Clifford Chance

Industrialised construction is back in vogue having overcome the design and defect horrors of the pre-fab label and with the concept now covering not only fully modular building components but also offsite manufacture of package component sets which can be relatively quickly assembled or installed on site.

It is increasingly used for repeat interior components in buildings (with the hotel and residential sector expanding quickly) and a number of recent projects in sensitive areas have shown how it can be combined with superb exterior design to overcome traditional objections.

Apart from savings on cost, proponents of using industrialised processes point to the other advantages they offer including:

• Speed of manufacture/construction in factory.
• Reduction in the number of transport movements to site - helpful in both urban and remote locations
• Reduction in skilled labour needs at site location.
• Potential reduction in structural costs – modular system loads are more predictable and are reportedly generally physically lighter than traditional construction.
• Reduction in design and workmanship defects.

Because the use of industrialised and modular processes imports changes to the design and building process, changes to contracting norms also need to be considered such as:   

1. Integration of design (particularly with M&E services) is clearly critical – from this perspective, the process is well suited to the use of BIM and digitisation generally, provided the manufacturer's software platform and digital product can be integrated within the project model.

2. Manufacturers may be protective of intellectual property rights in their processes, requiring licenses to distinguish between open art and black box processes. On larger projects IP escrow arrangements may be appropriate.

3. Developers and lenders will wish to carry out a sensitivity analysis on the worst-case consequences of manufacturer failure (insolvency or termination) – would it be possible to step-in or use the process design to ensure the project is completed without requiring wholesale re-design? This may lead to requests for additional lender protections. 

4. The increase in off-site construction will typically lead to requests for advance payments and a higher proportion of payments being directed off-site (unless the manufacturer has the capability and desire to finance its process). This will mean developers and lenders are likely to focus closely on transfer and security of title (ownership) provisions as well as performance security – guarantees and bonding. Conversely, if the manufacturer is capable of financing component production through to delivery ex-works or at site, it may seek payment security to protect itself against early project termination 

5. Provision for inspection off site and testing before transportation to site.

6. Defect liability provisions may need to be supported by root-cause serial defect remedies. These may apply both in respect of repeat defects and the same/similar defects appearing in a certain percentage of components within the project or (if relevant) on a wider industry basis.   

Industrialised construction is an important facet of the welcome (and unstoppable) technological evolution of the construction industry highlighting the likely consequential need to adapt the way the industry finances and pays for projects. In many respects, it is also consistent with the trends towards disaggregation and early contractor involvement.