Why are we seeing more off-site modular construction projects?

Steve McCombe in Thrings’ Construction and Engineering team looks at the emergence of off-site modular construction – buildings which are constructed within a factory setting before being transported to site for installation – and discusses some of the associated contractual issues that may arise.

The terms modern methods of construction (MMC), smart or modular construction all refer to off-site construction processes using a broad range of parts that benefit from controlled factory conditions and mass production techniques for on-site assembly of ‘complete’ modules.

There is perhaps nothing ‘modern’ about MMC in that it simply offers an alternative to elements of traditional construction processes. The Crystal Palace, an enormous iron, timber and glass structure originally erected in Hyde Park, London to house the 1851 Great Exhibition, used prefabricated modules in a grid formation.

Supporters claim that off-site modular construction has an increasingly important role in the construction industry, including the housing sector, and that it offers a more efficient, quicker and more sustainable method of project delivery.

A National Audit Office report published in 2005 suggested that if off-site modular construction was adopted in place of more traditional construction methods, amongst other things up to four times as many homes could be built with the same on-site labour and on-site construction time could be reduced by more than half. However, the subsequent level of use of off-site modular construction in the housing sector was perhaps disappointing.

In September 2018, the NEC issued a practice note explaining how the NEC4 suite of contracts could be used to support the use of off-site modular construction.

Off-site modular construction was, nevertheless, becoming increasingly popular before 2020 and the Covid-19 pandemic has made those processes an even more attractive option for projects involving housing, hospitals and laboratories (where high levels of cleanliness can be achieved), schools, hotels, student accommodation and prisons.

There is a never-ending demand for more housing. The following are examples of recent initiatives involving off-site modular construction:

  • BoKlok, a modular housing joint venture between Skanska and IKEA, uses a timber-frame modular technology to produce sustainable schemes and its business is currently targeted on the south coast and Bristol;
  • BAM has recently expanded its modular business by purchasing a stake in Modern Homes Ireland (MHI) which builds steel-framed homes and commercial buildings, with up to 90% of the dwellings being completed within MHI’s factory; and
  • When completed, the 44-storey and 38-storey residential towers in George Street, Croydon will be the world’s tallest modular buildings.

Homes England, the government’s housing agency, announced in March 2021 that it had commissioned a major research programme on the impact of the use of off-site modular

construction within the housing sector across eight pilot sites, totalling approximately 1,800 homes.

Homes England hopes that the evidence of the benefits of off-site modular construction will provide greater confidence to the industry, investors, insurers and customers to support its use across the housing sector.

As to current and future projects involving off-site modular construction, numerous often interrelated contractual issues will need to be considered, including:

  • whether the modular contractor is to be employed direct by the employer or by the contractor who will be responsible for the works as a whole;
  • the form of contract to be used by the key parties, such as an amended JCT Construction Management Contract (the modular contractor being one of the trade contractors) or an amended NEC4 contract;
  • whether the Housing Grants, Construction and Regeneration Act 1996 (as amended) will apply to the contract(s) and whether one or more contracts should be amended to incorporate act-compliant payment terms and adjudication provisions;
  • the appropriate payment terms, such as milestone payments, for the relevant contracts;
  • the modular contractor possibly requiring a substantial advance payment - in which case an advance payment bond might be needed to protect against insolvency risk;
  • the timing of the completion of any design of the modular components that may need to be early in the project to enable the off-site construction process to be completed in line with the overall project programme;
  • any design and associated insurance obligations on the part of the modular contractor;
  • the right to inspect at the factory premises and, if necessary, test at various stages during the off-site construction process;
  • the risk of loss or damage to modular units remaining with the modular contractor while being transferred to site - that contractor also being required to take out sufficient insurance to cover off-site storage, loading, transportation and unloading;
  • how and when title in the modular units should pass up the contractual chain; and
  • the ownership or licensing of intellectual property rights associated with the modular units.

If you would like advice on potential and/or ongoing projects that involve off-site modular construction, please contact Steve McCombe or another member of Thrings’ Construction and Engineering team.