In this final article of our three-part series, we examine why, despite its promise, modular construction faces fundamental obstacles that limit its potential to transform the housing market—and why scale remains the biggest barrier.
In The Origins of Efficiency, Brian Potter explains that improvements in production efficiency—rather than singular inventions—are the main driver of abundance. He examines how processes become more efficient over time through a combination of factors.
Potter, a structural engineer, experienced this firsthand at Katerra, the ambitious startup he joined in early 2018. Katerra aimed to disrupt the construction industry by moving building processes off job sites and into factories, doing for construction what Henry Ford did for automobiles. Backed by more than U.S.$2 billion in venture capital, the company sought to solve the inefficiencies of traditional construction and establish better ways of building. For Potter, Katerra became a real-world laboratory.
Just over three years after Potter joined, Katerra had burned through its capital, laid off most of its employees, and ultimately declared bankruptcy. Some attributed the failure to operational missteps—too many products and difficulty integrating acquired companies—but the broader question remains whether the business thesis was sound: can construction truly be cheaper and more efficient if done in factories?
Katerra’s factories struggled to compete with the existing market. As we noted in our second article, it was not the first U.S. attempt at factory-built housing to fail. While prefabricated construction is more widely adopted in other countries, even there we rarely see the dramatic cost savings needed to justify large-scale industrialization of the building process. For example, in Sweden, nearly all single-family homes are factory-built, but their construction costs remain higher than those of conventionally built U.S. homes (Potter, p. 357).
Applying Manufacturing Lessons to Construction
The Toyota Production System (TPS) is widely regarded as the gold standard in efficient manufacturing. Its objective is to eliminate waste, shorten lead times, and deliver products quickly, at a low cost, and with consistently high quality. Toyota is one of the world’s most successful manufacturers.
In the 1970s, Toyota launched a prefabricated housing company in Japan, seeking to apply its expertise to homebuilding. Even though TPS set the standard for efficient car manufacturing worldwide, Toyota remains a niche player in homebuilding, and its homes are relatively expensive compared with traditional site-built construction (Potter, p. 356).
Why Scale Matters: The Limits of Factory Efficiency
The greatest potential for cost savings through factory production is in mobile homes, but this type of housing is often resisted by communities, even though CMHC’s chattel loan program provides an effective financing framework. As housing moves away from tiny trailer form, the cost savings quickly disappear. According to Potter, part of the challenge is that the cost per pound, or per cubic foot, is relatively small. “A dollar’s worth of building is much heavier and requires much more physical space than a dollar’s worth of cars, electronics, or appliances” (Potter, p. 362). Transporting a building, or even just its components, is costly, which limits the market a factory can serve. With a small market size, the opportunities for economies of scale are reduced, especially in an industry where volumes are relatively low. This cost challenge is compounded by the inherent variability of construction—each site is somewhat different from the next.
Permitting presents another challenge. Each jurisdiction has its own process, and the variations make it difficult to standardize or automate. The inspection process is also poorly aligned with a factory-style approach.
Materials present additional obstacles. Many are bulky, requiring larger automation equipment—an investment that only pays off at high production volumes. Drywall, for example, is labour-intensive to hang and easily damaged during shipping. While interior finishes could be selected to make mechanized production more efficient, these options are often more expensive (Potter, p. 365).
Beyond production-specific challenges, the construction industry faces regulatory burdens. Building codes have become longer and more complex, and approvals can take years.
The crux of the problem is volume. To achieve real efficiency gains, the production process needs to operate at massive volumes. Without repetition, economies of scale are not possible. Even if the goal is to build large numbers of homes, the market simply isn’t large enough to achieve the kind of volume needed for significant cost savings.
Micro-Factories: A Nimble Alternative
Factories still have a role, but likely for solving specific challenges rather than large-scale production. For example, traditional construction has struggled to deliver adequate housing for people experiencing homelessness, or for Indigenous communities, particularly in remote areas.
These challenges can be addressed by rethinking how factories are used. Rather than relying on large, expensive, conventional factories, flexible, small-footprint manufacturing technology—robots, CNC machines, and other automated equipment—can be quickly set up and taken down near the jobsite. This approach captures many of the benefits of factory production, such as automation and improved efficiency of labour-intensive tasks, while avoiding many of the drawbacks like high transportation costs and expensive factory overhead.
A shippable micro-factory combines automation, modular equipment, and digital coordination to enable localized, on-demand manufacturing. It can perform tasks such as cutting, framing, and assembling components using software-driven automation, bringing factory-level efficiency directly to the construction site.
By trading size for agility, micro-factories deliver many of the same benefits as traditional factories—precision, speed, and a controlled environment—within a temporary, on-site setting. Once a project is completed, the micro-factory can be packed up and moved to the next job. This approach makes it possible to build homes in remote areas where prefabricated units are difficult to transport and reduces the reliance on highly skilled labour, making it easier to source workers onsite.
The Bottom Line: Scale Is the Obstacle
Prefabricated housing has a role to play. It can improve quality and help address labour challenges, particularly in remote areas, but it is not a game-changer. Without the massive volume needed to achieve true economies of scale, modular construction alone cannot dramatically reduce costs or boost productivity. It can support Canada’s housing strategy, but it is only one part of the solution.
Independent Opinion
The views and opinions expressed in this publication are solely and independently those of the author and do not necessarily reflect the views and opinions of any person or organization in any way affiliated with the author including, without limitation, any current or past employers of the author. While reasonable effort was taken to ensure the information and analysis in this publication is accurate, it has been prepared solely for general informational purposes. Any opinions, projections, or forward-looking statements expressed herein are solely those of the author. There are no warranties or representations being provided with respect to the accuracy and completeness of the content in this publication. Nothing in this publication should be construed as providing professional advice including investment advice on the matters discussed. The author does not assume any liability arising from any form of reliance on this publication. Readers are cautioned to always seek independent professional advice from a qualified professional before making any investment decisions.
