Prefabrication is a promising method for minimizing construction waste since it is conducted in a controlled environment. This paper develops a simulation model for quantitatively evaluating the potential of prefabrication on construction waste reduction by considering interaction behaviors among factors influencing the application of prefabrication and construction waste reduction during the design stage. The theory of planned behavior is applied to determine the system boundary, and a system dynamic model is applied for establishing the simulation model. A case project in Anhui, China, is selected for demonstrating the established model. Results show that the (1) Application of prefabrication method contributes to construction waste reduction by reducing material wastes and reworking due to design changes. (2) Impacts of prefabrication method on concrete waste reduction is the most significant. (3) Increasing investment on designers’ professional training and strengthening policies is two efficient strategies to make full use of the potential of the prefabrication method on construction waste reduction during the design stage. The developed model can offer designers as well as policymakers with references for applying prefabrication method for construction waste reduction by comparing outcomes under various scenarios with different strategies and policies ahead of implementation.