London South Bank University Faculty of Engineering, Science and The Built Environment Department of Property, Surveying and

Construction

Managing Risks Associated with Modular Construction in the UK Budget Hotel Sector

2007 Kenneth Philip Oke MSc Quantity Surveying

Contents

List of Figures List of Appendices Acknowledgements Abstract

iv v vi vii 1 1 1 4 4 5

1.0

Introduction
1.1 1.2 1.3 1.4 1.5 Scope of chapter Rationale for the research Research questions Outline methodology of the research Structure of the dissertation

2.0

Literature Review Off-site Fabrication

2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 Scope of chapter Definition Historical development Implications of use Characteristics of projects suited to modular construction Economic factors Perceptions of off-site fabrication Chapter review

6 6 6 7 8 14 15 16 16

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Contents

3.0

Literature Review Budget Hotels

3.1 3.2 3.3 3.4 3.5 Scope of chapter Definition Economic factors Design and construction Chapter review

18 18 18 19 22 24

4.0

Literature Review Risk Management

4.1 4.2 4.3 4.4 4.5 Scope of chapter The nature of risk Risk management Risk in construction Chapter review

26 26 26 27 32 34

5.0

Research Design
5.1 5.2 5.3 5.4 Scope of chapter Research questions emerging from the literature review Design of the research Chapter review

36 36 36 40 46

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Contents

6.0

Results and Discussion

6.1 6.2 6.3 6.4 6.5 6.6 Scope of chapter Research appraisal Discussion Benefits of modular construction Discussion Risks of modular construction Discussion Risk management strategies Chapter review

48 48 48 49 51 56 63

7.0

Conclusions and Recommendations

7.1 7.2 7.3 7.4 7.5 7.6 Scope of chapter Aims of the study Research questions Recommendations Limitations of the study Areas requiring further research

66 66 66 67 70 71 71 72 73

Word Count List of References

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List of Figures

2.1 3.1 3.2 3.3 3.4 3.5 4.1 5.1

Example of a programme from a modular construction project Budget hotel market segmentation in 2001 Budget hotel market segmentation in 2003 Number of budget hotel rooms by operator Typical guest-room layouts Guest-room floor plan configurations Specific activities for implementation by type of innovation Target sample

9 20 20 21 23 24 34 45

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List of Appendices

1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 11.0

Interview schedule design Interview schedule Revised interview schedule Summary of interviewees Interview transcript Contractor Interview transcript Manufacturer Interview transcript Cost Consultant Interview transcript Project Manager Interview transcript Client A Interview transcript Client B Interview transcript Architect

76 80 82 84 86 91 96 101 105 110 116

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Acknowledgements

The author wishes to express gratitude to the following, without whom the study would not have been possible:

The interviewees who agreed to take part in the study, for giving up their time and consistently providing open and honest answers to the questions put to them.

Steve Pearson, Director of Postgraduate Studies at London South Bank Universitys Department of Property, Surveying & Construction, for providing continual guidance, encouragement, and constructive criticism where necessary.

Willmott Dixon Construction, for providing the financial support necessary to carry out the study.

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Abstract

This study is concerned with identifying the risk management strategies that have been successfully applied to the modular construction of budget hotels in the United Kingdom. A review was undertaken of the existing literature relating to off-site fabrication, budget hotels, and risk management. Semi-structured interviews were subsequently conducted with the aim of exploring: (1) the perception of modular construction; (2) the extent to which modular construction had been applied to the budget hotel sector; (3) risk management strategies that had been applied to budget hotel projects using modular construction; and (4) the extent to which these risk management strategies had been successful. The responses suggested that modular bathroom pods had been widely used in the budget hotel sector for many years and that the modular construction of entire guest-rooms was in the early stages of implementation. The study was able to identify fourteen key risk management strategies, the most significant of which was the use of shipping containers as the basis for module construction. There are concerns that use of foreign suppliers may present risks to Corporate Social Responsibility, particularly due to the strong emphasis on branding of budget hotels.

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Chapter 1

Introduction

1.1

Scope of chapter

This chapter describes the rationale of the research and how the study aimed to add to current knowledge. The process of reviewing existing literature is summarised in order to demonstrate how a gap in the current body of theory was identified. The chapter discusses how the aims of the research evolved during this process and states the research questions that emerged from the literature review. The process of designing the research method is recounted, followed by a prcis of the seven chapters that comprise the study.

1.2

Rationale for the research

The study began as an examination of the use of modular construction in the budget hotel sector. Anecdotal evidence suggested that budget hotel firms had been using modular construction of bathrooms for some time, and were beginning to move towards the off-site fabrication of entire guest-rooms. Despite this a cursory review of existing literature failed to identify a single piece of empirical research on modular construction in the budget hotel sector, which was suggestive of a gap in current theory. A more comprehensive and in-depth review of existing literature began by focusing on off-site fabrication, particularly modular construction. Key works included those of Bagenholm (2001), CIRIA (1999), Davis Langdon (2002; 2004; 2006), Gibb (1994; 1999) Gibb & Isack (2003), Neale (1993), Parry (2003), and Stirling (2003). The literature suggested that modular construction has a large number of advantages over traditional construction methods, including a reduction of project duration, reduced overall cost (despite greater initial cost), and better quality. However the literature also indicated that modular construction can have a number of adverse effects on a project. For example greater up-front investment is required, which has a negative effect on clients cash flows. There are said to be potentially greater CO2 emissions and congestion, which could result in a greater environmental impact. A reduced margin of error, greater craneage and planning requirements, and

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Chapter 1

Introduction

more complex contractual interfaces put increased pressure on the parties to modular construction projects. The literature suggested that projects with certain characteristics are particularly suited to modular construction. These are sites with restricted space, high-quality finishes, a high degree of repetition, and commercial projects. Finally the literature revealed that off-site fabrication was not a new concept and in fact had been through several periods of intense use during the twentieth century. Unfortunately these periods of use were widely perceived as failures and this resulted in off-site fabrication attaining a stereotype of producing poor quality. The study moved on to review the literature concerning budget hotels. This was particularly challenging due to the scarcity of research available. Key works included those of Brotherton (2004), Deloitte & Touche (2004), Fiorentino (1995), Ransley & Ingram (2001), and Rutes et al (2001). There was consensus within the literature that budget hotels are defined as offering high value-for-money, providing minimal facilities and services, being strategically located in people-intensive flow areas, covering a wide geographical area, operating centralised booking systems, and employing heavy branding. The literature revealed that the budget hotel sector is an oligopoly dominated by three large firms. Strong growth in demand is fuelling large-scale building programmes in the sector. Hotel buildings and particularly rooms are typically of a standard design across the firms portfolio and are arranged in highly-efficient, regular geometric-shaped layouts. The literature review concluded that off-site fabrication had the potential to improve the performance of the UK construction industry despite its stereotype of producing poor quality. The budget hotel sector seemed particularly suited to modular construction. Indeed anecdotal evidence suggested that use of bathroom pods had been common in budget hotel construction for some time. It was apparent that use of modular construction had a significant affect on the risk profile of a project; however the continued use of bathroom pods in the budget hotel sector suggested that this risk had been managed with success. The study thus evolved to focus on the use of modular construction in the budget hotel sector from a risk management perspective.

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Chapter 1

Introduction

A further review of literature was therefore carried out with respect to risk management. Key works included those of AIRMIC (2002), Cervone (2006), Dallas (2006), Flanaghan & Norman (1993), Godfrey (1996), Mills (2001), and Uff & Odams (1995). The review found that risk is intangible and therefore difficult to define, but it is generally accepted that risk is a function of likelihood and impact. Although tools have been developed to assist in assessing the likelihood and impact of a given risk, intuition often plays an important role in the assessment process. The literature review found that risk management is a rapidly growing discipline. A number of formal systems have been developed but there is no single universally accepted system. The concepts of risk and risk management are particularly relevant to the construction industry for a number of reasons. Despite this the industry has a poor record at implementing risk management systems. Innovation in construction is often perceived as risky, particularly large-scale innovations due to the greater investment required. Modular construction is clearly a large-scale innovation requiring considerable investment and therefore likely to be perceived as being risky. However the continued use of bathroom pods in the budget hotel sector is suggestive of a willingness to accept the risk of innovation in pursuit of the potential benefits, as well being suggestive of the presence of effective risk management systems. If it could be established how budget hotel construction project teams have managed the risk of bathroom pod construction this might assist in developing risk management strategies for implementing larger-scale modular construction. These strategies could be equally applicable to building types other than budget hotels, and therefore benefit the wider construction industry. The objective of the study was therefore to explore precisely how risks have been managed in budget hotel construction projects using modular methods. The study anticipated that much of the evidence would be based on the use of bathroom pods, but aimed to gather evidence from projects using full modular construction of guestrooms.

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Introduction

1.3

Research questions

The literature review refined the rationale for the research, and this informed a number of specific research questions: 1. What is the perception of modular construction amongst the stakeholders of budget hotel projects? 2. To what extent has modular construction been applied to the budget hotel sector? 3. To what extent and in what form has risk management been applied to budget hotel projects using modular construction? 4. To what extent has risk management been successful when applied to budget hotel projects using modular construction?

1.4

Outline methodology of the research

A qualitative research methodology was chosen in favour of a quantitative methodology as the study considered that a rich quality of information in the form of attitudes and experiences was required in order to satisfy the research questions. Semi-structured interviews were selected as the precise research method as an indepth level of information was required and the study considered it reasonable to generate responses from a relatively small number of participants. Furthermore semistructured interviews would give interviewees the freedom to develop their own ideas and recall their experiences, but within a framework to ensure that the requirements of the research questions were met, and to facilitate the comparison of responses. The research questions were used to develop an interview schedule consisting of nineteen questions, although this was later revised to seventeen questions following a reassessment based on preliminary interviews. A snowball method of sampling was used to identify potential interviewees, which involved contacting a known suitable interviewee and asking them to recommend further suitable interviewees, and so on until an acceptable sample was attained.

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Chapter 1

Introduction

1.5

Structure of the dissertation

The next three chapters comprise an in-depth review of the existing literature that is of relevance to the study. The first of these relates to off-site fabrication, with regard to its definition, the implications of its use, the barriers to its use, and the characteristics of projects that are suited to modular construction. Chapter 3 contains a review of existing literature relating to budget hotels, particularly its definition, the economics of the sector, and the major considerations when undertaking design and construction. Chapter 4 completes the literature review and deals with risk management, including the definition of risk and risk management, formal risk management systems, and the concept of innovation and how it relates to risk. Chapter 5 draws together the theories and concepts discussed during the literature review process in order to demonstrate a gap in the current body of knowledge and inform a set of specific research questions. The process of designing the precise research method used to satisfy the research questions is described. Chapter 6 contains an appraisal of the research process, followed by an in-depth discussion of the responses generated from the interviews. Findings are related back to existing literature in terms of what was confirmed, what was contradicted, and what were entirely new findings. The final chapter summarises the results of the study and makes an assessment on the extent to which the research questions were satisfied. A number of recommendations are made based on the results of the research, followed by a statement on the limitations of the research, and finally suggestions for further areas of study.

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Chapter 2

Literature Review Off-site Fabrication

2.1

Scope of chapter

This chapter attempts to provide a detailed analysis of the literature available on offsite fabrication (OSF). The definition of OSF is discussed in order to provide a conceptual framework for the study. A synopsis of the historical development of OSF is given to put its recent increased use into context. The implications of adopting OSF methods are considered in terms of its effect on time, cost, quality, predictability and reliability, Health & Safety and the environment, interfaces and co-ordination, and the development of a project-wide strategy. The economics of the OSF industry are examined with the aim of understanding some of the barriers to its use. Finally the characteristics which make a project particularly suited to OSF are identified.

2.2

Definition

Gibb (1999:2) has defined OSF as the following:

A process which incorporates prefabrication and pre-assembly. The process involves the design and manufacture of units or modules usually remote from the work site, and their installation to form the permanent works at the work site. In its fullest sense, off-site fabrication requires a project strategy that will change the orientation of the project process from construction to manufacture and installation.

Within this definition is a reference to prefabrication, defined by Richard (2005:443) as:

Building (in a factory) components or full modules very similar to the ones done on a traditional construction site, very often using the same processes and the same materials.

Gibbs definition of OSF also refers to pre-assembly, which CIRIA (1999:12) define as:
Refers to the manufacture and assembly of buildings or parts of buildings ahead of the time that they would traditionally be constructed on-site. Usually this takes place at a manufacturing facility remote from the site.

The common factor to these definitions is the concept of performing work in a controlled environment off-site, which would have been traditionally carried out onsite. For the sake of simplicity off-site fabrication (OSF) is used as the general term to describe this concept during the course of the research.

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Literature Review Off-site Fabrication

OSF can potentially encompass a large range of techniques, from the simple manufacture of a single brick, to the off-site construction of an entire plant room (Gibb, 1999). White (1965, cited in Gibb 1999) has commented that the concept could be stretched so wide as to lose all meaning. Therefore a number of subcategories have been developed which define the extent and scale of OSF. The following sub-categories are generally accepted and widely used throughout the construction industry (CIRIA, 1999; Davis Langdon, 2002; Gibb, 1999; Gibb & Isack, 2003; Neale, 1993):

Non-volumetric does not enclose usable space, e.g. windows, door-sets, cladding panels, pre-cast concrete floor slabs

Volumetric encloses usable space, usually does not provide structural support and is fitted within a separate structure, e.g. bathroom pod, plant room pod

Modular complete three-dimensional unit, often fully-finished, provides structural support, thus creating an entire building comprised of volumetric units

This study is primarily concerned with modular construction and its application to the budget hotel industry. However it must be emphasised that any conclusions drawn by the study may equally apply to all three sub-categories, and to industries other than the budget hotel. Even when operating at the modular end of the scale, it is usually impossible to construct and fully-finish an entire building off-site and transport it to its final location (Morton, 2002), unless of course that building was relatively small. Modular buildings, even fully-finished, will ultimately have to be assembled and externally clad on-site.

2.3

Historical development

The use of OSF has increased within the UK construction industry in recent years and this is the result of an innovation agenda which developed towards the latter part of the last century (Edum-Fotwe et al, 2004). Frequently during the 20th century the UK construction industry was accused of underperforming in terms of time, cost and quality (Banwell, 1964, cited in Morton, 2002; Latham, 1994; British Property -7-

Chapter 2

Literature Review Off-site Fabrication

Federation, 1997, cited in Egan, 1998). During the 1990s the UK government commissioned two reports which each sought to examine the failings of the UK construction industry and propose strategies to improve performance. Constructing the Team (Latham, 1994) reported that the UK construction industry was indeed underperforming compared with its European neighbours. One suggestion for improvement was the adoption of greater levels of standardisation of components and increased use of off-site fabrication (emphasis added). Rethinking Construction (Egan, 1998) agreed with Lathams (1994) view that the industry was generally under-achieving and highlighted the benefits of OSF, but did not explicitly state that its use should increase. The relatively quick succession of major reports in the 1990s focused attention on industry performance and created an innovation agenda (EdumFotwe et al, 2004), which were ideal conditions to foster support for increased use of OSF.

2.4

Implications of use

The use of OSF has a number of effects on a project. These effects may be perceived as positive or negative, dependent on the specific characteristics and priorities of the project and client. Gibb (1999) discusses the implications of OSF in terms of its effects on the following:

Time Cost Quality Predictability and reliability Health & Safety and environment Interfaces and co-ordination Developing a project-wide strategy

These seven headings were considered suitably comprehensive in terms of being the chief areas of concern on many construction projects, and were therefore used as the basis for discussion in the following sections.

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Time
There is an overwhelming consensus that one of the major benefits of modular construction is the reduction of overall project duration, but particularly the on-site duration (Bagenholm et al, 2001b; Davis Langdon, 2004; Egan, 1998; Gibb, 1994, 1999; Parry et al, 2003; Stirling, 2003). When using purely on-site methods the project must typically follow a sequential pattern (Gibb, 1999) and many activities can only commence once a preceding activity has been completed. With modular construction the project can adopt partly-parallel processes (Davis Langdon, 2002; Gibb, 1999), with work proceeding off-site at the same time as work proceeds onsite. Figure 2.1 shows the construction programme of the UKs first multi-storey, prefabricated, modular residential construction at Murray Grove. This programme quite clearly demonstrates that the overall duration was reduced by carrying out the on-site preparation work simultaneous to the construction of the modules off-site. It was generally agreed that use of modular methods reduced the overall programme by eighteen weeks (Bagenholm et al, 2001a).

Figure 2.1 Example of a programme from a modular construction project (Source: Bagenholm et al, 2001a)

The period from project inception to construction work commencing can be extensive on a traditionally constructed project because of the time required to produce a detailed design. If the building is constructed from a standard modular design this duration can be dramatically reduced, thus further reducing overall project duration (Davis Langdon, 2002; Gibb, 1999). As the level of OSF on a project increases, the dependence of progress on weather is reduced (Gibb, 1994; Gibb & Isack, 2003; Stirling, 2003). Non-productive time

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caused by inclement weather can be significant on some traditionally constructed projects. Logically the risk of work being interrupted by weather is inversely proportionate to the amount of work that takes place in a controlled environment offsite. Time spent identifying and rectifying defects at the end of a project can be considerable. One of the benefits of modular construction is said to be better quality control and reduced defects, discussed below. Therefore the time spent snagging should be reduced where modular construction is employed (Gibb & Isack, 2003).

Cost
Modular construction currently attracts an initial cost premium of approximately 10% to 30% greater than the traditionally constructed equivalent (Gibb, 1994; Neale, 1993) due to the prototype nature of the technology (Bagenholm et al, 2001b). The additional craneage and transport costs are a highly visible difference between modular and traditional construction. Gibb (1999) has pointed out that on a traditionally constructed building all the materials are still transported to the site, but there are a large number of small deliveries. Transport costs are therefore spread over the various elements of the building on a traditionally constructed project, whereas transport costs are more easily identifiable as a separate cost where modular construction is used. Based on this premise Gibb (1999) has suggested that the elemental method conventionally used by estimators contributes to the perception that modular construction is more expensive than traditional methods. The use of modular construction has a significant effect on cash flow as greater upfront investment is required (Chiang et al, 2006; Gibb, 1999). This earlier requirement for a cash outlay would unquestionably have a negative effect on appraisal techniques such as Net Present Value (NPV) and Internal Rate of Return (IRR) (Neale, 1993), which may result in a project being rejected in favour of a traditionally constructed building with a more evenly spread cash requirement. It has nonetheless been widely argued that use of modular construction reduces the overall cost of a project when compared with the traditionally constructed equivalent (Egan, 1998; Gibb, 1994; Gibb & Isack, 2003; Hutchings, 1996); however the cost savings are more indirect and less tangible, and therefore may not be fully appreciated by investors.

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The reduction in overall project duration, discussed above, will have two effects on the clients cash flow. Firstly if the building is one that will generate an income upon completion, such as a hotel, the client will receive earlier income streams (Bagenholm et al, 2001b; Davis Langdon, 2002; Gibb, 1994, 1999; Hutchings, 1996). Secondly the shorter overall duration will reduce the clients interest payments if they have taken on debt to finance the construction (Davis Langdon, 2002; Gibb, 1994, 1999). When taken into account both of these factors would have a positive effect on NPV and IRR and may therefore alter the appraisal in favour of the modular constructed building. Shorter on-site durations will also reduce the building contractors preliminaries cost, although in the short-term these savings may not be passed on to clients (Gibb, 1999).

Quality
A commonly acknowledged benefit of modular construction is the ability to perform quality inspections in the factory prior to delivery (CIRIA, 1999; Gibb, 1994, 1999; Hutchings, 1996; Parry et al, 2003; Pheng & Chuan, 2000). Furthermore it may be possible to programme construction to allow adequate time for rectifying defects offsite without detriment to the overall programme. This should result in less ad-hoc onsite works which can result in poor quality and can also significantly extend project durations (CIRIA, 1999). The controlled environment of the factory should produce better quality work than the often unpredictable and unfamiliar on-site environment (Davis Langdon, 2002; Gibb, 1999; Gibb & Isack, 2003; Stirling, 2003). OSF provides an opportunity to design working environments which are more conducive to producing high quality work (Gibb, 1999; Neale, 1993). Highly serviced areas such as plant rooms and bathrooms usually involve the operatives of many different trades working in cramped, over-crowded and damp environments when constructed on-site (Gibb, 1994). Taking the construction of these areas off-site is therefore likely to increase the quality of work (Davis Langdon, 2004). Vandalism and damage by operatives is unfortunately a common problem on many traditional construction sites (Gibb, 1994, 1999). This can often have an adverse effect on project duration, whether the culprit is identified or not. OSF is said to reduce the incidence of vandalism and therefore minimise the impact of damage on project duration (Gibb, 1994, 1999; Neale, 1993).

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Predictability and reliability

Use of modular construction methods should increase predictability, both of project cost and duration (CIRIA, 1999; Davis Langdon, 2004; Gibb, 1999; Hutchings, 1996; Parry et al, 2003). Where modular methods are employed it is necessary to impose an early design freeze in order to allow the manufacture of modules to take place offsite simultaneous to the construction of foundations on-site (Gibb & Isack, 2003). As a result there should be fewer variations because no party is allowed to make significant changes to the design (Davis Langdon, 2002). On traditional projects this is often the cause of exceeding the original anticipated budget and duration.

Health & Safety and environmental impact

Use of OSF has the potential to significantly improve health and safety standards in the construction industry by maximising the amount of work carried out in a controllable factory environment (CIRIA, 1999; Davis Langdon, 2002; Gibb, 1999). The factory environment is better suited to recycling materials and therefore reducing waste (Bagenholm et al, 2001b; Davis Langdon, 2002; Gibb, 1999; Pheng & Chuan, 2000; Stirling, 2003). The overall cost of the operation will be reduced as less material is required and there is a reduced impact on the environment. This will result in a far lower social cost, but tangible costs may also be reduced in terms of charges for contaminated waste and land-fill. By performing work in a controlled environment it is possible to control pollution, noise and dust far easier than on-site (Bagenholm et al, 2001b; Gibb, 1999). Combined with fewer deliveries this will reduce the impact on the neighbours of a site (Bagenholm et al, 2001b; Davis Langdon, 2002). However, the impact of the unique transport requirements of modular constructed projects has not been researched to date (Bagenholm et al, 2001b; Stirling, 2003). It is possible that the impact in terms of CO2 and congestion is far greater than the equivalent effects on traditionally constructed projects (Davis Langdon, 2002).

