Why On-Site Work Is Key To Off-Site Construction

On-site work must improve to unlock modular construction’s lofty potential, especially in the Bay Area, modular manufacturers and developers said during Bisnow’s off-site construction webinar last week.

Despite the cost and time savings the technique is meant to give developers, modular construction, a process in which buildings are constructed in an off-site facility, still takes up less than 5% of of the construction market, according to estimates by Fulcrum and other modular specialists.

Experts point to on-site logistical challenges and commercial real estate’s continued lack of familiarity with the building method as major impediments to the process.

“The on-site has got to catch up,” Guerdon CEO John Beddow said.

“They’re really not pricing, in most cases from what we see, they’re not pricing to an elemental cost. They’re pricing to what they’re used to — per key, per suite, per SF," he added. "And then they’re trimming it down to whatever they feel they have to to get the deal, as opposed to building the cost from a detailed scope doc. I think that’s going to have to change if they’re going to be competitive.”

Even so, Guerdon, one of the country’s biggest module manufacturers, and others familiar with off-site construction aren’t without their fair share of successes. Guerdon itself finished a Home2 Suites hotel for Hilton in South San Francisco last year that Beddow said took just over one year from groundbreaking to opening. That project was led by Vijay Patel, president of general contractor Akshar Development.

“It was unique in that the developer and owner decided to self-perform the general contracting, which at first we were very nervous about,” Beddow said. “But [Patel] owned the project from the get-go and managed the [architect of record], and us, the manufacturer, and his sub-consultants, extremely tightly.”

Modular projects often don’t go smoothly, though. Founders of Vallejo-based Factory OS and Minneapolis-based Rise Modular, two other modular manufacturers, both said that the mechanical, electrical and plumbing trades can erase cost savings from modular construction.

“The most critical thing to getting modular to achieve the cost-saving potential is the MEP trades,” Rise Modular CEO Christian Lawrence said. “Their scope of work is what is such a shift from traditional stick-built. They can accurately budget their materials, but their labor, they don’t know whether it’s going to be 2,000 labor hours or 4,000 labor hours, and we want to avoid them quoting 5,000 labor hours.”

Factory OS CEO Rick Holliday said the same thing, calling the MEP trades “the most serious impediment to us getting the savings to the customer.” He said Factory OS gets billed 6,000 hours of labor in San Francisco’s “unbelievably overheated” construction labor market.

In Truckee, California, meanwhile, Holliday said Factory OS was about four months away from finishing a project that was “stick-bid” at $28M for about $22M.

Beddow said Guerdon has looked to adjust by partnering with certain general contractors early on in the process and that it still doesn't count on cost savings in its projects. 

“We’re marrying up with GCs more and more where we work together to go after jobs because we find a GC that is structuring themselves to address modular efficiently," he said.

“The process of building in the field with a modular project is different than it is with a site built. We’re going to save some money every now and then, but we don’t look at that as the key. We look at the schedule because that’s a cost benefit to the customer," he said. "It mitigates their risk and it gives them revenue faster, which gives them payback."

Much of whether cost savings are realized in a modular construction project comes down to site selection, two developers in the webinar said. For instance, projects along busy streets can make module transportation and stacking an expensive endeavor, according to Panoramic Interests owner Patrick Kennedy.

On one of its projects along Berkeley’s busy Shattuck Avenue, Panoramic Interests ended up spending more money on traffic control than on carpenters and electricians on the job, "which is a demoralizing state to be in when you’re trying to make progress,” Kennedy said.

“Be very mindful of the site and the logistics that you have in your project prior to embarking on it because there are a lot of hidden costs that arise that you don’t really think about when you’re a conventional builder,” he said.

UrbanCore Development President and CEO Michael Johnson, who said his first exposure to modular construction was through a visit to Panoramic Interests’ 38 Harriet St. development (San Francisco’s first modular project), said UrbanCore’s second of two modular projects went better than the first, thanks in part to both site selection and experience.

“Our second transaction, which also involved Guerdon as our manufacturer, and [Cahill Contractors] as our general contractor, here in Oakland Coliseum Connections was a success,” Johnson said. “The coordination between Pyatok, our modular design firm, and with Cahill and with Guerdon was crucial in pre-construction, before they started building the modules, during the construction process in the factory and then on-site, in particular.”

Johnson said UrbanCore shaved $4M in construction costs off its $40M construction budget, cost savings difficult to come by in the Bay Area.  

“It’s no accident that the Bay Area is a key site for modular because we’re facing prohibitive construction costs,” Kennedy said. “This is the best market, I suspect, in the world for modular construction.”