Modular construction: procurement route and key contractual terms

The use of offsite construction is becoming increasingly prevalent, including modular construction where three dimensional units such as a school room, prison cell or housing module are manufactured for installation on site.

The Government has adopted a presumption in favour of offsite construction across suitable capital programmes, where it represents best value for money. The consultation on this presumption closes on 17 February 2019 and the results will be developed into an official strategy with the Government aiming to promote the use of offsite techniques and standardisation across the public sector and construction industry as a whole.

The industry standard construction contracts such as NEC, JCT and FIDIC do not specifically address the risks associated with modular construction, although NEC4 issued a practice note in September 2018 to explain how the NEC4 suite of contracts can be used to support the use of offsite modular construction. The NEC4 note considers the procurement options for offsite modular construction including single point responsibility for the main contractor or whether the client will directly engage members of the supply chain and if the client will specify the use of modular construction on a project or whether it will leave it to the supply chain to decide to adopt it or not.

Careful consideration should be given to the procurement route when modular construction is a part of the project. If there is to be a main contractor with single point responsibility for the whole project, including undertaking the modular elements, the employer will want to verify the experience and solvency of such a contractor. The main contractor may be more willing to take on risk if it has chosen the modular supplier rather than the supplier being selected by the employer.

The sub-contract manufacturing terms for the modular supplier will need to reflect those of the main building contract, where the supplier will not be the main contractor. Some provisions from the building contract, which would not usually be found in manufacturing terms and conditions, will need to be incorporated, such as the scheduling of payments and obligations in relation to design liability and insurances. In particular, if the manufacturer is also a designer then the design liability will need to be robust. Fitness for purpose and professional indemnity insurance provisions may be needed beyond the usual product liability requirements.

The type of copyright licence usually given by a contractor to an employer, where the employer is entitled to use the intellectual property rights for any purpose relating to the project, but the contractor retains ownership of the rights, may not be sufficient for projects using modular construction. The employer may want ownership of the rights, rather than relying on a licence, to give them maximum flexibility to use the modular design across a number of sites.

Contracts should include the right to inspect at the factory premises and test at various stages during the offsite construction process. There may need to be several stages of certification before payment is released.

The supplier should take the risk of loss or damage to modular units while being transported to site and should be required to take out sufficient insurance to cover offsite storage, loading and transportation.

The Build Offsite Property Assurance Scheme (BOPAS) is a scheme of assurance for innovatively constructed properties and enables developers to gain an accreditation for modular residential developments after undergoing a durability and maintenance assessment. This accreditation and a new build warranty from a reputable insurer should be procured for these types of projects in order to give comfort to purchasers and lenders that there is a form of recourse in the event of defects.

Due to the increased upfront costs with modular construction, funders may insist on vesting certificates, so that ownership of the units or components passes upon payment, thereby alleviating the risk of insolvency of the modular supplier. This may be in addition to requirements for on-demand performance bonds and collateral warranties to be procured by the supply chain.

If modular construction is becoming more widespread, with its promise of greater efficiency and a reduction in the costs of construction, then standard form and other construction contracts will need to be adapted accordingly.