The return of modular construction
Tough times in the construction industry have renewed interest in modular and off- site construction methods. Here are the key commercial and contractual risks that employers should look out for.
Modular construction dates back to the end of World War II, when a huge demand for new homes forced housebuilders to maximise the speed of construction projects by manufacturing houses in factories and assembling them on site. In today's market, it is rather less popular: a 2016 National House Building Council report found that the proportion of homes built with an element of offsite construction fell from 24% in 2008 to 16% in 2015.
The tide appears to be turning again. In October 2016, the Farmer Review (entitled "Modernise or Die – time to decide the industry’s future") focussed on the need to encourage "pre-manufactured" construction to make cost savings. The Government's Housing White Paper also sets out support for the efficiencies of off-site building, and developers including Berkeley, Crest Nicholson, Urban Splash and the NHS have also expressed interest in adopting these methods.
Modular construction has a number of commercial and social benefits. Manufacturing is undertaken within a controlled manufacturing environment, resulting in fewer work related injuries than work on construction sites. It also requires a highly skilled, permanent workforce, which provides new training and employment opportunities.
Construction projects employing modular construction carry a number of contractual risks for employers, especially regarding the storage of materials off-site. The general rule is that ownership of materials passes when the materials are delivered to site and/or incorporated into the works. However, many standard construction contracts state that ownership of materials passes to the employer when the goods are paid for. The employer is, therefore, at risk in relation to materials that it doesn't have physical ownership or control over.
A contractual solution can be to make evidence of the contractor or supplier's ownership of the off-site items a condition precedent to payment. Whether in the UK or elsewhere, a vesting certificate (or the jurisdictional equivalent) can stand alongside a construction contract setting out the employer's requirements on ownership, storage and insurance of the materials. Advance payment bonds can also mitigate the risk of non-delivery of modular construction materials.
Where a contractor or supplier becomes insolvent, the question of who legally owns the off-site materials becomes crucial. Contracts often deal with this by including requirements to clearly label and separate materials and to require the contractor to take out materials insurance for the benefit of the employer. Once materials have been delivered to site, the employer's all-risks insurance policy will also need to be updated to include them.
Employers engaging contractors and suppliers who use modular construction methods should ensure that their contract documents, prices and insurance requirements are drafted adequately to cover these risks.