Interfaces and co-ordination

The margin for error when constructing foundations is significantly reduced on a modular building as there is not the inherent flexibility to correct mistakes as with traditionally constructed buildings (Bagenholm et al, 2001b; Stirling, 2003). Any error

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in setting-out or incorrect levels would have a disastrous impact so it is essential that these are correct first-time and on-site managers must therefore be highly competent. It is imperative that the logistics and sequencing of module deliveries is wellmanaged (Bagenholm et al, 2001b). On a traditionally constructed project materials can be stored on-site until required. With a modular building there is not sufficient space to store large modules on-site until they are ready to be installed. The building contractor must therefore employ Just in Time (JIT) methods, which even experienced manufacturing firms often fail to implement successfully (Pheng & Chuan, 2000). It is unrealistic to expect that site managers will cope with this new technique without additional training (Gibb, 1999). The management of craneage becomes critical on a modular building project as the crane is used in a condensed period of time and in a high-pressure environment (CIRIA, 1999). The building contractor must plan well in advance (Stirling, 2003), for example checking weather forecasts before making a judgement on when to call off modules for delivery. If a module is delivered and the crane cannot be used due to high winds this is likely to cause congestion to the surrounding area. If the factory is a significant distance from the site it may not be possible to send the module back to the factory. For example in the UK, module factories tend to be concentrated in the North of England (Bagenholm et al, 2001b), and many more are located overseas (Davis Langdon, 2004), so the planning of deliveries would be especially critical for a project located in the South-East of England. As discussed above modular building typically requires external cladding to be constructed on-site. This presents designers and builders with a new type of interface to deal with, which may therefore require re-training for both parties (CIRIA, 1999; Gibb, 1999). There are further factors which are not a consideration on traditional projects. If the modules are to be slid through a building, the structure in-between the point of entry and final location must be sufficiently load-bearing, and there must be adequate head-room (Gibb, 1999). The module must be designed to withstand lifting and transportation (Neale, 1993). Warping or twisting may prevent a neat fit upon arrival to site (Gibb, 1999) and may also result in damage to internal finishes. The module design must incorporate a method of being lifted, with consideration to the even distribution of weight during craneage (Gibb, 1999).

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Developing a project-wide strategy

Traditional management structures are inappropriate where modular construction is used (Gibb, 1999). Use of modular construction requires complete restructuring of managerial and contractual interfaces (Davis Langdon, 2004). Both contractors and specialist subcontractors must be appointed early on in order to provide expert design advice (CIRIA, 1999; Davis Langdon, 2002; Stirling, 2003), and the management structure must facilitate communication between all parties (Davis Langdon, 2002). Ambiguity of responsibility may occur where a new type of management structure or bespoke contract is used thus it is vital that roles and responsibilities are clearly defined in order to prevent disputes (Gibb, 1999; Parry et al, 2003).

2.5

Characteristics of projects suited to modular construction

A building is particularly suited to modular construction if its location is restricted in terms of space (Gibb, 1994; Neale, 1993). By taking the majority of the work off-site there is a reduced requirement for site accommodation, welfare facilities, and material storage areas. Where high-grade finishes are specified and good quality is important, modular construction methods are particularly appropriate (Gibb, 1994; Neale, 1993). For many reasons discussed above, modular construction is more conducive to producing and maintaining a high quality of finish. Buildings with a high degree of repetition are specifically suited to modular construction (Stirling, 2003). For example prisons, student accommodation, keyworker accommodation and hotels are essentially comprised of a large number of virtually identical units, with a relatively small proportion of the buildings being made up of more unique elements such as communal areas. The potential benefits of modular construction described above suggest that commercial clients should be suited to using modular construction. Commercial clients will incur costs through additional interest payments and lost revenue if the duration of the project overruns, and make savings through reduced interest

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payments and earlier revenue streams if the project is completed ahead of schedule (Davis Langdon, 2002; Neale, 1993). Clients who can offer a steady flow of demand for modular construction will have greater power over their suppliers (Stirling, 2003). Modular construction has indeed been adopted enthusiastically by hotel and fast-food chains (Davis Langdon, 2002), which would seem to confirm that modular construction is particularly suited to commercial clients with a steady flow of demand for construction.

2.6

Economic factors

Firms will be attracted to a market if demand is predicted to increase (Sloman & Sutcliffe, 2004). Parry et al (2003) predict that demand for OSF will increase with a Compound Annual Growth Rate (CAGR) of 9.7% until 2010. Strong growth is particularly expected in the modular sector (Parry et al, 2003). This would explain the recent increase of competition within the sector as big players enter the market and add capacity (Davis Langdon, 2004). Sloman & Sutcliffe (2004) state that the bargaining power of buyers will be greater where there are a relatively small number of large buyers. The budget hotel market has an oligopoly structure, with 77% of budget hotels in the UK operated by just three firms (Mintel, 2005). This would suggest that the bargaining power of budget hotel firms as buyers is strong relative to modular construction firms. Ireland (2004) supports this view, stating that a steady demand for prefabrication gives a client greater buying power, especially where there are a lack of alternative clients or contracts. Sloman & Sutcliffe (2004) also state that the bargaining power of buyers is greater where there are many firms to purchase from, and when buyers can threaten to backward integrate in order to supply themselves. There are currently few firms operating in the modular construction industry, but set-up costs are high (Chiang et al, 2006) which may deter buyers from upstream vertical integration. These factors would limit the bargaining power of buyers. The threat of potential new entrants is largely dependent on the extent of barriers to entry (Sloman & Sutcliffe, 2004). There are huge capital requirements involved in

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entering the modular construction industry in terms of premises, plant, R&D and training of operatives (Chiang et al, 2006). These high set-up costs form a significant barrier to entry, thus competition may be restricted in the modular construction industry in the short-term until demand reaches a certain level, maintaining high prices.

2.7

Perceptions of off-site fabrication

Use of OSF during the post-war period of the 20th century had a significant effect on the public perception of the technology, which is still seen today (Stirling, 2003). In the period immediately following the second world-war the UK government was faced with a huge shortage of social housing due to extensive bomb damage and an influx of migrant workers. The government adopted prefabrication as the solution to this problem, converting old munitions factories to manufacture low-rise prefab homes, as well as ordering several thousand such homes from the USA (Morton, 2002). The low-rise prefabricated homes were often riddled with defects and unpleasant to live in (Morton, 2002), which resulted in the term prefabrication acquiring negative connotations. The stereotype of prefabrication producing poor quality persists to the present day (Bagenholm et al, 2001b; Davis Langdon, 2004). Nevertheless, the government embraced prefabrication and systems building throughout the 1950s and 1960s (Gann, 2000). Many towns and cities were transformed by the construction of high-rise blocks of flats, often incorporating a high degree of prefabrication (Jones, 2004). However the buildings frequently had leaking joints and problems with condensation (Gann, 2000). Furthermore social problems associated with high-rise dwellings began to emerge, and the government was finally forced to abandon its strategy in the late 1960s (Gann, 2000). Unfortunately this was too late to prevent the partial collapse of Ronan Point, an infamous incident which killed three people and seriously injured a further twelve (Gann, 2000; Jones, 2004; Morton, 2002). The cause of the collapse was identified as a weakness in the loadbearing panellised structure, contributing to the negative image of prefabrication.

2.8

Chapter review

There is overwhelming consensus that modular construction has the potential to improve the performance of certain types of construction project. This has naturally - 16 -

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Literature Review Off-site Fabrication

caused many parties to call for greater use of modular construction, particularly in consideration of the frequent criticisms levelled at the construction industry over the last century. Use of modular construction dramatically changes the nature of relationships between different parties to a construction project. The traditional forms of subcontract are wholly inappropriate for use between a building contractor and a module manufacturer (Hsieh, 1997), even if the manufacturer will also fix the modules on site. Hsieh (1997) has observed that the relationship resembles a spot purchase much like the purchase of a material, rather than a subcontracting relationship. The manufacturer is outside the scope of the building contractors control whilst carrying out the majority of the work, and manages the off-site work themselves (Hsieh, 1997). The building contractor only takes over the management of the works when actual on-site assembly commences, by which time the vast majority of the manufacturers work is already complete. It is unclear how the client will be protected from the risk of the manufacturer going into liquidation (Hsieh, 1997), which many clients perceive as a risk of OSF (Gibb & Isack, 2003). Usually clients assume ownership of works as they progress on-site through a series of interim valuations and payments (Hsieh, 1997), and even ownership of unfixed goods on-site can be transferred to the client. Most standard forms of building contract also provide for taking ownership of goods off-site, however this is usually goods that have been manufactured but not yet delivered, such as steelwork. It is unclear how a client could take ownership of live work being carried out off-site. Despite the consensus on the potential benefits of modular construction, there are a number of barriers to its use. Many clients may perceive that the potential risks associated with modular construction outweigh the potential benefits (Bagenholm et al, 2001b). There is a commonly held perception that OSF produces poor quality buildings so naturally many clients may decide against using off-site methods. The higher initial cost of modular construction can deter certain types of client due to the effect on project cash-flows.

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Chapter 3

Literature Review Budget Hotels

3.1

Scope of chapter

This chapter will attempt to define the concept of the budget hotel by identifying and discussing common characteristics. The economics of the budget hotel sector are examined in order to understand the behaviour of budget hotel firms. The chapter will finally describe the unique design features and challenges concerned with constructing budget hotels. It is important to note that relatively little research has been carried out on the budget hotel sector. This is reflected by the scarcity of references and the relative brevity of this chapter compared to chapters 2 and 4.

3.2

Definition

It is difficult to provide a comprehensive definition of a budget hotel (Brotherton, 2004; Fiorentino, 1995). There has been relatively little research carried out that is specifically devoted to the concept of budget hotels (Brotherton, 2004), and there is significant segmentation even within the budget hotel sector (Fiorentino, 1995; Mintel, 2005). However the following common characteristics can be derived:

Value for money

Tariffs are typically 25-50% cheaper than traditional hotels (Fiorentino, 1995). Rates are fixed to a standard level across the entire hotel chain, and are charged per room rather than per person (Brotherton, 2004). Budget hotels are therefore perceived as offering greater value for money than traditional hotels.

Facilities and services

Low tariffs are maintained by offering a very limited range of facilities and services (Brotherton, 2004). Facilities such as restaurants, bars, gymnasiums, swimming pools or health suites are unlikely to be provided, and services such as internet access and room service are kept to a minimum. Mintel (2005) has observed that intense competition has caused some budget hotel chains to begin providing some of these facilities and services in order to differentiate themselves, a trend that has been termed amenity creep.

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Chapter 3

Literature Review Budget Hotels

Location and accessibility

Mintel (2005) identifies the target markets of budget hotels as business users and frequent travellers. Budget hotel sites are therefore located strategically near to people intensive flow areas such as airports, train stations, city centres, and motorways to make the hotel as accessible as possible (Fiorentino, 1995). Travellers within the target markets are believed to frequently travel to many different locations so an extensive geographic coverage is essential in order to develop brand loyalty (Brotherton, 2004). Centralised reservation systems are a standard feature of budget hotel chains. This allows the hotel operator to save customers details from previous bookings, thus making the booking process more efficient (Fiorentino, 1995). Ultimately this reduces the hotel operators overhead cost, but also increases customer loyalty as booking is more convenient. Storing customer data also allows the hotel operator to identify trends and increase the effectiveness of their marketing which may be a source of competitive advantage (Fiorentino, 1995).

Branding
Contrary to popular belief, non-price competition is of vital importance to budget hotels (Fiorentino, 1995). Strong branding is used to develop customer loyalty in order to create barriers to entry. Branding of budget hotels is based primarily on consistency (Fiorentino, 1995). The standards of service, quality, design, layout and facilities must be at a consistent level at every hotel a customer visits. This increases brand loyalty because customers feel more relaxed and comfortable in a familiar environment.

3.3

Economic factors

The core customers of budget hotels are business users operating with a limited budget (Mintel, 2005; Deloitte, 2004). Figures 3.1 and 3.2 show the segmentation of the budget hotel sector in 2001 and 2003, respectively, and confirm that over half of all budget hotel customers at this time were business users, and this segment increased by seven percentage points in the period. This strong reliance on business users to generate demand leads to the logical conclusion that the success of the budget hotel industry is heavily reliant on wider macro-economic strength.

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Chapter 3

Literature Review Budget Hotels

Figure 3.1 Budget hotel market segmentation in 2001 (Source: Deloitte & Touche, 2004)

Figure 3.2 Budget hotel market segmentation in 2003 (Source: Deloitte & Touche, 2004)

Fiorentino (1995) has suggested that the development of the budget hotel concept was a strategic move by hotel operators in response to two important cultural shifts in the UK. Firstly the budget hotel can be seen as an attempt by the hotel operators to offer a no-frills alternative, in the same way that fast-food restaurants, low-cost airlines and internet-based retailers offer a cheaper alternative to established consumer product concepts. Secondly Fiorentino (1995) suggests that budget hotels were a response to consumers becoming increasingly demanding. Low-cost motels and bed & breakfasts had been in existence for some considerable time prior to the introduction of the budget hotel, which could be argued were the no-frills alternative
- 20 -

Chapter 3

Literature Review Budget Hotels

to traditional hotels. However the budget hotel concept was specifically developed to provide both a no-frills alternative and a high standard of service. Heavy branding was therefore used to differentiate the budget hotel concept from other low-cost hotel market segments.

16%

7%

42% Premier Travel Inn Travel Lodge Express by Holiday Inn Ibis Others

13%

22%

Figure 3.3 Number of budget hotel rooms by operator (Source: Mintel, 2005)

Figures 3.3 shows the number of budget hotel rooms operated by each of the major brands in the UK. Sloman & Sutcliffe (2004) state that oligopoly occurs when just a few firms share a large proportion of the market. Just four firms account for over 85% of the budget hotel market, thus it is fair to conclude that the budget hotel market is an oligopoly. The four dominant brands in the UK budget hotel sector are clearly Premier Travel Inn, Travel Lodge, Express by Holiday Inn and Ibis. There are several barriers to entry of new firms to the UK budget hotel sector, which is further evidence that the sector is an oligopoly (Sloman & Sutcliffe, 2004). By operating a large number of hotels with a nationwide coverage budget hotels are able to derive economies of scale. Costs associated with centralised reservation systems such as call-centres and web-sites are spread over a large number of hotels. Similarly the costs of marketing and advertising may be shared between many hotels. A potential new entrant to the sector would have to enter on a massive scale in order to achieve similarly low costs of these operations. Thus the huge capital requirements of the required minimum scale of entry act as a deterrent or barrier to many competitors.
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Chapter 3

Literature Review Budget Hotels

The term budget hotel suggests that the firms in the sector compete solely on price. However this is not the case. Sloman & Sutcliffe (2004) state that firms operating in an oligopoly tend to produce differentiated products, and compete in terms of marketing and branding. Furthermore oligopolists may often tend towards price collusion and tacitly fix prices at mutually-profitable levels across the industry. This can be observed in the budget hotel sector where firms employ strong branding, and prices of competing firms are comparable. This heavy branding is intended to create customer loyalty, thus acting as a barrier to entry as new entrants will struggle to attract customers away from the more familiar brand.

3.4

Design and Construction

Brotherton (2004) has studied the critical success factors of budget hotels and identifies design factors such as the appearance and size of bedrooms as being critical to the success of a budget hotel. Brotherton (2004) also believes that using a standardised design across the hotel chain can lower the cost of construction and therefore may be considered a critical success factor. Evaluating the impact of a well designed hotel is simpler to achieve retrospectively as it can be measured with reference to levels of demand and financial success. Ransley & Ingram (2001) have therefore argued that investors will always prefer a tried and tested model rather than an innovative approach, despite the lower risk-toreward ratio. The total area of a hotel is referred to as the Gross Floor Area (GFA) and the area taken up by the guest rooms is known as the Lettable Floor Area (LFA). The difference between these is made up of areas that are required to properly run a hotel, but do not directly contribute to generating income, for example circulation areas, plant rooms, laundry facilities, administrative offices and staff amenities. The percentage difference between LFA and GFA is known as the Grossing Factor (Rutes et al, 2001). Investors aim to maximise their return by achieving a low Grossing Factor, through maximising LFA and minimising of other areas. Rutes et al (2001) has observed that because of the repetitive nature of hotel design any saving on guest room floor area is multiplied many times, however the same rule applies to an inefficient and wasteful guest room floor design.

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Chapter 3

Literature Review Budget Hotels

Rutes et al (2001) state that a hotel room is typically comprised of a number of zones, with the bathroom, dressing and clothes storage areas grouped next to the entrance vestibule, the sleeping area in the centre of the room, and the seating and work areas next to the window, which is opposite the entrance vestibule. Figure 3.4 shows examples of typical hotel room layouts which demonstrate these principals.

Figure 3.4 Typical guestroom layouts (Source: Rutes et al, 2001)

The typical guestroom layouts shown in Figure 3.4 clearly tend towards regular geometric shapes. This enables the floor-plan of the hotel to be designed in the most efficient way possible, for example by allowing adjoining rooms to share risers for services. Rutes et al (2001) have discussed the floor-plan layout of hotels, and suggest that the most efficient configurations are those where circulation space is kept to a minimum, such as slab configurations. Figure 3.5 shows a number of variations of the slab configuration.

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Chapter 3

Literature Review Budget Hotels

Figure 3.5 Guestroom floor plan configurations (Source: Rutes et al, 2001)

Davis Langdon (2006) supports the view of Rutes et al (2001) on guestroom and floor-plan layouts, suggesting that guestroom sizes (of hotels) are by and large uniform, have a high degree of repetition and can be accommodated with a relatively short structural span.

3.5

Chapter review

The budget hotel sector is clearly of great importance to the wider hotel industry as a strategic marketing tool, accounting for over 10% of the total hotel market. It is therefore perplexing that there is such a dearth of quality research on the sector. The budget hotel sector in the UK is an oligopoly, being dominated by three large brands. These are Premier Travel Inn, Travel Lodge, and Express by Holiday Inn. Ibis are a fourth significant player, but do not compare to the three largest firms in terms of scale. The sector is highly competitive, but competition tends to be non-price based. An aspect of this non-price competition is the use of heavy branding. The hotels of each operator are virtually identical across their portfolio, particularly in terms of room design. A standard room design assists in budget hotels adopting the most efficient floorplans such as slab configurations. Furthermore a limited range in facilities means that common areas are kept to a minimum, thereby maintaining a low grossing factor.
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Chapter 3

Literature Review Budget Hotels

This is likely to be appreciated by operators of budget hotels due to the lower revenue received per guestroom than achievable in more traditional hotel markets. Budget hotel operators are amongst the most demanding of construction firms clients. Quality is very important despite the budget tag of the sector, due to the requirement of consistency across the portfolio, and the importance of non-price competition. Cost must be accurately predicted and tightly controlled due to the nature of the client as a speculative developer. This also means that time is critical, as the operator will incur greater interest payments the longer the project progresses and desire revenue streams as early as possible. It could be argued that budget hotel projects carry a greater level of risk than other types of project. The challenging requirements of the client mean that there is greater scope for the project to fail in some way. Moreover budget hotel clients are speculative developers operating in a highly competitive environment that can change in a short period of time. Despite the fact that budget hotels are relatively less affected by terrorism and economic problems (McCaskey & Symes, 2004), there remains a significant risk of changes to demand or customer tastes during the course of a project. Furthermore budget hotels are constructed on sites located in peopleintensive flow areas, which are highly visible and may be tight in terms of space.

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Chapter 4

Literature Review Risk Management

4.1

Scope of chapter

This chapter examines the literature available concerning risk management. The concept of risk is considered in order to understand the rationale to the development of the risk management discipline. Specific risk management strategies and methods in which risk can be dealt with are discussed. Finally the application of risk management to the construction industry is explored, including a discussion of the relationship between innovation and risk.

4.2

The nature of risk

Dallas (2006) states that there is no such thing as a risk-free project. Projects may differ in terms of the level of risk they carry, but all projects carry risk to a degree. Risk can be extremely damaging to project goals, potentially loss-making. However Dallas (2006) states that all businesses must take risks in order to maximise the benefit or value to be gained from a project. Risk is intangible and can therefore be a problematic concept to define, but essentially risk stems from uncertainty (Flanagan & Norman, 1993), which is caused by a lack of information. Flanagan & Norman (1993) have found that risk and uncertainty are often considered to be the same, but assert that risk is distinct from uncertainty. Decision makers can assess the probability of a risky event based on past data, whereas no historical data exists for an uncertain event and the decision is therefore unique. Flanagan & Norman (1993) have drawn the logical conclusion that uncertainty can be reduced and converted to risk by gathering information. A number of researchers have attempted to define risk. Godfrey (1996) describe risk as the chance of an adverse event. Uff & Odams (1995) definition is less succinct, but more comprehensive: Risk is the combination of the probability or frequency of a defined hazard and the magnitude of the consequence of that occurrence. Risk can thus be seen as a function of the probability and impact of a given event (Mills, 2001). In assessing the risk of a particular event it is therefore necessary to make an assessment on the probability and the potential impact of that event.

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Chapter 4

Literature Review Risk Management

Flanagan & Norman (1993) believe that experience is the strongest resource available to a decision-maker, and that many decision-makers place great emphasis on intuitive feeling. However decisions made based on experience alone can lead to a narrow-minded approach as people feel comfortable with information that validates their views, and may reject information which is hostile to their initial assessment.

4.3

Risk management

A high incidence of projects failing to meet their goals as a result of uncontrolled risk have resulted in formal risk management systems being adopted in many businesses (Dallas, 2006). Risk management has rapidly grown to become recognised as a discipline in its own right, separate to other traditional business functions (AIRMIC, 2002). There is a consensus that risk management is not concerned with the complete elimination of risk (Dallas, 2006; Mills, 2001; Uff & Odams, 1995). Indeed business is primarily about taking risks in order to generate a reward (Dallas, 2006). There is agreement within published work that risk management is actually about controlling risks (AIRMIC, 2002; Dallas, 2006). Flanagan & Norman (1993) state that a risk management system must be practical, realistic and cost effective. In other words the benefits of the risk management system should outweigh its cost, thus it should be a value-adding activity. The system should be as straight-forward as possible. If there is too much detail and complexity the system can become unwieldy to manage and the project team may lose interest (Dallas, 2006). A number of researchers have proposed formal systems for the process of managing risk, including Flanagan & Norman (1993), Dallas (2006), AIRMIC (2002) and Godfrey (1996). Each of the systems varies to a degree, particularly in terms of the number of stages involved. Despite the seemingly different approaches to the process of risk management there are a number of stages common to all systems, which are adequately captured in the rather more concise system proposed by Mills (2001):

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Chapter 4

Literature Review Risk Management

1. Identify 2. Analyse 3. Respond

Stage 1 Identify the risks

Mills (2001) suggests that the risk identification stage is the most difficult in the risk management process, yet it is also the most vital. A risk cannot be consciously managed unless it is first formally identified. It is vital that the project objectives are clearly defined in order to understand what factors may prevent these objectives from being achieved (AIRMIC, 2002). Risk can be classified in a number of ways. Firstly risk can be classified as speculative or pure (Flanagan & Norman, 1993). Speculative risks have potential gains as well as potential losses, and therefore their effective management can add value to a project. An example of speculative risk is the use of an innovative technology. Pure risks have only potential losses, and must be managed effectively in order to prevent the project suffering some form of loss. An example of pure risk is unforeseen ground conditions. Risk can be controllable or uncontrollable (Flanagan & Norman, 1993). Controllable risks are taken voluntarily, when the potential benefits are perceived to outweigh the potential losses. Again, the use of an innovative technology is an example of controllable risk. Uncontrollable risks are taken involuntarily, but the adverse effects can be reduced by incorporating precautionary measures. An example of uncontrollable risk is adverse weather.

