The off-site trap (and how to avoid it)
Modular housing has existed for many years but it still remains relatively unpopular in the UK market, which is generally wedded to traditional construction techniques.
Perhaps due to the potential for improved energy efficiency, shorter construction programmes, lower labour demands and greater consistencies in the final product, this approach to project delivery is again gaining greater momentum and interest in the market.
So what are the key differences that developers (including those in the public sector) need to think about when considering delivery of modular housing rather than using traditional construction processes? Here are five things to think about.
Selecting a site and finding a contractor
Very few developers approach the contractor market in a way that encourages the use of off-site construction facilities. Developers fear that they are limiting the number of bidders who tender for the project when modular housing is required. This is not helped by the fact that modular housing has historically been considered to be more expensive to deliver than traditional housing, although this assumption is being challenged as technology improves and off-site construction becomes more prevalent.
It is important that developers understand the potential benefits and detriments of modular housing from a practical perspective and identify sites that may benefit from off- site construction, either for specific materials or the whole build. Approaching contractors at an earlier stage of the design process to procure a modular solution is something that many developers will consider a leap of faith.
The shorter construction periods with modular housing may also be appropriate for difficult sites where there are problems with access or a greater potential to cause nuisance. As the construction of modular developments can be much simpler, it can offer opportunities for smaller contractors to tender for larger projects and can enable a quicker, cheaper single-stage procurement. In short, modular housing may provide an opportunity for developers to build a property portfolio for sale or rent in a relatively short time scale on sites that may not be appropriate for traditional development.
Funding and insurance
The banking and insurance sectors do not offer a particularly extensive product range for modular housing and obtaining funding or insurance for modular houses can be challenging.
A number of organisations have developed products to give insurers and lenders comfort that off-site construction is a viable and secure process for delivering construction projects. For example the Buildoffsite Property Assurance Scheme (BOPAS) provides certificates assuring lenders of the quality and durability of key components. Schemes like these should help to build confidence in modular construction, allowing lenders and insurers to offer a wider range of competitively priced products for modular housing developers.
Developers are generally comfortable with the long accepted practice of making interim payments (either for completed work stages or periodically) for work done. This limits issues surrounding security of payment (as what is being paid for has already been delivered) and is also an approach that lenders are comfortable with. In contrast, the manufacturers of modular housing typically require a large part (if not all) of the cost of the pre-fabricated materials before work begins.
This puts the developer (and their funder) at risk in the event that the manufacturer becomes insolvent. This issue, however, also arises in traditional construction projects where certain materials may be subject to an advance payment before being delivered to site. The particular issue with modular housing is the scale of the risk as it may be the materials for the entire project that have been paid for in advance. Nevertheless, security documents such as vesting certificates, parent company guarantees and advance payment bonds can all be used for modular housing as required.
Ownership of materials
It is vital that any contract for off-site construction confirms the point at which legal ownership of the materials passes from the manufacturer to the developer. This should be no later than the date when they are paid for. This is important if the manufacturer becomes insolvent, because the materials should not form part of the assets to be divided amongst all unsecured creditors of the insolvent manufacturer. A vesting certificate could be used to confirm when ownership passes. Developers should not, however, treat the transfer of ownership as a comprehensive solution, mainly because there will be a host of practical difficulties to deal with. What use is it to a developer to own partly completed panels of a modular house? Can another manufacturer complete the job? How will the completed materials be transported to site? Who will complete assembly? As in any insolvency situation, achieving project completion may be complicated, time-consuming and expensive.
Health and safety legislation
The assembly of pre-fabricated buildings falls squarely within the scope of the Construction Design and Management (CDM) Regulations and, as such, developers of modular housing projects should ensure full compliance with the regulations including in relation to the appointment of a principal contractor and principal designer. Those appointed must have sufficient skill and experience in ensuring the delivery of modular housing projects in a safe manner.
The interesting element with regard to modular housing, is the extent to which the manufacturing process is subject to the CDM Regulations. Although the regulations include no specific reference to the manufacturing process, the principal contractor and principal designer will need to be appropriately informed of the design and manufacturing process to ensure the safe installation of the materials on site.