Building the Future

Germany’s manufacturing industry, for instance, has increased its productivity by 91 percent over the level in 1992. By contrast, the country’s construction industry is still operating at or even below its productivity of thirty years ago. Similar trends can be observed in other countries and regions. The results include an inability to adhere to what are often too optimistic deadlines and budgets. 

The low productivity has many causes, but a major one is the traditional approach to work. Each construction project is carried out individually on the site itself, and its value chain is highly fragmented, with 99 percent thereof consisting of small and medium-sized enterprises.³ This traditional model is mired in a vicious circle. Spreading service and performance among countless and often very small enterprises with low investment power and productivity leads to low and unstable profit margins. This continues to depress budgets for research and development that could produce major technical advances and innovations — which in turn keeps productivity low.

Even established prefabrication companies, such as those that make prefab housing, often take a product-based approach solely in their sales while failing to consistently pursue this approach in production itself. They frequently offer individualization options that have not been thought through from a production perspective. As a result, process efficiency suffers and automation potential remains unused.

Constructing and operating buildings accounts for 55 percent of global energy use and 37 percent of carbon emissions worldwide. In addition, the sector was responsible for 37.5 percent of the volume of waste generated in Europe in 2020.⁴ Although some recycling initiatives exist, most currently use the materials only for filling purposes, for example in highway construction. In addition to a scarcity of ideas, the reasons for this situation include a lack of streamlined authorization processes for recycled and generally more environmentally friendly substances in specific areas of application. Furthermore, circular economy concepts are evidently still at square one. The 2022 Global Status Report predicts that with its current structures, the construction industry will not reach its net-zero CO₂ goal by 2050. It should be noted that this is not just a matter of competitive advantage, but also of legal requirements.

Changes are needed and are called for by policymakers and the public alike. This is compelling the industry and its entire value chain to develop more environmentally friendly solutions — and not only for the most important material categories and segments. It also means that regulatory bodies need to authorize these new solutions.

In contrast to some other industries’ goods and products, “buildings” are an essential commodity. True, some serve recreational purposes and others fall in the luxury segment on account of their dimensions, attributes, and designs. However, certain minimum-standard buildings are truly essential for the purpose of meeting basic residential and commercial needs. 

At the same time, wishes and preferences for designs, floor plans, dimensions, services, and smart-home functions are many and varied. However, customer centricity and the ability to fulfill customer wishes at acceptable prices are not strongly anchored in the construction industry. There are two reasons for this. First of all, the industry’s value chains are populated by many compartmentalized and changing parties. Each one, such as investors, developers, designers, and general contractors, has its own agenda. Projects are viewed as one of a kind, and are completed using traditional construction methods and inefficient processes. And second, the end users, i.e., the people who reside in the homes as owners or tenants, have other preferences and needs than do investors, facility managers, or initial buyers — unless the latter are active from the start in planning and then using the structures, as can be the case with single-family homes.

Tenants are often not involved at all in the creation of building products — although their wishes regarding floor plans, size, materials, and smart-home functions should play key roles. As such, there are few incentives or practical concepts for creating high-grade buildings that benefit both investment business cases and individual tenants. 

Other sectors, such as the automotive industry, have recognized the importance of understanding and fulfilling customer needs. They offer products that can be individually configured. They use standardized processes to research customer needs, derive technical specifications, develop products, and introduce them to the market. Most branches of industry have established such processes, which yield high-grade products with numerous configuration options based on efficient production systems. That is not the case in the real estate and construction industry.

Industrialization as potential solution for the construction industry

Many countries are currently very interested in providing more affordable housing and have set correspondingly ambitious aims. Germany, for example, wants to build 400,000 new housing units a year, including 100,000 for social housing. Industrialization not only offers a chance to meet these needs sustainably at lower cost, with higher quality, and in reasonable periods of time. It also offers both tenants and investors the prospect of added product value. The sufficiency concept, which consists of building the minimum for a given purpose, uses fewer resources to create housing for more people. Productization can generate solutions that measure value no longer on the basis of (utilized) surface area but rather on maximum added value for owners and users. However, this necessitates a completely different approach because it requires understanding customer needs in structured ways and deriving product portfolios on that basis. It increases product quality as well as scalability.

In contrast to the conventional approach based on individual projects, a product-based approach changes the value chain in large part by shifting product development upstream and by utilizing the potential for industrial manufacturing. To bridge differences between the conventional construction tradition on the one hand with its high degree of individualization and a new industrialized strategy on the other with its efficient mass production of pre-developed products, the range of configurable components needs to be expanded. “Configure to order” (CTO) is the term used here.