Stage 2 Analyse the risks

Risk analysis aims to measure the probability and impact of each identified risk. There are a number of ways in which this can be attempted and the measurement of both probability and impact can be qualitative or quantitative (AIRMIC, 2002; Dallas, 2006). If the analysis is intended to develop a control measure the measurement can be qualitative, but if the analysis is intended to inform a financial contingency or risk allowance the measurement must be quantitative (Dallas, 2006).

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Chapter 4

Literature Review Risk Management

The most common method of qualitative assessment is the use of three or five-point scales for likelihood and impact (AIRMIC, 2002; Dallas, 2006). Multiplying the likelihood by the impact gives the risk rating. Thus the most severe risks, with a high likelihood and high impact, rank 9 (3 x 3) on a three-point scale and 25 (5 x 5) on a five-point scale. Dallas (2006) has criticised this type of method as it does not differentiate between risks with a high likelihood but low impact, and risks with a high impact but low likelihood. Brooks (2007) supports this view, stating that three-point risk analysis matrices demonstrate a lack of imagination, and the system is dependent on an individuals interpretation of what constitutes high, medium or low risk. The purpose of quantitative risk measurement is to generate a tangible figure which can be used to make a contingency allowance. Quantification of risk can be far more complex than the simplified tools for qualitative measurement described above, and there is a lesser degree of consensus amongst researchers on the best way to achieve this. It was not deemed necessary to explore any of these specific methods within the scope of this chapter.

Stage 3 Respond to the risks

Risk identification and analysis should result in a greater ability to prioritise risks. To effectively manage all risk on a project would require huge resources; however resources are usually limited, and therefore must be allocated as efficiently as possible. The process of risk analysis allows the project team to identify the risks which pose the greatest threat to the project objectives and concentrate their resources on the management of these risks, and the maximising of opportunity (AIRMIC, 2002). Risk analysis will inform the choice of management structure and level of human resource, ensuring that the skills required to effectively manage these risks are present within the project team (Dallas, 2006). Furthermore it is more likely that budgets and timeframes will be set at levels realistically required to achieve the desired outcomes and manage risks effectively (Dallas, 2006). There is a wide consensus that there are four possible strategies for responding to a risk (AIRMIC, 2002; Cervone, 2006; Dallas, 2006; Flanagan & Norman, 1993; Godfrey, 1996; Mills, 2001; Uff & Odams, 1995): Retain Reduce - 29 -

Chapter 4

Literature Review Risk Management

Transfer Avoid

Retain the risk

Retaining a risk is most appropriate when the risk is minor in terms of its impact (Flanagan & Norman, 1993). When this is the case it is likely that the cost of responding to the risk in another way would be greater than the potential cost of its impact, thus it would be uneconomical. This type of risk requires no active management action and is simply absorbed by any time or cost contingency allowed for within the projects budget or programme.

Reduce the risk

Flanagan & Norman (1993) state that this may be attempted in one of four ways. Firstly the project team can be educated and trained to increase understanding of the risk and reduce uncertainty, for example sending employees on Health and Safety training courses. Secondly physical protection can be employed to reduce the likelihood of the risk occurring, for example by erecting barriers along the leading edge of a roof where operatives are working. Thirdly systems can be implemented to ensure consistency and focus attention on a risk, for example by adopting formal quality checks. Finally physical protection can be used to protect persons and property, for example covering a newly laid floor with protective sheeting in a semicompleted building. The effect of risk reduction is to increase costs in some way, but reduce the contingency requirement.

Transfer the risk

A very common method of responding to a risk is to transfer that risk to a party in a position to manage the risk more effectively due to some specialist skill or resource they hold. A common form of risk transference is insurance (Flanagan & Norman, 1993), whereby the transferring party pays a premium in return for the transferee taking on the financial responsibility for the risk should it be realised. This converts an uncertain risk to a certain cost which is clearly of benefit to organisations that value cost certainty. Another common form of risk transference is through the use of contracts. This method does not eliminate the risk, but aims to transfer the risk to a party in a better position to manage that risk. This is most evident on construction projects, where a

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Chapter 4

Literature Review Risk Management

vast range of specialist skills and competencies are required, resulting in risks being transferred to a large number of different parties. Again the transferring party pays a premium in return for transferring the risk. The transferee aims to effectively minimise the risk and therefore retain the premium as pure profit. This strategy can increase risk if the transferee does not possess the necessary resources or capabilities to manage the risk. Furthermore risk can be significantly increased if a critical risk is transferred without the knowledge of the transferee, for example by hiding an onerous term in a complex contract. If the transferee is unaware of the risk transfer they will not consciously manage the risk and therefore not allocate the necessary resources.

Avoid the risk

Risk avoidance is quite simply the refusal to accept a risk. This is often achieved by the use of exemption clauses in contracts (Flanagan & Norman, 1993) which can therefore only be used in the pre-contract negotiation stage. To avoid a risk postcontract involves significantly changing the project in some way such as amending the project objective that carries the intolerable risk, or even cancelling the project altogether.

The benefits of risk management

Particularly ambitious projects can be fraught with risk. A formal risk management system increases the likelihood of such projects succeeding by formally identifying the desired outcomes and putting the necessary processes in place to maximise value and minimise uncertainty (Dallas, 2006). Senior management can thus embark on a project with greater confidence that they can control risk and maximise reward (Dallas, 2006). Where risks are realised and a project fails to meet its goals in some way, a risk management system provides an audit trail to either demonstrate that effective management was in place, or reveal why the project failed (Dallas, 2006). A formal risk management system improves communication by providing a mechanism for reporting back to appropriate levels of management on a regular basis (Dallas, 2006), keeping them informed of the evolving risk profile of the business and its projects. This improves decision-making at senior management and

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Chapter 4

Literature Review Risk Management

board level thus benefiting the business as a whole. This feedback also assists the business in learning from experience, repeating successes, eradicating mistakes and improving in the long-term.

4.4

Risk in construction

Risk management in construction

The construction industry is subject to more risk than virtually any other industry, for a number of reasons (Dallas, 2006; Flanagan & Norman, 1993; Mills, 2001). The construction process is often complex, requiring many parties to be involved in order to get the right mix of skills (Flanagan & Norman, 1993). Each party has its own interests to serve, which can often be in conflict with the interests of other parties. The co-ordination of such a wide range of parties and activities therefore makes construction inherently risky (Godfrey, 1996). A large number of uncontrollable external factors increase the risk to construction projects (Flanagan & Norman, 1993), such as weather, and labour and material shortages. Construction projects are typically unique in terms of their design and location, therefore every project has a large degree of unknowns (Dallas, 2006). Furthermore the process can often take several years from inception to completion, which puts pressure on all parties due to the relationship between time and cost. This pressure often means that the construction phase commences before the design is fully completed, when information is inadequate. Construction projects therefore often proceed with a high degree of uncertainty (Uff & Odams, 1995), which breeds risk, as discussed above. Despite its risky nature the construction industry is poor at the management of risk when compared to many other industries, such as banking and corporate finance (Flanagan & Norman, 1993). This view is supported by Mills (2001) who claims that the frequent failure of the construction industry to meet its clients requirements is a result of poor risk management. Uff & Odams (1995) have observed that risk is often ignored or dealt with in an arbitrary way, and cite as a common example the addition of a 10% contingency to allow for unspecified risk.

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Chapter 4

Literature Review Risk Management

It is important to recognise that the various parties to construction projects each have different priorities. Flanagan & Norman (1993) suggest that parties can be classified as either principals or agents, principals being defined as those who commission buildings, and agents being defined as those who participate in the design and construction of buildings. Principals are more likely to see the relevance of risk management (Flanagan & Norman, 1993), particularly those who are making an investment decision such as speculative developers. Principals will want to know the risk profile and the risk-reward ratio of a project before committing its scarce resources. Conversely agents such as contractors have often sough to insulate themselves from risk by off-loading additional costs back to their principals, and transferring risk to subcontractors (Flanagan & Norman, 1993). This may explain why formal risk management is poorly executed in the construction industry.

Risk and innovation in construction

Innovation is often perceived by decision-makers as being highly risky due to the high levels of investment it can require (Kuczmarski, 1996). Slaughter (1998) asserts that there are varying levels of innovation, which would suggest that innovation can vary in terms of riskiness. Slaughter (1998) identifies five levels of innovation: Incremental A small change, with impacts confined to improvement of the specific element or component Modular A more significant change in the basic concept, but also has limited impacts on other components or systems Architectural A small change within a concept or component, but strongly linked and interactive with other components and systems, thus requiring changes in the linkages or the linked units System Multiple innovations that must be integrated together and may require significant changes in other components and systems, as well as the linkages to those elements Radical A new approach that causes major changes in the nature of the industry itself, appearing as a rare and unpredictable event Figure 4.1 is taken from Slaughters (1998) model of innovation and shows how the five levels of innovation vary according to the levels of co-ordination, resources and supervision required for their implementation. - 33 -

Chapter 4

Literature Review Risk Management

Type of Innovation Incremental

Timing of commitment At any time

Co-ordination within project team None

Special resources None

Supervision organisational level At locus of improvement At design level At affected system level At top engineering management level At top management level

Supervision type Notification

Supervision competency Specific product or processes Technical competency System competency Technical and system competency Specialised technical competency

Modular Architectural

System

At design/ selection At design/ implementation stages At conceptual design stage

None Among affected parties With all project team members

For concept change For complementary changes For integration of set of innovations For breakthrough

Notification, review Notification, agreement, review Project scope, agreement, review Project objectives and scope

Radical

At technical feasibility stage

With top management from all involved organisations

Figure 4.1 Specific activities for implementation by type of innovation (Source: Slaughter, 1998)

Clearly an incremental innovation requires far less investment to implement than a radical innovation. This suggests that incremental innovations carry minimal risk, whereas system and radical innovations may be associated with a high level of risk. Slaughter (1998) supports this view, stating that implementation of a radical innovation entails financial and project risk, as well as the risk of technical failure, which therefore increases the requirement of the attention of top level management. This may explain Ganns (2000) view that designers are often reluctant to specify innovative systems that are not tried and tested.

4.5

Chapter review

Risk is linked to uncertainty, which is itself caused by a lack of information. Logically the less familiar an individual or organisation is with something the more risky they will perceive it to be. The perception of risk can be reduced by obtaining information and increasing familiarity. Risk management is a rapidly growing discipline in its own right, separate to traditional business functions. A number of theorists have attempted to develop an authoritative model of the risk management process, but to date there is no single universally recognised model. However three common stages can be derived from the various models: identification, analysis, and response.

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Chapter 4

Literature Review Risk Management

Risk identification is possibly the most important stage as a risk cannot be consciously managed unless it is formally identified. Risk analysis involves the quantification of the likelihood and impact of each risk in order to prioritise those risks to which resources must be diverted for effective management. There is very little consensus on the best way to achieve this quantification, and a range of techniques have been proposed. Although objective assessments can be made using statistical formulas based on historical data (where it exists), ultimately decisions fall to individuals, so subjectivity will invariably play a part in the analysis of risk. The role of subjectivity in risk analysis cannot be understated. It is based on a large range of factors that are unique to each individual, and include experience, beliefs and education. Risk response falls under four main categories: retain, reduce, transfer, and avoid. Each of these responses, and indeed the whole formal risk management process, require resources and therefore increase costs. However a formal risk management process can add significant value to a project by increasing the likelihood of meeting its objectives. The greater the resource and commitment to risk management, the greater the value that is added to the project. However this is only true to a point, a minimum efficient scale, beyond which the cost of risk management outweighs any potential benefit. The level at which the minimum efficient scale is reached is largely based on the intuition of senior management. The projects of the construction industry are particularly fraught with risk for a number of reasons. Despite this the record of implementing formal risk management is poor. Therefore a strong argument exists for increased use of formal risk management in order to significantly improve the performance of construction projects in the UK. The riskiness of construction projects has an important bearing on the willingness to innovate in the UK construction industry. Innovation is often perceived as being risky, because by its nature it is unknown and represents a departure from the familiar, tried and tested way of doing things. Furthermore the increased investment required to implement innovations means that the potential losses due to failure are greater. System and radical innovations are therefore likely to be perceived as the most risky as they represent the most dramatic shift from the established methods, and require the greatest levels of investment.

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Chapter 5

Research Design

5.1

Scope of chapter

This chapter explains how the literature review helped to clarify the research questions. The interrelationships of the three subject areas discussed in Chapters 2, 3 and 4 are analysed in order to demonstrate the existence of a gap in the current knowledge and explain precisely how this was identified. A number of research questions are set which intend to fill the gap in current knowledge. The chapter then moves on to assess potential research methodologies and identify the most appropriate strategy for satisfying the research questions. Later sections describe the process of designing the precise tools for gathering information and the practical and ethical considerations underpinning the process.

5.2

Research questions emerging from the literature review

Scope and focus

The purpose of the literature review was to develop a thorough knowledge and understanding of the main subject areas of the study, namely off-site fabrication, the budget hotel sector and risk management. Consequently three separate literature reviews were in fact carried out, and reported over three chapters to reflect this. This examination of the current body of theory identified gaps in the research and thus identified a number of research questions, which formed the basis of the study. There was a deliberate strategy to explore each of the three areas of theory in isolation, before looking at how they interrelated. Gaining a thorough understanding of each subject area individually was considered a prerequisite to fully understanding the relationships between them. However whilst researching each subject area separately it was important to remain mindful that it would be necessary to draw linkages at a later stage. Without this consideration there was a real risk of generating a large amount of irrelevant information. For example it was important to research the design factors of budget hotels, but hotel management theory was largely irrelevant.

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Chapter 5

Research Design

It must be emphasised that the three subject areas were not equal in terms of importance to the study. The principal focus of the study was initially off-site fabrication and its application to the budget hotel sector, as preliminary investigation suggested that this had not been researched in any real depth, with only anecdotal evidence available. However during the course of the literature review it became clear that off-site fabrication had a significant effect on the risk profile of projects. An initial review of literature relating to risk management revealed that this was a relatively new subject area, which also appeared un-researched with regard to offsite fabrication. The focus of the study therefore evolved during the course of the literature review to become a study of how risk management relates to off-site fabrication, focusing on the budget hotel sector as a means of ensuring that the study was manageable. Therefore the most important subject area was off-site fabrication, followed by risk management, then the budget hotel sector. This is clearly demonstrated by the depth and extent of each of the three literature review chapters. Therefore any conclusions drawn by the study are most significant to risk management in the off-site fabrication of budget hotels, but could be expanded to risk management in the off-site fabrication of other building types. However it is highly unlikely that any conclusions drawn could be expanded to other aspects of the budget hotel sector, such as marketing or operations management.

Interrelationship of subject areas

The UK construction industry has been frequently criticised over the last century for underperforming and failing to adequately meet its clients expectations. This has led to a strong argument being made for increased use of off-site fabrication as a way of improving industry performance, due to a number of potential advantages over the traditional in-situ construction methods. However off-site fabrication is not a new concept and actually has a long history. Several periods of use during the last century were ultimately seen as failures and this has resulted in the concept of off-site fabrication acquiring a stereotype for producing poor quality. Terms such as prefabrication are still perceived by many to have negative connotations to this day. Off-site fabrication is therefore by no means a quick and simple solution to the problems of the construction industry. There are a

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number of significant barriers to use, which include the image of poor quality, as well as the perception of high cost and increased risk. The literature review suggested that modular construction lends itself to hotel construction for a number of reasons. Typical guest-rooms are often virtually identical in terms of size, shape and layout, and the most common floor-plan arrangements are highly repetitive. Therefore hotel constructions are essentially a large volume of identical units arranged in a highly repetitive manner. Budget hotels are especially suited to modular construction as they tend not to have additional facilities such as restaurants, bars, swimming pools, gymnasiums and meeting rooms. Buildings in the budget hotel sector therefore consist of identical units arranged in a repetitive manner to an even greater degree than in other hotel sectors, with a very low percentage of the building being made up of large, open spaces. The commercial nature of budget hotels means that operators will appreciate many of the potential benefits of modular construction:

Improved quality gives a greater ability to compete using non-price competition, and maintain the brand standard through a consistently high standard of quality across the entire portfolio.

Early design freeze gives the client greater cost certainty. The hotel will generate an income upon completion, and is financed either by re-invested profit (with an opportunity cost), or debt (with an interest cost). Therefore any time savings create cost savings, which may off-set any cost premium associated with modular construction.

Furthermore the budget hotel sector is an oligopoly; so each firm is responsible for a relatively large proportion of the aggregate supply. Growth is currently strong in the sector so the incumbent firms are pursuing major building programmes. They are therefore in a position to generate huge demand for modular construction, which puts them in a strong position relative to the modular construction firms. However the full modular construction of a budget hotel represents a large-scale innovation. Under Slaughters (1998) model it would be considered a system

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innovation. This is likely to be perceived as highly risky, due to the huge investment and resource required to implement such an innovation, and the degree of departure from the tried and tested method of constructing budget hotels. Despite this there is anecdotal evidence that budget hotel chains have enthusiastically adopted modular construction of bathrooms, commonly referred to as pods. Use of bathroom pods suggests that the hotel operators were not deterred by the negative stereotype of off-site fabrication and were willing to accept any perceived risk in pursuit of the potential benefits. Furthermore the continued use of modular bathroom pods over many projects suggests that the budget hotel firms were able to successfully manage the risks of the system innovation. When budget hotel chains first began using modular bathroom pods this method of construction would have been risky and unfamiliar, much as the concept of full modularisation of entire rooms could be perceived as being today. The strategies employed to manage the risk of using bathroom pods could show the way forward with regard to managing the risks of full modular construction of budget hotel rooms. It could be argued that budget hotels are the ultimate test for large-scale modular construction. The commercial nature of the project means that the client has challenging requirements in terms of time, cost and quality. The typical location of budget hotels means that sites are prominent and high-profile, and tight in terms of space. Therefore risk management techniques which have been proven in the budget hotel sector could set the benchmark and be successfully applied to less commercially-risky projects that are also suited to modular construction, such as prisons, student accommodation and social housing.

Research questions
Following a thorough analysis of the existing literature a definite gap in the research was identified. Off-site fabrication clearly has a great deal to offer to the construction industry. In particular the highly competitive budget hotel sector could see huge benefit from the use of modular construction. Although in many ways the use of modular construction can actually reduce project risk, there are added risks due to the innovative nature of the technology. Anecdotal evidence of the continued use of modular construction in the budget hotel sector would suggest the presence of successful risk management strategies. Risk management is a relatively new, but rapidly growing discipline that is increasingly recognised as a business function in its - 39 -

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own right. The study was however unable to identify a single piece of published research into the use of modular construction in the budget hotel sector, whether from a general perspective or specifically concerning risk management. If it can be established how the risks of modular construction can be effectively managed to a level that clients perceive as acceptable, the rate of use should increase. This will ultimately benefit all stakeholders in the UK construction industry. The study therefore aimed to explore precisely how risks have been managed in budget hotel construction projects using modular methods. The study anticipated that much of the evidence would be based on the use of bathroom pods, but aimed to identify and gather evidence from any projects using full modular construction of guest-rooms. It was apparent that the study would need to answer four specific research questions: 1. What is the perception of modular construction amongst the stakeholders of budget hotel projects? 2. To what extent has modular construction been applied to the budget hotel sector? 3. To what extent and in what form has risk management been applied to budget hotel projects using modular construction? 4. To what extent has risk management been successful when applied to budget hotel projects using modular construction?

5.3

Research design

Research methodology
It is generally accepted that a research methodology can be classified as either quantitative or qualitative (Dawson, 2006). Quantitative research is objective in nature and is used to find hard facts and generate statistics, often in order to test a hypothesis (Naoum, 1998). The research method employed under quantitative research is usually a large scale survey, questionnaire or structured interview. - 40 -

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Quantitative research therefore tends to reach a large number of people, but the contact with each individual is relatively short (Dawson, 2006). In contrast qualitative research is more subjective in nature and is used to explore attitudes, behaviour and experiences (Naoum, 1998). Qualitative research is usually conducted by interviews or focus groups and attempts to get more in-depth opinions from each participant. This type of research therefore reaches far fewer people than a quantitative research methodology, but the contact with each individual is far longer (Dawson, 2006). Denscombe (2003) suggests that two questions may be asked of the study in order to determine whether it is appropriate to adopt a qualitative research methodology with interviews as the primary method of information gathering: 1. Does the research require detailed information? 2. Is it reasonable to rely on information gathered from a small number of participants? If each of these questions is answered in the positive then Denscombe (2003) suggests that qualitative research using interviews is appropriate. An examination of the research questions identified in section 5.2 concluded that the study would benefit from an in-depth level of information. The study would require detailed opinions and experiences in order to satisfy the research questions. For example the study was interested in the extent to which formal risk management was applied to budget hotel projects using modular construction methods. This would involve exploring opinions on whether a formal system was used, if it was of benefit and examples of how it was beneficial. Conversely if the study had simply wanted to know the percentage of budget hotel projects completed within the last twelve months that had employed a formal risk management system, a simple closed-ended yes or no response would suffice, thus implying a quantitative approach. Given the nature of the budget hotel sector as an oligopoly, and the fact that modular construction was a fairly recent innovation, it was believed that there may be a relatively small number of completed projects in the UK on which to gather opinions and experiences. Furthermore the study was not intended to generate statistics or test a hypothesis, thus little benefit would be gained from gathering responses from a - 41 -

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huge number of participants, even if they were available. It was therefore decided that the study would not be compromised by obtaining responses from a limited number of participants. The two questions above were both answered in the positive; hence the decision was taken to adopt a qualitative approach using interviews as the primary method of information gathering.

Research method
In contrast to the research methodology which defines the broad nature of the research design, the research method is the tool that is actually used to gather data (Dawson, 2006). For this study interviews were chosen as the research method. However interviews are generally divided into three categories: unstructured, semistructured or structured (Dawson, 2006; Denscombe, 2003; Kumar, 1996; Naoum, 1998). Structured interviews were dismissed as a research tool for this study very early on as this method is typically used for a quantitative study, due to the limited range of responses that are generated (Denscombe, 2003). Unstructured interviews involve the interviewee talking freely about their opinion and experience of a subject, with very little guidance or direction from the interviewer (Dawson, 2006). This type of research method therefore generates an extremely rich quality of information, but this makes the comparison of responses from different participants inherently difficult (Kumar, 1996). As the name would suggest, semi-structured interviews are more structured than unstructured interviews in that the interviewer has a set of questions or topics that need to be covered in order to generate specific information to compare with other responses. However semi-structured interviews are far more flexible than structured interviews in terms of the order of questioning and allowing the interviewee the freedom to develop their own ideas and speak freely about a given topic (Denscombe, 2003). This study required specific information in order to satisfy the research questions identified in section 5.2, and would benefit from the ability to compare responses in order to identify commonality or difference between opinions. Equally the nature of - 42 -

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the study meant that it was beneficial to allow participants the freedom to discuss their experiences within the confines of a set of topics derived from the research questions. Semi-structured interviews were therefore clearly the most appropriate method of research.

