Might Covid-19 spark a revolution in offsite modular construction?
As Huw Wilkins discusses, offsite modular construction is a process of constructing a building in modules offsite, within a factory setting, before transporting those modules to site for installation.
Trends in the use of offsite modular construction
Offsite modular construction is not a new concept; London's Crystal Palace, which hosted Prince Albert's Great Exhibition in 1851, was built using prefabricated modules in a grid formation. Then, in the aftermath of World War Two, the UK government introduced the “Emergency Factory Made” housing programme. These houses were required to replace homes destroyed during the war, but they were only intended to last 10-15 years, before being dismantled and replaced.
More recently, we have seen a growing focus placed on modern methods of construction including offsite modular construction. Its benefits include:
- the design for manufacture and assembly (“DfMA”) approach simplifies the design. Coupled with standardised production techniques, this allows manufacture and assembly to be more efficient, reducing time and cost and the risk of over-runs;
- most of the work is undertaken in a factory – a controlled, safer environment;
- DfMA enables quantities to be measured to a high degree of precision, which results in less waste; and
- fewer site deliveries result in reduced carbon emissions.
In 2017, the UK government announced that five government departments1 would introduce a presumption in favour of offsite construction from 2019, which was confirmed in the “Construction Sector Deal” launched in July 2018.
The private sector has also started to embrace offsite modular construction:
- housing developers such as Barratt Homes, Legal & General and Berkeley Group have begun to invest in offsite modular construction; and
- contractors such as Laing O’Rourke and Wates have committed to strengthening their capabilities in offsite modular construction.
Construction during the Covid-19 nationwide lockdown
Perhaps unsurprisingly, the construction industry was a key area of focus during the first Covid-19 nationwide lockdown. Despite government urges to stay open and carry on, many construction sites were shut down because of the difficulties in complying with social distancing rules. Those that stayed open were subject to criticism for putting the health and safety of their workforce (and others) at risk.
Offsite modular construction wasn’t affected in the same way. Indeed, there were a number of high- profile success stories for offsite modular construction. In China a new 1,000-bed hospital dedicated to treating those with Covid-19 was built in less than two weeks. Closer to home, sections of Grange University Hospital in South Wales were opened a year early to help cater for Covid-19 patients. It included, for example, 661 horizontal corridor services modules and 243 bathroom pods manufactured from 3D models. It was because of its modular construction that the health board was able to take possession of 50% of the space within the hospital early. Less publicly, because offsite modular construction is less labour intensive, and predominantly undertaken in factories with only limited time required on site, it was easier to comply with social distancing requirements so that work could continue.
Throughout the pandemic, the Construction Leadership Council has issued Site Operating Procedures which are based on the government guidelines. At the time of writing, version 5 of these remains in place. With the second wave of Covid-19 upon us, and further restrictions already coming into force in parts of the country, contractors must have in place plans and method statements to deal with Covid-19. To comply with these requirements, it is likely that fewer people will be allowed on site at any one time. This will, in turn, impact the sequencing of work, programme and contractor’s preliminaries.
For the same reasons that it wasn’t impacted (to the same extent as traditional construction) in the nationwide lockdown earlier this year, offsite modular construction won’t be affected (to the extent of traditional construction) as stricter restrictions return. Against this backdrop, offsite modular construction looks more appealing for those starting new projects.
Are certain industries more likely to move towards offsite modular construction?
Embracing offsite modular construction may be at least part of the answer to the perennial housing shortage. Offsite modular construction is ideally suited to housebuilding, whether one-off high-end modern houses or large-scale developments such as build-to-rent schemes or affordable housing.
However, there are a number of other sectors that are equally well-suited to offsite modular construction. The restrictions that have been in place during the past year have forced a change in people’s lifestyles. People’s work and social/home-life have been forced to move online with greater IT and internet use. Two beneficiaries of this might be:
- Warehousing: over the past five years shopping habits have moved away from the high street and shopping centres, to shopping online and delivery to the door. The pandemic accelerated this move. It also saw more and more people look towards having their weekly “big shop” delivered online, with supermarkets expecting this to continue longer term. This move online requires less shop space and more warehousing.
