July 9, 2024 • 40 mins
With many expected to double the amount of work being done via prefabrication methods, you can't afford to just wing it. It's critical to have a long-term strategy and operationally efficient processes to get the most out of these efforts.
In this episode of the FMI Built-In podcast, we sit down with Tyler Paré, head of our performance consulting practice. Tyler unpacks Part 2 of FMI's Labor Productivity Study and shares insights on prefabrication and the opportunities and challenges that come with it.
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Episode Transcript
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(00:00):
Welcome and thank you for listening to our latest episode of Built In.
(00:05):
I'm Scott Winston, FMI Consulting President.
I'm really excited about today's episode.
I'll be talking with FMI's very own Tyler Paray about Part 2 of our recently released Industry Labor Productivity Study.
For background purposes, Tyler leads our performance practice and is an FMI partner and board member.
Well, good morning Tyler. How are you? Welcome to the show. Thanks for being here.
(00:26):
Yes, Scott. Thanks for having me. Very much looking forward to the conversation today.
Well, great. Let's go ahead and jump in.
The frame list for folks that may have missed our conversation about Part 1 of this study.
I'd love it if you would share an overview of the research your team conducted last year.
Why you chose to do the research in the first place and what did you learn?
So, the team that I lead at FMI, our performance practice, exists to help contractors with really the core interworking functions of their business.
(00:55):
Sort of the old doc fails, get work, do work, keep score.
How are we estimating and pricing work effectively?
How are we managing and coordinating work effectively in the field?
And then how are we leveraging sound project controls to understand job progression and performance?
And one of the things that we're often asked to help contractors with is optimizing labor productivity.
(01:18):
It's work that we've done for decades in the industry.
And we like to think we know something about it, but given the turbulence in markets over the last several years,
you think about the post pandemic supply chain shocks, the ramp up in construction that we've seen, the dearth of available, qualified labor.
We really wanted to understand how self performing labor intensive contractors are managing labor productivity in today's environment.
(01:44):
What are the biggest challenges that are out there?
Are folks finding success? What best practices are they leveraging?
And where do they see opportunities going forward?
So, this research really set out to answer those questions.
And not surprisingly, contractors by and large have seen a decline in productivity.
And that's really been driven by a couple of things we think of the external factors like quality of design documents,
(02:10):
increasingly compressed schedule, insufficient general contractor coordination, which I know our general contractors, listeners probably won't appreciate to hear.
But I think if we're all candid with one another, certain jobs are managed better than others, and that has a direct effect on labor productivity in the field.
We also looked at the internal factors like lack of qualified craft, which is a well documented trend in our industry.
(02:35):
And we can get into that more later, but also, you know, lack of planning and communication and coordination amongst project teams as it relates to labor productivity.
And when we got down to it, you know, the most profitable contractors in our research had strongly held beliefs around consistency and planning practices and project controls in their business that helped them maximize productivity.
(02:59):
And that directly correlated to really the bottom line, those firms that had consistency in those best practices outperformed their peers head and shoulders from an operating profitability standpoint.
That's super helpful to frame the origin of the first study that was conducted last year.
Now, if we kind of fast forward to today, I'd love it if you kind of do the same thing and share more about Part Two of the study, and specifically about how prefabrication is connected to labor productivity.
(03:28):
Well, prefab has been is and will be a growing portion of construction put in place in the industry.
So we felt like we'd be missing a huge piece of the puzzle that we didn't dive in on prefabrication.
And anytime we talk about trade contractors and labor productivity, prefabrication is always part of that conversation.
As I referenced a moment ago, some of the major challenges that folks are seeing are compressed schedules and lack of qualified craft.
(03:56):
And these are issues that prefab is helping to address directly and we'll talk about that a little bit more here in a minute when we when we look at some of the research findings.
So we sought to understand, where are we as an industry in terms of prefabrication by getting feedback from the executives that participated in our research.
And what are the current state of their prefab efforts, where do they see it going in years to come and what are their motivations for and what are the obstacles against growing and scaling prefabrication.
(04:27):
So kind of building on that, how would you summarize the most important takeaways of this second part to the study, in other words, maybe how are how should folks listening be thinking about this as it relates to their business.
Yeah, and this may be a little bit old hat for the folks that are already into the throes of their prefabrication efforts, but you know, we really sought to understand what are the key benefits or key drivers.
(04:49):
What would motivate somebody to try to either get into prefabrication or scale existing prefabrication efforts.
And the top benefits or top drivers were really quality, you know, more control over quality, better quality coming out of their prefabrication efforts as opposed to sort of stick building in the field.
It's an opportunity to reduce schedule duration. So if you think about taking features of work outside of the work face and managing those in parallel to the installation, able to reduce schedules on site and having really more control over that schedule.
(05:27):
The third thing that was at the top of that list was safety so improve worker safety, lower incident rates. From a commercial perspective lower insurance premiums is always attracted from a business standpoint.
And then the fourth piece was really reduced reliance on skilled craft flavor in the field. So the ability to prefab or manufacture components with less skilled labor than otherwise needing, you know, very seasoned experience folks to to install components at the work face.
(06:00):
I think the other piece there that we saw in the research is the ability to attract a different segment of the workforce that may prefer. I'll just say the the the comforts of factory setting or environment as opposed to maybe the unpredictability of the field if you think about a manufacturing
facility that's well lit that is environmental control that secure access. They're able to reach a broader demographic of workforce that is attracted to that environment versus the rain the mud the early mornings of the construction site.
(06:34):
One of the other things that we saw was that contractors across all trade disciplines anticipate their prefab efforts doubling over the next five years. Pretty shocking average hours, average craft hours today around 15% of total hours spent in prefabrication forecasting five years out average about 30% of
labor hours being spent in prefabrication. So there's this there's this real conviction about what the future is going to look like amongst the trade contractor community and where prefabrication is going.
(07:05):
Some of the key challenges that we heard from folks in the research was design and coordination so there's that there's that design piece again rising the top similar that we heard and just the the original piece of this study around labor productivity but design is such a huge piece of enabling
prefab and we'll touch on later the capabilities needed to really accelerate prefab growth and a construction business. The stakeholder collaboration so outside the four walls of your construction business the design entities the owners the general contractors that have to sort of get on board, or be
(07:41):
part of the sausage making of a pre construction effort that's going to enable prefab and then lack of early contractor involvement right so your mechanicals or electricals or plumbers any type of trade that's going to take a prefabricated approach to the project has to have a seat at the
table early and often so that the design the budget the schedule can appropriately consider the prefab elements, you know, in industrial and manufacturing environments.
(08:12):
Often there's commercial parameters of projects that require prefab to be considered and it may even very well be part of the qualifications based selection, like can you bring prefab capabilities to the table.
That's that's tickets to the ballgame to be even in the running for selection. You know, in other areas the market it's more left up to the contractor if you want to prefab great.
(08:34):
And it's either something that gets brought in as a VE effort typically late in design or worse the contractor takes on that VE risk internally and you know rationalize as they can prefab more effectively the job being stick built in the field.
This can obviously work there's many contractors are successful pricing it traditionally and then fabbing a portion of it but you can obviously foresee some of the perils that that might come along with that.
