Mitch Lund, Project Manager
The last decade saw a significant dearth of skilled labor in the construction industry. A downward spiral that began during the Great Recession—when the construction industry lost approximately two million workers—is unlikely to end anytime soon. According to an August 2018 report by the Associated General Contractors of America, 80 percent of the construction firms in the U.S. have trouble recruiting skilled workers, with the declivity expected to persist into the near future. With the workforce estimated to grow at a measly annual rate of 0.5 percent over the next 10 years, the construction industry is justifiably concerned over the hundreds of thousands of vacant jobs.
For general contractors, the labor shortage is an obstacle of epic proportions. The negative impact on construction costs and schedules notwithstanding, they are passing up opportunities to bid on certain projects as they are unable to recruit the needed subcontractors. Moreover, as existing construction projects are experiencing schedule delays and cost overruns, construction costs are increasing and many new projects are simply not “penciling”. “Owners are reluctant to proceed with new projects as they are unlikely to meet their profit goals based on the upfront estimate of hard and soft costs,” says Darren A. Seary, director, Fulcrum – a construction risk management service provider with specialized experience in modular construction. “To make matters worse, the labor shortage has forced general contractors to prolong construction schedules due to the owner choosing to prioritize quality and costs.” Seary explains, “Time, quality, and costs make up the construction triangle. In the existing landscape, it is proving extremely challenging to achieve all three.”
A pioneer in the arena of construction risk management, Fulcrum—having monitored thousands of construction projects across the country—anticipated the industry-wide attrition many years ago. In search of a solution, the proactive organization explored various technologies to help the construction industry counter the impending labor crisis. “Modular construction was one of the potential solutions that we committed R&D resources to many years ago to assist our clients in achieving all aspects of the construction triangle,” says Seary.
Modular construction is a technique whereby a significant portion of the construction is completed offsite (typically in a facility) and delivered to the jobsite for assembly. Its advantages include lower reliance on local labor resources, efficient construction schedules, improved quality, reduced delays, and fewer risks of exposure to moisture. The other critical gain of modular construction is the potential construction cost savings, especially in markets where local labor costs are high. “However, an often overlooked advantage is the potential to ’get to market’ sooner and take advantage of the increased operating revenue and, for developers who sell their properties upon project completion, maximize their profits prior to any potential economic downturns,” adds Seary, whose grandparents were early beneficiaries of the construction methodology. “In response to the need for housing on a tight timeframe following The London Blitz of the Second World War, my grandparents were accommodated in a concrete-paneled prefabricated home, referred to as a ‘prefab’” he informs.
Fulcrum educates its modular clients— owners, developers, construction lenders, general contractors, and equity investors—on the benefits and risks of modular construction. If and when a project receives the green light, Fulcrum handholds clients throughout the process of modular construction, which includes preliminary and in-depth feasibility studies, entitlements services, identification of the most appropriate project delivery team, collaboration with manufacturers, and everything else in between. Since modular construction is relatively new to most people in the real estate industry and not effective for every product type or region, Fulcrum goes the extra mile to outline the pros and cons associated with the construction technique. “To construction lenders and banks that try to be risk-averse, the idea of venturing into something new, such as modular construction, can often be a nonstarter, which in-turn negatively impacts a project’s ability to obtain funding.
This is where we come in, educating and managing construction risks for lenders and developers to help facilitate successful modular construction projects,” stresses Seary, who—along with his colleagues—is a frequent speaker at events dedicated to modular construction.
Fulcrum will host a modular construction summit on September 18 in Los Angeles this year and a second event in San Francisco on November 5.
The Modular Construction Professionals
Fulcrum’s deep-rooted knowledge and experience in modular construction is a noteworthy market differentiator. Mitch Lund, Project Manager, Fulcrum, has worked in modular construction for over a decade and knows firsthand the advantages and risks that owners, developers, lenders, equity investors and general contractors need to be aware of before venturing into the new wave of construction. “At Fulcrum, we use a variety of educational forums to embark on a program of educating the construction industry as to the advantages and risks Mitch outlines above and work closely with our clients to mitigate those risks,” says Seary.
Banking on its in-house team and vast network of contacts across the realm of modular construction, Fulcrum offers customized construction risk management services that can take the form of either a support/advisory role, owner’s representation role or a full turnkey development solution.