- Data centres: as people work from home, the work “Zoom” call has become an invaluable form of communication. Outside working hours, more and more people are streaming their favourite shows and films. This increased internet use requires increased data centre capacity.
Both warehouses and data centres are well-suited to offsite construction.
But offsite modular construction can also be more widely used in infrastructure. For example, in August 2020, the first permanent structure to be delivered for HS2 – a 65-metre road bridge over the M42 – was installed in a matter of days, having been built offsite and transported to site for assembly. A similar operation will take place later this year for a bridge over the A446.
Legal considerations regarding offsite modular construction
There are, however, a number of issues arising from offsite modular construction that parties will need to consider when negotiating contract terms. A key consideration will be what payment terms to apply. In circumstances where most of the work is done in a factory before being delivered to site for installation, the contractor will want to front-load payment for cash flow purposes, whilst the employer will want to protect itself against the risk of the contractor’s insolvency in circumstances where it pays for work before it is installed on site. The payment terms will need to be clear and, if it is a “construction contract” under the terms of the Housing Grants, Construction and Regeneration Act 1996, it must provide an “adequate mechanism” for determining what payments become due and when, as well as the final date for payment.
Some issues that parties should also consider include:
- Design freezes: offsite modular construction benefits from settling on a final design as early as possible (it may be preferable for all parties to have phased design freezes). This is because, once work starts in manufacturing the prefabricated components, changes to the design are likely to be far more complex and costly to accommodate than they would be on a traditional build. Parties will need to decide how variations are to be valued in circumstances where the cost of a late change in the design might be far more than if the change had been made before the design freeze.
- Rights of inspection, and potentially testing, at the factory where the prefabricated components are being manufactured: a rigorous inspection and testing regime might identify defects at this early stage, rather than once units have already been manufactured or, worse still, installed.
- When ownership of the prefabricated components passes: the employer will likely want ownership to pass on payment, to give it some protection against the contractor’s insolvency.
- When risk of the prefabricated components passes: where ownership and risk pass at different times (for example where ownership passes on payment, but risk passes on delivery), the parties will need to consider how to deal with risk, which may require contractual provisions governing storage of the components and additional insurance.
- Storage and delivery of prefabricated units: there is unlikely to be storage space on site, and prefabricated units will be stored in the factory. This will also require a delivery schedule to ensure the prefabricated units are delivered on time (to allow the work to take place) but not early (because of the lack of storage on site).
- Defects: As in all cases, once a defect is identified, it will be necessary to identify the cause of that defect, and what work is required to remedy the defect (and who is liable for that defect). However, in a project that involves multiple identical units (for example modular bathrooms), it will be necessary to investigate whether any other units are (or may be) affected by the same defect (which may not yet have manifested in those other units). For example, if the defect arises because of a batch of a particular material, all modules using that batch of material will likely be affected. In the worst-case scenario, a design defect will affect all identical units. Parties will therefore need to clearly set out the scope of work, define what a “defect” is and allocate risk.
Whilst there may in time be a standard form dedicated to offsite modular construction, until that happens there is no reason why these matters cannot be dealt with through carefully drafted amendments to existing standard form contracts.
Conclusion
Before the Covid-19 pandemic, offsite modular construction was gathering some momentum, driven by both public and private sectors. Social distancing rules undoubtedly had an impact on the construction industry; that impact is likely to continue beyond the end of the pandemic. Offsite modular construction could prove to be a beneficiary of the pandemic, because the social distancing rules cause less of an issue for offsite modular construction.
When parties are deciding whether to use offsite modular construction, there will be a number of important technical considerations to determine whether it is suitable. There will also be legal considerations and the parties will require appropriate drafting to reflect the allocation of risk, particularly regarding payment and transfer of ownership.