As momentum grows for offsite and modular construction, senior construction lawyer May Winfield explores the potential legal and contractual issues
Offsite and modular construction is not a new concept and has been used in the construction industry for some time; however it has not gained extensive traction within the industry until recently. This arguably is partly due to the Government’s express push towards greater offsite construction. In the 2017 Autumn Budget, the Chancellor of the Exchequer made a commitment that “the Department for Transport, the Department of Health, the Department for Edu
cation, the Ministry of Justice, and the Ministry of Defence will adopt a presumption in favour of offsite construction by 2019 across suitable capital programmes, where it represents best value for money”.
The industry has seen a significant increase in interest around offsite manufacturing, modular construction and design-for-manufacturing (“DfMA”) although some question whether these are simply the latest buzzwords to hit the industry. The reported benefits of offsite construction and DfMA are numerous, and include increased efficiency, reduced cost, reduced waste and reduced time. However, these benefits are necessarily in turn predicated on the correct processes being put in place. For example, offsite construction and DfMA require a shift in mindset from typical or traditional design and construction, as it is obviously far more difficult to introduce or implement these concepts halfway through the design process.
KPMG’s Smart Construction Report (April 2016) pointed out that traditional construction procurement methods generally mean that construction designs are really only tested for their buildability once teams are on site, where it is more costly and disruptive to rectify mistakes.
A design suitable for manufacturing needs to be completed or frozen before the manufacturing process commences to avoid expensive reworking. Could BIM be used to test out the design for feasibility and achievability before incurring the expense of manufacturing?
Both the designer and the manufacturer in turn need to understand the requirements and limitations of the manufacturing process and any site limitations (such as those which will restrict the size of components transported to site). In this regard, the correct parties need to be involved at early stages of the design to ensure that the proposed design is feasible and achievable for the intended manufacturing process.
I have seen suggestions that this early involvement can be achieved via a two-stage procurement such as using the NEC supplementary ECI clause (for use with NEC EEC contracts Options C and E) or a JCT Pre-Construction Services Agreement. However, equally where the contractor is being appointed under a design and build contract, would they be happy to take on responsibility for all the offsite construction and DfMA to date if they had not had sufficient early involvement?
When considering the end of the manufacturing process, it would be equally important to ensure the relevant individuals have appropriate and sufficient training to handle, and put together, the manufactured components when they arrive from the manufacturer.
What about legal risks?
With new processes come new risks. The majority of the legal articles that I have seen on this topic appear to focus on the issues of ownership prior to delivery and the risks of damage in transit. However, the potential issues arguably do not stop there. For example, what about insurance and liability for the components after delivery when on site, and responsibility for quality of the manufactured components? Equally importantly, is it clear who takes responsibility for the correct and defect-free assembly of the components?
This article considers some of the potential legal and contractual issues that could be considered, although this article is not exhaustive or legal advice and specialist advice should be obtained on your particular concerns.
As a starting point, it is worthwhile to ensure that the split of rights and obligations is consistent and comprehensive throughout the suite of contracts between the parties, e.g. the employer, contractor, consultant and manufacturer, including that there is no gap in rights or duties.
Are the binding contractual terms clear on who is responsible for the manufactured components at each stage of the process? How far are the contractor and consultants responsible for the manufacturer’s interpretation of their design and the subsequent manufacture and assembly, particularly if the results are not as envisaged? Equally is it clear who is responsible for any additional costs and delay due to interoperability issues arising due to the different software platforms used by the parties?
Issues such as the correct programme to be complied with for manufacture and assembly, and responsibility for interpretation and application of the design, are arguably complex matters that could cause friction between parties and should be clarified at an early stage.
Who is responsible for damage during storage, in transit and during construction? Do the relevant responsible parties have insurance cover for such damage? Is there clarity on who is responsible for insuring the components at each stage? What about responsibility for failure in quality or KPIs due to untrained assembly of the components on site, e.g. does the manufacturer have express obligations to provide sufficient assembly guidance? Indeed, on a related issue, when setting out the KPIs for the components within the contract documents, are parties comfortable that these are both measurable and achievable?