(09:00):
So Tyler building on that from all the feedback you gathered through the research as well as your travels and consulting Oracle clients in the industry. What do you see as the key considerations for scaling prefab.
I think it's a multitude of things got a foundational piece of all this is the organizational vision, where are we trying to take this long term and what's the why behind it do we have real conviction as a leadership team on what the future of the market is going to look like and where we need to be in terms of
(09:28):
what is the logical sequence for us as an organization to get from point A point C their structural elements to be considered as well you know is this going to be a separate division of separate business unit a separate entity, who are the folks that are involved in
(09:50):
the roles that we're going to need. And then there's a big shift in business models as well so manufacturing is fundamentally different than the business of construction and by getting into pre fabrication you're essentially saying we're going to be both we're going to be
both a contractor and we're going to be a manufacturer and those two things those two business models sometimes can work at odds against one another. And so having those considerations factored into the overall plan, having the right talent is key as well.
(10:20):
We've certainly seen contractors try to take traditional field folks and stick them into prefabrication roles to manage that function the business and that can work it works a little bit slower than maybe folks that have a background and experience and the discipline in manufacturing.
And then I think having the right processes and systems in place so anytime you embark on something new what are the guardrails or the rules of the road for how we're going to operate together across the entire organization to support prefabrication.
(10:52):
And then lastly I think there is there is a cultural implication to consider here, which is, hey, we've been doing things one way for the life of the organization and now we're throwing in this new element or we're growing this new element and how are people going to feel about that.
And we think about what really drives the performance of a trade contracting or a self performing labor intensive organization. It's the men and women in the field. And so all of a sudden we're doing something different we're carving out man hours we're carving out scopes and we're prefabricating them either on site or off site or doing it a little bit differently.
(11:28):
There, there is as you might anticipate oftentimes some cultural resistance to prefabrication.
Curious, where have you seen business strategy for prefabrication missed the mark.
I think one of the keys to success that we have seen is making sound bets that are rationalized by the total addressable market opportunity for that particular contractor when it comes to prefabrication so we take a look at our backlog today.
(11:55):
And we say, okay, what, what portion of that are we prefabricating or could be prefabricating and so you've got that as a starting point and then you look to the future and say well if our ambition is to grow that.
Where is it going to come from is it going to come from the existing look and feel and make up of our backlog today or does our work mix need to look different to enable or prefabrication.
(12:19):
Certain delivery methods owners market segments are much more conducive to prefabrication.
And so if one of our strategic goals is to grow this thing a lot of it has to do with what our work mix looks like.
I mentioned making sound bets. Jim Collins has this great analogy about firing bullets before you fire cannonballs and I would probably butcher it if I tried to recite it but the punchline is.
(12:48):
You make a bunch of small bets first and find out what's working before you launch into big bets.
And the firms that we have seen do this successfully is very much a crawl walk run type of strategy.
In many cases we have seen contractors firing cannonballs before bullets said differently.
We jump in we invest in a prefab facility before we really built a plan on how we're going to do this.
(13:14):
And what would that plan look like. Well it's all the things that we mentioned before.
It's the structure the business model the talent processes the systems the considerations for culture.
How are we going to get ready to get ready to go do this as an organization and putting a lot of thought into that.
Let's one of the things you mentioned there was business models.
I'd love it if you would share a little bit more about the different business models for construction and prefabrication.
(13:39):
Yeah the bottom line that comes down to being in a volume driven business or a margin driven business and so manufacturing if we're going to call prefabrication a type of manufacturing.
It's really a volume driven business model or you've got fixed cost associated with prefabrication that requires a certain amount of volume to be run through the plant and I'll put the plant in air quotes that could be a yard that could be on site that could be an extension or a carve out of an extension.
(14:08):
Or a carve out of an existing warehouse but there's definitely cap acts associated with it and having a consistent throughput and a certain volume to run through that think is where we see some contractors get in trouble because construction can be a lumpy business.
And even if you said well definitionally we have that already with our DNA infrastructure for the construction business model but not all projects as we mentioned a moment ago when themselves to really substantial amounts of prefabrication so anytime you have lumpiness or downtime spread over your fixed costs related to prefabrication you're going to feel that pain in the P&L.
(14:49):
And so there's oftentimes this tension between we need to drive more volume through prefabrication but our construction backlog or construction volume might not always enable that.
You know I think most folks try to cap their capacity for prefab slightly underneath the maximum surge demand that they might expect and if we do reach a point of surge demand where we are prefab capabilities can't handle that well that's an opportunity to try to carve that out shed that risk.
(15:22):
Subcontracted to another partner you know it's a bit like heavy civil firms that are very equipment intensive you would never manage a equipment fleet for peak demand right because 90% of the time you'd have a certain amount of equipment being idle and so it's figuring out again what's that total addressable demand where do we think the volume is going to be for our prefab efforts let's invest appropriately alongside that demand.
(15:51):
What are some of the structural questions that contractors need to answer.
Yeah, there's a myriad of them Scott and you know we'll share our point of view here in a minute.
But there's a lot of different ways to skin this cat and I don't think we're here to tell anybody that there's a right answer or a wrong answer but I think getting clarity on it early on is really helpful for contractors and so, you know, one of the fundamental questions that we see out there is is prefabrication a cost center or a profit center.
(16:20):
The pushback we often hear is well that doesn't really matter because it's all going in the same place at the end of the day but clarity around that is essential to help squaring the economics and surprisingly many firms are quite vague on this and so everything from how we price the cost of what it takes us to prefab assemblies and how that relates to a project level estimate.
(16:44):
How do we incentivize folks in the prefab facility what are the economics back and forth between project level PNL and prefab PNL, even if those exist or not and so I think it's really important early on to to have a point of view on that.
I think the other pieces is is this going to be carved out and separate or commingled into the construction business and what I mean separate is it a separate business unit is it a separate entity is it running a separate PNL.
(17:15):
And so that has implications right there's there's some attractiveness to separation right so we can have increased accountability we can almost treat our prefabrication partners internally like a subcontractor and there's accountability around schedule cost and quality and delivery.
The downside risk to that obviously is, you know, anytime we create a new division we're creating division, we create silos inside the organization and we've got to manage against that cultural risk.
(17:47):
And I think one of the other elements that we we also hear quite often from a structural standpoint is, is this an in house resource.
Or are we going to go do third party work third party work can be attractive. And one of the most compelling reasons is as it helps to smooth out the volume right so if your captive construction volume is is lumpy or not large enough to really support your prefabrication efforts will go in outside and serving customers third party can help create a more
(18:24):
smooth demand flow more smooth throughput from our point of view, having a separate business unit and a separate PNL responsibility, and the freedom to do third party work creates really the environment and the incentives for accountability and continuous improvement and competitiveness said differently
could this could this function or this entity this prefabrication business unit stand on its own as a business and we mentioned the downside risk of creating a silo and a separate business unit.
(18:58):
But I think the benefits greatly outweigh the downside risk, particularly because that downside risk can be managed and there's things you can do to curb that, but having a separate and distinct business unit allows you to get extreme clarity on the return on investment in the performance of prefabrication function of the business.