It requires the following steps: 1) determining customer and user preferences (e.g., investors, owners, tenants, facility managers); 2) incorporating flexible use phases in the design of buildings; 3) optimizing production processes based on a modular product architecture; 4) ensuring efficient logistics; 5) streamlining assembly with plug-and-play systems; and 6) including disassembly and reuse of components and materials in the overall concept.

Taken together, this requires early integration of all parties involved and a collaborative approach that in turn leads to more efficient and sustainable construction processes and a customer-oriented model. This model offers comprehensive solutions, reduces complexity, and adds value in the form of customized construction products, significant savings in cost and time, and consistent compliance with sustainability requirements.

The product-based approach described above lays the foundation for scalable industrial production. Incorporating production processes into product design has been the key factor in the most significant advances in manufacturing efficiency for many sectors and companies thus far. “Design for manufacturing & assembly” is one of the perspectives taken by interdisciplinary product-planning teams that enables simple and rapid production processes in factories and subsequent assembly processes on construction sites. Only when product design and production processes are taken together can the full potential of industrialization be utilized.

The essence of industrial production consists of standardized mass production of the same items, or at least of items that use the same types of resources and processes. It is marked by standard processes, divisions of labor, automation, and continuous improvement. In contrast to traditional construction, labor is divided not along trade lines but by processes. This means production and logistics processes are often separated and workstations optimized specifically for certain activities. 

Changing the approach to construction also requires a new way of thinking. Different regulatory systems based on scaled building production are needed. In addition, workers need new skills and companies need a certain size and favorable financial conditions to set up and run the requisite production capacities. It is already clear that this situation will encourage not only established construction companies to launch industrial production. Disruptive players from other sectors will also spot opportunities and put financial resources and industrial expertise into attempts to acquire shares of the market.

Opportunities from industrializing the construction sector

Industrial production consists of shifting work processes from the construction site to the controlled environment of a production plant. This enables new iterations of products and processes on an ongoing basis, which in turn can significantly improve economic, environmental, and social aspects.

Studies and previous projects by Porsche Consulting show that industrialization can save up to 20 percent of construction costs. Higher levels of preliminary production can also result in shorter construction times at the site itself, where fewer activities remain to be done. In fact, construction times can be dramatically reduced to a fraction of what traditional approaches are capable of. This benefits not only investors and landlords, who can generate income earlier, but also tenants, who can move into their new homes sooner.

Innovations in production technology, process efficiency, and sustainability are much easier to achieve in industrialized settings than in one-off construction scenarios at traditional sites subject to environmental influences and with ever-changing sets of players. This should further improve efficiency, which has otherwise been stagnating in the construction sector.

With product designs already optimized for industry settings, industrialized processes also offer environmental advantages over work at traditional construction sites. In the first place, their controlled conditions reduce levels of incorrect deliveries, damage and consequent repairs, and waste. Their automated solutions, recurring actions, and product-specific work aids such as tools and templates additionally serve to reduce scrap and losses. Preliminary production also lessens the environmental impact at construction sites. Local ecosystems are affected to lower degrees and for considerably shorter times by dirt and noise emissions.

The societal component is of special relevance to three groups: customers, workers, and suppliers. The first group, namely buyers and tenants, benefits from the possibility of higher volumes of housing that is also more carefully conceived and affordable. As for workers, production halls offer a considerably more attractive work environment than do construction sites with their straining climate conditions, occupational hazards, and need for physical exertion. This in turn can help counteract the shortage of skilled workers.

And finally, industrialization makes it easier to pursue due diligence on human rights issues. This is increasingly important for supply chains, as can be seen in Germany by the recently passed Act on Corporate Due Diligence Obligations in Supply Chains (Lieferkettensorgfaltspflichtengesetz) affecting ever more companies, and by similar legislation in many other countries. Although some high-volume and mass materials such as concrete aggregates can often be obtained locally, that is much less often the case for wood, steel, and many technical components. Given the extent of global supply chains, the small enterprises often involved in construction work can hardly be expected to muster the time and resources needed for due diligence.¹ By contrast, industrial construction companies often cultivate long-term and intensive supplier relationships and are therefore in a better position to consistently monitor and develop compliance with respect to human rights.

Industrializing construction is a promising approach that can significantly improve quality, efficiency, speed, and sustainability and thus make a substantial contribution to environmental protection and societal development.

Despite the clear benefits it offers, industrializing construction faces challenges. These consist in large part of regulatory framework conditions that have yet to be fully adapted to this type of construction, high investment hurdles for setting up production capacities, changes to workforce qualifications, and a new process- and data-based approach to management. Funding programs, training initiatives, and new norms can help advance industrialization in the construction sector. At the same time, a new way of thinking in the sector is needed. Some pioneers — also from outside the industry — have already begun to break new ground here. If traditional construction companies miss the chance to increase their efficiency by means of industrial approaches, they are in danger of being left behind by more adaptable companies and non-industry players.