A McKinsey & Company report finds that modular construction firms handling both manufacturing and on-site assembly achieve better profitability than those offering only one service.
By controlling the entire process—from factory production to installation—these integrated offsite construction companies gain greater oversight of quality, scheduling, and efficiency. Because their teams are trained across the full modular system, they can manage larger project scopes internally and rely less on subcontractors, which improves margins.
Profitability is especially strong in specialized sectors such as hospitality and healthcare facilities. Higher construction costs per square meter in these markets increase the benefits of factory-built methods, and competition is often less intense compared with residential construction.
At the same time, advances in technology and tailored solutions are helping modular construction scale up, delivering higher-quality projects and a broader range of building types. Emerging digital platforms also make it easier for companies to link customers with suppliers, while optimizing and customizing designs to suit specific sites.
Modular construction’s growing relevance
Modular construction refers to building methods where major components are manufactured off-site—often in factory conditions—and then transported for on-site assembly. In McKinsey & Company’s analysis, “modular” encompasses 3D volumetric units, 2D panels, and bathroom pods, but excludes simple prefabricated parts or precut materials. Their focus is on permanent buildings, though they also touch on providers of rental modules for temporary facilities.
This approach addresses several of the construction sector’s biggest challenges: improving productivity, cutting labor needs by as much as 40 percent, shortening project timelines by up to 50 percent, unlocking cost savings (when executed properly and at scale), and potentially lowering carbon emissions.
Thanks to recent advances in technology and more tailored solutions, modular construction is now beginning to reach its full potential. It enables higher-quality results and supports a wider range of building types beyond the geometrically limited designs of the past. Digital platforms are also transforming the ecosystem by linking customers with suppliers and making it easier for companies to customize and optimize projects for specific sites.
A fragmented but vibrant industry
McKinsey’s database tracks over 700 companies active in modular construction. More than 100 have operated for over half a century, while more than 200 have been founded in just the past 20 years—evidence of the sector’s growing importance. The market remains highly fragmented, with a few large players but a long tail of over 500 firms generating under €50 million in revenue.
Many of these companies are performing well, showing solid growth or profitability. Those focused on permanent buildings achieve an average EBITDA of about 7 percent, although performance varies widely. Some firms have expanded significantly and even begun scaling internationally, while others have faced financial setbacks and notable bankruptcies.
Scope within the value chain
“Value chain presence” describes the stages of the modular construction process in which a company is active. McKinsey & Company identifies several archetypes that differ in how much of the chain they cover and how profitable they are (see sidebar “Archetypes of modular construction companies”). Data from McKinsey show that vertically integrated firms consistently achieve stronger results: companies that handle both off-site manufacturing and on-site assembly average EBITDA margins of about 15–20 percent, compared with roughly 5 percent for businesses focused only on manufacturing.
This performance edge comes from tighter control over operations, quality, and timelines. Companies combining manufacturing and assembly typically achieve the highest EBITDA for three main reasons:
- They can take on a broader range of activities.
- Their teams are trained to manage the full modular system, enabling more efficient organization.
- They pass fewer costs on to subcontractors.
Focus on building types
“Building type” refers to the main asset classes served by a modular company. Around 60 percent of players concentrate on single-family homes. Yet profitability is often greater among firms delivering more specialized projects—such as hotels or healthcare facilities—because higher per-square-meter costs favor factory production and because there tends to be less competition in these segments.
Choice of structural materials
“Structural material choice” denotes the primary material used for modules. Globally, steel and timber dominate modular construction. According to McKinsey, about 42 percent of firms primarily use steel, 38 percent focus on timber, and around 11 percent specialize in concrete (which is more common in some regions). The most profitable companies generally center their offerings on one core material. This focus enables more standardized design and production, as well as cost advantages from bulk procurement.
