Dive Brief:

• Construction prefab startup Katerra, most recently valued at $3 billion, has reportedly experienced production-based delays, high executive turnover and design errors that could potentially derail its mission to revolutionize the construction process, according to The Information. The company has raised more than $1 billion from major investors like Foxconn and SoftBank Group Corp., but has yet to complete a major project using its end-to-end design, manufacturing and construction model.
• Current and former Katerra employees told The Information that there is a "lack of construction experience" at the executive level, which has supposedly seen managers across all disciplines come and go, and that "every day is a fire drill." The anticipated efficiencies of being able to prefabricate components of buildings have reportedly not materialized because the company has not yet been able to automate some construction processes such as installing windows in wall panels, which now have to be done manually. This has created delivery delays, and sources told The Information that some materials have been leaving the Katerra plant in Phoenix only to be returned unused because of errors made during manufacturing. Sources have also reported that the company has sent under-skilled workers to perform onsite building.  
• In response to some sentiment that the company should be focused on achieving a quality product rather than on expansion and acquisitions, Katerra chairman and co-founder Michael Marks told The Information that the firm is "doing great in all respects, growing revenue, increasing margins, breathtaking backlog, rapidly falling losses" and that the turnover is just part of a process that will "sort out who the long-term players are." Even so, some familiar with company operations said Katerra is trying to "hedge its bets" through side businesses including apartment renovations and selling China- and Mexico-sourced materials to developers.

Dive Insight:

The construction business is a tough one, even for companies that have a deep bench of experience in upper management. And once a business starts to falter in its quality output, it can be hard to convince customers to take a second chance. A very good sign, however, is that there are no reports that Katerra has fallen behind on payments to suppliers, employees or subcontractors. 

And for those that have the quality aspect of their construction business nailed down, fast expansion can present its own set of problems, particularly given the lack of available skilled labor. It takes most general contractors years of successful projects to build a reliable pool of subcontractors, therefore giving them access to the skilled workforce and trade-level expertise they need.

But a successful Katerra — and other companies like it — could eventually ease the industry's labor problems if it can overcome these hurdles, deliver on its business model and provide savings of time and money for owners.