(19:19):
So Tyler building on the concept of having it as its own entity to smooth out the lumpiness as you said which thing is a great point. How would that impact the business from a branding perspective from an external stakeholder perspective you know clients competitors, you know likelihood to use an entity that was tagged to the company.
(19:42):
Yeah, I think it's definitely a consideration and oftentimes we will see clients of ours, brand it differently. It's under a different name, maybe it's even in a different location. It creates some separation, if you will, separation of church and state so that the third party market feels like they're getting a fair shake from a cost competitive standpoint.
(20:03):
There's things to consider when going down that path as well. You know, again, it does. Are we creating this separate business that has no relation to our core that's a risk to manage against.
But it oftentimes giving in its own identity helps by helps to brand that in the marketplace that you know we're in business as prefabrication company.
(20:26):
And we can serve the needs of multiple stakeholders, certainly our own and others and I think this works both ways to and so we'll talk a little bit later around third party prefabrication from a strategy standpoint so what are the things that we ought to be subcontracting out versus doing ourselves.
I think it's important to be consistent and honest in the marketplace around that so you're able to get competitive pricing and really upfront in a project life cycle in a precon pursuit, being clear to your fabrication partners on hey this is something that we plan to prefabricate on our
(21:02):
own or something that we really have no interest in doing it it's outside of our core we really need your help and we want competitive pricing and so there's a whole dynamic associated with that. It is possible. Every market is different in terms of receptivity to that, but we certainly seen it work again going back to the volume driven
strategy and consistency of throughput, having third party work really helps to smooth out that business.
(21:28):
From a processes and system standpoint, where do you see folks tend to get tripped up.
Yeah, we go back to our get work do work keeps score rubric that we started out talking about defining how this is going to be done and by who and setting clear rules for the road so when we think about the selection of work.
Can the prefab function say no to the construction function right today. Do they have autonomy and the work that we take on in prefab and likewise for construction does this construction have the ability to be selective on what they choose to funnel towards the prefab function or not, and who arbitrates these
(22:07):
decisions and so there's a lot that goes into that discussion. I think most folks will say look we're going to try and prefab all that we can if it's the right stuff and it's going to work for us economically, but sometimes we have to have some rules established right and waste in which to manage that.
I think we think about who prices the work, because we've got two different elements going on. We have work that's going to be performed in the prefab facility. And there's a whole different economic story associated with that then how we plan to build it in the field and so who's going to
(22:40):
estimate it or estimate it, who reviews it, who sets pricing and margin. Those are key things to work out from a process standpoint and then even things like procurement of materials and so we've won a project. Part of it's going to be executed in the field part of it's going to be executed in prefab.
Who has responsibility for the buyout of the job, the management of the vendor, or the verification of delivery and managing all of that. The same thing with the alignment on schedule and production and where are things in the queue from issuance of shop drawings to
(23:17):
manufacturing to stage to en route to delivery to being delivered to the job site and really how do we hold one another accountable is probably the biggest piece that we see here so you can imagine a scenario where we've carved out a piece of the scope of work to be performed through prefabrication.
And what happens if that scope runs over on costs, right to those costs hit the project level PNL and does that does that margin fade, if you will, affect potentially people's incentive compensation.
(23:53):
There's a whole lot of rules for the road that have to be set up, and you can go a lot of different ways on it but I think the point is is just being clear who's going to do what and when, how are we going to hold one another accountable, and how are we going to do this together.
I think when that breaks down and there's a lack of clarity on those rules is where you start to see the infighting, you start to see the cultural erosion you start to see sort of this lack of trust, and that really works hard from from a scaling standpoint, once you've gotten into that rut.
(24:26):
I think being clear on process structure and systems and then communicating and training on those things early and often really helps set the stage for an organizational culture that can successfully embrace prefab.
Speaking of culture, what are some of the cultural challenges you commonly see as a place to prevent.
A big one is fear that we're replacing hours and therefore jobs in the field so this cannot be further from the truth at least from our perspective prefab actually helps contractors be more competitive and build a stronger backlog and a stronger business.
(25:02):
And that directly translates to job security for the field. But if it isn't message properly and consistently from the top of the organization you can see where that perception may be coming from.
Another one that we commonly see is what we talked about a moment ago is this us versus them mentality.
Every project is going to have issues whether it's related to costs, schedule, quality, etc. And when things go wrong, it's easy to point the finger internally particularly if prefabrication is like this new experimental thing that we haven't quite figured out yet.
(25:39):
This is where clear processes systems and structure really come into place that everyone is clear on the expectations there's there's much less room for finger.
We've talked a bit about where we often see firms get tripped up in the process as it relates to prefab if we were to take the flip side to that question.
I love it. If you would share your perspective on a successful case study where somebody's done it really well.
(26:05):
Off the top of my head, I can think of one mechanical contractor in particular has done this really well, done a great job of growing prefabrication in a managed fashion and, you know, fundamentally they were able to take a step back and take stock of a lot of the elements that we've already discussed
and the leader of this contractor had particular convictions about market structures in the future of the space and that prefab was going to be a necessary part of their business model to remain relevant and competitive.
(26:38):
So back to the vision piece, right, of where are we taking this organization long term prefab was definitely a part of that vision and now it was really about figuring it out.
And also, interestingly enough, resolved to the fact that prefab wasn't going to be some huge economic windfall, right, it wasn't going to double their, their profitability out of the gate or anything like that.
(27:04):
But they said, if it could help them become a better business, while holding serve on earnings, it was worth pursuing.
And so we think about when I mentioned earlier the Jim Collins analogy of firing bullets before filing cannonballs, they definitely took a slow methodical process and approach to building prefabrication so they started out by cataloging all the different assemblies and components and modules that they could possibly prefab starting there from
(27:36):
the first one, then they scrub that list to say, okay, what's most common in our work, or the most common assemblies that we're going to have an opportunity to prefabricate.
And where could they drive sufficient throughput back to that whole volume equation we talked about earlier.
They also looked at what was most unique to them like where did they have the right to win. What are the things that they could do better, faster, cheaper than anyone else could.
(28:05):
And also took a candid look at where could they be better off by subcontracting certain components to a third party or or just procuring those components from a manufacturer stuff that yeah we could do it but it's really not in our best interest to pursue so
they really defined some guardrails for their sweet spot in terms of prefab and that really helped a lot in terms of subsequent strategic conversations about capital and talent allocation, and to provided a clear message to the organization on what they meant by
(28:42):
capital and talent allocation, what was in and what was out. And they were able to develop really standard designs for prefabricated assemblies and modules. So here's the dimensions the tolerance how the structural design needs to consider those opponents so
the language of designers and making it really easy for designers to incorporate those elements into the design. And one of the things we talked about earlier is having a robust design and or design coordination capabilities is essential to scaling prefabrication
(29:17):
and not be able to influence the design to enable prefabrication. And when you have those capabilities internally, it's much easier to make suggestions and recommendations for how this is going to work with the overall project.
And also by having clarity on what they were going to do as a core really help them dial in their costs and the economic story so that allowed them to then reverse engineer what the growth plan and the investments can look like.