Product offerings
Modular products range from flat-packed 2D panels to fully finished 3D modules. Most companies focus on one of these two approaches, and the market is roughly evenly divided between them. Margins are broadly similar across both product types, although McKinsey’s database shows firms producing 3D volumetric modules post slightly higher average EBITDA—about 8 percent compared with 6 percent for 2D panels—suggesting that product type alone is not a major determinant of profitability.
Level of building complexity
“Complexity” refers to the sophistication of the buildings and modules produced, from simple, low-rise structures to highly specialized units. The majority of modular players still concentrate on low- to mid-complexity projects, such as buildings with fewer floors or limited technical and geometric demands. In fact, some companies working on simpler projects achieve stronger EBITDA margins. This is largely because lower-complexity work allows greater standardization, more repeatable processes, and a larger share of construction to be completed off-site—enabling firms to capture more of modular’s efficiency benefits.
Commercial approach
McKinsey identifies two main business models in modular construction, which function as distinct markets:
- Project-based sales for permanent buildings.
- Rental models in which companies produce and manage fleets of modules leased for temporary needs—such as worker accommodation or additional classroom space.
Most firms follow the project-based model, but EBITDA margins are typically much higher for rental businesses or for companies combining both approaches. The hybrid model allows producers to serve two markets at once, which helps smooth demand and increase utilization of manufacturing facilities.
Geographic footprint
Modular construction has traditionally been a local business. Differences in customer preferences, building codes, and regulations have limited most companies’ ability to expand across borders. While these barriers still exist, they are gradually easing as standards converge between countries and regions. This shift—together with more efficient long-distance logistics and the establishment of factories in multiple locations—now enables some firms to serve several markets at once.
Despite this progress, most modular players remain locally focused. McKinsey’s database shows that more than 60 percent operate solely within one market. Around 20–25 percent work at a regional scale, typically by running multiple plants or exporting within a region, while only about 15 percent have achieved a global presence. Looking ahead, major changes such as the digitalization of construction codes and the alignment of regulatory requirements between countries could open the door to a more global industry.
Companies that are expanding internationally usually do so to increase asset productivity and tap into new demand pools. Automation and digital tools are making it easier to design and manufacture for multiple jurisdictions. Scaling production also reduces exposure to the ups and downs of any single market, helping firms keep factories fully utilized and operations more resilient.
Pathways to success
McKinsey & Company’s research indicates there is no single formula for winning in modular construction. Yet, when assessing the market across the seven dimensions described above, three characteristics consistently appear among top-performing firms: a strong building system at the core, direct control of the value chain, and disciplined, focused scaling.
Building system as the foundation
A “building system” is the framework of standards, processes, and components that underpins how a structure is designed, produced, and assembled. It covers everything from the major and minor building elements themselves, to how they’re manufactured or sourced, transported, organized, and installed on-site. It also sets the rules around design flexibility—defining which changes are allowed—and clarifies which players are involved at each step of the value chain.
Traditionally, these systems center on a single structural material such as timber, concrete, or steel. However, advances in technology and digital tools—like building information modeling, parametric modeling, and 3D configurators—are enabling companies to create and continuously refine more comprehensive systems. By linking design software directly to manufacturing, firms can offer far easier customization while keeping processes standardized.
According to McKinsey, leading modular companies devote substantial resources to building and improving these systems. They begin by establishing a robust, efficient platform that supports standardized production with room for controlled customization. Over time, they refine and upgrade the system, incorporating insights from completed projects to drive ongoing improvements.
Control over the value chain
Top-performing modular companies maintain direct oversight of most—or all—stages of the value chain, particularly manufacturing and assembly, while collaborating closely with partners in other areas. Firms that are limited to manufacturing or excluded from early design stages often fail to capture the full advantages of modular construction, remaining smaller and less profitable.
In traditional construction, misaligned incentives between different players can lead to inefficiencies and higher risks. When a single company occupies a central position in the value chain, it can better align objectives across all participants, streamline operations, and reduce risk.