Developing the interview schedule

Prior to conducting the semi-structured interviews an interview schedule was prepared. Dawson (2006) describes this as a list of open-ended questions or topics, which the interviewer may tick-off as each interview progresses. This approach ensured that all questions or topics that were necessary to satisfy the research questions were covered in each interview. The interview schedule could also be updated after each interview to add new topics that arose during the course of the interview (Dawson, 2006). The study employed the system advocated by Kumar (1996) to develop the interview questions. The process involved four steps: Step 1: Step 2: Clear definition of the specific research questions Listing all the associated questions that the study aimed to answer, for each research question Step 3: Taking each question identified in Step 2 and listing the information required to answer it Step 4: Formulating question(s) to obtain this information

This process was performed on the research questions identified in Section 5.2, and is set out in full in Appendix 1. There were several instances where the same piece of information was required for more than one question. Kumar (1996) acknowledges that this is often the case and clarifies that the interview question is asked only once. The interview questions were accordingly developed and grouped under relevant topics. The preliminary interview schedule is contained in Appendix 2.

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Research Design

Sampling
It is often difficult to reach every single person in a research population therefore it is necessary to choose a smaller and more manageable number of people to take part in the study, referred to as a sample (Dawson, 2006). Kumar (1996) supports this view, describing sampling as the process of selecting a few participants from a larger group. Kumar (1996) has warned that sampling involves a trade-off between saving on the time and expense of involving a large number of participants, but compromising the accuracy of the findings by using fewer participants. However Dawson (2006) states that the aim of qualitative research is to explore what is happening with a smaller group of people and thus potentially gain insights into what is happening in the wider population. Furthermore Dawson (2006) categorises sampling as either probability-based, or purposive. Probability sampling is used where every single member of the research population has an equal chance of being selected for the sample, and is useful when the aim of the research is to make generalisations. Purposive sampling is used when description, rather than generalisation, is the aim of the study. This study therefore used a purposive sampling method. Where purposive sampling is used and it is difficult to identify the entire research population, a technique referred to as snowball sampling may be useful (Dawson, 2006; Kumar, 1996). This involves contacting a known member of the research population and asking them to recommend other potential members of the research population. These new contacts are then asked for further recommendations, and so on. Thus the full sample is attained by generating a network of contacts. Dawson (2006) states that it is down to the intuition of the researcher to decide when a saturation point has been reached, in other words enough participants have been identified to adequately satisfy the research questions. The nature of the budget hotel sector as an oligopoly meant that it was relatively straightforward to identify the initial contacts for the sample. The three dominant firms in the sector were contacted and asked to identify their Heads of Construction, or equivalent role. These participants were then asked to identify and recommend other potential participants, and so on.

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Category Architect Client Contractor Cost Consultant Project Manager Specialist Manufacturer Total
Figure 5.1 Target sample

Number of participants Min. Max. 1 2 2 1 1 1 1 7 3 2 2 2 2 13

The study aimed to ultimately obtain a sample with the composition set out in Figure 5.1. In the view of the researcher a sample comprised of these participants would provide a range of experiences and perceptions with which to satisfy the research questions.

Recording method
All interviews were conducted face-to-face and were recorded using a digital voice recorder. The recording of interviews allowed the interviewer to concentrate fully on what was said (Dawson, 2006) and allowed the interviewer to maintain eye-contact and to react to body-language and other visual cues. Post-interview analysis was enhanced because the interviewer held a complete record of everything that was said. Thus the interviewer was able to incorporate any significant quotations that were made during the course of the interviews (Dawson, 2006).

Ethical issues
All participants were informed clearly and frankly of the research questions in advance of the interviews, as recommended by Kumar (1996). This ensured that respondents were sufficiently informed in order to decide whether they wanted to take part in the study. The names of the respondents and the firms they are employed by are all kept confidential, each being simply referred to as Architect A, Architect B or Client A, Client B, and so on. Kumar (1996) points out that certain information is sensitive, however if that information is not gathered it is more difficult to contribute to the

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existing body of knowledge. Thus all respondents were assured of their anonymity in order to reduce the amount of information they were unwilling to divulge.

5.4

Chapter review

The literature review demonstrated that off-site fabrication is a huge subject area with a thoroughly documented and well understood history. Conversely risk management and the budget hotel sector are relatively less established or researched, despite their importance to management science and the macro-economy, respectively. The focus of the study evolved during the course of the literature review as it became apparent that there were inadequacies in the current body of knowledge. Off-site fabrication and modular construction are undeniably important to the future of the UK construction industry, but certain building types are more suited to these methods than others. Budget hotels are certainly one building type that is suited to modular construction, and indeed there is anecdotal evidence to suggest that budget hotel firms have adopted the modular construction of bathrooms with some success. This however would seem to present a dichotomy as modular construction is a system innovation under Slaughters (1998) model, which typically involves a high degree of risk. Budget hotel firms on the other hand should be risk averse due to the already risky nature of their speculative commercial projects. Precisely how the budget hotel firms have been able to manage the risk of modular construction to an acceptable level has not been researched to date. By gaining an understanding of this the study would be able to make reliable suggestions as to how the risk of full modular construction of budget hotel rooms could be managed. Thus a gap in the current body of research was identified. In order to fill this gap the following research questions were set: 1. What is the perception of modular construction amongst the stakeholders of budget hotel projects? 2. To what extent has modular construction been applied to the budget hotel sector? 3. To what extent and in what form has risk management been applied to budget hotel projects using modular construction?

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4. To what extent has risk management been successful when applied to budget hotel projects using modular construction? In order to answer these questions a qualitative approach was chosen, as the study would require an in-depth level of information from a limited number of participants. The precise research method chosen was semi-structured interviews as this would give interviewees the freedom to speak freely and thus provide a rich level of information, but within a framework that would allow the comparison of responses. The research questions were used to generate a number of specific questions, which formed the basic interview schedule. The study adopted a snowball approach to sampling due to the difficulty of identifying and isolating the sampling frame. Once a willing interviewee was identified face-to-face interviews were conducted. Interviews were recorded but interviewees were assured of their anonymity in order to make them feel more comfortable and thereby limit the amount of information they were unwilling to share with the study.

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Chapter 6

Results and Discussion

6.1

Scope of chapter

This chapter contains a review of the interview process and a discussion of the responses generated during the interview phase of the study. The discussion is structured into three sections, focusing on the benefits of modular construction, the risks of modular construction, and the risk management strategies used on modular budget hotel construction projects. The findings are related back to the conclusions of the literature review in order to state whether these were confirmed, contradicted, or ignored. Due to the qualitative nature of the research method the discussion was entirely descriptive and no form of statistical analysis was employed.

6.2

Research appraisal

During the interviewing process it became apparent that the latter questions on the schedule were superfluous as the freedom of the semi-structured interview allowed interviewees to provide all the necessary information in answers to the earlier questions. The interview schedule was modified accordingly; the revised schedule is contained in Appendix 3. Only the form of the interview schedule was revised, the substance was largely unchanged which maintained the comparability of responses. The interviews were not transcribed verbatim therefore all interview transcripts are presented in Appendices 5-11 under the revised interview schedule, regardless of which was used in the interview. The study set a target range for the number of interviewees, shown in Figure 5.1. Ultimately the minimum number was achieved in each category, giving a total of seven interviews. A greater number of potential interviewees were identified but many either proved difficult to contact or declined to interview, possibly due to the frenetic nature of the UK construction industry. The literature review gave the interviewer a thorough knowledge of the issues being discussed and resulted in a greater ability to strike up a rapport with each interviewee. The interviewers experience in the construction industry made it easier to build a rapport with interviewees who were also from a construction background. Developing a rapport was far more challenging where the interviewee was from a - 48 -

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non-construction background or operated at a senior level. However during the course of the research phase the interviewer developed knowledge of specific projects which became a source of common ground in later interviews. Seven interviews were conducted over a period of four weeks in March and April 2007. Appendix 4 contains a description of each interviewee including a summary of their experience of the construction industry and of modular construction. Appendices 5-11 contain full transcripts of the interviews, presented in the order in which the interviews were conducted. Anonymity is maintained for ethical reasons thus the interviewees are referred to simply as the Contractor, Manufacturer, Cost Consultant, Project Manager, Client A, Client B, and Architect. The study involved a number of professions and thus captured a diverse range of opinions and experiences. Interviewees generally had extensive experience in their respective fields. The only exception to this rule was the Contractor who had limited experience in comparison to the other interviewees. However the Contractors input was considered important due to his more hands-on role at a grass-roots level.

6.3
Time

Discussion Benefits of modular construction

An increase in the overall speed of construction was identified by all interviewees as being one of the primary benefits of using modular construction, confirming what was established during the literature review. Each interviewee emphasised a slightly different aspect of the increased construction speed: the Project Manager and Client A highlighted the ability to bring hotels to market quicker; the Cost Consultant focused on the reduction in preliminary costs; the Contractor identified minimising the risk of delay as the main benefit.

Cost
Client A, Client B, and the Manufacturer all recognised that use of modular construction should result in a reduction of the overall cost of projects, which confirmed the findings of the literature review. Conversely the Project Manager and Cost Consultant both opposed this view as their respective firms had each developed cost models that suggested modular construction of budget hotels was more
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expensive than traditional construction. Although the literature review suggested that the initial cost of modular construction was higher than traditional methods, a widely held view was that the overall cost should be less. Significantly neither the Project Managers nor Cost Consultants firms had been involved in a project using full modular construction of guest-rooms so their cost models are not conclusive in relation to wholesale modularisation. The Manufacturer made the boldest statements concerning cost by quoting actual figures: the cost would be 10% lower with fifty guest-rooms, 15% lower at two hundred rooms, and 25% lower at five hundred rooms. However these figures appeared speculative rather than based on actual data. The Manufacturer is likely to have been strongly biased towards overstating the financial benefits of modular construction.

Quality
Both Client A and Client B explained that the current trend is for new budget hotel buildings to be constructed by third-party developers with the budget hotel firm operating in an overseeing role as the brand manager. The building will then either be leased back to the client, or the developer may manage the hotel as a franchisee. Either way the client typically maintains a very active role in overseeing design in order to ensure that brand and quality standards are adhered to. This was new information not revealed by the literature review. Both clients explained that their lack of direct contractual link to the building contractor or module manufacturer made control of design and quality challenging, but use of modular construction gave a greater ability to control the design process. The literature review suggested that better quality and greater quality control were indeed benefits of modular construction. However the specific benefits that arise due to the separate roles of developer/franchisee and brand manager were entirely new findings. This provided yet another reason why budget hotels are particularly suited to modular construction: because of the unique role of brand managers in the construction project team. The only other interviewee to identify greater quality as a benefit of modular construction was the Cost Consultant. This was an unexpected outcome of the research phase because the achievement of greater quality was one of the main benefits to be identified during the course of the literature review, and because it was
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Results and Discussion

apparently of such importance to both of the clients who were interviewed. This also was in accordance with the findings of the literature review, which suggested that budget hotels compete aggressively using non-price methods. It would seem reasonable to expect the other interviewees to be aware of their clients priorities. It was perhaps unsurprising that the only interviewee to discuss the issue of greater quality in any real depth was the Cost Consultant, who later in the interview stated that he believed his role was to determine his clients main priorities in order to identify the risks to the accomplishment of the same.

6.4

Discussion Risks of modular construction

Corporate social responsibility

By far the most significant and previously unknown finding of the study concerned Corporate Social Responsibility (CSR). The Architect, Project Manager, and Client B explained that there was unease within the industry about using manufacturers based abroad, particularly those based in China. Specific concerns relating to CSR were the use of child labour, Health & Safety of operatives, use of non-sustainable materials, control of harmful emissions, and the impact of the manufacturing facility on the local environment. Evidently there were three factors to explain the focus on China: firstly the interviewees concerned had each either worked with or been approached by a firm based in China. Secondly China has undeniably been the subject of some extremely negative and high-profile media attention concerning its poor human rights record. This may give consumers the impression that Chinese firms also have questionable CSR policies. Finally firms operating in China are less accessible than UK-based firms so it is more difficult for clients to inspect operations and satisfy themselves of the veracity of firms CSR assurances.

Future increases in demand

The Architect, Client B, and the Manufacturer each described how the demand for bathroom pods has increased dramatically over the last decade resulting in an increase in lead times. They each stated their belief that demand for full modular construction of guest-rooms would see a similar pattern and that lead times would inevitably increase. An increase in lead times would require an even earlier design
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freeze, notwithstanding the earlier design freeze that modular construction requires over traditional construction. If the market for guest-room modules behaves similar to that of bathroom pods a further impact of demand increases may be a decline in the quality of the manufacturers customer service. The Contractor explained that it had been very difficult to get the bathroom pod manufacturer to return to site in order to rectify defects following installation. In his opinion this was due to the pod manufacturer being under-resourced to cope with a high level of demand. Client B talked at length of his belief that the same pattern will occur with modular guest-rooms. The Manufacturer was surprisingly candid on this issue and also suggested that a dramatic increase in demand would cause problems. However these concerns were not related to their capacity to manufacture, rather the increased complexity of scheduling deliveries and installations. It was considered extremely significant that of all the interviewees the Manufacturer chose to raise this as they might be expected to suppress such concerns. The issue of future demand increases and the effects of these was new information, not found in existing literature. However it must be stressed that the interactions of supply and demand are amongst the most basic of economic concepts thus although the information was new, it was by no means ground-breaking. The Project Manager raised a previously unconsidered point concerning the early design freeze of modular construction projects. Because of time-cost related pressures the whole design process tends to be condensed into a shorter period of time rather than delaying commencement of the construction phase. This places far greater pressure on all the parties involved in the design process and the risk of poor decision making is therefore greatly increased on modular construction projects. This idea was previously unconsidered. Bringing together the issues of demand increases and the pressure on decisions caused by early design freezes, the study would infer that the pressure on decision making will be exacerbated if lead times extend as a result of demand increases. Furthermore the literature review found that modular construction gives less flexibility to correct mistakes so the impact of poor decisions could be far greater.

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Results and Discussion

Quality control
Both Client A and Client B identified late design changes as a key risk due to the detrimental impact on quality. Client A stated that the design must be completed to a fine level of detail prior to commencing manufacture in order to avoid this risk. Considering the points above concerning early design freeze and the resulting pressure on decisions, the study would infer that Client As stipulation places even greater pressure on those involved in the design process. Again the anticipated increase in lead times discussed above is likely to exacerbate this problem. The literature review picked up that late design changes are a risk on modular construction projects but however did not suggest that this was a greater risk on projects where quality is of paramount importance, such as budget hotel projects. Given that the priority of both Clients appeared to be the consistency and level of quality it was not surprising that they each identified late design changes as a key risk. The Cost Consultant and Contractor each identified additional risks to quality. The Cost Consultant explained that if modules are fully-finished in the factory and delivered to site in a sealed state then a high level of quality is likely to be achieved. However if modules are not fully-finished and following trades have to carry out work inside the modules on-site then there is a considerable risk that clients will not achieve the full benefits in terms of quality. The Contractor gave practical examples which supported this view. Subsequent to bathroom pods being delivered and installed on site, following trades had to enter the pods to install the flooring and this resulted in damage occurring to the internal finishes of the pods. Furthermore as soon as the pods were unsealed the pod manufacturer absolved itself of any responsibility for damage, even if the Contractor believed the damage had actually occurred during transit. The literature review identified greater quality control as being a key benefit of modular construction and this was confirmed by several of the interviewees. However both Client B and the Cost Consultant identified quality control as being a key risk. This is not as contradictory as it might seem as Dallas (2006) has stated that risk and value are intrinsically linked. Client B and the Cost Consultant each suggested that although modular construction potentially enabled more effective quality control the impact on quality would be more severe if robust quality control systems were not in place.

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Results and Discussion

The Contractor stated that in his experience quality inspections were carried out offsite. This was indeed identified by the literature review as a benefit of modular construction as non-conforming modules could be rejected prior to delivery. However the Contractor explained that the bathroom pods arrived to site in a sealed state and with inspection check-lists fully signed-off. The Contractor was sceptical that the checks had actually been carried out and suggested that the pod manufacturer had simply signed-off the check-lists without bothering to perform the inspections. As discussed above, the Contractor had to allow the pods to be unsealed for following trades to enter. As soon as this occurred the pod manufacturer denied responsibility for any damage that was found and would rely on their inspection check-list as proof that the pods were delivered with no defects. The study would argue that the link between risk and value in this case is thus: by taking construction off-site the contractor has less control over quality; therefore the risk to quality is increased. However if resources are employed to manage this risk effectively then greater quality is achieved, thereby creating value.

Transportation
The Architect, Client A, Client B, and the Contractor highlighted that as the length of the modules journey from factory to site increases so too does the level of associated risk, especially if sea travel is necessary. This will inevitably increase the number of high-risk lifting operations involved during transit. The Manufacturer described two incidents that occurred during the transportation of twenty-four modules from China to the UK. In one incident a module had its end bashed in a collision with another module and in a second incident a module was dropped on a lifting pin which punctured its outer skin. Sea travel increases the risk of delay caused by inclement weather. The Manufacturer, Client A, and the Architect all cited an example from the same project described above during which twenty-four modules were transported from China to the UK. The contractor on the project requested that delivery was postponed as they were not ready for installation. The Manufacturer agreed to the delay but when delivery was finally supposed to proceed a fierce typhoon had struck the South China Sea. The delivery was consequently delayed by another week. The risk of delay to overseas deliveries caused by inclement weather was not picked up by the literature review but this is a fairly common-sense concept.

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Results and Discussion

The Architect, Client A, and the Manufacturer discussed the possibility of a ship sinking. The Manufacturer explained that all the modules for a single hotel are transported on the same ship so this type of incident would undoubtedly result in the entire building being lost. Although an incident of this nature would have an undeniably catastrophic impact on a project it was generally accepted that the likelihood of such an incident occurring was minimal. This risk had not been picked up during the literature review. The Architect raised an extremely interesting point concerning the performance of materials during transit. If a module is constructed in China and transported to the UK by sea this means the module is constructed in a completely different set of atmospheric conditions to where it will be permanently installed. Furthermore the module may be subjected to varying conditions during transit. The Architect stated there was a significant risk of materials reacting adversely when subjected to changing atmospheric pressure, humidity, and temperature. This was an entirely new consideration that was not picked up during the literature review and only one interviewee identified this risk. Unsurprisingly and somewhat reassuringly it was the Architect.

Contractual interfaces
The ambiguity of contractual interfaces was identified by Client B, the Contractor, the Cost Consultant, and the Manufacturer as being a key risk. This was not unexpected given that the literature review had found that traditional management structures and contractual arrangements might be inappropriate on modular construction projects. However the interviewees were able to provide a number of insights and examples that had not been revealed during the literature review. Client B described the unique contractual arrangements that were required because of the separate entities of the developer and the brand manager. Confusion would often arise because Client B, as brand manager, had control over the design of bathroom pods from an appearance and aesthetic point of view. This included the power to reject non-conforming pods, which Client B had exercised in certain instances where the design had been changed without approval. However the pod manufacturer had no direct contractual link to the brand manager, only to the franchisee/developer, leading to a dispute over the responsibility for the cost of remediation works to pods that had been rejected by the brand manager.

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Results and Discussion

The Contractor had also been involved in disputes with a bathroom pod manufacturer caused by ambiguity of responsibility. The Contractors on-site Mechanical & Electrical (M&E) subcontractor would have to connect their services to the pods onsite. However the connecting pieces on the pods were often positioned incorrectly, forcing the M&E subcontractor to adjust the connection pieces themselves. If this adjustment resulted in an air leakage the pod manufacturer would deny responsibility because another firm had caused the damage. The M&E subcontractor would also deny responsibility because the connection pieces were incorrectly positioned in the first place. Invariably the Contractor would have to accept the cost of repairs rather than enter a potentially long and complex dispute. Predictably the Cost Consultant raised contractual ambiguity as a key risk. The Cost Consultant warned that an inadequate design brief could lead to ambiguity of responsibility for portions of work and for management of certain risks. The Manufacturer also highlighted the demarcation of responsibility as a common area of risk.

