Modular Homes: Rethinking the industry means rethinking your contracts

The UK’s housing crisis is a continuing “hot topic” in our sector, with the National Housing Federation estimating that 8.4 million people in England are living in unaffordable, insecure or unsuitable homes. Add climate change to this and it’s no surprise that the UK’s housebuilding sector is looking for new solutions that tackle the housing shortage whilst striking a balance with sustainability.

One solution that now seems to be gaining traction in the market is modular housing. Modular homes are constructed off-site and then installed at their final destination. This method allows for a fast construction and installation time, whilst simultaneously allowing for innovative technologies to be tested in a controlled environment on the factory floor as opposed to part way through an on-site build.

However, there has been a lot of debate as to whether modular housing can resolve the housing crisis and initial uptake has been slow with sceptics doubtful as to reliability and funders cautious of the upfront costs involved. Notwithstanding this, we are beginning to see first-hand that developers and funders alike are seeking ways to overcome the challenges associated with modular projects and embracing the opportunity to be at the forefront of innovation and sustainability.

We recently visited Ilke Homes’ factory in Flaxby, Yorkshire, and saw evidence that this method of construction is beginning to boom and overcome the naysayers. Having seen “live” modular operations has enabled us to better understand the issues and potential challenges surrounding this method of construction. We set out below our analysis of the most prominent benefits and challenges for modular homes and what this is likely to mean for your construction contract and project relationships.

What are the benefits to modular homes?

The benefits to modular homes are numerous and include:

• The ability for continual controlled as-built checks that are not structured around sometimes unpredictable site conditions. Meaning, in theory, the module should be “snagged” before delivery/installation. This enables units to be installed on site with NHBC (or similar) sign off and gives more control over the construction phase and should see a reduction in defects.
• Providing equal employment opportunities for a local and de-skilled workforce – modular designs mean that sections can be pre-cut and installed using efficient installation techniques which keep labour costs down and opens up the construction sector to a swathe of new employees. This is particularly encouraging given press around the potential skills shortage in the wake of post-Brexit construction operations in the UK.
• Working towards Net Zero – the UK is targeting 2050 to bring all greenhouse gas emissions to net zero and we are seeing an increase across various construction sectors (including retail and renewable energy) seeking ways to develop and innovate to meet these targets. Modular housing allows for real innovation in this area with insulation installed in all corners, including the highest pitch of a roof, from a fully accessible position on the factory floor (as opposed to on-site where there are hard to reach places and site conditions (including the often unpredictable UK weather) to work around). Modular units are easy to adapt at the design phase and can accommodate pre-installed solar panels or the installation of heat pumps instead of gas boilers.
• Efficiency – build time and design efficiencies are much faster than traditional build methods which can see returns on sales and lettings becoming realised much earlier than previously. This is something that may be attractive to developers and funders alike as we see a move away from the cash-flow challenges traditionally associated with undertaking and/or funding construction projects.
• Maintenance and stock control – as design is streamlined this allows for robust systems and processes in terms of record keeping at every step in the construction process, making it easier to manage stock and prepare fully bespoke planned maintenance programmes.
• Variations – as every unit arrives on site ready made (with kitchen, shower and all the trimmings installed) there should be a significant reduction in the prevalence on-site variations which should introduce greater price certainty as well as reduce delay and final account disputes.

What are the challenges to modular homes?

As with all innovations, challenges will inevitably arise and flexibility and working solutions are required. Having been involved in modular projects and having visited the factory to see first-hand how operations work, we suggest that the biggest hurdles facing modular construction at the moment include:

• Logistics/transport – unit size is tightly regulated (over a certain size would require a police escort) and transport hire can prove expensive. Therefore, the risk of delay (with the potential resulting need to move units to external storage and then to site separately) can prove costly for whoever bears that risk and we are likely to see a need to forge strong connections with transport companies to seek to minimise delay from third parties. Similarly, storage costs add further expenses and, depending on whose fault the delay is, could result in changes to traditional risk allocation.
• Services/utilities – as the units arrive fully fitted, there is very little fit-out construction work required on site. However, each unit needs connecting to the relevant services required on site (water, gas etc.) and liaising with utility providers and having these services ready when the units arrive is paramount to on time completion.
• Inclement weather – weather is often an issue in construction and the UK can be notorious for delays as a result of flooding, fog, high winds or snow. Whilst modular housing avoids many of these issues during construction as the units are built inside, weather can pose a real challenge during transportation and delivery with the availability of cranes impacting the programme should weather cause delay.
• Title of goods and payment – the programme for modular homes does not work the same as traditional methods, with a lot of the initial costs being borne by the contractor upfront in ordering materials that sit off site for the majority of the build. This will (and does) pose questions around title of goods (which typically passes on delivery to site under traditional construction models) and payment (which is often done on monthly valuations or against set milestones that are reasonably equal in distribution over the project). We recently drafted solutions including Advance Payment Guarantees and Vesting Certificates which are likely to become increasingly common requirements for modular projects.

What does this mean going forward?

In order to succeed as a long term solution to the housing crisis, modular construction is going to require a collaborative and open dialogue across the sector. As so much of the project will be planned and built prior to delivery, good relationships with logistics, utilities providers, suppliers and other third parties are needed so that last minute challenges don’t bring projects grinding to a halt. There is also a need for collaboration with designers, engineers and materials suppliers to meet the needs of an increasingly sustainability driven sector.

Employers and contractors also need to have realistic negotiations and be aligned in their approach to risk allocation. As apparent from the above, not only are modular homes a change in building method, they are a change to the sector as a whole. The current standard of forms of contract don’t currently sit well with the obligations and risks of a modular project, in particular the widely-used JCT Design & Build model. Standard from contracts are likely to require bespoke amendments with elements of both D&B and EPC working as a hybrid to provide drafting solutions that cater for the supply, delivery and rapid programme implications these projects have.

Contact a solicitor

For more information on modular homes, please contact Simone Protheroe or Hayley Steel.