One important area that will no doubt be of great concern will be ownership. This includes ownership during manufacture and during transit, and clarity on when this ownership (and risk) passes. Are the contract terms clear on this, e.g. will it pass on payment or on delivery? The JCT Standard Form of Building Contract (both 2011 and 2016 editions) contains an example of a retention of title clause that deals with off-site materials; it provides for payment in respect of materials stored off-site and title to pass provided that certain conditions are met. Some parties may require payment to be backed by a vesting certificate or bond to protect passing of title or ownership. An employer may want to ensure that the manufacturer (if not contracted directly with them) does not have any unexpected retention of title over the manufactured components.
Given how new the technologies and processes are, it will no doubt be important to ensure binding clarity and consistency of testing and checking regimes (both at the manufacturing facility and on site) and sufficient (but reasonable) rights to visit the facility to carry out inspections on quality and progress. Where a project is using multiple manufacturers for different components, standardised risk assessments and quality management or testing and checking regimes could provide important reassurance and speed up compliance checks.Arguably, the manufactured components would be regarded as “goods” under the Sale of Goods Act and Supply of Goods and Services Act so that the implied warranties of satisfactory quality and fitness for purpose apply. Whilst employers may understandably require warranties as to quality of the components given the limited evidence of durability of the components at present, parties will equally need to obtain specialist legal advice on the impact of these statutory implied terms and discussions had with their insurance broker on whether they give rise to any insurance coverage concerns.
What about responsibilities and duties on the manufacturers themselves? This could feasibly include obligations to meet the project’s programme dates and an obligation to provide a schedule of manufacturing/ delivery to avoid prolonged storage on site and consequential storage costs and increased risk of damage. Delay in manufacturing timetables could have significant consequences for the project timetable as a whole. Could the obligations even extend to requiring the components to fit into the notified construction on site, or would such obligations be an onerous step too far?
Due to the nature of offsite manufacturing, the contract terms on this would no doubt have to take into account the length of the design and fabrication process such as, in appropriate circumstances, reasonable allowances for price inflation. Would advance payment be required by the manufacturer, although backed by corresponding advance payment bonds and possibly a project bank account?
What about standard form contracts?
Do we have any help from standard form contracts in seeking to make contractual arrangements for offsite construction and DfMA? Some non-exhaustive examples are provided below for consideration and discussion, of some of the available standard form contract documentation.
As some readers will be aware, the RIBA DfMA overlay (in a joint publication by the Royal Institute of British Architects (RIBA) and the Off-site Management School, “RIBA Plan of Work 2013: Designing for Manufacture and Assembly”) provides helpful new task bars which are supplemental to the eight already included in the RIBA Plan of Work 2013. These set out which activities should be carried out or considered at the various stages. The task bars include, for example, suggested BIM Tasks for DfMA and suggested Procurement Tasks for DfMA.
The NEC Supply Contract and NEC Supply Short Contract appear to take further steps towards incorporating manufacturers into the contractual supply chain framework. In this standard form contract, the typical NEC early warning procedure is tailored to the requirements of a manufacturer and purchaser by incorporating some changes to the usual NEC provisions. For example, the parties are to warn of events that may affect the price, delay the delivery or impair the performance of the goods or impair the usefulness of the services to the purchaser.
The contracts contain a manufacturer style limitation of liability at Option X25: “The Supplier gives the Purchaser warranties for the amounts stated in the Contract Data and in the form set out in the scope. A warranty is given to the Purchaser before Delivery”. Some commentators suggest these contracts can be utilised for international fabrication and supply arrangements. There is not enough room in this article to discuss this in detail, and readers are advised to obtain specialist legal advice if they would like to know more.
From an international perspective, some commentators suggest suppliers and manufacturers use Incoterms to clarify delivery obligations although these are not without their complications and specialist drafting advice will be needed. For example, the importance of choosing the most appropriate Incoterm and choosing the appropriate jurisdiction and applicable law. Many of these issues are admittedly the same issues arising in any case when purchasing materials from an international supply chain.
The position nonetheless remains that there are currently no accepted standardised terms within the industry for offsite construction and DfMA. As we have seen with BIM, it may therefore be sensible to be more detailed and explicit in contractual terms than normal regarding the parties’ positions and expectations, to avoid misunderstandings and disputes regarding rights, duties and deliverables.
Legal and contractual side thoughts
Like BIM, the nature of offsite construction and DfMA requires a good or increased level of collaboration between parties. Imbedding collaborative processes and appropriate information exchange processes within the contractual documents could assist to ensure this takes place, whilst encouraging the project team to develop a mindset of collaboration being business as usual.