(29:46):
And once they had that core figured out that core prefabricated offerings they were able to one influence that design process early and often because they're very clear on the value engineering opportunities that they could bring to the table it wasn't this guessing game it wasn't
going to be out on the fly and we're going straight to the catalog of the things that we do day in and day out project in project out and here's what we can bring to the table. It also helped them incorporate prefab into their business development project selection processes so
(30:19):
they knew when they were going out to market and trying to source work. These are the types of projects that we're looking to pursue because it's going to enable us to do the things that we know how to do well.
And then once they had that core established building from a core string they were able to identify what's next on their prefabrication frontier what are the next things that we're going to incorporate into our sweet spot capabilities.
(30:42):
And so by starting small and building from a core with a lot of intentionality and thought behind it. They were able to have early success and I would say they gained credibility inside the organization. They were able to overcome the skeptics and that gave them permission
then to seek broader opportunities. You know it's interesting Tyler as you were walking through that I'm reminded I know our strategy practice talks a lot about the four pillars of a successful strategy. It's got to have focus choice systems and mindsets and behaviors and all four of those boxes were clearly
(31:17):
in fact in what you just shared. They were very clear on where they were going to play and how they were going to play. They were very choosing in terms of what to do and what not to do. It's easier said than done. A lot of times in the construction market their systems all seem to
hang together in terms of the strategy and the structure of the rewards. Business development everything and then their mindset you talked a lot about overcoming skeptics and how there was a cadence in the communication to doing that.
(31:41):
Absolutely Scott. I mean all this directly ties to enterprise strategy right and I think that's if you had to pick one thing of where we see this fall down is is is a lack of strategic intent.
We haven't thought through all those steps that you just mentioned. We know that we want to do more prefab we've got the capability to do it and sort of jump in with both feet.
Maybe without thinking through the order of operation. So it is definitely a strategic question for the executive suite of contractors to be thinking about. Now you set this up properly.
(32:12):
So the ready fire a philosophy.
Well we've covered a lot. Very robust study I would encourage listeners to check it out. I'm curious. Tyler if you could share maybe what's not in the study that you feel is important to the conversation.
We did not spend a lot of time on onsite prefabrication which has a lot of attractive characteristics.
(32:35):
You know oftentimes the cost of onsite prefab facilities can be built into the cost of work so it's less capital intensive.
Less overhead intensive approach it also eliminates a lot of the logistical challenges that you could foresee with prefabricating offsite and having to ship things to site.
It's a great way to enable multi trade fabrication as well right. You're already on the job site. You've already got the trades out there working. You can carve out portions of crews and have them collaborate on multi trade prefabricated assemblies.
(33:07):
One of the biggest challenges related to onsite prefab is cyclogistics in the availability of space and so it's not always the case that you're going to have large amounts of space to set up temporary facilities.
But even small elements of prefabrication like bending pipe can be done onsite in dedicated areas with repetition and stage material.
(33:30):
Potentially with less skilled workforce rather than at the point of installation. So many contractors are already doing onsite prefabrication but that is really an area to do more of that.
Which is I think different than maybe what we've been talking about a lot and what a lot of the research said was while we're doing single trade offsite prefabrication and that's where we're struggling the most.
(33:53):
That's where we get a lot of challenges related to you know the economic story in the business models but if we're finding ways just to build smarter onsite by doing onsite prefabrication big or small single trade or multi trade.
That's a really compelling strategy as well.
I think another thing that we didn't touch on deeply in the study is third party or subcontracted prefabrication.
(34:18):
It's an approach that many have found success with and so if you step back and you think about OK what's the benefits that we're seeking here when it comes to prefabrication.
Our research would suggest it's all around schedule quality and safety.
Less so on margin accretion although many firms see margin accretion but if we focus on schedule quality and safety.
(34:39):
Sometimes subbing that out subbing that prefab out is a lower risk less capital intensive approach.
It's sort of depressures or takes some anxiety away from providing that consistent volume and throughput for a manufacturing facility or prefab business unit.
Time back to some of the economics we talked about earlier.
(35:00):
A prime example of this would be sheet metal duck fabrication which people might not call that prefab but there are plenty of mechanicals out there that don't fab their own duck.
They've made a conscious decision that let's partner with someone who specializes in that and take on that risk.
The keyword here is is to partner with someone you have to have a reliable partner that's able to deliver on the expectations to make the economics of that work.
(35:25):
So if there are things that there's a peer or quasi competitor in the market that has already figured this out.
It has already built the facilities that already has scaled it can already do it with a lot of consistency and reliability.
That's often something we ought to consider before we just decide that we're going to start doing that ourselves as well and trying to compete.
(35:46):
And then lastly there's another stakeholder in this dynamic that we didn't really cover yet but that's building product manufacturers or BPMs and those manufacturing companies are continuously looking for ways to stretch their value proposition further downstream into what has traditionally been thought of as construction
activity. So and many of these building product manufacturers are very large sometimes publicly trading companies with diverse customer bases.
(36:16):
So it's hard to compete on a one on one basis as a mid market contractor if you're producing the same assemblies that a manufacturer otherwise could and there are a lot of assemblies and components that BPMs do really well.
And so for contractors it's often a recognition of there's some things that are better off being procured versus fabricated unless we have a real compelling reason for why we can do it better faster more cost effectively than they can.
(36:45):
Maybe just to round out the conversation.
We love your perspective on what you hope listeners may take away from the study in our conversation here today if you had an error down.
Yeah if you think about the different challenges and dynamics we've talked through today one can infer that there's a lot of risk associated and prefabrication and I think they'd be right.
But I want to clarify that we FMI is very bullish on the future of prefabrication in our industry in many ways.
(37:12):
We see the industry being forced over time to adopt more industrialized construction approaches.
We've got permanent labor supply challenges the speed to market frontiers perpetually being challenged by the sheer nature of contractor competition.
So we think prefab here is here to stay we think it's going to grow the contractors involved in the research say it's going to grow it's going to double in the next five years so it's happening.
(37:39):
There's definitely risk associated with and what we hope folks take away from our conversation here today or if they have a chance to read the study is just thinking through some of those elements that have enabled others to be successful or where have others maybe missed the mark
or had less than ideal outcomes and incorporating that into the way they think about setting their prefabrication approach for success.
(38:04):
We hope that folks can take away from our research and our discussion here today is that there's very compelling reasons to lean into prefabrication.
But there's also some perils out there there's a lot of mistakes that we've seen contractors make. Conversely, there's some really successful stories out there.
And so the elements that we've listed out here on the podcast we'd encourage folks to think about inside the four walls of their business do we have a clear vision for the future are we clear on strategy do we have a capital allocation plan how we're really going to scale this thing.
(38:38):
How we set up the right structure, the right economic models, the right processes and systems in place to allow us to be successful. And have we messaged this consistently in a way that's going to allow our culture to embrace this and really get behind this as a key part of our future strategy for the business.
(38:59):
You know I mentioned at the beginning of our discussion, our specialized team at fmi focuses on helping contractors be more profitable manage their business risk so we're really looking forward to bringing these insights to our clients and partnering with them on helping them think
through how are they going to scale prefab. We know it's going to be a big part of the future of the industry. Everybody's at a little bit of a different stage, whether that's zero or we've been into it for 15 or 20 years.
(39:29):
And so thinking through what is next and how do we do that in a responsible fashion that's going to build a better business more sustainable business for the future.
