Modular construction
Modular construction of hotels, apartments and other buildings comprising numerous identical rooms has been popular in Europe for some time. Building projects using modular construction are now being considered in Perth.
Anecdotal evidence is to the effect that modular construction will be similar in cost to traditional construction methods. The benefit to the developer is the likely reduction in time for construction and the financial benefit associated with that. In other words, the sooner the hotel is completed the sooner the developer can receive income from paying customers.
Documenting an agreement for modular construction
The form of building contracts used for traditional construction will be suitable for modular construction subject to some modification.
It would not be inappropriate for the head contract between the developer and the builder to incorporate a standard form set of conditions such as AS 4300 or AS 4902 (design and construct), with appropriate modification. The builder could engage the fabricator using a contract such as AS 4911 (supply of equipment without installation) with appropriate modification.
The modification required to each would largely be dependant upon the risks associated with this construction method. That requires an assessment of the practical issues associated with this method of construction. Some of the risks and issues associated with this method are considered below.
Practical issues and documenting risk
Design
Construct only contracts and “free issue” supply of the modules by the developer should be avoided, at least by developers.
Accuracy of design is particularly important in this type of construction. If upon their arrival at site it is found that the modules do not fit properly, and in particular if the services and connection points do not match with the existing, it will be necessary for re-works to take place on site. If there is no place to store the modules whilst this is done, there will be double handling and lost time resulting. In other words, the builder will be making variation and/or prolongation cost claims unless the builder has agreed to take on this risk.
In addition, if the builder takes on the design, it can take steps to reduce costs. For example, the builder may want to have the external facade included on the modules themselves to save on having to scaffold the building.
Payment for offsite materials and security for payment
Provision needs to be made in the contract for securing payment for off-site materials and the ability for the developer to step in and take possession of the modules under fabrication in the event of insolvency.
Once materials are incorporated into the works on site they become fixtures and ownership automatically passes to the owner of the site. As a general rule the owner only makes payment for works so incorporated.
However, in modular construction a considerable portion of the works (and as a consequence their value) will be constructed off site. The fabricator of the modules will want to be paid progressively. Before making such payment, the developer will want security for such payment in case the fabricator becomes insolvent. The simplest way to achieve this is by way of bank guarantee. That will secure the payment but won’t necessarily cover the delay caused to the project if the fabricator becomes insolvent and the modules are not available.
In the event of the fabricator’s insolvency, the developer may want to step in and take possession of the modular units then in the fabricator’s possession not the least to allow construction to continue. Similarly if the builder becomes insolvent the developer may want to have the fabrication contract novated to it. In other words the developer would want to take some sort of interest in the modular units and have a right to step in and take possession of the components then under fabrication. To do this it would need to register its interest under the Personal Property Securities Act 2009 (Cth) and have an agreement/deed with the builder/fabricator allowing it to enter and take possession of the units in appropriate circumstances.
Note that the ability to take possession of modular units being fabricated by an overseas fabricator may well be non-existent.
Quality control
Provision should be made in the contract to maintain and check for quality control.
Modular units are expensive to fabricate in Western Australia, even in Perth, when compared to fabrication costs overseas. Historically there have been quality control issues with construction of components fabricated overseas, in particular as to compliance with Australian Standards. This gives rise to the need for one or more quality controllers to attend the fabricator’s factory (possibly full time).
A prudent developer will want to ensure that the modules are well constructed, not the least to ensure that the building will be free from latent defects upon handover.
Loss of control
The consequences of a fabricator’s failure to deliver on time or at all can be quite serious, particularly if the modules are fabricated overseas. Unless both the builder and the developer have great confidence in the fabricator, the risk and the builder’s allowance for that risk in its tender price for the project will be considerable. It is not unlikely that the builder and developer will make specific provision as to who will bear that risk in the contract as it will have a direct bearing on the contract sum.
This is because on conventional construction projects, if the tiler does not turn up, the builder can usually replace the tiler quite quickly. However, if the modules don’t turn up, the project stops.
The contract will also need to make provision for dealing with the consequences of breakages and spares. If a module is damaged on the way to site, provision needs to be made for another to be fabricated within such time as will minimise downtime on site. I would also expect provision to be made for delivery of individual components of the modules.
Transport issues
A prudent developer will want to be satisfied that there will not be any hold ups in the transport of modules and be assured that the builder has considered and has all transport issues in hand.
The risks that need to be addressed in that regard include:
Relatively high shipping costs due to the size of the modules and risk of demurrage for delay.
Risk of damage during shipping and the need for the modules to be adequately insured.
Risk of delay is considerable. It could be a port strike, cyclones or even congestion at the harbour.
Risk and costs of double handling. If for example you were having 100 units delivered to the wharf, they cannot be stored at the wharf except at considerable holding costs and it is most unlikely that there will be sufficient space at the building site for them all to be stored pending erection. It is likely they will go from the wharf to a storage yard and then to the site, resulting in double handling and extra costs.
Australian quarantine requirements.
Union issues
Consideration needs to be given as to whether unions will take action to prevent modules constructed overseas being used on construction sites in the Perth CBD. Provision for that risk should be made in the contract.
Safety
In theory fabrication in a factory should be a safer process than on site, particularly high rise construction. Overseas construction of modules may not be carried out to the safety levels expected in Australia. That may be of concern to principals.
