Modular construction has been heralded for several years now to save time and reduce waste and cost, and forms part of the "modern methods of construction" being encouraged by the government. However, it is not without its challenges, as demonstrated by Legal & General's closure of its modular factory.
"If the client becomes insolvent the contractor may not be able to reuse the modules for another project"
There are also several legal and contractual issues that arise and need to be addressed in contracts, including:
1. Payment and transfer of title
Under a "traditional" construction contracts a contractor will usually receive payment on a monthly or stage basis based on the value of works carried out during the previous month or stage.
However, a modular contractor is likely to incur large costs at the beginning of the project in regard to the material and fabrication costs and therefore will be seeking for the payment terms to be front-loaded.
A client (and in particular their funder) will require some security before such payment can be made. Vesting certificates (in England) and offsite materials agreements (in Scotland) are often used to transfer ownership, but will a modular contractor agree to that before full payment is made? And if payment is being made before the modules are fully formed, what ownership can be transferred if the modules are not yet in existence?
In these situations an advance payment bond may provide some comfort, although there is a cost to those and there will be a limit to the value that can be realistically covered under these bonds before the costs are prohibitive.
2. Location of modules
Even if title in the modules is transferred effectively under UK law, if the modules are located elsewhere will this be binding under the law of the jurisdiction where the modules are located? And from a practical perspective, in an insolvency how easy will it be to get access to the modules and procure their delivery to site?
3. Insolvency
Issues arising from insolvency are exacerbated in modular construction – the modules are specialised materials that are unique to each modular contractor. Other contractors will not have the facilities or the intellectual property licence to reproduce these designs. From the contractor's perspective, if the client becomes insolvent the contractor may not be able to reuse the modules for another project.
4. Delivery
Additional considerations such as transit risk, delays at port, import duties, access route to site and storage space pending unloading may all need to be considered.
5. Inspection
Clients will want to inspect modules at certain stages in the factory before items are closed up. This is of increased importance as defects identified in delivered modules may have already been replicated in the construction of other modules yet to be delivered to site.
6. Interface
The procurement route may affect the contractual responsibility, but from a practical perspective it will be important that any platform on which the modules are being placed is at the correct gradient and can bear the required structural load.
7. Intellectual property obligations
A modular contractor may seek to provide as limited an intellectual property licence as possible to avoid their designs, drawings etc are shared with a rival modular contractor.
Conclusion
There are many benefits to modular construction, not least from a timing perspective. However, there are added complications and parties should not assume that one size fits all. The traditional procurement model and standard form contracts are not fit for purpose in ensuring that the different risks are addressed appropriately and it is important to have considered these before the contracts are entered into so that all parties are clear as to the risks and responsibilities.
Original source: Modular construction – technically rewarding but contractually challenging | Constructor Mag
Image: Kirsteen Milne is a legal director at Brodies LLP