Well thank you Tyler I think that's a great book into the conversation today. As always, very content rich and super insightful I really appreciate your time and great senior.
Thanks Scott.
(39:50):
As always thank you for listening and please remember to like or subscribe to our podcast so you don't miss an episode.
Welcome and thank you for listening to our latest episode of Built In.
(00:05):
I'm Scott Winston, FMI Consulting President.
I'm really excited about today's episode.
I'll be talking with FMI's very own Tyler Paray about Part 2 of our recently released Industry Labor Productivity Study.
For background purposes, Tyler leads our performance practice and is an FMI partner and board member.
Well, good morning Tyler. How are you? Welcome to the show. Thanks for being here.
(00:26):
Yes, Scott. Thanks for having me. Very much looking forward to the conversation today.
Well, great. Let's go ahead and jump in.
The frame list for folks that may have missed our conversation about Part 1 of this study.
I'd love it if you would share an overview of the research your team conducted last year.
Why you chose to do the research in the first place and what did you learn?
So, the team that I lead at FMI, our performance practice, exists to help contractors with really the core interworking functions of their business.
(00:55):
Sort of the old doc fails, get work, do work, keep score.
How are we estimating and pricing work effectively?
How are we managing and coordinating work effectively in the field?
And then how are we leveraging sound project controls to understand job progression and performance?
And one of the things that we're often asked to help contractors with is optimizing labor productivity.
(01:18):
It's work that we've done for decades in the industry.
And we like to think we know something about it, but given the turbulence in markets over the last several years,
you think about the post pandemic supply chain shocks, the ramp up in construction that we've seen, the dearth of available, qualified labor.
We really wanted to understand how self performing labor intensive contractors are managing labor productivity in today's environment.
(01:44):
What are the biggest challenges that are out there?
Are folks finding success? What best practices are they leveraging?
And where do they see opportunities going forward?
So, this research really set out to answer those questions.
And not surprisingly, contractors by and large have seen a decline in productivity.
And that's really been driven by a couple of things we think of the external factors like quality of design documents,
(02:10):
increasingly compressed schedule, insufficient general contractor coordination, which I know our general contractors, listeners probably won't appreciate to hear.
But I think if we're all candid with one another, certain jobs are managed better than others, and that has a direct effect on labor productivity in the field.
We also looked at the internal factors like lack of qualified craft, which is a well documented trend in our industry.
(02:35):
And we can get into that more later, but also, you know, lack of planning and communication and coordination amongst project teams as it relates to labor productivity.
And when we got down to it, you know, the most profitable contractors in our research had strongly held beliefs around consistency and planning practices and project controls in their business that helped them maximize productivity.
(02:59):
And that directly correlated to really the bottom line, those firms that had consistency in those best practices outperformed their peers head and shoulders from an operating profitability standpoint.
That's super helpful to frame the origin of the first study that was conducted last year.
Now, if we kind of fast forward to today, I'd love it if you kind of do the same thing and share more about Part Two of the study, and specifically about how prefabrication is connected to labor productivity.
(03:28):
Well, prefab has been is and will be a growing portion of construction put in place in the industry.
So we felt like we'd be missing a huge piece of the puzzle that we didn't dive in on prefabrication.
And anytime we talk about trade contractors and labor productivity, prefabrication is always part of that conversation.
As I referenced a moment ago, some of the major challenges that folks are seeing are compressed schedules and lack of qualified craft.
(03:56):
And these are issues that prefab is helping to address directly and we'll talk about that a little bit more here in a minute when we when we look at some of the research findings.
So we sought to understand, where are we as an industry in terms of prefabrication by getting feedback from the executives that participated in our research.
And what are the current state of their prefab efforts, where do they see it going in years to come and what are their motivations for and what are the obstacles against growing and scaling prefabrication.
(04:27):
So kind of building on that, how would you summarize the most important takeaways of this second part to the study, in other words, maybe how are how should folks listening be thinking about this as it relates to their business.
Yeah, and this may be a little bit old hat for the folks that are already into the throes of their prefabrication efforts, but you know, we really sought to understand what are the key benefits or key drivers.
(04:49):
What would motivate somebody to try to either get into prefabrication or scale existing prefabrication efforts.
And the top benefits or top drivers were really quality, you know, more control over quality, better quality coming out of their prefabrication efforts as opposed to sort of stick building in the field.
It's an opportunity to reduce schedule duration. So if you think about taking features of work outside of the work face and managing those in parallel to the installation, able to reduce schedules on site and having really more control over that schedule.
(05:27):
The third thing that was at the top of that list was safety so improve worker safety, lower incident rates. From a commercial perspective lower insurance premiums is always attracted from a business standpoint.
And then the fourth piece was really reduced reliance on skilled craft flavor in the field. So the ability to prefab or manufacture components with less skilled labor than otherwise needing, you know, very seasoned experience folks to to install components at the work face.
(06:00):
I think the other piece there that we saw in the research is the ability to attract a different segment of the workforce that may prefer. I'll just say the the the comforts of factory setting or environment as opposed to maybe the unpredictability of the field if you think about a manufacturing
facility that's well lit that is environmental control that secure access. They're able to reach a broader demographic of workforce that is attracted to that environment versus the rain the mud the early mornings of the construction site.
(06:34):
One of the other things that we saw was that contractors across all trade disciplines anticipate their prefab efforts doubling over the next five years. Pretty shocking average hours, average craft hours today around 15% of total hours spent in prefabrication forecasting five years out average about 30% of
labor hours being spent in prefabrication. So there's this there's this real conviction about what the future is going to look like amongst the trade contractor community and where prefabrication is going.
(07:05):
Some of the key challenges that we heard from folks in the research was design and coordination so there's that there's that design piece again rising the top similar that we heard and just the the original piece of this study around labor productivity but design is such a huge piece of enabling
prefab and we'll touch on later the capabilities needed to really accelerate prefab growth and a construction business. The stakeholder collaboration so outside the four walls of your construction business the design entities the owners the general contractors that have to sort of get on board, or be
(07:41):
part of the sausage making of a pre construction effort that's going to enable prefab and then lack of early contractor involvement right so your mechanicals or electricals or plumbers any type of trade that's going to take a prefabricated approach to the project has to have a seat at the
table early and often so that the design the budget the schedule can appropriately consider the prefab elements, you know, in industrial and manufacturing environments.
(08:12):
Often there's commercial parameters of projects that require prefab to be considered and it may even very well be part of the qualifications based selection, like can you bring prefab capabilities to the table.
That's that's tickets to the ballgame to be even in the running for selection. You know, in other areas the market it's more left up to the contractor if you want to prefab great.
(08:34):
And it's either something that gets brought in as a VE effort typically late in design or worse the contractor takes on that VE risk internally and you know rationalize as they can prefab more effectively the job being stick built in the field.
This can obviously work there's many contractors are successful pricing it traditionally and then fabbing a portion of it but you can obviously foresee some of the perils that that might come along with that.
(09:00):
So Tyler building on that from all the feedback you gathered through the research as well as your travels and consulting Oracle clients in the industry. What do you see as the key considerations for scaling prefab.
