Beneath the advantages for a modular factory to build large projects rather than single and multifamily projects of less than 40 modules, lies a world where being at the top of your game is imperative. Over the past few years, several large modular factories have shuttered their production lines because they relied on large projects.
all photos – VBC modular
THE GOOD
PFS Corporation
Viking Carrier
Mariotti Building ProductsWith the hotel and hospitality industry increasingly turning to modular construction as a practical solution to many of its challenges, it opens up challenges for the modular factory. This shift is driven by several key benefits that modular construction offers over traditional onsite building methods.
Modular construction allows developers to reduce project timelines significantly. By manufacturing modules offsite while site work is ongoing, developers can achieve faster completion. This is crucial for hotels, where quicker construction means quicker revenue generation.
Factory-based construction offers cost-saving advantages through economies of scale, reduced waste, and minimized on-site labor expenses. The controlled environment of a factory also makes labor and material costs more predictable, which helps with budgeting and financial planning.
Factory settings offer greater consistency and quality control. The construction process is less affected by environmental variations and human error, leading to higher-quality outputs. This is especially important for hotels, where customer experience is key.
Modular construction reduces onsite activity, which is beneficial in urban environments or areas sensitive to noise and disruptions. This can be advantageous for hotels aiming to minimize neighborhood disturbances during construction.
Factory-based construction processes are often more environmentally friendly due to efficient use of materials and reduced waste. Additionally, modules can be designed for energy efficiency, aligning with the growing emphasis on sustainability in the hospitality industry that offers flexibility for developers who may want to expand or reconfigure their properties. Adding new rooms or wings is often easier with modular construction compared to traditional methods.
It enables hotel chains to replicate their designs and brand standards consistently across locations. This uniformity is important for brand image and guest experience.
Larger projects allow modular factories to benefit from economies of scale, reducing costs per unit. The costs associated with setting up and running a factory are better amortized across a larger number of modules, increasing profitability.
Producing a larger number of similar modules enhances operational efficiency. Repetitive production processes result in streamlined operations, minimizing errors and increasing productivity.
The hotel and hospitality industry, as well as certain residential sectors, often demand larger projects. Targeting these sectors can lead to steady and substantial business that typically have bigger budgets, which can provide consistent revenue for the factory, leading to financial stability.
Focusing on larger projects allows modular factories to specialize in specific types of construction, developing expertise and a strong reputation, which attracts more business.
THE NOT SO GOOD
However, the market for large projects can be volatile and sensitive to economic downturns. Factories relying solely on this market face significant challenges during periods of reduced demand or instability.
Larger projects typically have longer sales and development cycles, potentially leading to cash flow issues during periods of inactivity between projects. Larger projects also involve higher financial risks, including substantial upfront investments in materials and labor. If a project is delayed or canceled, the financial repercussions can be significant.
Focusing solely on large projects may limit a factory’s ability to pivot to smaller projects if market conditions change. Diversifying the project portfolio can provide resilience in fluctuating markets.
Large projects typically involve fewer, larger clients. This concentration of business relationships can be risky if a major client pulls out or reduces demand, leaving the factory exposed. Larger projects might also strain a factory’s capacity, leading to delays or quality issues if the factory is not properly scaled to handle the workload.
Delays can disrupt cash flow. Factories typically incur costs for materials, labor, and overhead in anticipation of payment upon delivery or project milestones. A delay might postpone payments, leading to cash flow shortages and difficulty covering operational costs.
A six-week delay by a developer could force the next project in line and has finished their site and foundation work to wait an additional six weeks before seeing modules arrive. Patience is not usually a quality many developers have.
The factory might incur additional costs to store completed modules or materials, especially if the delay causes an overstock or backlog. Carrying costs include storage fees, potential deterioration of materials, and maintaining inventory. Delays can also disrupt scheduling, impacting other projects or creating idle time for workers and equipment. The factory might bear the costs of underutilized resources or pay for temporary solutions to bridge the delay gap.
A delay in one project might prevent the factory from taking on new projects or focusing on other profitable activities, representing a significant financial impact. If the factory has contractual obligations tied to delivery dates or milestones, delays could result in penalties or fines, impacting profitability.
Delays can damage the factory’s reputation, leading to future business losses. If the factory is seen as unreliable or unable to meet deadlines, potential clients might choose competitors for future projects. A delay might also expose the factory to increased costs for materials or labor due to price fluctuations, eroding the profitability of the delayed project and if the factory relies on loans or credit, a delay might lead to issues with lenders, impacting the ability to make timely payments on loans, leading to additional financial strain.
To mitigate these risks, modular factories should consider diversifying their project portfolios, negotiating favorable contract terms, maintaining contingency reserves, and carefully managing cash flow and inventory.
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Gary Fleisher is a renowned blogger, consultant, and commentator on construction and housing trends, known for his insightful analysis of the industry.