At Fulcrum, we use a variety of educational forums to embark on a program of educating the construction industry as to the advantages and risks of modular construction
Fulcrum’s service offering varies based on the results of an initial feasibility study that determines the extent to which it can help clients avail the benefits of modular construction. A project may be compatible for modular construction; however, certain design and layout changes may have to occur. During the second step, Fulcrum helps clients identify the right team of personnel/vendors to work on the project. As a member of the Modular Building Institute, Fulcrum leverages its vast network in the modular construction industry to select vendors such as the manufacturer of the modules and the design team to ensure successful execution of the project. “We also identify a reputable transportation company, an experienced general contractor and ‘set-up contractor’ who collectively are responsible for delivering and assembling (‘setting’) the modules and completing the project as a whole),” explains Seary.
Representing the Owners
After putting together a competent team to execute a modular construction project, Fulcrum acts as the owner’s representative and oversees the entire project lifecycle—from inception to completion. During the construction stages, Fulcrum undertakes a more in-depth role that involves coordination between various stakeholders and the project delivery team. “The fast-paced nature of modular construction makes coordination extremely vital. For example, if the modules or panels arrive onsite before the footings or podium structure is complete, the project is held up and the modules or panels need to be temporarily stored. Similarly, if the footings or podium structure is developed several months in advance of the modules or panels arriving, then the compressed schedule advantages of modular construction are not realized. Through intensive coordination efforts, we strive to eliminate these scenarios,” says Seary.
This proven skillset of timely coordination can be illustrated through a recent success story. The client—a hotel owner/ operator—was hampered by high labor costs and low labor availability in the Bay Area. The client was prepared to embrace modular construction with four specific goals: reduce construction costs, streamline schedules, maintain quality, and ultimately launch the hotel as soon as possible. Fulcrum came through with flying colors and executed the project faster than expected. “The hotel opened its doors approximately eight months sooner than if conventional construction techniques had been utilized, with construction cost savings in the region of $2MM. Based on conservative average daily rates and initial occupancy percentages, the operator was able to see gross revenue advantages associated with opening earlier of approximately $4MM. Needless to say, with combined financial gains of around $6MM, the developer’s next modular project is already being planned,” notes Seary.
Darren A. Seary, FRICS - Director
The Biggest Beneficiary: The Hospitality Industry
As evidenced by the hotel example, the hospitality industry has been a prime proponent of modular construction, with the majority of the big name flags actively encouraging their franchisees to explore this construction method.
By utilizing volumetric modular systems, hotels can build two rooms separated by a strip of common corridor. The modules are delivered to the jobsite and craned (‘set’) next to each other to form the common corridor and stacked atop each other to create extra floor levels. The modules can arrive at the jobsite almost guest-ready, with all fixtures and finishes complete and even beds, appliances, and TVs securely stocked within the room ready for final installation.
With more owners, developers and general contractors getting wind of the wonders of modular construction, a number of multi-family projects are now being successfully built using not only panelized and volumetric modular systems but also innovative modular components that are being continually developed.
Besides multi-family ventures, Fulcrum executes an array of volumetric hospitality projects, leveraging the speed and efficiency of modular construction. “All MEP/FP work is completed within the rooms prior to being delivered to the jobsite, leaving the onsite MEP/FP subcontractors to hook up and continue their installations in the corridors and common areas,” Seary explains.
Recent examples of modular construction include the 21-story CitizenM hotel in New York—built using steel modules—and the 26-story AC Hotel in New York, which is expected to be completed by late 2020. “We hope to see modular systems being used to a greater extent in the U.S. in the near future,” says Seary, while adding that a host of local municipalities in the U.S. are getting onboard with modular, and several building codes are being amended.
Leading the Modular Construction Movement
It is clear that modular construction can solve the predicaments associated with labor shortages in the construction industry. In the coming years, Fulcrum is “open-minded in terms of service offerings” and plans to seek out fresh opportunities and expand to new sectors. On that front, Fulcrum is now engaging directly with hoteliers rather than just working with building owners. “We have the skillset and experience to venture into this new arena and provide full turnkey development services to those who have desires to be hotel operators but not developers,” says a confident Seary.
Fittingly, team Fulcrum—which includes professionals with a background in contracting, surveying, entitlements, and modular construction—makes up “a modular consulting team” that integrates various skill sets and expertise. “In many ways, we are a modular team that stacks up different skills to provide a high level of service,” says Seary. This level of collaboration is evident when clients engage with Fulcrum. Seary adds, “Unlike some of our competitors, we don’t assign just one point of contact to our clients. Instead, we utilize our vast spectrum of team members behind the scenes who lend their collective skills to a particular project. When a company hires Fulcrum, they are hiring a team, and not just a person.”
In conclusion, Fulcrum is confident that its growing network and experience in the modular construction arena will script new and exciting chapters in the coming years. “We are honored to be viewed as a leader in the industry and are fully committed to continuing our research, growing our network, and gaining further experience on modular projects so we can best assist in minimizing risk while keeping the construction industry moving forward,” states Seary.