I think it's a multitude of things got a foundational piece of all this is the organizational vision, where are we trying to take this long term and what's the why behind it do we have real conviction as a leadership team on what the future of the market is going to look like and where we need to be in terms of
(09:28):
what is the logical sequence for us as an organization to get from point A point C their structural elements to be considered as well you know is this going to be a separate division of separate business unit a separate entity, who are the folks that are involved in
(09:50):
the roles that we're going to need. And then there's a big shift in business models as well so manufacturing is fundamentally different than the business of construction and by getting into pre fabrication you're essentially saying we're going to be both we're going to be
both a contractor and we're going to be a manufacturer and those two things those two business models sometimes can work at odds against one another. And so having those considerations factored into the overall plan, having the right talent is key as well.
(10:20):
We've certainly seen contractors try to take traditional field folks and stick them into prefabrication roles to manage that function the business and that can work it works a little bit slower than maybe folks that have a background and experience and the discipline in manufacturing.
And then I think having the right processes and systems in place so anytime you embark on something new what are the guardrails or the rules of the road for how we're going to operate together across the entire organization to support prefabrication.
(10:52):
And then lastly I think there is there is a cultural implication to consider here, which is, hey, we've been doing things one way for the life of the organization and now we're throwing in this new element or we're growing this new element and how are people going to feel about that.
And we think about what really drives the performance of a trade contracting or a self performing labor intensive organization. It's the men and women in the field. And so all of a sudden we're doing something different we're carving out man hours we're carving out scopes and we're prefabricating them either on site or off site or doing it a little bit differently.
(11:28):
There, there is as you might anticipate oftentimes some cultural resistance to prefabrication.
Curious, where have you seen business strategy for prefabrication missed the mark.
I think one of the keys to success that we have seen is making sound bets that are rationalized by the total addressable market opportunity for that particular contractor when it comes to prefabrication so we take a look at our backlog today.
(11:55):
And we say, okay, what, what portion of that are we prefabricating or could be prefabricating and so you've got that as a starting point and then you look to the future and say well if our ambition is to grow that.
Where is it going to come from is it going to come from the existing look and feel and make up of our backlog today or does our work mix need to look different to enable or prefabrication.
(12:19):
Certain delivery methods owners market segments are much more conducive to prefabrication.
And so if one of our strategic goals is to grow this thing a lot of it has to do with what our work mix looks like.
I mentioned making sound bets. Jim Collins has this great analogy about firing bullets before you fire cannonballs and I would probably butcher it if I tried to recite it but the punchline is.
(12:48):
You make a bunch of small bets first and find out what's working before you launch into big bets.
And the firms that we have seen do this successfully is very much a crawl walk run type of strategy.
In many cases we have seen contractors firing cannonballs before bullets said differently.
We jump in we invest in a prefab facility before we really built a plan on how we're going to do this.
(13:14):
And what would that plan look like. Well it's all the things that we mentioned before.
It's the structure the business model the talent processes the systems the considerations for culture.
How are we going to get ready to get ready to go do this as an organization and putting a lot of thought into that.
Let's one of the things you mentioned there was business models.
I'd love it if you would share a little bit more about the different business models for construction and prefabrication.
(13:39):
Yeah the bottom line that comes down to being in a volume driven business or a margin driven business and so manufacturing if we're going to call prefabrication a type of manufacturing.
It's really a volume driven business model or you've got fixed cost associated with prefabrication that requires a certain amount of volume to be run through the plant and I'll put the plant in air quotes that could be a yard that could be on site that could be an extension or a carve out of an extension.
(14:08):
Or a carve out of an existing warehouse but there's definitely cap acts associated with it and having a consistent throughput and a certain volume to run through that think is where we see some contractors get in trouble because construction can be a lumpy business.
And even if you said well definitionally we have that already with our DNA infrastructure for the construction business model but not all projects as we mentioned a moment ago when themselves to really substantial amounts of prefabrication so anytime you have lumpiness or downtime spread over your fixed costs related to prefabrication you're going to feel that pain in the P&L.
(14:49):
And so there's oftentimes this tension between we need to drive more volume through prefabrication but our construction backlog or construction volume might not always enable that.
You know I think most folks try to cap their capacity for prefab slightly underneath the maximum surge demand that they might expect and if we do reach a point of surge demand where we are prefab capabilities can't handle that well that's an opportunity to try to carve that out shed that risk.
(15:22):
Subcontracted to another partner you know it's a bit like heavy civil firms that are very equipment intensive you would never manage a equipment fleet for peak demand right because 90% of the time you'd have a certain amount of equipment being idle and so it's figuring out again what's that total addressable demand where do we think the volume is going to be for our prefab efforts let's invest appropriately alongside that demand.
(15:51):
What are some of the structural questions that contractors need to answer.
Yeah, there's a myriad of them Scott and you know we'll share our point of view here in a minute.
But there's a lot of different ways to skin this cat and I don't think we're here to tell anybody that there's a right answer or a wrong answer but I think getting clarity on it early on is really helpful for contractors and so, you know, one of the fundamental questions that we see out there is is prefabrication a cost center or a profit center.
(16:20):
The pushback we often hear is well that doesn't really matter because it's all going in the same place at the end of the day but clarity around that is essential to help squaring the economics and surprisingly many firms are quite vague on this and so everything from how we price the cost of what it takes us to prefab assemblies and how that relates to a project level estimate.
(16:44):
How do we incentivize folks in the prefab facility what are the economics back and forth between project level PNL and prefab PNL, even if those exist or not and so I think it's really important early on to to have a point of view on that.
I think the other pieces is is this going to be carved out and separate or commingled into the construction business and what I mean separate is it a separate business unit is it a separate entity is it running a separate PNL.
(17:15):
And so that has implications right there's there's some attractiveness to separation right so we can have increased accountability we can almost treat our prefabrication partners internally like a subcontractor and there's accountability around schedule cost and quality and delivery.
The downside risk to that obviously is, you know, anytime we create a new division we're creating division, we create silos inside the organization and we've got to manage against that cultural risk.
(17:47):
And I think one of the other elements that we we also hear quite often from a structural standpoint is, is this an in house resource.
Or are we going to go do third party work third party work can be attractive. And one of the most compelling reasons is as it helps to smooth out the volume right so if your captive construction volume is is lumpy or not large enough to really support your prefabrication efforts will go in outside and serving customers third party can help create a more
(18:24):
smooth demand flow more smooth throughput from our point of view, having a separate business unit and a separate PNL responsibility, and the freedom to do third party work creates really the environment and the incentives for accountability and continuous improvement and competitiveness said differently
could this could this function or this entity this prefabrication business unit stand on its own as a business and we mentioned the downside risk of creating a silo and a separate business unit.
(18:58):
But I think the benefits greatly outweigh the downside risk, particularly because that downside risk can be managed and there's things you can do to curb that, but having a separate and distinct business unit allows you to get extreme clarity on the return on investment in the performance of prefabrication function of the business.
(19:19):
So Tyler building on the concept of having it as its own entity to smooth out the lumpiness as you said which thing is a great point. How would that impact the business from a branding perspective from an external stakeholder perspective you know clients competitors, you know likelihood to use an entity that was tagged to the company.
