes quicker, cheaper and better whilst achieving greater certainty over costs. This is the change that is needed to institutionalise investment in residential housing.'. Tom Ground, Chief Executive of Legal & General Homes Smart Construction : The value in offsite Construction 5.

9 Introduction Vision of smarter Construction Economic push' and pull' factors The joint government and industry industrial strategy, Some clients have tried to drive greater use of modern Construction 2025, sets out a vision of the industry's methods of Construction . A survey conducted by Inside future using three strategic priorities: smart Construction Housing magazine in March 2014, showed that over the and digital design, sustainable Construction and improved three successive years, of 22,544 homes planned trade performance. For the Construction 2025 targets by 17 of the UK's largest housing associations will be to be met, smarter and more effective methods of constructed using offsite methods. Construction must be applied wholescale across the In October 2014 the Hyde Group housing association, industry. But for this to happen, a more compelling which has 55,000 homes3 called for support to offsite case for investment in modern methods of Construction by allowing properties built using Modular technologies (MMC) must be made.

10 To qualify for mortgage support on the same terms as traditionally built homes. For the industry to truly An alliance between Laing O'Rourke and Legal and value offsite Construction General was announced in 2015 in a public land housebuilding venture to build 2,000 new homes a year;. and the benefits it brings, potentially indicating a change in how future investments we must actively do more in offsite are made. to quantify its value and In addition, future infrastructure clients like HS2 are specifying the presumption for offsite' in future tenders recognise the crucial part it and The Housing Corporation and English Partnerships will play in transforming are requiring that 25%4 of funded units be constructed using MMC. our industry Government interest in offsite manufacturing also Andrew Wolstenholme, OBE, Co-Chair appears to be increasing. In 2015, the Department for Business Innovation and Skills awarded a grant to of Construction Leadership Council a consortium led by Laing O'Rourke to develop advanced methods for the manufacture of homes, buildings and This and other industry papers go some way in driving infrastructure.