6.5

Discussion - Risk management strategies

Design
The Architect stated his belief that module design plays an important part in minimising or avoiding risk on modular construction projects. This is certainly true of the guest-room modules of the Manufacturers firm. The Manufacturers modules are based on a shipping container model which gives a huge number of benefits from a risk management perspective. This section is dedicated to discussing precisely how the Manufacturers use of the shipping container model enables more effective risk management. Prior to this discussion it must be emphasised that the modules in question are not simply generic shipping containers. The Manufacturer and Architect were keen to stress rather that the modules are based on the shipping container model but with the necessary modifications to facilitate the modular construction of a range of building types, including budget hotels. The Manufacturer actually out-sources the off-site fabrication of their modules to a supplier based in China. The supplier is a well-established manufacturer of shipping containers and is one of the largest firms of its kind in the world. The study would

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argue that this strategy enables both risk avoidance and transfer. The literature review found that the capital costs involved in setting up a manufacturing operation are substantial. Furthermore although demand for modular construction is predicted to grow it is currently low and unstable so entry into the market is risky. Thus by outsourcing its manufacturing operation to a supplier that already has the necessary resources and is well-established in unrelated markets the Manufacturer avoids the risk of investing huge amounts of capital into a risky and uncertain market. Furthermore the Manufacturer will benefit from its suppliers economies of scale and will not have to endure the inefficient period of the experience curve. A further benefit of outsourcing the manufacturing operation is that the Manufacturer transfers the inherent Health and Safety risks of the off-site fabrication process to a more experienced firm that is in a better position to manage those risks. The specific use of a shipping container model yields a number of benefits that would not be achieved using another system. The shipping container logistics network is extremely well established at a global level. The network is comprised of a vast number of container ships, HGVs and locomotives providing transport, and ports providing both storage and a link between over-sea and over-land transport. This has allowed the Manufacturer to avoid the risk of investing in setting up and maintaining its own logistics operation. The Architect explained that use of the established shipping container network has allowed the Manufacturer to build a two-week contingency into its deliveries. The literature review found that modular construction firms may often have to employ Just in Time delivery techniques because they do not have the vast space required to store modules on-site. The Manufacturer is able to ship its modules from China two weeks earlier than required and simply store the modules at a UK container port until required. Although this strategy incurs a greater storage cost this is seen as being outweighed by significantly reducing the risk of late deliveries. The Manufacturer developed this control measure following the example discussed above where a typhoon in the South China Sea delayed delivery by a week. A number of interviewees expressed concern at the risk posed by transporting an entire consignment of modules by ship from China as in particularly rough weather a container may fall into the sea. The Manufacturer was aware of these concerns and explained that although the likelihood of this risk occurring was very small, the impact would be severe enough that control measures had been put in place. The
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Manufacturer has set up an agreement with a UK-based supplier to construct a very small number of modules, even a single module, at very short notice if necessary. Accordingly the Manufacturer has been able to significantly reduce the impact of suffering a loss of modules during transit. Shipping containers are constructed from a rigid steel frame with a full steel outer skin. This construction makes the modules extremely robust and more impervious to damage than a timber framed module. The Manufacturer offered two examples where damage had occurred to modules during transit, discussed above. In one incident a module collided forcefully with another but this only resulted in minor cosmetic damage externally and the internal finishes sustained no damage whatsoever. In a second incident a module was dropped on a lifting pin. Although the outer skin of the module was punctured this was again only cosmetic and the structural integrity of the module remained intact. In both cases the modules were still fit for construction use. The Architect explained that the rigid steel frame of the shipping container model prevents the modules from warping or twisting during lifting operations. The literature review found that this can often damage internal finishes. The Architect also described how timber framed modules used on some of his earlier projects had been prone to water ingress during transit and therefore required additional protection. The fully steel-framed shipping containers were far more water resistant to the degree that a journey by sea from China to the UK presented virtually no risk of water ingress and required no additional protection. Based on the robustness, rigidity, and water resistance of the modules described above there is a strong argument that use of the shipping container model has enabled the Manufacturer to reduce many of the risks of damage during transit and lifting that were identified during the literature review. The literature review found that tolerances are far lower on modular construction projects and this was confirmed by a number of interviewees. Modular buildings such as budget hotels are essentially comprised of a large number of identical modules placed next to one another therefore any inaccuracy in the size of modules is multiplied many times. This effect is also seen on container ships due to the huge number of identical containers placed next to and stacked upon one another. The global shipping network therefore sets strict limits on the size and tolerance of modules. Manufacturers of shipping containers are therefore faced with the same risk
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Results and Discussion

of low tolerances as modular construction firms. The Manufacturer has again been able to transfer the risk of low tolerance to its supplier and benefit from the suppliers experience of managing this risk. The global shipping container manufacturing industry is so experienced at managing this risk that tolerances are guaranteed to be within two millimetres over a fourteen metre length and this guarantee is underwritten by Lloyds Shipping. The Architect explained that the equivalent tolerances achieved by timber framed modular construction firms are over ten millimetres in every fourteen metres. The Manufacturer discussed the risk of sequencing a large number of modules. Although modules may appear identical from the outside each module is actually discrete and must be placed in a unique position within the structure. The use of shipping containers means that every module not only has a unique serial number but also has a radio tracking device which the Manufacturer can utilize to control its sequencing. This significantly reduces the risk of incorrect sequencing.

Quality control
The Architect discussed the risk of materials reacting differently under varying atmospheric conditions, discussed above. The Architect explained that his firm had commissioned research into the materials, fixings, and adhesives that were used within the modules in order to identify those that were less reactive. Ultimately the Architect believed that materials would be developed specifically to be used in a range of atmospheric conditions. The research can be seen as an attempt to increase understanding, reduce uncertainty, and therefore reduce or avoid the risk of materials reacting adversely during transit. The literature review found that an early design freeze is necessary on modular construction projects and the implication of this was discussed by the Project Manager, above. Both Client A and Client B explained how their brand standard acted as a risk management tool in this regard. The brand standard dictates that the internal design of guest-rooms is identical across the budget hotel portfolio, meaning that the design is virtually complete even before project inception. Only site-specific factors such as the floor-plan layout and external cladding require considerable attention to design. This reduces the pressure on the project design team and therefore reduces the risk presented by the requisite early design freeze. Client A expressed a desire to actually build up a stock of completed guest-room modules

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and to call these off as and when required, but explained that this was not possible because each order of modules is placed by a different developer. The Contractor described how the site management team visited the bathroom pod manufacturers facility in the Czech Republic in order to increase their understanding of the operation and increase confidence that the manufacturer was capable of fulfilling the order. The literature review discussed how the adequacy of head-room is a key risk on projects where modules are to be installed within a frame. The pod manufacturer had been unwilling to accept the risk of guaranteeing manufacture within a size constraint therefore the Contractor also had to physically measure the bathroom pods to ensure that there would be adequate head-room on site. Although the Contractors firm was experienced at working with bathroom pods some members of the site team were new to the method of construction. In order to reduce uncertainty and increase knowledge of the key risks of working with pods the inexperienced site team members visited previous projects and held meetings with more experienced colleagues. The Contractors firm had also produced a risk management datasheet concerning bathroom pods and this was updated after every project and made widely available within the firm. A number of interviewees highlighted the risk of a poor quality control system. In particular the Contractor explained that it would not be practical for a representative of the Contractor to attend all factory inspections thus there was a reliance on the modular construction firm to perform these. The Contractor believed that the manufacturer might be tempted to sign off modules as being defect-free despite inspections having not been performed. The Manufacturer, the Architect, and the Project Manager explained how this risk could be avoided entirely by employing an independent third party to perform inspections. Because the Manufacturer uses shipping containers it is obligated to allow Lloyds Shipping to inspect and sign off the external state of the module prior to shipping. The Manufacturer has taken this one step further and voluntarily employs Lloyds Shipping to also inspect and sign off the internal state of each module. The Manufacturer believes that the extra confidence this policy gives its clients is worth the added cost of the inspections. The Project Manager described how some UK based manufacturers employ the Building Research Establishment in a similar role to avoid the risk of false or bias inspections.

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Results and Discussion

Incremental change
Client A explained that standard forms of contract have been used on its early modular construction projects and will continue to be used until project team members become more familiar with modular construction. Client A believes that as project teams gain experience of modular construction it will be possible to introduce appropriate contract amendments and even develop bespoke forms of contract. The literature review suggested that the move to modular construction would be classed as a system innovation and that this type of innovation is particularly risky due to the scale of change from accepted practices. Client A has clearly aimed to reduce the risk of a system innovation by introducing change in an incremental way. Whilst Client As strategy initially appears prudent from a risk management perspective the study would argue that it could result in exposure to greater risk. The literature review found that traditional forms of contract and management structures are likely to be inappropriate for modular construction projects precisely because of the radical scale of change, which is ironically the very reason that Client A is continuing to use them. Furthermore Client B, the Contractor, the Cost Consultant, and the Manufacturer each expressed views which confirmed that contractual ambiguity and inadequate demarcation of responsibility represent key risks on modular construction projects, discussed above. Client A and the Architect each gave further examples of reducing risk exposure by introducing change in an incremental way. Client A chose to undertake its first full wholesale modular project on a relatively small scale, using a twenty-four bedroom extension project as an opportunity to trial the technology. This allowed the project team to gain valuable knowledge and experience of full modular construction whilst maintaining a relatively low exposure to the risk of project failure. The Architect described a similar strategy, introducing the extent of internal finishing in an incremental way. The Architects first modular budget hotel project used modules to construct the superstructure but were still internally finished on-site, even with separate bathroom pods. The second project will use modules with internal linings completed off-site, the third project will have bathrooms installed off-site, and so on. The Architect believes it may take up to six projects before the modules are fully-finished off-site. This allows the Architect and other members of the project team to gain experience of modular construction over a period of time and learn from their mistakes without exposing the client to an unacceptable level of risk.
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Results and Discussion

Procurement
Rather than exclusively use a single supplier of modules Client A is developing relationships with a number of different firms. Client A perceived that there was a risk of fostering a close relationship with a single supplier and developing that suppliers understanding of its brand standard, only for the supplier to go out of business. Conversely the research revealed that if the modular construction industry experiences a dramatic increase in demand there is likely to be an adverse affect on supply. By developing relationships with a number of modular construction firms Client A is able to spread its risk and reduce the potential impact of supply problems. One of the most significant risks to be identified during the course of the research was that concerning CSR, particularly with regard to suppliers based in China. The Project Manager suggested that using exclusively UK-based suppliers would reduce this risk considerably. There are infinitely less concerns related to CSR with UKbased firms and moreover accessibility is less of a problem so clients can more easily visit their suppliers facilities in order to increase confidence in their CSR standards. Furthermore the distance from the factory to the site will be reduced and sea travel will not be necessary so the risk associated with transit is greatly reduced. The Project Manager accepted that using UK-based suppliers results in a greater overall cost because of higher labour costs, despite the significantly lower transport costs. The study would argue that client have a clear choice to make concerning whether to use UK-based or foreign suppliers. Using a UK-based supplier offers far lower risk but at a greater cost. Using a foreign supplier offers a far higher riskreward ratio. Although there are greater risks the overall cost is far lower, thus if risks are effectively managed clients can create far greater value.

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Results and Discussion

6.6

Chapter review

Corroboration of existing literature

The following conclusions of the literature review were confirmed during the course of the research:

Modular construction achieves a reduction in on-site durations and overall project durations

Use of a standard design further reduces overall project durations due to the reduced time required for design

The importance of brand standards to budget hotel clients and the associated importance of the standard and consistency of quality

Modular construction can assist in achieving better quality Modular construction can enable greater quality control Ambiguity of responsibility is a key risk on modular construction projects

Contradiction of existing literature

The following conclusions of the literature review were disputed during the course of the research:

Cost was a divisive issue. Client A, Client B, and the Manufacturer agreed that overall costs should be lower. Both the Cost Consultant and Project Manager claimed their cost models showed modular construction projects to be more expensive but neither of their respective firms had been involved in full modular construction.

Client A stated that standard forms of contract would continue to be used in the short-term and the Manufacturer was confident that traditional management structures were appropriate to modular construction projects, in direct contradiction to the conclusions of the literature review. Significantly the Manufacturer had very little experience of the construction industry and had no experience whatsoever of traditional construction projects, which may explain his incongruous view.

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Results and Discussion

Issues not discussed

The following conclusions of the literature review were considered highly significant, yet were not raised during the course of the research. This called into question whether the issues were in fact as significant as previously thought:

The effect of modular construction on project cash-flow How clients might take ownership of live works as they are carried out off-site The negative stereotype that off-site fabrication produces lower quality buildings

The existence of formal risk management systems

The fact that none of these issues were identified would suggest that either the interviewees were not aware of them, or that the interviewees did not consider these issues to be of any significance. Given the extensive experience of the parties in question the study would conclude that the latter is more likely.

New findings
The practice of budget hotels being constructed and even subsequently managed by developers and franchisees was not identified by the literature review, but this in itself was not particularly significant. It is not unusual for firms to adopt such arrangements, and it would seem particularly appropriate for the budget hotel sector as it allows the client to focus on its core competency as a brand manager and also reduce the burden on its balance sheet by liberating itself of fixed assets such as buildings. More significant was the impact this practice had on the contractual relationships of budget hotel construction projects. The study revealed that the separate roles of developer and brand manager increase the ambiguity of responsibility and as discussed above this can be exacerbated by use of modular construction. As discussed there is already an argument for using bespoke forms of contract and innovative management structures on modular construction projects, and this argument would seem even more compelling where the project is a budget hotel with a separate developer and brand manager. However Client B suggested that although the separate roles of developer and brand manager have led to difficulties and disputes concerning quality control, the use of modular construction increases his ability to control quality and therefore reduces the

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Results and Discussion

impact of this ambiguity. The study was therefore able to identify a further reason why budget hotel projects are suited to modular construction. The issue of Corporate Social Responsibility (CSR) was the most significant new finding of the study. This had not been identified or considered during the literature review in any way. The literature review noted Flanagan & Normans (1993) comments that risk and uncertainty are distinct and that uncertainty can be converted to risk by gathering information. The study considered the concerns about foreign manufacturers to be more of an uncertainty than a risk, thus clients should be able to convert this uncertainty to a quantifiable risk through investigation and information gathering. Nevertheless the concerns are quite reasonable given the importance of branding to budget hotel firms. It would be extremely damaging for a budget hotel firm to construct a new hotel using foreign-sourced modules, only for the media to expose that the modules were constructed using child labour. The study would argue that CSR is less of an issue for a firm constructing a modular prison or student accommodation. That demand for modular construction would dramatically increase in the future had already been raised during the literature review. A commonly-held view amongst the interviewees was that this would result in supply problems, and the study would stress again that this is a very basic economic concept. However it is still considered a significant new finding because the literature review had suggested that capacity was being added and there would be adequate supply to meet the predicted upsurge in demand. Even the Manufacturer was sceptical that the modular construction industry would be unaffected by the increase in demand. Several interviewees used the historical increase in lead times for modular bathroom pods to support their views, and this was also new information not revealed during the literature review. The use of shipping containers as the model for constructing modules was new finding that was considered extremely significant. Designing and procuring the modules in this way would seem to reduce or transfer a considerable amount of risk. Outsourcing the manufacture of modules to the shipping container manufacturer avoids, reduces, or transfers the risks associated with health and safety of operatives, achieving strict tolerances, investing huge amounts of capital into specialist plant, and setting up a logistics network. The risk of damage during transit is significantly reduced by the inherent robustness, rigidity, and water-resistance of shipping containers.
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Chapter 7

Conclusions and Recommendations

7.1

Scope of chapter

This chapter provides a summary of the findings of the study. The aims and rationale of the study are restated, followed by a summary of the conclusions drawn with reference to the research questions. Based on these conclusions the chapter then makes a set of five recommendations for parties to modular construction projects, commenting on the extent to which these are applicable to projects other than those in the budget hotel sector. The chapter then comments on the limitations of the research and identifies areas requiring further study.

7.2

Aims of the study

The study initially aimed to focus on the use of modular construction in the budget hotel sector. Anecdotal evidence suggested that modular construction of bathroom pods had been enthusiastically adopted by budget hotel firms and that full modular construction of fully-finished guest-rooms was next on their agenda. Preliminary investigation could find no evidence of existing empirical studies on the subject. A study focusing on risk management seemed beneficial due to the impact of modular construction on the risk profile of a project and the inherent riskiness of budget hotel projects. A more thorough examination of the existing literature identified a definite gap in the body of existing knowledge and thus the aims of the research were specifically developed to fill this gap. Following the review of existing literature the study aimed to explore precisely how risks have been managed in budget hotel construction projects using modular methods. It was anticipated that the study would be far more reliant on evidence based on the use of bathroom pods than on use of full modular construction of guestrooms. However the study aimed to use this evidence to surmise how the risk of full modular construction of guest-rooms might be effectively managed.

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Conclusions and Recommendations

7.3

Research questions

The review of existing literature and subsequent discussion contained in Chapter 5 enabled four research questions to be developed that were intended to satisfy the aims of the study. This section contains a summary of the conclusions that were drawn with regard to each research question.

What is the perception of modular construction amongst the stakeholders of budget hotel projects?
Not one of the interviewees mentioned that off-site fabrication suffers from a stereotype of producing poor quality, a key finding of the literature review. This suggested that the finding of the literature may have been outdated and that the modern modular construction industry has been able to considerably improve its image. None of the interviewees perceived modular construction as being more risky than traditional construction. The Cost Consultant and Project Manager each suggested that use of modular construction should actually reduce the risk profile of projects, provided that the correct checks and balances are in place. Client A and Client B were particularly enthusiastic about the benefits of using modular construction and proceeding with full modular construction of guest-rooms. Unsurprisingly the Project Manager and Cost Consultant were more cautious and were keen to emphasise that modular construction still requires appropriate risk management systems to be in place.

To what extent has modular construction been applied to the budget hotel sector?
Use of bathroom pods is widespread in the budget hotel sector. Virtually every project that each of the interviewees had been involved in had used modular construction of bathroom pods at the very least. Client B went as far as suggesting that budget hotel clients had so much experience of using bathroom pods that it was now a virtually risk-free operation. The off-site fabrication of fully-finished modular guest-rooms was less common. Based on the interviewees responses it would seem that a very small number of such projects have been completed, but none have so far been internally fullyfinished off-site. However this form of construction is clearly being pursued, subject to

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Conclusions and Recommendations

satisfying a number of concerns. For example the Corporate Social Responsibility of foreign manufacturers and the performance of materials in changing atmospheric conditions are currently being addressed.

To what extent and in what form has risk management been applied to budget hotel projects using modular construction?
The study identified a large number of practices that were considered to be risk management techniques:

Appointing a third-party to perform quality inspections Building in a two-week contingency to deliveries Continued use of standard forms of contract and traditional management structures

Developing agreements with several different suppliers Exclusively using UK-based manufacturers Insisting on the right to reject modules for non-conformance to brand standards

Introducing the extent of internal finishing off-site and the scale of the project in an incremental way

Producing a risk datasheet and distributing this within the organisation Research into less reactive materials Setting up an agreement with a UK supplier to produce a single module at short notice to replace modules lost or irreparably damaged during transit

Strict control of design changes Use of a standard design for guest-rooms Use of shipping containers as modules Visiting and inspecting the manufacturing facility

These risk management techniques were largely based on the intuition and experience of decision makers rather than being the product of a formal risk management system or based on historical or statistical data. In certain instances when the interviewer suggested that a system or practice was a risk management technique the interviewee indicated that they had not even consciously considered this to be the case.

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Chapter 7

Conclusions and Recommendations

To what extent has risk management been successful when applied to budget hotel projects using modular construction?
It is difficult to measure the success of many of the risk management techniques identified above as this will only become apparent over time as more projects are undertaken. However the following examples given by interviewees show how certain techniques have been successful:

Insisting on the right to reject modules for non-conformance to brandstandards Client B recounted an example where it exercised the right to veto the opening of a hotel constructed by a developer-franchisee due to nonconformance with the brand standard. Although this initially caused a dispute over the responsibility to pay for remediation, Client Bs refusal to sanction the opening of the hotel focused the minds of the developer and pod manufacturer. The pods were subsequently brought back in line with the brand standard and the hotel still opened on time, avoiding any damage to the reputation of the brand.

Increasing the scale of the project in an incremental way based on his experience on a two-storey pilot project the Architect was able to develop a temporary locking mechanism that could be operated from within the modules. This will prevent operatives having to work on the external face of the structure during module installation on the next project, a fourteen-storey structure.

Use of shipping containers as modules no significant damage was sustained when one of the Manufacturers modules was involved in a collision, or when another was dropped on a lifting pin. The project in question was a twenty-four bedroom extension and was completed on-time and onbudget. The client was sufficiently impressed to have subsequently commissioned another project with over one-hundred bedrooms.

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Conclusions and Recommendations

The most obvious example of an unsuccessful risk management technique was the continued use of standard forms of contract and traditional management structures. The fact that there have been disputes over the responsibility for the cost of remediation works to non-conforming pods would suggest that standard forms of contract are wholly inappropriate due to the separate roles of developer/franchisee and brand manager.

7.4

Recommendations

Based on the findings of the study the following recommendations can be made: 1. Although the extent of finishes completed off-site can be introduced in an incremental way as a risk management technique, ultimately modules should be delivered fully-fished and sealed in order to prevent the requirement for following trades to carry out works on-site. This recommendation is applicable to all projects using modular construction, not just budget hotels. 2. Use of modules based on the shipping container model reduces, avoids, or transfers a significant amount of risk and is therefore preferable to alternative systems. This recommendation is applicable to all projects using modular construction, not just budget hotels. 3. Foreign-based modular construction firms must ensure that they meet their clients Corporate Social Responsibility expectations. However it is not sufficient to simply ensure that these expectations are satisfied. Firms must invest resources into actively marketing themselves and demonstrating to their clients that any CSR concerns are unfounded. Modular construction firms should focus on budget hotel clients as CSR concerns are likely to be less of an issue for other clients such as prisons or student accommodation. 4. A third-party should be employed to perform quality inspections prior to the delivery of modules in order to ensure impartiality. This recommendation is applicable to all projects using modular construction, not just budget hotels.

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Conclusions and Recommendations

5. Bespoke contracts should be developed specifically to allow for the unique roles of developer, franchisee, brand manager, and module manufacturer. This recommendation is applicable only to the budget hotel sector.

7.5

Limitations of the study

The study obtained the minimum number of target interviewees and therefore included just one member of each of the professions, with the exception of the budget hotel clients. Although sufficient experiences were recorded to satisfy the research aims and questions, the views expressed may not have been representative of the wider profession. The study would have benefited from obtaining a greater sample, however this would have increased the resource required to execute the study.

7.6

Areas requiring further research

The author was able to identify two areas requiring further research that were not within the scope of this study:

How might foreign-based modular construction firms address Corporate Social Responsibility concerns and thus improve the way they market themselves?

An in-depth comparison of the overall cost of modular construction versus traditional construction

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Word Count

Chapter 1 Introduction Chapter 2 Literature Review Off-site Fabrication Chapter 3 Literature Review Budget Hotels Chapter 4 Literature Review Risk Management Chapter 5 Research Design Chapter 6 Results and Discussion Chapter 7 Conclusions

1,535 4,017 2,036 3,475 3,790 6,649 1,641

Total

23,143

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List of References
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Appendix 1

Interview Schedule Design

Step 1 Research Question 1 What is the perception of modular construction amongst the stakeholders of budget hotel projects?

Step 2 Associated Research Questions Why would modular construction be used in the budget hotel sector?

Step 3 Information Required Participants understanding of the reasons for applying modular construction to the budget hotel sector Participants understanding of the barriers to applying modular construction to the budget hotel sector Participants understanding of the risks, in terms of the likelihood and impact of each risk

Step 4 Interview Questions What do you perceive as the arguments for applying modular construction to the budget hotel sector? What do you perceive as the arguments against applying modular construction to the budget hotel sector? What do you perceive are the most common risks associated with using modular technology in the construction of budget hotels? Which risks do you perceive as the most likely to occur? Which risks do you perceive as potentially having the greatest impact? What is your current job title? How would you describe your current role? How long have you been in your current role? How would you describe the path to your current role?

What would prevent modular construction being used in the budget hotel sector?

What are the risks of using modular construction?

How do perceptions vary among different categories of participant?

Occupation of participant

Experience of participant

- 76 -

Appendix 1

Interview Schedule Design

Step 1 Research Question 2 To what extent has modular construction been applied to the budget hotel sector?

Step 2 Associated Research Questions What is the frequency of use of modular construction in the budget hotel sector?

Step 3 Information Required The proportion of new budget hotel construction projects adopting modular methods

Step 4 Interview Questions How many budget hotel construction projects have you been personally involved with? How many budget hotel construction projects have you been personally involved with where modular methods were used? What is your current job title? How would you describe your current role? How long have you been in your current role? How would you describe the path to your current role?

How do perceptions vary among different categories of participant?

Occupation of participant

Experience of participant

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Appendix 1

Interview Schedule Design

Step 1 Research Question 3 To what extent and in what form has risk management been applied to budget hotel projects using modular construction?

Step 2 Associated Research Questions What are the risks of using modular construction?