(19:42):
Yeah, I think it's definitely a consideration and oftentimes we will see clients of ours, brand it differently. It's under a different name, maybe it's even in a different location. It creates some separation, if you will, separation of church and state so that the third party market feels like they're getting a fair shake from a cost competitive standpoint.
(20:03):
There's things to consider when going down that path as well. You know, again, it does. Are we creating this separate business that has no relation to our core that's a risk to manage against.
But it oftentimes giving in its own identity helps by helps to brand that in the marketplace that you know we're in business as prefabrication company.
(20:26):
And we can serve the needs of multiple stakeholders, certainly our own and others and I think this works both ways to and so we'll talk a little bit later around third party prefabrication from a strategy standpoint so what are the things that we ought to be subcontracting out versus doing ourselves.
I think it's important to be consistent and honest in the marketplace around that so you're able to get competitive pricing and really upfront in a project life cycle in a precon pursuit, being clear to your fabrication partners on hey this is something that we plan to prefabricate on our
(21:02):
own or something that we really have no interest in doing it it's outside of our core we really need your help and we want competitive pricing and so there's a whole dynamic associated with that. It is possible. Every market is different in terms of receptivity to that, but we certainly seen it work again going back to the volume driven
strategy and consistency of throughput, having third party work really helps to smooth out that business.
(21:28):
From a processes and system standpoint, where do you see folks tend to get tripped up.
Yeah, we go back to our get work do work keeps score rubric that we started out talking about defining how this is going to be done and by who and setting clear rules for the road so when we think about the selection of work.
Can the prefab function say no to the construction function right today. Do they have autonomy and the work that we take on in prefab and likewise for construction does this construction have the ability to be selective on what they choose to funnel towards the prefab function or not, and who arbitrates these
(22:07):
decisions and so there's a lot that goes into that discussion. I think most folks will say look we're going to try and prefab all that we can if it's the right stuff and it's going to work for us economically, but sometimes we have to have some rules established right and waste in which to manage that.
I think we think about who prices the work, because we've got two different elements going on. We have work that's going to be performed in the prefab facility. And there's a whole different economic story associated with that then how we plan to build it in the field and so who's going to
(22:40):
estimate it or estimate it, who reviews it, who sets pricing and margin. Those are key things to work out from a process standpoint and then even things like procurement of materials and so we've won a project. Part of it's going to be executed in the field part of it's going to be executed in prefab.
Who has responsibility for the buyout of the job, the management of the vendor, or the verification of delivery and managing all of that. The same thing with the alignment on schedule and production and where are things in the queue from issuance of shop drawings to
(23:17):
manufacturing to stage to en route to delivery to being delivered to the job site and really how do we hold one another accountable is probably the biggest piece that we see here so you can imagine a scenario where we've carved out a piece of the scope of work to be performed through prefabrication.
And what happens if that scope runs over on costs, right to those costs hit the project level PNL and does that does that margin fade, if you will, affect potentially people's incentive compensation.
(23:53):
There's a whole lot of rules for the road that have to be set up, and you can go a lot of different ways on it but I think the point is is just being clear who's going to do what and when, how are we going to hold one another accountable, and how are we going to do this together.
I think when that breaks down and there's a lack of clarity on those rules is where you start to see the infighting, you start to see the cultural erosion you start to see sort of this lack of trust, and that really works hard from from a scaling standpoint, once you've gotten into that rut.
(24:26):
I think being clear on process structure and systems and then communicating and training on those things early and often really helps set the stage for an organizational culture that can successfully embrace prefab.
Speaking of culture, what are some of the cultural challenges you commonly see as a place to prevent.
A big one is fear that we're replacing hours and therefore jobs in the field so this cannot be further from the truth at least from our perspective prefab actually helps contractors be more competitive and build a stronger backlog and a stronger business.
(25:02):
And that directly translates to job security for the field. But if it isn't message properly and consistently from the top of the organization you can see where that perception may be coming from.
Another one that we commonly see is what we talked about a moment ago is this us versus them mentality.
Every project is going to have issues whether it's related to costs, schedule, quality, etc. And when things go wrong, it's easy to point the finger internally particularly if prefabrication is like this new experimental thing that we haven't quite figured out yet.
(25:39):
This is where clear processes systems and structure really come into place that everyone is clear on the expectations there's there's much less room for finger.
We've talked a bit about where we often see firms get tripped up in the process as it relates to prefab if we were to take the flip side to that question.
I love it. If you would share your perspective on a successful case study where somebody's done it really well.
(26:05):
Off the top of my head, I can think of one mechanical contractor in particular has done this really well, done a great job of growing prefabrication in a managed fashion and, you know, fundamentally they were able to take a step back and take stock of a lot of the elements that we've already discussed
and the leader of this contractor had particular convictions about market structures in the future of the space and that prefab was going to be a necessary part of their business model to remain relevant and competitive.
(26:38):
So back to the vision piece, right, of where are we taking this organization long term prefab was definitely a part of that vision and now it was really about figuring it out.
And also, interestingly enough, resolved to the fact that prefab wasn't going to be some huge economic windfall, right, it wasn't going to double their, their profitability out of the gate or anything like that.
(27:04):
But they said, if it could help them become a better business, while holding serve on earnings, it was worth pursuing.
And so we think about when I mentioned earlier the Jim Collins analogy of firing bullets before filing cannonballs, they definitely took a slow methodical process and approach to building prefabrication so they started out by cataloging all the different assemblies and components and modules that they could possibly prefab starting there from
(27:36):
the first one, then they scrub that list to say, okay, what's most common in our work, or the most common assemblies that we're going to have an opportunity to prefabricate.
And where could they drive sufficient throughput back to that whole volume equation we talked about earlier.
They also looked at what was most unique to them like where did they have the right to win. What are the things that they could do better, faster, cheaper than anyone else could.
(28:05):
And also took a candid look at where could they be better off by subcontracting certain components to a third party or or just procuring those components from a manufacturer stuff that yeah we could do it but it's really not in our best interest to pursue so
they really defined some guardrails for their sweet spot in terms of prefab and that really helped a lot in terms of subsequent strategic conversations about capital and talent allocation, and to provided a clear message to the organization on what they meant by
(28:42):
capital and talent allocation, what was in and what was out. And they were able to develop really standard designs for prefabricated assemblies and modules. So here's the dimensions the tolerance how the structural design needs to consider those opponents so
the language of designers and making it really easy for designers to incorporate those elements into the design. And one of the things we talked about earlier is having a robust design and or design coordination capabilities is essential to scaling prefabrication
(29:17):
and not be able to influence the design to enable prefabrication. And when you have those capabilities internally, it's much easier to make suggestions and recommendations for how this is going to work with the overall project.
And also by having clarity on what they were going to do as a core really help them dial in their costs and the economic story so that allowed them to then reverse engineer what the growth plan and the investments can look like.
(29:46):
And once they had that core figured out that core prefabricated offerings they were able to one influence that design process early and often because they're very clear on the value engineering opportunities that they could bring to the table it wasn't this guessing game it wasn't
going to be out on the fly and we're going straight to the catalog of the things that we do day in and day out project in project out and here's what we can bring to the table. It also helped them incorporate prefab into their business development project selection processes so
(30:19):
they knew when they were going out to market and trying to source work. These are the types of projects that we're looking to pursue because it's going to enable us to do the things that we know how to do well.
