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Focus on modular construction as NEC issues new practice note

Signing Document Print publication

03/10/2018

On 25 September 2018, the NEC issued a practice note explaining how the NEC4 suite of contracts can be used to support the use of offsite modular construction.

The note expressly refers to the Transforming Infrastructure Performance programme launched by the Infrastructure and Projects Authority (IPA) in December 2017. The IPA has identified Smart Construction (or “modern methods of construction”) as offering “the opportunity to transition from traditional construction to manufacturing, and unlock the benefits from standard, repeatable processes with components manufactured offsite”.

Supporters of modular construction cite a number of advantages, which are summarised below. However there remain two fundamental legal issues with modular construction that always need to be considered before pursuing this form of procurement.

What is Modular Construction?

Modular construction is a term used to describe a type of offsite production. Using a range of parts and ‘complete’ units (i.e. finished pods), construction companies assemble pre-fabricated components on site following their production in an offsite factory setting.

Due to its versatility, modular construction can be used for a large range of projects across a number of sectors. The NEC4 practice note identifies the following as examples:

  • Housing where rooms or the component parts of a complete house, including all fixtures and fittings, can be fabricated offsite.
  • Schools, hospitals and prisons where complete rooms, wards, operating theatres or cells can be manufactured offsite.
  • Branded retail units such as fast food outlets where the component parts are fabricated offsite and fitted together on site.
  • Oil and gas where modules of process plant are fabricated offsite in sections and connected together on site.

Pros and Cons of Modular Construction

The main advantages of modular construction are perceived to be:

  • Significantly reduced on site construction period and therefore potential cost-saving from reduced build period.
  • Health and safety benefits with reduced waste; reduced dust and noise on site; and fewer accidents due to less construction work taking place on site.
  • Increased economies of scale and increased quality.

Some challenges of modular construction are perceived to be:

  • Timing is critical as once the modular components are finished, the supplier will usually want them to be delivered to site immediately. There is some burden on the management of the site in that it must be ready to cope with delivery as soon as the components are finished.
  • Damage – there is a risk that a finished unit (for example entire bathroom pods pre-fabricated for a hotel development) which has been installed may be damaged whilst other works are carried out around it.
  • Modular suppliers frequently demand a significant advance payment on placement of the order, before anything has been manufactured. To protect against insolvency risk, it is prudent to take out an advance payment bond. However these come with a cost (which can undermine the cost-saving advantage referred to above).

However the fundamental legal issues that we see time and again are:

Ownership

The modular supplier will invariably want to be paid before the materials are delivered to site or title passes in the materials up the contractual chain. However, equally, a Developer (and in particular its funder) will be loath to release a significant amount of money to the Contractor for materials offsite unless it can also arrange for title to pass immediately upon payment.

The NEC4 practice note readily identifies how the issue of title and payment can be addressed for modular construction as between the Employer and the Contractor in the main contract. For example when Payment Option A is used, the Supervisor can mark offsite goods as the property of the Developer (to pass title), and an Activity Schedule can describe an activity as complete for payment once an offsite module has been manufactured. However in practice, the Supervisor can only arrange for title to pass to the Employer if the Contractor has title from its subcontractor/modular supplier. As mentioned above, this is unlikely to be the case until payment.

There are solutions to this, for example to amend the Contracts to provide for direct payment by the Employer to the supplier. Or the modular supplier could be appointed under a separate direct contract, but this would dilute single point of responsibility and not be attractive to many developers. Another option would be to provide security to the Employer by way of a bond to cover the period between payment and title passing. However, the Contractor would inevitably recover the cost of the bond in its contract sum.

Design Freeze

A major issue with modular construction is that the design freeze takes place much further in advance of the programme than traditional construction, to enable the modular part of the development to then be manufactured in line with the overall programme. A problem for developers is that, in order to maintain programme, significant up front consultant costs may need to be incurred to develop the detailed design, which may prove to be abortive if incurred pre-planning and the planning application is unsuccessful. Waiting until after planning permission may mean that the long lead in times erode any cost savings that modular construction would otherwise secure.

The NEC4 practice note highlights the provisions in NEC that are designed to stimulate effective project management, and Option X12 which can be used to achieve common objectives (for example by using cooperation and collaboration and multi-party incentives).

However, in practice, post contract variations are sometimes inevitable, and despite best intentions, will generally prove far more difficult (and expensive) to implement when using modular construction.

Conclusion

As stated in the NEC4 practice note, the key to successful use of offsite modular construction is early development of the right procurement and contract strategy. It is vital that legal issues and challenges are discussed and resolved at the outset, including agreeing any bespoke amendments to standard form contracts.

Should you have any issues arising from this briefing, please do not hesitate to contact Jules, or any other member of the Construction & Engineering team, who will be happy to help.

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