Step 3 Information Required Participants understanding of the risks, in terms of the likelihood and impact of each risk

Step 4 Interview Questions What do you perceive are the most common risks associated with using modular technology in the construction of budget hotels? Which risks do you perceive as the most likely to occur? Which risks do you perceive as potentially having the greatest impact? Can you give examples of specific risk management techniques that have been applied to budget hotel construction projects using modular methods? In your experience has the level of risk management been appropriate on budget hotel construction projects using modular methods? What is your current job title? How would you describe your current role? How long have you been in your current role? How would you describe the path to your current role? How would you describe your personal role in the risk management process? What do you consider to be the other project team members roles in the risk management process?

Have risk management techniques been applied to modular construction in the budget hotel sector?

Participants experience of specific risk management techniques

Participants perception of whether level of risk management is appropriate

How do perceptions vary among different categories of participant?

Occupation of participant

Experience of participant

How does the individuals role in risk management vary among different categories of participant?

Participants perceptions of their own role in risk management Participants perceptions of other roles in risk management

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Appendix 1

Interview Schedule Design

Step 1 Research Question 4 To what extent has risk management been successful when applied to budget hotel projects using modular construction?

Step 2 Associated Research Questions What risk management techniques have been most effective?

Step 3 Information Required Participants perceptions of risk management techniques that were successful Participants perceptions of what factors were responsible for the success Participants perceptions of risk management techniques that were unsuccessful Participants perceptions of what factors were responsible for the lack of success Occupation of participant

Step 4 Interview Questions In what ways do you believe the application of risk management techniques were successful? What factors do you believe contributed to the success of the risk management techniques? In what ways do you believe the application of risk management techniques were unsuccessful? What factors do you believe prevented the success of the risk management techniques? What is your current job title? How would you describe your current role? How long have you been in your current role? How would you describe the path to your current role?

What risk management techniques were ineffective?

How do perceptions vary among different categories of participant?

Experience of participant

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Appendix 2

Interview Schedule

Occupation and experience

1. What is your current job title? 2. How would you describe your current role? 3. How long have you been in your current role? 4. How would you describe your career path to date?

Modular construction in the budget hotel sector

5. How many budget hotel construction projects have you been personally involved with? 6. How many budget hotel construction projects have you been personally involved with where modular methods were used? 7. What do you perceive as the arguments for applying modular construction to the budget hotel sector? 8. What do you perceive as the arguments against applying modular construction to the budget hotel sector?

Risk
9. What do you perceive are the most common risks associated with using modular technology in the construction of budget hotels? 10. Which risks do you perceive as the most likely to occur? 11. Which risks do you perceive as potentially having the greatest impact?

Risk management
12. Can you give specific examples of risk management techniques that have been applied to budget hotel construction projects using modular technologies? 13. In your experience has the level of risk management been appropriate on budget hotel construction projects using modular methods? 14. How would you describe your personal role in the risk management process? 15. What do you consider to be the other project team members roles in the risk management process?

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Appendix 2

Interview Schedule

Perceptions of the success of risk management

16. In what ways do you believe the application of risk management techniques were successful? 17. What factors do you believe contributed to the success of the risk management techniques? 18. In what ways do you believe the application of risk management techniques were unsuccessful? 19. What factors do you believe prevented the success of the risk management techniques?

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Appendix 3

Revised Interview Schedule

Occupation and experience

1. What is your current job title? 2. How would you describe your current role? 3. How long have you been in your current role? 4. How would you describe your career path to date?

Modular construction in the budget hotel sector

5. How many budget hotel construction projects have you had significant involvement with? 6. Of these, how many used a form of modular construction? 7. What do you perceive as the arguments for applying modular construction to the budget hotel sector? 8. What do you perceive as the arguments against applying modular construction to the budget hotel sector?

Risk
9. What do you perceive are the most common risks associated with using modular construction in budget hotel construction projects? 10. Which risks do you perceive as the most likely to occur? 11. Which risks do you perceive as potentially having the greatest impact?

- 82 -

Appendix 3

Revised Interview Schedule

Risk management
12. Can you give specific examples of risk management strategies that have been applied to modular construction in budget hotel projects? 13. Can you give specific examples of how the risk management strategies were successful or unsuccessful? 14. What factors do you believe contribute to the successful or unsuccessful management of risk? 15. In your experience of using modular construction on budget hotel projects, has the level of formal risk management been appropriate? 16. What do you consider to be your personal role in the risk management process? 17. What do you consider to be the other key project members roles in the risk management process?

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Appendix 4
The Contractor

Summary of Interviewees

The Contractor was an Assistant Site Manager with two years experience in the construction industry. The Contractor had worked on just a single budget hotel construction project and although the project had not used modular construction of guest-rooms, bathroom pods had been used. The Contractor had been specifically responsible for the on-site management of the bathroom pod installation and could therefore provide extremely valuable insights into the risks and problems encountered on-site and the strategies employed to overcome these.

The Manufacturer
The Manufacturer was the Commercial Director of a modular construction firm based and managed in the UK but with an outsourced manufacturing operation in China. The Manufacturer had vast knowledge and experience of manufacturing in various industries but had relatively little experience of the construction industry and therefore could not offer a balanced view of off-site fabrication in comparison to traditional construction methods. Of all the interviewees the Manufacturer had the most experience of applying full modular construction to the budget hotel sector having completed one project and been involved in the feasibility study of approximately twenty others. The Manufacturers views of risk management strategies used at the early stages of projects were therefore particularly valuable. In contrast the Manufacturer had no experience of using bathroom pods and so could not make any useful contributions on this subject.

The Cost Consultant

The Cost Consultant was the Partner in charge of the Hotels Specialist Group of one of the worlds largest professional construction consultancies. The Cost Consultant had over twenty years of experience in a quantity surveying and cost management role and therefore had a vast knowledge of financial risk management and contract law. The Cost Consultant had extensive experience of budget hotel construction and could offer balanced views on the use of bathroom pods and traditional bathroom construction. The Cost Consultant operated at a strategic level and in a role that was more concerned with the earlier stages of projects, such as feasibility studies, risk identification, and contract formation.

The Project Manager

The Project Manager was the Partner in charge of the Hotels Division of another of the worlds largest professional consultancies. The Project Manager had been in his current role for over fifteen years, having previously operated in a quantity surveying role. The Project Manager had extensive experience in the hotel industry, but limited experience of budget hotels having completed just three projects in this sector. All of these had used bathroom pods and the Project Manager had considerable experience of using bathroom pods in other types of building. The Project Manager had no practical experience of using full modular construction of guest-rooms but had been involved in the feasibility study and risk analysis of such projects. The Project Manager operated in a similar role as the Cost Consultant, at a strategic level more concerned with the earlier stages of projects.

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Appendix 4

Summary of Interviewees

Client A
Client A was the Director of Construction of one of the big three budget hotel chains in the UK and had been in the role for two years. The role involved the supervision of new hotel constructions and conversions of existing buildings into hotels, ensuring that the strict brand standards of the budget hotel chain were adhered to. Client As current position was his first in the budget hotel sector but had involved the delivery of approximately eighty new hotels. Virtually all of these had employed modular construction in the form of bathroom pods and one had used full modular construction of guest-rooms. Therefore Client A could offer a balanced view of traditional construction versus modular construction.

Client B
Client B was the Director of Project Procurement of another of the big three budget hotel chains in the UK and operated in a very similar role to Client A. Client B had more experience of the budget hotel sector having been in his current role for six years and in the hotel industry for over twenty years. Having overseen the construction of over fifty budget hotels with his current employer, Client B was considered to have a thorough knowledge of construction in the budget hotel sector. Again virtually all had used modular bathroom pods, but none had used full modular construction of guest-rooms. Client B was however heavily involved in assessing the feasibility of full modular construction of guest-rooms.

The Architect
The Architect was an Architectural Designer with the in-house design practice of a large national building contractor. The Architect had over twenty years of experience in his field throughout which he had always been involved in the budget hotel sector, having been involved in the inception of over one hundred projects and the construction of forty. All of the Architects budget hotel projects had used modular bathroom pods and three had used full modular construction of guest-rooms. The Architect was therefore considered to have in-depth knowledge of the architectural profession, the design and construction of budget hotels, and modular construction.

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Appendix 5
1. 2.

Interview Transcript - Contractor

What is your current job title?

Assistant Site Manager

How would you describe your current role?

On-site management of a number of designated areas or works packages on a project

3. 4.

How long have you been in your current role?

Eight months

How would you describe your career path to date?

Entered construction industry as a trainee engineer two years ago, but decided to move into site management eight months ago. First project as site manager was the conversion of an office building into a budget hotel. Was made responsible for the management of the bathroom pod works package.

5.

How many budget hotel construction projects have you had significant involvement with?
One

6. 7.

Of these, how many used a form of modular construction?

One

What do you perceive as the arguments for applying modular construction to the budget hotel sector?
The use of bathroom pods avoided many of the problems associated with M&E services that are experienced when bathrooms are constructed onsite. Services are pre-installed and tested prior to installation so any problems can be identified and rectified early on, without adversely affecting the construction programme. On-site M&E works are reduced to making simple connections. Connections are standardised and identical for every pod so once the on-site team have connected the first few pods they develop a good understanding of the connections and the remaining pods are connected extremely quickly.

8.

What do you perceive as the arguments against applying modular construction to the budget hotel sector?
Tolerances are lower with bathroom pods than with traditionally constructed bathrooms, there is less of a margin for error and reduced flexibility to correct mistakes. If the M&E connections were not precisely positioned and needed to be manually adjusted on site to make the connection, this invariably resulted in air leakage. It was difficult to get the pod manufacturer to return to site to rectify defects once the pods had been installed. This was due to the pod manufacturer being under-resourced and over-committed to other contracts in the UK. Therefore supply can be a problem.

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Appendix 5

Interview Transcript Contractor

9.

What do you perceive are the most common risks associated with using modular construction in budget hotel projects?
Did not perceive any significant risk in the manufacture or installation of the pods. However following installation there was often disagreement relating to responsibility for damage to the pods, especially concerning the M&E service connections. Where the M&E contractor had been forced to modify a connection that was positioned incorrectly and an air leakage resulted, the pod manufacturer immediately denied any responsibility due to another contractor having attempted to rectify the problem themselves. There was significant risk if terms of the clear definition of responsibilities. Every pod comes with test certificates for M&E services. Contractor A was sceptical whether the pod manufacturer had actually carried out all the tests, for example the plumbing was certified as having been air tested, despite not yet being connected. However in practice it would be impossible for the contractor to check every pod themselves as they arrived on site in order to check the validity of the test certificates. The bathroom pods were not fully-finished, for example another subcontractor had to supply and fit the ironmongery to the inside of the pods. This represented a further interface where there was potential for ambiguity of responsibility if damage was caused. Late deliveries can have an adverse affect on programme. Contractor A alluded to the fact that many delivery dates were missed because the pod manufacturer was in a phase of rapid growth and was therefore underresourced. Contractor A had actually been informed by the pod manufacturer that they were over-committed and were missing a lot of dates for other contractors and projects. There is significant risk of internal damage during transit as the pods twist or warp. Accuracy of pod dimensions was a key risk, particularly when installing pods into an existing structure. Pods were of a uniform size, with the exception of the pods for disabled persons which were larger.

10.

Which risks do you perceive as the most likely to occur?

Having to re-test the M&E services on pods because of damage during connection, and subsequently a dispute arising over the apportioning of blame for the damage.

11.

Which risks do you perceive as potentially having the greatest impact?

Where a dispute arose over the responsibility for repairing any damage related to interfaces between the pod and M&E services, the contractor was invariably forced to carry out repairs at their own cost. The contractor could not afford to enter into a dispute as they were working to a tight deadline and would incur time related charges if they suffered a delay. Even if the pod manufacturer accepted responsibility they would be slow to return to site to rectify their defects, so the contractor would simply pay another contractor to carry out the work.

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Appendix 5

Interview Transcript Contractor

Miscalculating on the dimensions of the pods and not having adequate headroom to move the pod through the existing structure would have been disastrous. Contractor A said they were unsure what would have happened if that risk had become realised, and there was no contingency in place.

12.

Can you give specific examples of risk management strategies that have been applied to modular construction in budget hotel projects?
Contracts were used as the primary method of apportioning responsibility for key project risks. The pod manufacturer carried out their own quality control and submitted a snag list to the contractor upon delivery. However the snag list invariably stated that all pods were clear of snags, whereas in reality there were always a number of defects. Accordingly the contractor insisted upon a representative of the pod manufacturer attending site and inspecting the pods for defects as they were delivered. The contractor visited the factory in order to enhance their understanding of the manufacturers operations, but particularly to check the dimensions of the pods to ensure that the existing building had adequate headroom for installation. The pod manufacturer had refused to take on responsibility for providing accurate dimensions, so the contractor had to go and physically measure the finished pods. Contractor A also visited a previous project carried out by a competitor and discussed the pod installation to gain a better understanding of the process and what risks to be particularly aware of. Following the completion of the project the on-site staff of Contractor A produced a datasheet which was published on the companys internal intranet, to ensure that any lessons learnt were diffused throughout the organisation. When Contractor A visited the pod manufacturers factory they saw that the pod manufacturer had a huge storage facility and actually manufactured the pods months in advance of the installation. It therefore became apparent that any delays to delivery were not due to bottlenecks or delays in production, but were down to delays in transportation or a lack of installation teams.

13.

Can you give specific examples of how the risk management strategies were successful or unsuccessful?
Much like any other works package there are invariably areas of responsibility that are left undefined or not covered by the contract. Rather than get involved in a dispute the contractor would take on responsibility at their own cost. For example the pods were delivered with protective coverings that had been fitted in the factory. The contractor obviously had to remove these to allow other subcontractors to access and work on the pods, but as soon as the protection was removed the pod manufacturer absolved itself of responsibility for damage, in accordance with the contract. In practice it would have been unrealistic to adhere to the contract, as this would have involved contacting the pod manufacturer and asking them to remove the - 88 -

Appendix 5

Interview Transcript Contractor

protection to allow other subcontractors to access the pods, and subsequently re-apply the protection. The pod manufacturer missed several delivery dates. On one occasion the deliveries (coming from Prague) had to sit and wait in Germany for two days due to a public holiday. With hindsight the planning had been inadequate as it had not picked up on the public holiday dates in the countries on the transport route. The pod manufacturers quality control system would not pick up damage which occurred during transit as its own internal inspection is carried out in the factory prior to the pod actually being lifted or moved. By measuring the pods themselves prior to delivery the contractor was confident that the pods would fit in the existing building. However there were a couple of instances where the pods had only millimetres clearance as they were transported through the building, particularly with the larger disabled pods on the ground floor where the transfer slabs were thicker and therefore gave less headroom.

14.

What factors do you believe contribute to the successful or unsuccessful management of risk?
Developing a good relationship with the manufacturer is important. In this case the pod manufacturer was on the clients supply chain and was therefore effectively a nominated supplier, although contractually they were a domestic subcontractor to the contractor. This made it difficult for the contractor to develop a relationship with the manufacturer as they already had a good relationship with the client. The contractor felt that this may have contributed to the manufacturer being uncooperative. Good planning is essential. Although the pod manufacturer is usually responsible for manufacture, delivery and installation, the contractor should participate in the planning of these operations to ensure that all risks are identified and managed correctly. Contractor A was not sufficiently involved in the planning of deliveries, and simply gave the manufacturer a set of dates to meet. With hindsight the contractor could have assisted in planning to ensure that the dates were met. Programmes must be realistic. The pods should be installed early enough to be able to rectify any defects or damage afterwards, without adversely affecting the overall programme. Although the pod manufacturer gave a full service including design, manufacture, transport and delivery, Contractor A felt it was important to assign a member of their own team to be specifically responsible for the pod operation, in an overseeing role and to assist co-ordination with other works. Contractor A found that the pod manufacturer was unwilling to take on the responsibility for a lot of risks that the contractor felt they would have been best-placed to manage, for example the calculation of pod dimensions. The handover of pods was not planned satisfactorily. Because the pods arrived not fully-finished the contractor had to allow access to other - 89 -

Appendix 5

Interview Transcript Contractor

subcontractors, but as soon as they removed the protection they were deemed to have taken possession of the pod. Therefore any damage or defects that were identified without the presence of the pod manufacturer became the responsibility of the contractor.

15.

In your experience of using modular construction on budget hotel projects, has the level of formal risk management been appropriate?
On future projects the interviewee intends to implement far more detailed and formalised systems of quality control once the bathroom pods have been delivered to site. With hindsight the on-site quality control was not rigorous enough in terms of its incorporation into the contract or application on-site. This caused a number of problems which could have been avoided had stricter measures been agreed in advance and subsequently implemented.

16.

What do you consider to be your personal role in the risk management process?
Contractor As primary role was quality control. Although the pod manufacturer had its own quality inspection system in the factory prior to delivery, the contractor would carry out an initial inspection upon delivery, and a second inspection following installation.

17.

What do you consider to be the other key project members roles in the risk management process?
The M&E Services Engineer has a key role to play in designing the interfaces between the pod services and the main building services. Connections must be designed accurately and so as to make installation a simple process. The Structural Engineer had to calculate the loadings of the pods on the buildings superstructure, both in terms of the final locations of the pods, but also the routes through the building, to ensure that the slabs were of sufficient strength.

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Appendix 6
1. 2.

Interview Transcript - Manufacturer

What is your current job title?

Commercial Director

How would you describe your current role?

Responsible for the sales and marketing operation involved in bringing a new modular building system to market. The role has involved developing relationships with hotel operators and contractors in order to promote the benefits and advantages of the new system.

3. 4.

How long have you been in your current role?

One year

How would you describe your career path to date?

Not from a construction background. The interviewee has vast experience in the field of manufacturing

5.

How many budget hotel construction projects have you had significant involvement with?
The interviewee has been involved in bidding for approximately twenty budget hotel projects. Of these, three have been successful. One of the successful bids was a twenty-four guest-room extension to an existing budget hotel and this project has been completed. A further two projects are currently under design.

6.

Of these, how many used a form of modular construction?

The interviewees experience of construction was entirely with his current firm; therefore all projects had been modular.

7.

What do you perceive as the arguments for applying modular construction to the budget hotel sector?
For budget hotels in the fifty guest-room range there are time and cost savings to be made by using modular construction. The interviewee believes that at this number of guest-rooms the time and cost savings equate to approximately 10% each when compared to traditional construction methods. As the number of guest-rooms increases above this level the cost and time savings increase at an exponential rate. At two hundred rooms the savings should be approximately 15% of cost and 3540% of time. At five hundred rooms the savings should be approximately 20-25% of cost and 50% of time. Budget hotels are particularly suited to modular construction as there are less large, open areas such as restaurants. A greater proportion of the hotel is made up of identical, module-sized guest-rooms.

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Appendix 6

Interview Transcript - Manufacturer

8.

What do you perceive as the arguments against applying modular construction to the budget hotel sector?
Certain budget hotel floor-plans do not lend themselves to modular construction. For example the interviewee was asked by a contractor to conduct an appraisal on a budget hotel project that was based on a triangular floor-plan. The regular rectangular shape of the typical module meant that the project was far more suited to a traditional in-situ method of construction. Large, open areas are problematic for the modular system. The modules form the superstructure of the building and therefore a minimum of twothirds of each wall must be closed-in to provide support and rigidity to the module. Any open-plan areas therefore must be constructed traditionally on-site from either a concrete transfer structure or a steel portal frame. Provided that the floor-pan configuration is a relatively regular geometric shape, the interviewee can think of no reason why modular construction should not be applied to the construction of budget hotel guest-rooms. The interviewee perceives many parties in the construction industry as being unnecessarily risk-averse and this may inhibit use of modular construction because it is innovative and less well-understood than traditional on-site construction methods. The interviewee believes that parties to construction projects are individually risk-averse, but become more risk-averse when operating within the project team environment. The interviewee believes that this is especially true of the UK construction market and that overseas construction markets tend to be more openminded and accepting of innovative methods. The interviewee believes that parties to UK construction projects such as architects are disinclined to use cheaper construction methods as their fee is based on a percentage of the construction cost.

9.

What do you perceive are the most common risks associated with using modular construction in budget hotel projects?
Risks fall into two categories: real and perceived. The risks of modules falling off a ship during transit, or of the ship sinking resulting in the loss of the entire consignment of modules are only perceived risks. In reality the risk of such disastrous events occurring is statistically so low that the insurance premium to cover these risks is negligible. The real risk is of encountering adverse weather conditions leading to a delay in delivery or damage in transit. The risk of water leaking and flooding the compartmentalised building is a real risk. The interface between the modules and the traditionally constructed elements presents a risk in terms of the demarcation of responsibility. Dimensional tolerance is a real risk. If modules are manufactured too large or too small the error is multiplied many times because of the large number of modules used on a budget hotel building. On projects that require a large number of modules there is a sequencing - 92 -

Appendix 6

Interview Transcript - Manufacturer

risk. Modules must arrive to site in a strict order to ensure that modules are erected in the correct sequence. As the number of modules increases so does the risk of an error in sequencing. A significant increase in demand could result in scheduling problems. Outsourcing manufacture to the shipping container firm ensures that manufacturing high volumes in not problematic. However the quality of service may suffer if demand increased rapidly in a short period of time and there were suddenly ten different global projects to co-ordinate. On-site erection of modules may be delayed under severe weather conditions. Strong winds would certainly prevent modules from being craned into position.

10.

Which risks do you perceive as the most likely to occur?

The most likely occurrence on early projects is a problem with the interface between the modules and the external cladding that is carried out by another subcontractor.

11.

Which risks do you perceive as potentially having the greatest impact?

A significant increase in demand could lead to the quality of service suffering. This would have a very damaging impact on the manufacturer as it is an embryonic business attempting to enter a highly competitive market.

12.

Can you give specific examples of risk management strategies that have been applied to modular construction in budget hotel projects?
The manufacturer carried out an exercise in conjunction with their insurers to identify all possible risks to the operation. For example a strike at the manufacturing facility, a module falling off the ship during transit, a shortage of a key component or material, etc. There is always the chance of something unforeseen occurring so the manufacturer and contractor usually include a risk allowance in their bid to limit the financial effect of such occurrences. Clients are taken to the overseas manufacturing facility in order to increase knowledge, understanding, and familiarity. The aim of this is to identify and address any of the clients concerns or perceived risks. Modules are manufactured by a large firm in China that specialises in the manufacture of shipping containers. This allows the module manufacturer to benefit from the extremely low tolerances achieved by the shipping container manufacturers operation. On a module that is 14m in length the tolerance will be approximately +/- 2mm. This reduces the risk of modules being manufactured too large or too small. Every module incorporates a unique radio-frequency tracking device to assist in accurate sequencing. This reduces the risk of delivering modules to site in the wrong order or erecting modules in an incorrect sequence. Although the risk of a module falling of a ship during transit is remote the - 93 -

Appendix 6

Interview Transcript - Manufacturer

manufacturer has set up an agreement with a UK based firm to manufacturer a single module or small number of modules at short notice if required. The manufacturer would pay a premium for this service but this would be covered by an insurer. Nevertheless the additional cost would be justified by avoiding the potential impact of having to wait for a replacement module to arrive from China. All modules are inspected internally and externally by an independent third-party to ensure that quality control is of a high standard. The thirdparty inspection is carried out by Lloyds Shipping, who are extremely wellrespected and have an excellent reputation. This reduces the risk of poor quality and increases the confidence of all parties. An external inspection carried out by a third-party is mandatory for all containers entering the global shipping container network. The manufacturer voluntarily uses the same third-party inspector for the internal inspections to ensure that the quality control system is conscientious and impartial.

