Industrialization and Modularization in the Construction Industry

The construction industry has experienced a flourishing business environment in recent years but is not yet realizing its full potential. Since the financial market crisis in 2009, construction investments have enjoyed a steady upward trend. This trend will continue to grow because both demand and need for residential, educational, and senior living building remain high.

Due to the shortage of housing, there is also a need for affordable housing, especially in the big cities. The German government, for example, has declared the ambitious target of building 400,000 residential units per year (source 1) in the current legislative period, including 100,000 social housing units. At the same time, the UK government is aiming to build 300,000 homes a year (source 2) to tackle Britain’s housing shortage.

Unfortunately, the construction industry is meeting this need with its traditional project business, which has not seen any significant improvements in productivity over the last 30 years. Compared to other industries, the construction industry has traditionally struggled to keep up with continuous productivity increases (Fig. 1). Although there are already efforts to increase efficiency, the working methods in the construction industry are comparatively traditional. The construction industry is therefore struggling with the challenge of meeting the current increase in demand.

Current issues such as fragile supply chains, higher raw material prices and a shortage of skilled labor will make it even more difficult for construction companies to continue to operate as profitably as they currently do in the market.

In order to be able to profit even more from the increasing demand in the future, the construction industry needs to shift from a classic project approach toward industrialized and modular construction. This means moving away from on-site construction to off-site construction. An intelligent, modular product structure makes it possible to satisfy customer individualization needs while reducing internal complexity through the use of the same modules and components across several products. The increased degree of standardization in the products enables construction companies to produce components in series and assemble them in production facilities in a similar way to the automotive industry. They thus benefit from the advantages of economies of scope.

While there are many companies already pursuing this path, an industry-wide shift is yet to come. In particular, the industrialization aspect is often underestimated. Companies that claim to do off-site construction often simply move operations from the construction site to a factory environment – there is no modular product structure and no production concept that would enable a leap in productivity.

The problem of the engineer-to-order approach is not the sequence in which the services are performed, but the fact that the construction industry struggles with adequate execution of the required services. Each individual order and each individual project is seen as a one-off and is therefore processed as such. In practice, development and design only begins with the order from the client.

Typically, the customer's requirements are not aligned with the performance capabilities of the entire value chain at this stage. All design work has to be synchronized among the respective stakeholders, which is particularly challenging as the product/technical solution has to be developed simultaneously with the order fulfilment process, the supply chain and the construction process. This involves a variety of different stakeholders, each with their own opinion and interest regarding the best solution. In general, this leads to interface problems, lacking or inadequate collaboration, missing decisions and unclear processes and usually has a significant negative impact on the course of the project, resulting in delayed deadlines, cost increases and quality issues.

The main cause for the frequent deviations with a project approach is therefore project processing as a one-off, where everything is developed and designed from the beginning and from scratch. In the product approach, there is a change from engineering-to-order processing to adapt-to-order processing: pre-conceived and pre-developed modules and components are adapted to the project according to the customer’s specification. Where there is no standard solution, it is designed within and added to the known solution space. The required modules and components are manufactured and pre-assembled off-site in production facilities, then delivered to the construction site and finally assembled. After its operational time, the building gets a second life and is dismantled and the parts ideally recycled.

The major advantage of this is the fact that products are predominantly specifically assembled and built with the help of standardized components, parts or even entire modules. Order processing, supply chains and construction processes can be set up in advance during the product creation process; at the time of the customer's order placement, the challenges from traditional construction are already largely resolved. The focus here lies on the technical solution through adaptation. Disruptions due to lack of synchronization, missing materials and thus delayed construction processes are significantly reduced and the focus can be placed on the essentials: delivering value for the customer. Buildings are then no longer constructed but are produced and assembled.

1 https://www.bundesregierung.de/breg-de/suche/wohnungsbau-bundesregierung-2006224

2 https://commonslibrary.parliament.uk/research-briefings/cbp-7671/

3 Statistisches Bundesamt (Volkswirtschaftliche Gesamtrechnungen 2021, Fachserie 18 Reihe 1.5, S.61)