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How Residential Construction Companies Can Recover in 2021 and Beyond

The future of the housing market is difficult to predict. As construction recovers post-lockdown, developers, constructors and contractors alike face some uncertainty in the coming months and even years. Here, I look beyond COVID-19 and outlines how home-builders can navigate their path to success by ensuring high quality, cost-effective and on-time housing projects.

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Major Uncertainty in the Market

There is a global shortage of affordable housing, and governments across the world are doing everything they can to stimulate the residential housing market.

Here in the U.S., the Department of Housing and Urban Development (HUD) has announced that it will provide a new round of emergency relief funding, $472 million, for eligible low-income families and individuals living in public housing. The funds are made available by the coronavirus Aid, Relief, and Economic Security (CARES) Act.

While the housing market itself has shown initial bounce back in the U.S., experts have been warning of a ‘W’ shaped recovery curve. This entails an initial rebound from backlogged moves taking place across June, July and August, followed by a reduction in demand dependent on employment levels and virus resurgence. 

This is a challenge for residential construction companies, as there are no guarantees about what will happen in the market over the short and medium term. The house-builders will need to be agile and able to change direction very quickly.

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The good news is that many house-builders have made large profits over recent years—so they are in a stronger position to re-invest this cash to future proof their businesses in the current market climate. This can open the door in evaluating opportunities in modular construction to scale operations at lower, more predictable costs.

Three Market Pressures: Labor Challenges, Quality Concerns and Tunnel Vision on Site Productivity

The construction industry has always had to contend with three market pressures, with or without the full force of the COVID-19.  

Firstly, labor shortages have stemmed from a difficulty in attracting skilled younger generations into the trade, resulting in an aging workforce which loses a vast amount of knowledge when experienced personnel retire. This has led to an increased reliance on bringing in less skilled personnel to help bolster the workforce, but this has an impact further down the line with build quality—while also constraining the capacity and speed of building more homes. 

Poor quality is the second pressure facing developers and constructors, from a reputational and cost standpoint. Poor build quality damages a firm’s reputation, making them unlikely to be re-contracted for future projects in the long term, but also means immediately incurring high costs to put unsatisfactory work right. Current statistics show that costs resulting from poor craftsmanship can be as high as 12% of total project cost, consuming 11% of total project hours.

Finally, there is the question of productivity.

Most house-builders tend to focus on the site-based construction processes and trades from a productivity perspective, with business management tasks and processes executed and accounted using dated non-integrated business systems. As a result, Excel spreadsheets are overused, and silos of information are common. This not only results in poor productivity, but also adds project risk and inefficiency as the information that is used to make decisions about the project is usually inaccurate, slow to produce and open to manipulation. The result is that C-level executives do not have strong robust oversight and governance. 

Offsite and Modular Construction Fill the Gap

One of the most innovative ways to ease the pressure of low productivity, the skills shortage and poor quality is adopting an offsite and modular construction model. This trend of building homes, modules or components in a manufacturing facility – and then shipping them to the construction site to be assembled – is increasing in pace, and we are seeing many new modular and offsite manufacturing plants being built. We expect offsite to become the new normal over the next 10 years.

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If you look at the geographical uptake in offsite and modular homes, it is still in its infancy in most countries. However, McKinsey research shows the most advanced region is Scandinavia where 45% of homes are built using offsite methods. Japan is 2nd with 15%, followed by Germany with 10%. After that you have China 6%, UK 5%, Australia 5% and USA 3%, meaning there is great opportunity for expansion in this area.

More specifically, we are seeing a number of organizations investing in these manufacturing plants. Skanska has formed BoKlok, a modular homebuilding business in partnership with IKEA. Amazon is developing Alexa-enabled prefabricated/modular homes. Some companies are even building 3D printed houses so this technology will also start to impact the market. 

Certainly, some traditional home builders have already anticipated this change and have invested and built new manufacturing plants. The McKinsey report also says, “40% of home-builders surveyed said that they were already investing in manufacturing facilities or intended to do so in the near future.”

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Changing Direction Requires Total Control and Flexibility…

Changing the way a construction organization builds homes is not a simple transition for a traditional home-builder which has been using the same processes and techniques for a very long time.

The altered process starts at the design stage, where the home must be built in a factory environment or assembled on site, namely, DFMA—Design for Manufacture and Assembly. Construction organizations must think about designing based on a configuration of standard components. With considerations crossing part numbers, bills of materials, kitting, inventory, shipping and logistics, BIM integration etc.

These are processes that most traditional house-builders do not currently follow. Alongside this, construction organizations still have to execute projects using traditional construction techniques such as sub-contract management, variations, retentions, etc.

To be successful requires becoming a hybrid business—an engineer-to-order manufacturer, a construction company and even a service business that offers an aftercare service to a client or homeowner. 

…and a Helping Hand From Supporting Software

This is where a single Enterprise Resource Planning (ERP) should span all the key requirements of a transition towards modular/offsite house building. Comprehensive ERP to cover the entire manufacturing and construction spectrum should connect all critical information streams and workflows, from project financial controls for on-site work and engineer-to-order ERP for shop-based design and fabrication, right through to building information modeling compatibility. 

Supporting software should contain lean infrastructure tools such as compatible unit functionality and geographic information system integration to help automate large scale utilities infrastructure design and construction—shaving cost and time off of green field real estate development initiatives.

Powerful service management software capabilities are required to allow the home builder to provide aftercare property services. This increases the company’s revenues and makes the revenue streams more predictable, as well as reducing the impact of cyclical downturns or unexpected market influences such as COVID-19. This can span from pricing an annual or multi-year contract to populating all of the work required into a schedule and automating compliance with service level agreements. 

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Change is Required

In the current market environment, traditional home-builders will not dominate the house-building market for much longer. New competitors are entering the market who comprehensively understand manufacturing, standardization, logistics and assembly—and they are challenging the market to change. Reacting accordingly means adapting to new principles such as modular and offsite construction. 

Technologies such as BIM, AI, service management and everything in between, underpinned by integrated business software such as construction and offsite-centric ERP, are the key tools home builders require to strike back in an uncertain market. This foundation will allow the next generation home builders to put themselves in a strong position to execute projects in large volume, but at the right cost, quickly and to the highest quality.

[To share your insights with us, please write to sghosh@martechseries.com]

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