If the offsite facility is constructed and located on-site, will planning permission be required as well as appropriate contractual documentation for a licence/lease to occupy and use the site for this purpose?
The contract with the manufacturer may need to cover the usual provisions of Modern Slavery Act 2015 and GDPR requirements, and contain appropriate dispute resolution clauses to endeavour to resolve disputes quickly and amicably where possible, preventing serious delays and costs to the projects if delivery of the manufactured components is delayed during a costs dispute.
Quick reminders on insurance Some commentators point out that offsite construction and DfMA provide benefits for insurers due to a reduced H&S risks (reduced on-site time and number of workers).
Parties may be wise to have a specific conversation with their insurance broker and specialist advisers where offsite construction and DfMA are being contemComment plated. What is the impact on project-specific insurance policies; for example, where the relevant manufacturer is manufacturing components for multiple projects at once? What is the impact on latent-defects insurance cover?
Equally a clear split in design responsibility and liability between the contractor, designer consultant and manufacturer may assist to clarify whose PI policy responds in the event of a design or other error in the components. In this regard, will we see parties insisting on cross-indemnities between themselves as regards the quality and composition of the resulting components?
It is very possible that new forms of insurance will develop to cater for these new processes and ways of working and resulting changing risks. Indeed, Buildoffsite Property Assurance Scheme (BOPAS) provides a risk-based evaluation which is stated to demonstrate to funders, lenders, valuers and purchasers that homes built from non-traditional methods and materials will stand the test of time for at least 60 years.
Conclusion – evidence backed benefits
The UK Government recently announced the first direct investment in a modular housing factor; £30m investment in Ilke Homes; the Welsh Government has followed suit – announcing a planned £10m investment into modular factories.
The potential benefits to the industry of offsite construction and DfMA are arguably undeniable. The McKinsey Global Institute’s Report, Reinventing Construction: A Route To Higher Productivity (February 2017), suggests that parts of the construction industry could move toward a manufacturing-inspired mass-production system that would boost productivity up to tenfold. In addition, it also suggests that productivity could be boosted by 50 to 60 percent by acting in seven areas including rethinking design and engineering processes. Specific examples are given for this – of encouraging off-site manufacture, minimising on-site construction through the extensive use of pre-cast technology, assembling panels in factories and then finishing units on site.
KPMG’s Smart Construction Report (April 2016) in turn noted that whilst offsite construction costs were greater, the shorter construction time facilitated earlier revenue generation and provided greater savings when applying standardised product catalogue across a portfolio. In fact, KPMG reported that financial net savings of 7% were possible due to a shortened construction time; calculated as £36m savings for a 50-storey London office building.
KPMG equally pointed out that offsite construction in itself is not the panacea to all the industry’s ailments. It still requires the industry, and clients in particular, to develop compatible procurement and contractual strategies to facilitate and enable more collaborative investment in offsite construction to make it feasible. Nonetheless, the chief executive of Legal & General Homes stated in KPMG’s report that offsite construction enables parties to build houses quicker, cheaper and better with greater certainty of costs.
A final word from Mark Farmer
On being asked about offsite construction and DfMA, Mark Farmer, author of the “Modernise or Die” report and recently appointed as new independent champion for Modern Methods of Construction (MMC), confirmed his support of offsite construction and DfMA, “The initial impetus behind BIM has led to pockets of best practice and a passionate but designer skewed lobby pressing for change. For too long, the wider industry and its clients have not had sufficient drivers to embrace change.
“My evangelism on moving to greater levels of pre-manufactured content within the whole construction industry is not about ‘analogue building in a shed’ but is about embracing technology as part of the solution. This has direct ramifications for the speed of digitalisation as the advent of digital manufacturing is creating greater ‘hard wired’ links between digital design and component, element or building system manufacturing and assembly.
“The ability to retain the digital thread as far into the construction process as possible has accelerated in a world where post Grenfell regulatory reform and a politicised climate change agenda is going to increasingly dictate technology from cradle to grave as being the only way to better assure high performance outcomes. This in my view will force higher levels of pre-manufactured value, which will increasingly require the rigour of ISO 19650 at the heart of either fully vertically integrated or simulated integration via multi-party alliance-based workflows and business models.”
May Winfield is a senior construction lawyer specialising in BIM & innovation, and associate director at BuroHappold Engineering. You can find her on Twitter @Buildlaw_Arttea
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