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Can prefab preserve construction margins?

Apr 04, 2022

Here’s some good news and some bad news: Demand for construction services is strong, and, for many, backlog indicators have improved since the start of the COVID-19 pandemic. But busy doesn’t always mean profitable.

Elevated labor and materials costs are eroding profit margins. Competition for jobs is fierce — and often focused on the lowest bidder. Every project detail — estimating, scheduling and even things out of contractors control like the weather — has to be executed perfectly for construction firms to hold onto their hard-earned dollars.

This isn’t new. But some contractors aren’t taking it as “business as usual.” Instead of riding the waves, they’re shifting their business models and processes, changing where parts are being constructed.

Control what you can

With prefabrication and modular construction, building components or entire buildings are constructed in a shop or warehouse, then delivered to the job site. (Some assembly required)

Shifting the location — and environment — where construction occurs gives contractors more control over essential elements that affect performance and profitability:

  • Quality and safety are often easier to manage under controlled shop conditions. Templates and jigs that might not be feasible in the field help create consistent quality. Further safety protocols are just easier to follow when in the controlled shop space, and PPE is close at hand, so it really takes excuses away.
  • Labor needs change with prefabrication and modular construction. Fewer people are needed onsite, since a portion of the work can be completed in the shop. Some firms find it easier to retain workers when travel is reduced or eliminated from the job. The skills mix is different, too. Modular construction, when done right, can rely on standardization, which may reduce the need for highly skilled tradesmen with many years of experience.
  • Material costs are the same for modular/prefab builders, but you can leverage warehouse space to stockpile inputs when prices are good, instead of being at the mercy of pricing fluctuations and availability. Materials may be more secure when they aren’t stored on the yard, too. Tighter quality control can also reduce scrap, waste and rework.
  • Productivity increases when projects aren’t weather-dependent or restricted by other site work. Builders can schedule labor, materials and tools to maximize usage and efficiency and avoid costly downtime. Additionally, the shop may have specialized and full-size tools that contribute to productivity more so than their portable counterparts.
  • Time-to-completion is faster. By some estimates, modular construction can cut construction schedules in half. Even small-time savings add up, since they free workers and warehouse space for the next job.

All of these factors can preserve margins — and help construction firms win business and maintain profit margins. Cost and risk mitigation aren’t just favorable inside the firm; they build stability that contractors and clients value, too.

Weigh the options

Modular construction and prefabrication don’t eliminate all the day-to-day challenges contractors face — and do come with some tradeoffs. Before shifting to modular or prefabrication operations, contractors need to critically review their existing and incoming projects. If the work fits neatly into a niche or has a lot of standard components, it may convert to modular construction fairly easily. If every construction job is custom or specialized, prefab probably won’t cut it.

To experience the benefits of modular construction, you may need specialized tools, heavy equipment and more space to work and store construction products. All of which require big upfront investments. Tax credits and deductions such as enterprise zone credits and bonus depreciation can help firms overcome these barriers to entry, as long as the longer-term numbers make sense.

Transportation and logistics are an added cost in modular construction. Components are easier to make, but they have to be shipped to the final job site. Oversized shipping and insurance costs need to be accounted for. Logistically, prefabricators must adhere to schedules religiously. Planners and schedulers need materials coming and going in the exact right order, on accurate timetables in order to be successful.  

A blueprint for change

Compared to other industries, construction can be slow to innovate or implement new technologies. It might be time to pick up the pace.

Efficiency, quality and cost predictability can help construction companies preserve margins. A shift toward modular construction may give companies a foundation to improve performance and build value in the organization.

How Wipfli can help

Wipfli can help you tackle margin disruption. Our professionals specialize in business strategy, labor planning and tax services specifically for construction and real estate firms. Together, we can build a better future.

Explore our website to learn more, and subscribe to receive additional construction news and content in your inbox.

In the next article in our series on tackling disruption in the construction industry, we’ll cover how to tackle technology disruption.

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Author(s)

Curtis R. Olson, CPA, CCIFP
Partner
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Reed D. Sellers, CPA, CCIFP
Partner
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