13.

Can you give specific examples of how the risk management strategies were successful or unsuccessful?
Undertaking the first UK project on a small scale allowed the manufacturer to trail their system under a reduced level of risk. On the first UK project to use the system the contractor was concerned that the modules would arrive on site too early and asked the manufacturer to delay shipping by two weeks. The manufacturer obliged but this resulted in the delivery being pushed into a season of more adverse weather conditions. The delivery was therefore held up by a further week by a typhoon in the South China Sea. As a result of the adverse weather one of the modules was dropped on a lifting pin and had its steel base penetrated. However there was no water ingress during transit and the module was still perfectly fit for use. A second module was rammed, resulting in minor cosmetic damage to its external steel frame. There was no damage to the module internally whatsoever. Both incidents actually demonstrated the robustness of the shipping container modules.

14.

What factors do you believe contribute to the successful or unsuccessful management of risk?
Experience is important to successfully managing risk. As the manufacturer carries out more and more projects and their experience grows they will become more aware of the risks and therefore become more effective at the management of risk. With hindsight the manufacturer would not agree to late changes to delivery dates without first ensuring that this does not result in the delivery being pushed into the typhoon season.

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Appendix 6

Interview Transcript - Manufacturer

15.

In your experience of using modular construction on budget hotel projects, has the level of formal risk management been appropriate?
To date the manufacturer has only had to manage a small number of projects at any one time. The level of risk management has been appropriate to the level of activity in which the manufacturer has been engaged. However the firm is aiming to increase its demand significantly in the future. The risk profile of the operation would therefore change and the risk management strategy would need to be reviewed accordingly.

16.

What do you consider to be your personal role in the risk management process?
Management of all risks relating to manufacture, quality control, logistics, and installation. The manufacturer has an important role but believes that they would still be subcontracted to a management contractor. Identification of the concerns and fears of the other parties to the project with regard to perceived and actual risk, and responding to these fears accordingly.

17.

What do you consider to be the other key project members roles in the risk management process?
The structural engineer has a crucial role to play in designing the transfer structure that forms the ground floor/lower floors and supports the modules.

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Appendix 7 Interview Transcript Cost Consultant

1. 2. What is your current job title?
Partner in charge of Hotels Specialist Group

How would you describe your current role?

Co-ordinates a team of twelve cost consultants specialising in providing professional advice to hotel project clients, advising on developing costplans, setting budgets, value-engineering, procurement, forming contracts, etc.

3. 4.

How long have you been in your current role?

Eight years

How would you describe your career path to date?

Have been in Cost Consultant/Quantity Surveyor role for the last twentytwo years, with current employer for twelve years and previous employer for ten years. Have always been involved in advising on the hotel sector.

5.

How many budget hotel construction projects have you had significant involvement with?
Approximately thirty to thirty-five

6. 7.

Of these, how many used a form of modular construction?

Over 90% - bathroom pods

What do you perceive as the arguments for applying modular construction to the budget hotel sector?
Modular construction should be quicker than traditional construction methods, particularly giving shorter on-site periods. This may result in a saving on preliminaries costs. Clients should achieve a better quality of finish and greater consistency of quality. The interviewee believes that as long as a detailed risk assessment has been carried out at an early stage and the project is suitable for modular construction, this should actually reduce the risk profile of the project.

- 96 -

Appendix 7

Interview Transcript Cost Consultant

8.

What do you perceive as the arguments against applying modular construction to the budget hotel sector?
Interviewee does not believe there is any data to suggest that modular construction is cheaper than traditional construction methods, therefore cost should not be a driver of using modular construction. The benefits of better and more consistent quality may not be achieved unless the rooms can be fully finished and sealed without requiring access until the hotel is complete. If the specific method of modular construction requires other trades to enter the module in order to carrying out finishing works after installation, this can cancel out any quality benefits. Unless the client can generate a certain volume of demand, they are unlikely to see the full benefit of modular construction. It is likely to actually be uneconomical if the individual hotel or the clients building programme is below a certain scale. The interviewee feels that city-centre sites may be unsuitable for full modular construction of guest-rooms due to the size of the modules. Particularly tight sites may have restrictions imposed upon them by the local authority with regard to the size of vehicle that can deliver to the site.

9.

What do you perceive are the most common risks associated with using modular construction in budget hotel projects?
In the interviewees experience, other trades often had to enter installed modules to carry out finishing works such as tiling, plumbing, etc. and this resulted in damage to the modules. Therefore the risk of poor quality is increased unless modules are fully-finished internally. The interviewee regards tolerances as a major risk in the use of modular construction. The interviewee cited one example where modules had to be delivered to site and installed on a smooth, level, power-floated slab, with a very low tolerance of variance in level. However the slab was not quite within tolerance and the programme was adversely affected by having to carry out remedial works on the slab. Most modules would be designed to sit on a smooth, flat surface so as to equally distribute its load across the slab. If the module is placed on an uneven surface it will distribute its load through points, and the slab may not be sufficiently strong enough to take the concentrated point loads. If modules are stacked to create a multi-storey structure the modules at the very top do not have to bear any significant load. However the modules at the very bottom have to be sufficiently strong to bear the weight of all the storeys stacked upon it. Modules are usually all identical to achieve economies of scale; therefore the modules towards the top of the structure are strong enough to bear a far greater weight than is actually imposed upon them. Multi-storey modular buildings therefore have a real risk of being uneconomical, with a significant amount of the strength within the structure serving no purpose and going to waste.

- 97 -

Appendix 7

Interview Transcript Cost Consultant

10.

Which risks do you perceive as the most likely to occur?

In the interviewees experience modular budget hotel projects tend to be let under a lump-sum design and build form of contract, where the Architect is novated to the contractor, but the Structural Engineer and M&E Services Engineer have only developed outline proposals and are not novated. This invariably leads to the contractor taking on a design brief that is not comprehensive, which allows them to either cut corners and sacrifice quality in order to reduce costs, or claim for additional costs.

11.

Which risks do you perceive as potentially having the greatest impact?

A poor system of quality control, resulting in the wrong size of modules arriving to site, or the in-situ constructed elements being unsuitable, would have disastrous consequences for the project.

12.

Can you give specific examples of risk management strategies that have been applied to modular construction in budget hotel projects?
In terms of tolerances, common areas or traditionally constructed areas can be used to get over miscalculations on module size. For example if modules are slightly too wide, this extra width is multiplied every time a module is placed next to another. The total additional width could be counteracted by reducing the size of a stair core, unless the additional width was too great. The interviewee would carry out a detailed risk assessment as early as possible, in order to establish whether the site and building is actually suitable for modular construction. Following the appointment of the project team the cost consultant holds risk workshops with each of the project team members, preferably as a group but possibly individually, in order to formally identify all the risks to the project and apportion responsibility accordingly using a risk register. Quality control systems and procedures with a number of formal, recorded stages should minimise the risk of modules that are the incorrect size being delivered to site. An appropriately worded contract can apportion a great deal of responsibility for this risk onto the contractor or module manufacturer, but all members of the project team still have a role to play in terms of quality control.

- 98 -

Appendix 7

Interview Transcript Cost Consultant

13.

Can you give specific examples of how the risk management strategies were successful or unsuccessful?
In one example the modules were delivered to site before many of the internal finishes had been completed. This was because the modules had to be on site by a certain date to allow the external cladding to progress, but the module manufacturer had not completed the internal finishes on time. The decision was therefore taken to install the modules unfinished, and finish them on site. This resulted in a lower standard of quality than would have been achieved in the factory. In another example when the modules began to be delivered to site it was found that the slab they were to be placed upon was below the acceptable tolerance in terms of the variance in level. The project therefore suffered delays due to remedial works being carried out to the slab.

14.

What factors do you believe contribute to the successful or unsuccessful management of risk?
The most critical factor to successful risk management is identifying the risks in the first place. The interviewee points out that many buildings are constructed without any major problems, despite not having carried out any formal risk identification or management strategies. However if something does go wrong you will be far better prepared having implemented a formal risk management process. Not having the appropriate checks and balances in place from the earliest stage means that risks may not be identified and therefore not be managed correctly. If quality control procedures are not clearly planned and implemented, problems may go unnoticed until it is too late to rectify the problem without adversely affecting the project. In the interviewees opinion, because budget hotels operate at the end of the market where costs are tight, very often risks are off-loaded on paper on these type of projects, rather than actually being managed correctly by having the appropriate people involved. Addressing any problems, queries or questions as early as possible and in the pre-contract stage will reduce the likelihood of surprises or additional costs in the future. Once a contract has been agreed and formed the contractor and module manufacturer are in a position of greater bargaining power with regard to the cost of additional items. The interviewee believes that the greater the level of risk on a project, the more beneficial tools such as risk registers become. For example a budget hotel project using traditional construction methods on a Greenfield, out-of-town site would see less benefit than a tight, city-centre site using an innovative construction method. When holding a risk workshop it is vital to have the necessary people present, i.e. those who have sufficient knowledge of the project and decision-making power. It is also important to have their undivided attention for the duration of the workshop, until all parties are satisfied that they have satisfactorily covered every likely eventuality. Interruptions and absences will have a detrimental affect on the outcomes of the workshop. - 99 -

Appendix 7

Interview Transcript Cost Consultant

15.

In your experience of using modular construction on budget hotel projects, has the level of formal risk management been appropriate?
The interviewee feels that you can never have too many controls in place but these must be balanced against the cost of implementing controls. There will be a minimum efficient level beyond which the benefits gained from implementing formal risk management are outweighed by its cost. With a new method of building the level of formal risk management required will be high. As the level of knowledge and experience of a given method of building increases, there will be less risk and therefore less benefit to be gained from a formal risk management process.

16.

What do you consider to be your personal role in the risk management process?
As a cost consultant, the interviewee views his own role as being primarily concerned with risk related to the cost of the project. The interviewee believes it is his job to increase cost certainty by accurately forecasting the cost early on, and ensuring that the cost does not spiral out of control as the project progresses. This involves ensuring that a good quality of information is produced at an early stage, and subsequently used in the tender process in order to minimise the uncertainty of the contractors who are tendering. Upon receipt of tenders the cost consultant must ensure that any queries or qualifications are answered prior to agreeing a contract in order to prevent additional costs in the future. Although the interviewee questioned whether it was actually in a cost consultants remit, he suggested that he might comment on the quality of the information and whether it was sufficient to send out for tender.

17.

What do you consider to be the other key project members roles in the risk management process?
Every member of the project team has a risk management responsibility; however in the interviewees experience clients rarely get a water-tight set of appointments. Very often there is ambiguity concerning the responsibility for managing a particular risk, and consequently the risk is either not properly managed, or the client incurs additional cost by instructing someone to give it their attention. A frequent example is underground drainage. There is often confusion as to whether this falls under the remit of the Structural Engineer or the M&E Services Engineer. There may be similar problems with guest-room modules if the module manufacturer has design responsibility for the M&E Services within the module, and a separate M&E Services Engineer is responsible for designing the services in the main building. It may be unclear who is responsible for designing the interfaces, or they might each design systems which are not compatible.

- 100 -

Appendix 8
1. 2.

Interview Transcript Project Manager

What is your current job title?

Partner in charge of Hotels Division

How would you describe your current role?

Co-ordination of a team of twenty-four professional project managers and quantity surveyors providing expert advice to clients undertaking construction projects in the hotel sector.

3. 4.

How long have you been in your current role?

Fifteen years

How would you describe your career path to date?

Started career in the field of quantity surveying and attained the MCIOB professional qualification. Later moved into project management at a time when project management was a relatively new and unheard of discipline. Founded a stand-alone project management firm that was effectively a division of one of the big London-based consultancies. In 1997 the firm was brought under the full ownership of the LLP

5.

How many budget hotel construction projects have you had significant involvement with?
Historically the interviewees firm have avoided involvement in the budget hotel sector as it is more difficult to add value in the sector due to the tight margins. However as the budget hotel sector becomes increasingly important to the hotel industry the interviewees firm is beginning to be drawn into the sector. The interviewee has been involved in three projects that are now complete and is involved in a fourth project that is currently in the design phase.

6.

Of these, how many used a form of modular construction?

All have used bathroom pods. The interviewee has been involved with a significant number of hotel projects outside of the budget sector that have used bathroom pods. The interviewee has not been involved in any projects to use full modular construction of guest-rooms but recognises that this is the next big challenge for the construction industry and the budget hotel sector.

7.

What do you perceive as the arguments for applying modular construction to the budget hotel sector?
Full modular construction of guest-rooms should result in budget hotels being brought to market far quicker than is possible using traditional construction methods. The risk profile of the project should be significantly reduced at an earlier stage than is typical with traditional construction methods.

- 101 -

Appendix 8

Interview Transcript Project Manager

8.

What do you perceive as the arguments against applying modular construction to the budget hotel sector?
The interviewees firm has developed cost models for applying modular construction to budget hotels that suggest that costs are higher in comparison to traditional construction methods. Therefore use of modular construction should not be cost driven.

9.

What do you perceive are the most common risks associated with using modular construction in budget hotel projects?
Modular construction changes the way that people have to think about projects. Clients have to make decisions far earlier than they would if traditional construction methods were used because although time on site is shorter, lead times are longer. The whole process is more condensed therefore decisions generally have to be made earlier and pressure on all parties is greater. Use of an overseas-based modular construction firm creates uncertainty in terms of corporate social responsibility. The client has less certainty with regard to the quality of working environments, the use of child-labour, the use of sustainable materials, and the impact of the facility on the local environment. The embryonic stage of the overseas modular construction industry means that poor quality control and non-conformance with either the budget hotels brand standard or UK Building Regulations are significant risks. Use of an overseas manufacturer increases the risk of a language barrier and associated communication problems.

10.

Which risks do you perceive as the most likely to occur?

The overseas modular construction industry is currently in an embryonic stage of development therefore risks concerning corporate social responsibility have yet to be addressed. The interviewee feels that this type of risk is the most likely to cause problems for the budget hotel brands at this stage of the product life cycle.

11.

Which risks do you perceive as potentially having the greatest impact?

Unable to answer the question

- 102 -

Appendix 8

Interview Transcript Project Manager

12.

Can you give specific examples of risk management strategies that have been applied to modular construction in budget hotel projects?
Developing long-term relationships with project team members and creating a stable supply chain reduces uncertainty, increases familiarity and therefore reduces risk. Using UK-based suppliers and modular manufacturing firms increases costs due to higher labour rates. However the additional cost may be outweighed by the greater certainty of quality and confidence of the client in the suppliers commitment to corporate social responsibility. Furthermore the use of a UK-based supplier decreases transport costs and reduces risks associated with long-distance transit. The interviewee has worked with a module manufacturer that employs the BRE as an independent third-party inspector. This increases the confidence of all parties that high standards of quality are achieved and Building Regulations are met.

13.

Can you give specific examples of how the risk management strategies were successful or unsuccessful?
Unable to answer the question

14.

What factors do you believe contribute to the successful or unsuccessful management of risk?
All parties to the project must be committed to the use of modular construction. In order to do this the concerns of all parties relating to the risk of using modular construction must be identified and addressed prior to the decision being taken to proceed on that basis. Certain consultants may have to accept that they will make a smaller fee percentage on each project before they commit to the project. Experience is important as this allows parties to learn from what works successfully and what goes wrong.

15.

In your experience of using modular construction on budget hotel projects, has the level of formal risk management been appropriate?
In the interviewees experience the parties to budget hotel projects have traditionally acted with a high degree of caution with regard to risk-taking. The interviewee feels that the commercial nature of budget hotel projects justifies this approach.

16.

What do you consider to be your personal role in the risk management process?
A project managers role is to bring a balanced and objective view to decision-making and advise their clients with the benefit of a far greater level of knowledge and experience. The module manufacturers are trying to stimulate demand for their product and have therefore highlighted the benefits that their systems can offer hotel clients. The project manager must bring balance to the clients decision by highlighting both potential risks and benefits in order to ensure that an informed decision is made. - 103 -

Appendix 8

Interview Transcript Project Manager

17.

What do you consider to be the other key project members roles in the risk management process?
The traditional members of design team such as architects and engineers have a lesser role to play on modular construction projects as the module manufacturer takes a prominent and vital role. Therefore there has naturally been resistance to the use of modular construction from certain sections of the construction industry as they see their fees under threat. This may result in clients receiving less balanced, impartial advice from certain professions in the construction industry. On a modular construction project the architects role is reduced to designing external cladding. This is exacerbated by the fact that budget hotels typically have strict brand standards to internal specifications and design is often virtually complete even before a project commences.

- 104 -

Appendix 9
1. 2.

Interview Transcript Client A

What is your current job title?

Director of Construction

How would you describe your current role?

Supervises the delivery of new hotel construction, extensions to existing hotels and conversions of acquired existing hotel buildings to meet brand standards. Head of Facilities Management for entire portfolio. Assisted by four in-house Project Managers, four in-house Facilities Managers, and a wider team of external out-sourced consultants for Project Management, Quantity Surveying, Architecture, Facilities Management and Health & Safety.

3. 4.

How long have you been in your current role?

Two years

How would you describe your career path to date?

Commenced career as Architectural Technician. Moved to work in Property Maintenance for a major high-street bank in 1987 and stayed in this role for eleven years, during which time qualified as a Chartered Building Surveyor specialising in Project Management. Moved on to become Head of Design and Construction for a major fast-food chain in 1998, until head-hunted in 2004 by one of the big three firms in the budget hotel sector to become their Head of Construction.

5.

How many budget hotel construction projects have you had significant involvement with?
6500 new guest-rooms, equating to approximately 80 new hotels

6.

Of these, how many used a form of modular construction?

Only one of these used full modular construction of entire rooms, a 20 guest-room extension to an existing hotel. Virtually all of the remaining projects used modular construction in the form of bathroom pods.

7.

What do you perceive as the arguments for applying modular construction to the budget hotel sector?
Increase the speed with which new hotel openings can be delivered through a reduction in on-site programme time. Ideally a reduction in overall cost should be achieved. Quality should be improved through greater consistency achieved by carrying out work in a controlled environment, with a greater ability to implement quality control, an opportunity to reject rooms that do not conform to required standards. Would ideally like to build up a stock of completed guest-rooms that are known to conform to the required quality standards, to be called off as and when required on site. In reality this is unlikely as there is an increasing trend for Client A to not actually construct its own hotels. More commonly a private developer finances and constructs the new hotel (supervised by Client A to ensure brand standards are adhered to) and subsequently leases the building to the hotel operator. Client A therefore does not invest any of their own cash in actual construction work.

- 105 -

Appendix 9

Interview Transcript Client A

8.

What do you perceive as the arguments against applying modular construction to the budget hotel sector?
None. Definitely the way forward for the budget hotel industry, many competitors are also already using modular construction methods. The technology is already in existence and can relatively easily be adapted for use in the budget hotel sector.

9.

What do you perceive are the most common risks associated with using modular construction in budget hotel projects?
Not setting an early design freeze creates a significant level of risk. Making late changes to design would jeopardise consistency of quality, and any potential time and cost benefits. The design must therefore be 100% completed prior to approaching the module manufacturer. The use of brand standards makes this simpler as the internal specifications must be virtually identical across the portfolio. Only the external specifications vary significantly across hotels as this is controlled by the local planning authority. A further significant risk is the size of the modules. There is a reduced margin for error with modular construction and there is a risk that if modules are too big they will not fit the site and can not be installed correctly. There is a significant risk of inclement weather preventing craneage of modules into position, which may result in deliveries building up in the surrounding roads and creating problems for neighbours. This may then result in the neighbours forcing restrictions on the time periods within which deliveries can be made.

10.

Which risks do you perceive as the most likely to occur?

Damage to modules in transit from the factory to the hotel site. Even using modules that incorporate two guest-rooms per module, this still involves fifty journeys for a 100-room hotel, which therefore means there is significant risk of something going wrong during transit. If a module is irreparably damaged this could result in significant delay to the project if the manufacturer doesnt have ready-made replacements which meet the required standard. When procuring modules from a foreign manufacturer this risk is significantly increased as the journey is longer. If all modules are transported on a single ship there is a risk of losing the entire hotel if the ship were to sink, and it is questionable how well equipped any manufacturer would be to recover from this type of incident. Even if the manufacturer were insured it would be highly unlikely that the programme would still be met.

11.

Which risks do you perceive as potentially having the greatest impact?

The complete loss of the entire hotel due to a ship sinking would have disastrous consequences for the project, even if a successful insurance claim were made.

- 106 -

Appendix 9

Interview Transcript Client A

12.

Can you give specific examples of risk management strategies that have been applied to modular construction in budget hotel projects?
Client A was not aware of the contractor employing any formal risk management strategy. Transferring the large, heavy modules from their transports and positioning within the hotel construction brought inherent risks associated with increased craneage requirements. Accordingly specialist craneage consultants were employed by the contractor to provide expert advice and reduce the risk of craneage. The module manufacturer had been keen to break into the budget hotel market so agreed to give Client A a guaranteed maximum price that was equivalent to the cost of constructing the hotel using traditional in-situ methods, and underwrite any additional cost. A design and build procurement route was selected and contracts were structured so as to apportion the majority of risks to the contractor. The module manufacturer was employed by the contractor as a subcontractor so Client A had singlepoint responsibility. Consequently Client A did not perceive that they were exposed to any additional risk due to the use of modular construction. Standard forms of contract have been and will continue to be used for the early projects. However the experience gained and lessons learned during the early projects may result in specific contract amendments or even bespoke contracts being drafted. The complex relationships between the various members of the project team means that standard forms may prove to be unsuitable. With bathroom pods all plumbing has been pre-tested, certified and pressurised, and designed to make connection as simple as possible a plug & play system. This means that there is no requirement for a skilled plumber to assist in the installation of the pod on site. Client A believes this simplifies installation and reduces the likelihood of anything going wrong during the on-site stage of the process. Similarly with full modular construction of guest-rooms all services such as plumbing and electricity are fully installed, tested and certified in the factory to ensure that any problems are identified prior to on-site installation, and negating the requirement for skilled electricians and plumbers on site. All services can be simply connected by an unskilled installer. All services are installed and tested to the relevant British Standards, Building Regulations, etc. wherever they are installed, whether this is in the UK or abroad. Client A is intentionally developing relationships with a number of module manufacturers in order to minimise their risk. Client A considers it prudent to develop a supply chain with a number of suppliers, both in the UK and abroad, using slightly different systems, in order to spread their risk, in terms of suppliers going out of business.

- 107 -

Appendix 9

Interview Transcript Client A

13.