The same principle applies in modular construction. Strong integration across the value chain allows companies to synchronize processes, increase transparency, respond quickly to changes, and align incentives. For example, efficiently transporting and installing components requires close coordination among developers, subcontractors, and logistics providers, supported by digital tools that connect design, manufacturing, and assembly.
Strategic, focused scaling
Many challenges in modular construction stem from attempts to scale too quickly or without focus. Some companies build large, automated factories before securing enough demand or expand into new regions before establishing a solid presence in their initial markets.
To scale successfully, firms must first ensure stable demand before increasing capacity and carefully consider payback periods. Modular construction is capital-intensive, and a poorly executed project can threaten a company’s financial health. Mitigating risk requires thoughtful scaling, including building strong relationships with real estate developers to secure consistent demand.
Moreover, companies should validate their building systems, manufacturing processes, and construction workflows on a limited set of projects before expanding. Success in one building type or region should be fully understood before moving into others, as different markets and asset classes often have unique requirements and challenges.
Implications for stakeholders
As demand for modular construction grows, companies in the sector are becoming larger, more experienced, and increasingly sophisticated. Since the market has only tapped a fraction of its potential, there are ample opportunities for multiple players to succeed.
Various stakeholders in the construction value chain—including developers, modular manufacturers, contractors, and investors—can take proactive steps to improve their chances of success. Other participants, such as design and engineering firms, building materials suppliers, and distributors, should also evaluate how to engage in this rapidly evolving sector.
Developers
Modular construction offers developers the potential to enhance internal rates of return by accelerating project timelines, increasing control over processes, reducing risk, and, if implemented effectively, lowering costs. Developers should carefully assess where and how modular fits within their project portfolios.
Maximizing modular’s benefits requires a shift in planning, design, and execution. Developers looking to adopt modular approaches can embed these practices early in the design process and explore long-term partnerships with modular suppliers to ensure smooth implementation and sustained value.
Modular manufacturers
Rising demand, coupled with factors such as lower automation costs, is creating significant growth opportunities for modular manufacturers. However, companies must avoid common mistakes and develop thoughtful strategies for scaling across different building types and geographic markets.
Maintaining control over the value chain is likely to remain critical for realizing modular’s full benefits and achieving consistent factory utilization. Manufacturers can explore partnerships, expand their value chain reach, or adopt new go-to-market models to capture opportunities. Additionally, investing in a robust building system that standardizes processes will be essential for maximizing efficiency, quality, and profitability in modular construction.
Contractors
With recent technological advancements improving speed and efficiency in modular construction, and with manufacturers increasingly operating across borders, contractors will need to adapt to stay competitive. Embracing modular offers contractors new opportunities to gain an edge and develop additional capabilities. To succeed, contractors should define their role in the modular ecosystem and identify where modular construction adds the most value to their project portfolios. This could include forming strategic partnerships or building new in-house expertise.
Investors
The modular construction sector presents a range of investment opportunities, supported by strong market growth and favorable industry trends. However, outcomes can vary widely, making careful selection critical. Investors need a deep understanding of the sector and potential targets, as modular construction has historically seen a higher rate of bankruptcies and failures compared with other industries. A clear, high-level perspective on the market is therefore essential for informed decision-making.
Modular construction is gaining momentum, with a number of companies already achieving success. Opportunities exist across the value chain—not only for developers, contractors, modular manufacturers, and investors, but also for design and engineering firms, material suppliers, and distributors. The diversity of companies, approaches, and the factors behind past failures highlight the importance of strategic planning when entering or expanding in the market.
When executed well, modular construction can help address persistent industry challenges, including labor shortages, construction inefficiencies, housing deficits, and sustainability goals. While success is not guaranteed, the potential rewards for those who do it right are substantial.
Links
https://www.bdcnetwork.com/home/news/55316621/modular-construction-companies-that-do-both-manufacturing-and-assembly-are-more-profitable
https://www.mckinsey.com/industries/engineering-construction-and-building-materials/our-insights/putting-the-pieces-together-unlocking-success-in-modular-construction