With the impact that rising labour and material costs are having on the costs of construction projects, many developers are looking to modular construction to mitigate the effects of the current market.

Modular construction (also referred to as ‘off-site construction’) can mean anything from small prefabricated elements such as bathroom ‘pods’ or façade systems constructed in a factory away from the construction site, and delivered to site fully fitted out and tiled ready to be incorporated into the on-site structure, up to full apartments, where only the central core is constructed on site and the rest of the building is constructed off-site. Modular construction also comes in the form of complete houses which are produced in a factory, delivered to site as ‘flatpacks’ and then assembled on site in a number of weeks.

Benefits

The benefits of modular construction mainly derive from cost savings – whilst modular construction is often more expensive than standard construction, the shortened construction period on site more than compensates. Work on the ground can be carried out in parallel with the construction of the modules and, because the modules are constructed in a factory setting, delays due to adverse weather are mitigated. In addition, less labour is required on site as the majority of the work can be carried out at the factory utilising local labour. There does need to be a critical mass of construction to make modular construction financially viable given that it is, effectively, a production line that needs to be set up specific to a particular building or a number of buildings to the same specification (150+ rooms has been suggested as a guide).

We are increasingly seeing this form of construction being used for hotels, purpose built student accommodation and build to rent schemes, where the room sizes and layouts are standardised and are suitable for being replicated on a production line.

Whilst historically ‘pre-fabs’ have had a bad reputation as being lightweight, temporary looking, not durable, depreciating in value and with a high lifecycle cost exposure, quality is improving and with a maturing supply chain there are now a number of products on the market which have changed these perceptions.

Risks

However, there are still a number of issues specific to modular construction that need to be considered by developers and funders, and we have summarised some of the key legal points below.

Quality - Quality control is potentially more difficult than traditional construction as manufacturing issues are difficult to rectify once the module is on site. Developers and their funders need to have a presence at the place of construction of the modules to be able to monitor and inspect the modules and identify any issues before they leave the factory. Rights of access and inspection to the factory will be required along with a right to be present for all tests carried out on the modules.

Interface – there needs to be clear risk allocation between the structural engineer responsible for designing the frame or core, the mechanical and electrical engineer responsible for designing the cabling and plumbing and the design of the modules, as there is less scope for correcting ‘design clashes’ than when traditional construction methods are used.

Fixing design – modular construction requires both the design of the overall project and the detailed design to be fixed at an early stage, so that the modules can go into production. Once that process is underway design changes are very difficult and expensive to implement.

Payment – significant advance payments are usually required to be made to the module supplier, due to the bespoke nature of the modules. Developers and funders therefore need to ensure that there is sufficient security over the modules and the components within them at all stages of manufacture. This can be achieved (to some extent) by third party bonds and vesting agreements. We have also seen funders take a charge over the factory and plant where the modules are being constructed, but this may not be possible in many cases.

Title – there are two title issues which require specific consideration when it comes to modular construction. One is ensuring that the developer or funder has title over the constructed modules before their delivery to site. The second issue is that often a developer will provide certain elements of the modules to the module supplier for the supplier to incorporate into the module, such as tiles, or white goods, so any contract needs to deal with title in the developer’s goods to ensure that title is retained.

Insolvency Risk – in the event of insolvency of the module supplier, it will be difficult to find another supplier that can continue to deliver modules to the same specification, and it will have a huge impact on programme, certainly more so than finding a contractor to continue to build out a traditional construction project. Therefore it is critical to understand the financial covenant strength of the modular supplier and obtain appropriate performance security through bonds or guarantees or to look to cover off the risk through insurance.

Transit Risk/Insurance – the risk of damage to the modules in transit needs to be considered and the risk allocated appropriately, backed by suitable insurances.

Comment

Modular construction is clearly going to play a key part in the future of construction and has the potential to revolutionise the construction market but developers and funders must ensure that these key risk areas are addressed if they are to reap the benefits.