Can you give specific examples of how the risk management strategies were successful or unsuccessful?
The extension project was Client As first that used full modular construction of guest-rooms; therefore the risks were significant due to the innovative nature and degree of uncertainty. However the project was completed on time, within budget, to the required standard of quality and without incident with regard to safety. Client A therefore feels that the level of risk management was both appropriate and hugely successful. The modules used on the extension project had actually been originally manufactured for a different extension project. However upon delivery to site it was found that the modules were too tall and would have resulted in a step in the roof-line between the existing building and the extension. The local planners would not accept this and as a result the modules had to be put into storage and the extension completed using traditional construction methods. This resulted in significant delay and additional cost to the project.

14.

What factors do you believe contribute to the successful or unsuccessful management of risk?
Employment of specialist consultants for particularly high-risk activities such as craneage ensured that the project had access to the necessary knowledge and experience to minimise risks as much as possible. The embryonic stage of the modular construction industry meant that Client A was able to transfer a great deal of risk onto the module manufacturer. Poor planning and a lack of co-ordination between project team members resulted in the modules being manufactured taller than was acceptable by the local authority on the earlier project. A lack of consultation with the local planners also possibly contributed.

15.

In your experience of using modular construction on budget hotel projects, has the level of formal risk management been appropriate?
Despite the absence of a formal risk management strategy Client A was more than satisfied that the level of risk management was appropriate to the level of risk presented by the project. Client A felt that risks were managed correctly and effectively, which increased confidence that the project objectives would be successfully met. However Client As next full-modular construction project will pose a different set of challenges as it is located on a high-profile site within a busy city-centre, next to a major transport interchange which operates 24 hours a day. The area is very built-up and has limited access. Accordingly the contractor and module manufacturer have liaised with local stakeholders to develop a strategy for managing the risk of delivering the modules to site. This includes setting a strict window of time within which deliveries must be made on a daily basis, and the selection of a larger and more efficient crane to ensure that modules are installed quicker, thus reducing the risk of deliveries bottle-necking out into the surrounding - 108 -

Appendix 9

Interview Transcript Client A

roads. On this project Client A will expect to see a greater level of formal risk management from the contractor.

16.

What do you consider to be your personal role in the risk management process?
The revised Construction Design and Management Regulations which come into force on 6th April 2007 will put greater responsibility on the client in terms of managing risks relating to Health & Safety. However as mentioned previously projects are typically led by private developers. Client A only has a supervisory role and therefore does not have a handson role to play in terms of risk management. However as Client A has been pushing the use of modular construction, the private developer has insisted that Client A takes on an element of the projects financial risk. In return Client A has the right to inspect and reject rooms and entire hotels if they do not meet the brand requirements or quality standards. Leaving this inspection until the modules are installed and the hotel is complete would create significant risk for the private developer, therefore Client A is obliged to travel to the module manufacturing facility and inspect the fullyfinished rooms prior to leaving the factory and confirm that they are acceptable, waiving the right to rejection once the hotel is completed.

17.

What do you consider to be the other key project members roles in the risk management process?
Client A does not believe that the project team should be different to that used with a traditionally constructed building. They would still expect to see an Architect, Cost Consultant, Structural Engineer, Services Engineer, Contractor, etc. carrying out the traditional risk management roles and responsibilities. However with the full modular construction of guest rooms Client A would expect a greater degree of formal risk management from all project team members due to the innovative nature of the construction method. This is likely to involve the employment of specialist consultants to advise on particularly high-risk activities such as craneage.

- 109 -

Appendix 10 Interview Transcript Client B

1. 2. What is your current job title?
Director of Projects Procurement

How would you describe your current role?

Ensuring that the hotel brand standards are adhered to through coordinating the design of new hotels, providing support to Architects, Franchisees and Developers, developing a supply chain. Involves inspecting and approving or rejecting hotels built by external developers for external franchisees.

3. 4.

How long have you been in your current role?

Six years

How would you describe your career path to date?

Have been employed in various roles concerned with design and construction in the hotel industry for the last twenty years.

5.

How many budget hotel construction projects have you had significant involvement with?
Approximately fifty with current employer

6.

Of these, how many used a form of modular construction?

All previous new-build projects have used bathroom pods, none have used full modular construction of guest-rooms to date. The only projects that have not used any form of modular construction have been existing office building conversions, where modular construction was not feasible and/or appropriate.

7.

What do you perceive as the arguments for applying modular construction to the budget hotel sector?
An improvement in quality, a reduction in time, but above all else a decrease in cost. For Client B the development of a supply chain relationship with module manufacturers gives a greater degree of control over quality and design as the module manufacturer will seek Client Bs approval of any change in design by the franchisee, however minor, prior to implementation. This is despite the fact that Client B is not actually directly building or operating the hotel themselves. Client B believes the argument for modular construction of bathrooms is very compelling and that inevitably full modular construction of guestrooms will become more common due to the potential benefits. Client B has sought out module manufacturers to construct prototype rooms, which has been successfully completed. Client B has approved the prototypes and is now actively marketing the modular construction method to its external developers and franchisees in order to make its franchise more attractive through lowering construction costs, reducing construction time and improving quality. Client B is aware that its competitors are also moving towards the full modular construction of guest-rooms and in particular one of its - 110 -

Appendix 10

Interview Transcript Client B

competitors has already completed an extension using full modular construction very successfully, demonstrating that this construction method is more than feasible.

8.

What do you perceive as the arguments against applying modular construction to the budget hotel sector?
Client B can see no reasons for not using modular construction on its projects unless the project is unsuitable for practical reasons, such as the conversion of an existing building where there is inadequate headroom between floor-slabs for modules.

9.

What do you perceive are the most common risks associated with using modular construction in budget hotel projects?
Client B feels that there are inherent risks in the use of an innovative construction method due to the lack of familiarity, knowledge and experience. The most significant risks are with regard to the physical transportation of modules from the factory to the hotel site and the installation of each module into the superstructure of the hotel, during which there is considerable risk of damage to the modules, and risks relating to Health & Safety. Client B recognises that in the early stages of implementing full modular construction there is likely to be greater risk compared to the traditional construction method, but this is part of the learning curve that must be experienced in order to ultimately see the benefit of modular construction in the long-term. Client B perceives quality control as an area of risk as it is not clear how this will be carried out and controlled. Full modular construction typically involves a module with a guest-room at either end, separated by a corridor section. As the corridor section has to be open, the floor and ceilings are not supported or stiffened by wall sections. Client B is therefore concerned that guests will experience a bouncing feeling as they walk along the corridors. Client B therefore feels that there is still significant risk in terms of the design of guest-room modules. Client Bs brand standards dictate that any hotel over seven storeys must incorporate a sprinkler system. It is unclear how this could be designed into a modular building. The design of public areas is an area of concern for Client B as these are open and are possibly not suited to modular construction. There is therefore an interface between the modular and traditionally constructed elements of the building that present considerable risk in terms of design and construction. For example Client B doesnt know how the modules on the upper floors would sit above the open-plan ground floor without having to incorporate a greater number of columns, which tend to be avoided in hotels if possible. Client B has been considering a modular system constructed abroad in China, but has misgivings concerning Corporate Social Responsibility. The budget hotel sector is very brand orientated and therefore cannot risk - 111 -

Appendix 10

Interview Transcript Client B

dealing with a firm who may be employing child labour, operating without adequate regard to Health & Safety, using unsustainable materials, producing unacceptable levels of harmful emissions, etc. Client B would need firm assurances on these and related matters. They would need to have full details of suppliers, and their suppliers suppliers, to ensure that they do not construct a hotel which subsequently receives high-profile criticism for poor Corporate Social Responsibility. With UK based manufacturers this is perceived as less of a problem as the manufacturer is more easily accessible and there are less potential barriers to effective communication. Client B feels that using UK based firms enables them to take a far more hands-on role and therefore gives them a greater degree of control over the manufacturer. I dont think theres any greater risk with modular construction than there is with on-site construction. What I do like about modular construction is that its clean construction, whereas on-site construction is dirty, messy, and you dont know whos doing what. With modular construction the pods arrive in a finished state, and have been constructed in literally almost clinical, factory conditions. Theres a lot going for it, I like it.

10.

Which risks do you perceive as the most likely to occur?

Problems associated with the design of open-plan public areas are most likely on early full modular projects. As aggregate demand for modular construction increases due to increased use in the budget hotel sector, and social housing, student accommodation and prison constructions, there is a significant risk of supply problems and lead-times will increase. This was seen with the supply of bathroom pods, and Client B believes it is highly likely that the same will eventually be seen with guest-room modules. This means that modules will have to be ordered far earlier to ensure delivery to site on time. Client B believes use of modular construction will dramatically increase in the near future, especially overseas manufacturers, but that the industry will become a victim of its own success and struggle to fill orders on time. Client B believes manufacturers have a dilemma as the industry is in its infancy and demand is relatively low, but huge investment is required in order to take advantage of the anticipated increase in demand. The manufacturers must take a risk and invest now in order to prevent supply problems in the future.

11.

Which risks do you perceive as potentially having the greatest impact?

Because Client B does not have direct control over the construction of the hotels, the greatest risk in terms of impact is related to the quality of finishes and the adherence to the brand standard of the hotel. A problem has previously been encountered where the standard of grouting of the wall tiles in the sample bathroom pod was very poor, causing Client B to reject the pod. However the Franchisee had already placed an order with the manufacturer for a large number of pods as per the sample pod. The hotel was subsequently completed but Client B refused to approve the opening of the hotel until all non-compliant pods were rectified, at the Franchisees expense. Fortunately the hotel was still - 112 -

Appendix 10

Interview Transcript Client B

able to open on time, but a dispute subsequently arose between the Franchisee and the module manufacturer over the cost of the remediation works.

12.

Can you give specific examples of risk management strategies that have been applied to modular construction in budget hotel projects?
Client B believes that modular construction does not necessarily carry greater risk than traditional construction methods, but the risk profile is different. Efforts should be made to minimise and/or avoid unnecessary risks as early as possible. This can only be achieved through close coordination and co-operation between all members of the project team. Design, design, design! Client B emphasised the importance of ensuring the design is correct before commencing with manufacture. This involves ensuring that detailed design information is issued for inspection and approval by Client Bs in-house Architect. This would include detailed specifications, plans, elevations and sections of the hotel building as a whole, but also of individual rooms and bathroom pods to ensure conformance with every aspect of the brand standard. Following approval of the design on paper, requesting the module manufacture to build a sample pod or room allows the client to inspect and approve conformance with the approved design in terms of the quality of construction and finish.

13.

Can you give specific examples of how the risk management strategies were successful or unsuccessful?
Recently a dispute has arisen with a developer who made significant changes to the design and specification of the internal finishes to the bathroom pods, and instructed the pod manufacturer to do so. Despite both parties being aware that any change, however minor, should be approved by Client B, the changes were made without approval. Client B subsequently became aware of the changes, which were not in accordance with the brand standard, and Client B was therefore not willing to sanction the changes. Client B is obviously not willing to bear the cost of bringing the pods back in line with the brand standard.

14.

What factors do you believe contribute to the successful or unsuccessful management of risk?
There were adequate control measures in place to ensure that no changes were made without the approval of Client B. This stipulation was made very clear to both the developer and pod manufacturer, so there was no doubt that they should have been aware of the procedure. Client B believes the only explanation for the unapproved changes is the inadequacy of the developer and manufacturers internal controls and/or lack of communication between the developer and pod manufacturer. Experience is very important. Client B now considers use of bathroom pods to be a virtually risk-free operation. However this is the result of a wealth of experience over a long period of time, during which Client B has developed a thorough knowledge and understanding of what is required to successfully manage bathroom pod design and construction. Client B feels that there will be a similar learning curve with full modular - 113 -

Appendix 10

Interview Transcript Client B

construction of guest-rooms. Communication is also very important. Client feels that the only significant problem they have experienced recently was due to a lack of communication between different members of the project team. Developing close relationships with suppliers and understanding each others systems is vital to the success of modular construction projects. This would include frequent communication during the design process, and visiting the factory to inspect the manufacturing process from a quality perspective. A lack of communication and poor relationship between members of the project team will inevitably lead to suppliers trying to cut corners, unacceptable levels of quality, lateness of delivery

15.

In your experience of using modular construction on budget hotel projects, has the level of formal risk management been appropriate?
Client B believes that the module manufacturer and contractors own internal quality control and construction risk assessments and method statements have been satisfactory in terms of identifying and mitigating all risks associated with manufacture, transit and installation.

16.

What do you consider to be your personal role in the risk management process?
Client B perceives non-conformance with brand standards and poor quality as the main risks to their business, therefore they take a very hands-on role in terms of design. Client B insists that the franchisee or developer must seek the clients written permission to change any aspect of the bathroom pod design or specification. For full modular construction of guest-rooms Client B intends to operate in an advisory role, developing a strictly controlled supply chain which the module manufacturer must adhere to, ensuring that the guest-rooms are produced exactly in accordance with the brand standard.

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Appendix 10

Interview Transcript Client B

17.

What do you consider to be the other key project members roles in the risk management process?
Design, design, design! Client B believes that the Architect has a vital role to play, must be involved early on, and must be able to produce detailed construction information for bathroom pods or guest-room modules far earlier than with traditionally constructed hotel projects. From Client Bs perspective, early production of information is vital to allow them the time to thoroughly inspect the information prior to approval. Client B would expect a detailed formal risk management document from the pod or module manufacturer, including risk assessments for all operations, method statements for manufacture and on-site installation, quality control procedures, etc. During their extensive use of bathroom pods Client B has received this level of information from the manufacturer. During their initial discussions with manufacturers of guest-room modules Client B has requested and received a similar document which is satisfactory. However when a project goes live it will be reviewed and may result in a greater level of detail in terms of risk management being requested from the manufacturer.

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Appendix 11 Interview Transcript - Architect

1. 2. What is your current job title?
Architectural Designer

How would you describe your current role?

Employed by a contractor to produce their construction drawings on design and build projects. The contractor is the part-owner of a specialist module manufacturer which is a joint venture with a firm of structural engineers. The interviewee is employed by the module manufacturer to take a potential clients existing outline building design and assess its suitability for modular construction. If the conclusion is that the building is suitable the interviewees role is to adapt the existing design to show a modular construction. This involves production of construction drawings for the module manufacturer to use in the design and construction of their modules.

3. 4.

How long have you been in your current role?

Three years

How would you describe your career path to date?

Worked for an architectural practice for seventeen years and was primarily involved in budget hotel projects. Progressed to Associate level before being head-hunted by a contractor to head up their in-house architectural practice.

5.

How many budget hotel construction projects have you had significant involvement with?
Approximately one hundred at inception stage. Of these only approximately forty have progressed to full design and construction.

6.

Of these, how many used a form of modular construction?

All have used modular construction in the form of bathroom pods. The interviewee has been involved in three projects that have used full modular construction of guest-rooms. The first of these used a skeletal steel frame with timber stud walls, floors, and ceilings. The second used a container system constructed entirely from steel. The third project will also use the steel container system but is currently only at design stage.

7.

What do you perceive as the arguments for applying modular construction to the budget hotel sector?
The greatest advantage over traditional construction methods is the speed of construction. The interviewee believes that the priority of budget hotel clients is to open the hotel as soon as possible in order to generate revenue. Full modular construction allows the client to achieve this far quicker than with traditional construction methods.

8.

What do you perceive as the arguments against applying modular construction to the budget hotel sector?
Lead-in times are currently sixteen weeks for bathroom pods due to the huge levels of demand. Ordering so far in advance may cause a problem for some clients. - 116 -

Appendix 11

Interview Transcript - Architect

The guest-room modules are manufactured in a well-established facility in China that manufactures shipping containers. The facility operates on a massive scale so lead-in times are unlikely to become a problem in the future even if demand for guest-room modules increases dramatically. The interviewee can therefore not think of any reasons for not applying modular construction to the budget hotel sector. The technology may be less applicable to the non-budget sector because guest-rooms are not of a uniform design to the same extent as seen in the budget sector.

9.

What do you perceive are the most common risks associated with using modular construction in budget hotel projects?
The steel container modules are constructed in China and shipped for use in the UK. This means that the modules are constructed under a different set of atmospheric conditions to that of their final location. There is a risk of materials and adhesives reacting to the change in conditions during shipping or once delivered to site. The long transport route increases the risk of delay caused by poor weather. Because the modules are shipped such a great distance there is a significant risk of delay caused by bad weather and similarly there is a risk of losing the entire hotel if the ship were to sink. The construction and installation of modules will almost certainly always be on the critical path of the project programme, therefore any delay associated with the modules will result in a delay to the project. On the first project to use the steel containers shipped from China the shipment was delayed due to a typhoon in the South China Sea. This resulted in the delivery being delayed for a week. Because the modules are manufactured in China there is a concern over human rights and the quality of working environments. There is also a risk of an error in communication of vital information caused by the different language and culture.

10.

Which risks do you perceive as the most likely to occur?

Because of the long transport route the interviewee identifies delay as the most likely risk. There are many different potential risks during transit all of which could result in a delay to delivery. The importance of the modules to overall project programme means that any delay in delivery would undoubtedly result in a delay to project completion.

11.

Which risks do you perceive as potentially having the greatest impact?

The worst case scenario would be for a ship to sink resulting in the loss of an entire consignment of modules. The interviewee estimates that there would be an eight week delay to project completion if this were to occur.

12.

Can you give specific examples of risk management strategies that have been applied to modular construction in budget hotel projects?
The client of the interviewees first fully modular project has retained the same project team for the second project to use the system. The architect, engineer, contractor and manufacturer from the first project are all - 117 -

Appendix 11

Interview Transcript - Architect

involved in the second project and the interviewee believes that the intention is to use the same team for the next few projects that use the container system. This will allow the project team to develop more longterm relationships and hit the ground running on subsequent projects. Because the full modular construction of guest-rooms is an innovative construction method the project team are not designing modules to be fully-finished internally from the outset. The project team are gradually building up the extent of internal finishing carried out off-site. For example the first project used modules that were simply lined with plywood. The modules therefore needed to be fitted out and decorated once delivered to site and also required separate bathroom pods to be installed. The second project will go a stage further and carry out plasterboard lining offsite. The next project would then go another step further and carry out plastering off-site, and so on. This allows the project team to gain experience in an incremental way and limit the amount of risk exposure on each project. The speed of on-site construction should gradually increase as more and more work is performed off-site. Modules are thoroughly inspected prior to shipping so that any problems with quality are identified early and prior to delivery. The interviewee and other members of the project team are conducting research on various materials to ensure that the risk of damage during transit is minimised. For example the project team are working to identify grouting compounds that are flexible and therefore react better to being transported. The module manufacturer actually contracts with a shipping container manufacturer to construct its modules rather than incur the risk and expense of setting up a manufacturing operation. Using shipping containers means that the module manufacturer can take advantage of a well-established global infrastructure rather than setting up its own logistics operation. This also means that the modules can be stored at one of many shipping container ports in the UK for a relatively low cost. The use of shipping containers means that the modules are protected from the weather during transit. The interviewee points out that the steel framed modules with timber stud walls used on his first modular hotel would not have been transportable as they were not inherently weathertight like a shipping container. Furthermore the shipping container is far more rigid than the steel framed module therefore it is less likely to twist or warp during transit. The construction of all shipping containers is carried out with the guarantee of a two millimetre tolerance. This is underwritten by Lloyds Shipping. The containers must be manufactured to such a low tolerance in order to ensure that each container only takes up a certain amount of space on the ship. The use of shipping containers therefore gives the project team a greater degree of certainty with regard to the accuracy of manufacture. With timber frame construction the equivalent tolerance is a far greater: plus or minus ten millimetres.

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Appendix 11

Interview Transcript - Architect

All shipments are insured against loss or delay caused by a number of potential factors. The interviewee performs a design risk assessment on every project to identify design risks as early as possible. The interviewee will then carry out his design with consideration to avoiding or minimising risks. For example the modules must be locked together to give the structure rigidity. The interviewee therefore designed a steel plate to be fixed externally in order to hold the modules together. The first project using the steel container system was only a two storey structure which allowed operatives to fix the plates from a scaffold after the modules had been stacked. However the second project will be a nine storey structure so the interviewee has designed a temporary bolting system to be fixed from inside the modules. This will allow the modules to be temporarily held together until the structure is completed. A scaffold can then be erected to allow operatives to fix the permanent steel plates to the outside of the structure. In order to reduce the risk posed by the language barrier the module manufacturer sends one of its own English-speaking staff to supervise the actual off-site fabrication work in China. The delay to the first project caused by the typhoon has resulted in a contingency being built into the delivery times. The deliveries are now scheduled to include a two week holding period once the containers reach the UK port. The containers can simply be stored at the port with all the other shipping containers until they are required on site.

13.

Can you give specific examples of how the risk management strategies were successful or unsuccessful?
The first project to use the steel container system was a trial of the system on a relatively small scale. The project was only a twenty guest-room extension of an existing hotel. This allowed the project team to identify many of the projects risks prior to using the system on a much larger scale. As a result of this trail the interviewee was able to identify the need to develop a temporary bolting system to hold the modules together until the structure was completed. Accordingly the interviewee has developed such a system so that on the next project operatives will be able to use a much safer system of work in bolting the modules together. The interviewee has effectively eliminated the risk to operatives safety that was posed by having to work on the outside face of a structure that was still under construction. The operatives can temporarily bolt the structure together from inside and subsequently apply permanent fixings to the outside when the structure is complete.

14.

What factors do you believe contribute to the successful or unsuccessful management of risk?
The interviewee feels that it is essential to have the right team in place from the outset. It is also vital that the team works effectively and cooperatively from the beginning. With a project of this nature the design has to be developed to a more advanced stage of completion far earlier than on a typical traditionally constructed building project. Therefore the project team cannot afford to make a slow start and take time to develop good working relationships. - 119 -

Appendix 11

Interview Transcript - Architect

15.

In your experience of using modular construction on budget hotel projects, has the level of formal risk management been appropriate?
In a nutshell: yes. The interviewee feels that the design risk assessments and project team meetings have been sufficient to identify risks and develop management strategies accordingly.

16.

What do you consider to be your personal role in the risk management process?
As project designer the interviewee has a vital role to play in identifying risks early and designing the building in order to minimise or avoid the risks.

17.

What do you consider to be the other key project members roles in the risk management process?
Although the interviewee will carry out his design with consideration to buildability and safe systems of work it is the responsibility of the contractor to safely manage the installation of the modules to form the buildings superstructure and any other on-site construction work. Craneage is a particularly high-risk operation due to the size of the modules. This must be planned and managed by the contractor. The project team must include a structural engineer to calculate loadings. This information is required by the architect when designing the modules because the modules themselves form the superstructure and are not supported by any other structure. The structural engineer must also design the foundations to transfer the load of the modules safely into the ground. If the ground floor level is to be open-plan it may be constructed using traditional on-site methods with the guest-room modules placed on top. If this is the case the structural engineer will need to design the secondary structure upon which the modules are placed such as a steel frame.

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