And then once they had that core established building from a core string they were able to identify what's next on their prefabrication frontier what are the next things that we're going to incorporate into our sweet spot capabilities.
(30:42):
And so by starting small and building from a core with a lot of intentionality and thought behind it. They were able to have early success and I would say they gained credibility inside the organization. They were able to overcome the skeptics and that gave them permission
then to seek broader opportunities. You know it's interesting Tyler as you were walking through that I'm reminded I know our strategy practice talks a lot about the four pillars of a successful strategy. It's got to have focus choice systems and mindsets and behaviors and all four of those boxes were clearly
(31:17):
in fact in what you just shared. They were very clear on where they were going to play and how they were going to play. They were very choosing in terms of what to do and what not to do. It's easier said than done. A lot of times in the construction market their systems all seem to
hang together in terms of the strategy and the structure of the rewards. Business development everything and then their mindset you talked a lot about overcoming skeptics and how there was a cadence in the communication to doing that.
(31:41):
Absolutely Scott. I mean all this directly ties to enterprise strategy right and I think that's if you had to pick one thing of where we see this fall down is is is a lack of strategic intent.
We haven't thought through all those steps that you just mentioned. We know that we want to do more prefab we've got the capability to do it and sort of jump in with both feet.
Maybe without thinking through the order of operation. So it is definitely a strategic question for the executive suite of contractors to be thinking about. Now you set this up properly.
(32:12):
So the ready fire a philosophy.
Well we've covered a lot. Very robust study I would encourage listeners to check it out. I'm curious. Tyler if you could share maybe what's not in the study that you feel is important to the conversation.
We did not spend a lot of time on onsite prefabrication which has a lot of attractive characteristics.
(32:35):
You know oftentimes the cost of onsite prefab facilities can be built into the cost of work so it's less capital intensive.
Less overhead intensive approach it also eliminates a lot of the logistical challenges that you could foresee with prefabricating offsite and having to ship things to site.
It's a great way to enable multi trade fabrication as well right. You're already on the job site. You've already got the trades out there working. You can carve out portions of crews and have them collaborate on multi trade prefabricated assemblies.
(33:07):
One of the biggest challenges related to onsite prefab is cyclogistics in the availability of space and so it's not always the case that you're going to have large amounts of space to set up temporary facilities.
But even small elements of prefabrication like bending pipe can be done onsite in dedicated areas with repetition and stage material.
(33:30):
Potentially with less skilled workforce rather than at the point of installation. So many contractors are already doing onsite prefabrication but that is really an area to do more of that.
Which is I think different than maybe what we've been talking about a lot and what a lot of the research said was while we're doing single trade offsite prefabrication and that's where we're struggling the most.
(33:53):
That's where we get a lot of challenges related to you know the economic story in the business models but if we're finding ways just to build smarter onsite by doing onsite prefabrication big or small single trade or multi trade.
That's a really compelling strategy as well.
I think another thing that we didn't touch on deeply in the study is third party or subcontracted prefabrication.
(34:18):
It's an approach that many have found success with and so if you step back and you think about OK what's the benefits that we're seeking here when it comes to prefabrication.
Our research would suggest it's all around schedule quality and safety.
Less so on margin accretion although many firms see margin accretion but if we focus on schedule quality and safety.
(34:39):
Sometimes subbing that out subbing that prefab out is a lower risk less capital intensive approach.
It's sort of depressures or takes some anxiety away from providing that consistent volume and throughput for a manufacturing facility or prefab business unit.
Time back to some of the economics we talked about earlier.
(35:00):
A prime example of this would be sheet metal duck fabrication which people might not call that prefab but there are plenty of mechanicals out there that don't fab their own duck.
They've made a conscious decision that let's partner with someone who specializes in that and take on that risk.
The keyword here is is to partner with someone you have to have a reliable partner that's able to deliver on the expectations to make the economics of that work.
(35:25):
So if there are things that there's a peer or quasi competitor in the market that has already figured this out.
It has already built the facilities that already has scaled it can already do it with a lot of consistency and reliability.
That's often something we ought to consider before we just decide that we're going to start doing that ourselves as well and trying to compete.
(35:46):
And then lastly there's another stakeholder in this dynamic that we didn't really cover yet but that's building product manufacturers or BPMs and those manufacturing companies are continuously looking for ways to stretch their value proposition further downstream into what has traditionally been thought of as construction
activity. So and many of these building product manufacturers are very large sometimes publicly trading companies with diverse customer bases.
(36:16):
So it's hard to compete on a one on one basis as a mid market contractor if you're producing the same assemblies that a manufacturer otherwise could and there are a lot of assemblies and components that BPMs do really well.
And so for contractors it's often a recognition of there's some things that are better off being procured versus fabricated unless we have a real compelling reason for why we can do it better faster more cost effectively than they can.
(36:45):
Maybe just to round out the conversation.
We love your perspective on what you hope listeners may take away from the study in our conversation here today if you had an error down.
Yeah if you think about the different challenges and dynamics we've talked through today one can infer that there's a lot of risk associated and prefabrication and I think they'd be right.
But I want to clarify that we FMI is very bullish on the future of prefabrication in our industry in many ways.
(37:12):
We see the industry being forced over time to adopt more industrialized construction approaches.
We've got permanent labor supply challenges the speed to market frontiers perpetually being challenged by the sheer nature of contractor competition.
So we think prefab here is here to stay we think it's going to grow the contractors involved in the research say it's going to grow it's going to double in the next five years so it's happening.
(37:39):
There's definitely risk associated with and what we hope folks take away from our conversation here today or if they have a chance to read the study is just thinking through some of those elements that have enabled others to be successful or where have others maybe missed the mark
or had less than ideal outcomes and incorporating that into the way they think about setting their prefabrication approach for success.
(38:04):
We hope that folks can take away from our research and our discussion here today is that there's very compelling reasons to lean into prefabrication.
But there's also some perils out there there's a lot of mistakes that we've seen contractors make. Conversely, there's some really successful stories out there.
And so the elements that we've listed out here on the podcast we'd encourage folks to think about inside the four walls of their business do we have a clear vision for the future are we clear on strategy do we have a capital allocation plan how we're really going to scale this thing.
(38:38):
How we set up the right structure, the right economic models, the right processes and systems in place to allow us to be successful. And have we messaged this consistently in a way that's going to allow our culture to embrace this and really get behind this as a key part of our future strategy for the business.
(38:59):
You know I mentioned at the beginning of our discussion, our specialized team at fmi focuses on helping contractors be more profitable manage their business risk so we're really looking forward to bringing these insights to our clients and partnering with them on helping them think
through how are they going to scale prefab. We know it's going to be a big part of the future of the industry. Everybody's at a little bit of a different stage, whether that's zero or we've been into it for 15 or 20 years.
(39:29):
And so thinking through what is next and how do we do that in a responsible fashion that's going to build a better business more sustainable business for the future.
Well thank you Tyler I think that's a great book into the conversation today. As always, very content rich and super insightful I really appreciate your time and great senior.
Thanks Scott.
(39:50):
As always thank you for listening and please remember to like or subscribe to our podcast so you don't miss an episode.
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