Modular construction – is this the future for multi-unit construction in Perth?

Conjuring images of dongas and budget housing, the concept of modular construction of whole or portions of buildings off-site and assembly onsite is not a new one.  What is new however, and set to debunk these preconceptions, is a method of modular construction being used with great success in high quality residential and mixed use developments in Victoria.

Unitised Building (Aust) Pty Ltd (UB Australia), a Melbourne based company which is part of the Hickory Group have completed a number of modular constructed projects in Victoria.  Their first project “Little Hero” in Russel Place, Melbourne was erected in just four weeks.  On completion, these developments look no different to traditionally constructed buildings. 

Some of the benefits of modular construction espoused include:

  • up to a 50% reduction in construction time as there is simultaneous manufacture of units off-site and preparation and installation onsite;

  • the end product is energy efficient and aesthetically pleasing;

  • the construction site is safer and there is less traffic to and from the site and less disruption; and

  • there is less wastage and better quality control as the factory construction process is more precise.

UB Australia will be involved in the delivery of the Landing Resort North Hotel, in Port Hedland (being its first venture into Western Australia), so all indications are that it is only a matter of time before this type of modular construction hits the Perth metropolitan area.  The significant reduction in construction time should result in savings for developers which could create a more affordable price point for new accommodation in Perth.

The question is, are Perth developers ready for it, and what should developers considering harnessing the benefits of this type of construction be applying their minds to?

Funding

A developer’s requirements in terms of drawdowns on construction funding for a modular building will be different to that of a traditional building.  There is likely to be a smaller number of very large drawdowns in a very short timeframe – ie on delivery of the units to the site. 

How familiar are financier’s credit committees with the requirements of this type of construction? 

Will the time required to get credit approval eat away at the gains to be made from shortened the construction timeframe?

Procurement

A developer’s drivers in relation to degrees of control, responsibility and risk will have a bearing on the procurement method.

Division of design, supply and construct responsibilities - the developer may choose to:

  • engage the architect and engineer for design and project management – the developer then retains control of the design consultants and ensures the works required are defined prior to the commencement of construction;

  • enter into a supply contract with a manufacturer for the manufacture and supply of the units - by retaining the risk of the manufacture and supply of units the developer reduces the likelihood of any premium for manufacture risk; and

  • enter into a construction contract with a builder for the construction and installation of units.

Combinations of design, supply, construct responsibilities - alternatively, the developer could combine the design, supply and construct functions in a number of ways, such as by engaging a builder on a “turn key” basis to deliver the entire project in house, or by having the developer engage:

  • consultants for the preparation of the developer's project requirements; and

  • a builder on a “design and construct” contract whereby the builder will  complete the design, enter into a subcontract with a manufacturer, install the units and undertake the construction and installation of the units.

Timing

The timeline for a modular construction project differs to that of a traditional construction timeline.  The crucial date requiring co-ordination is the date for delivery of the units to the site.  This needs to coincide with the completion of the necessary site works. 

It is vital that the developer therefore understands:

  • the stages of manufacture which will take place off-site;

  • what happens before  transportation of the units to site;

  • what needs to be done before installation of the units onsite; and

  • when practical completion will be achieved. 

Failure to get this right can result in significant delays and holding yard costs.  As with any construction contract, the delay costs and grounds for extensions of time need to be clearly set out.  In the case of modular construction, particular consideration needs to be given to the key milestones appropriate for a modular project.  The developer should also look to cap delay or holding costs to mitigate its exposure.

Complying with Western Australian building regulations

Particular caution must be taken in respect of units being manufactured outside Western Australia.

Given the infancy of this type of development in Western Australia, will the manufacturer be alive to the legal requirements in terms of construction such as fire prevention requirements particular to Western Australia? 

Who is responsible for informing the manufacturer in terms of the specifications of the units to comply with these requirements? 

Transfer of risk and ownership in the units

Contracts in relation to modular supplies will need to address when title or ownership in the units vest in the developer.  This will also clarify who is required to take out insurance in respect of the units at any one time.

In addition, where the developer is making progress payments to the manufacturer in relation to the construction of units, the developer should consider registering a purchase money security interest (PMSI) in case a manufacturer becomes insolvent.  A PMSI is a security interest in the materials or units that secures the progress payments made by the developer.  The PMSI would be registered on the Personal Property Securities Register.

There is a question of the value of any partially completed units and also the fact that the manufacturer may be applying the funds to purchase construction material in bulk.  In this regard it will be important that the developer’s financier be a party to a tripartite agreement with the manufacturer so parties are clear in terms what is to happen if the units are not completed.

Responsibility for rectification of defects

The builder is almost always responsible for defects in a traditional building context. In modular construction there can in effect be two “builders”, namely the manufacturer (or supplier) and the installer.  Theoretically each builder is responsible for any defects in the units as if it were any other subcontractor.

Unlike a traditional builder, the responsibility for defects may not prove to be clear cut.

A common feature of litigation involving modular projects where contractual responsibility has been divided between a supplier and installer is that the supplier and installer will point the finger at each other in respect of delays and defects.

“Design and construct” type contracts are particularly useful in the context of modular construction because the builder is made responsible for all design, construction and manufacture faults, and the builder can be held to a warranty to provide an end result that is “fit for purpose”. 

Where there is a division of responsibility between separate contracts, it will be vital for contracts to:

  • specify the responsibility of each contractor for interface items and whether each contractor is given the additional responsibility of warranting the efficacy of the end product;

  • comprehensively deal with extensions of time (and associated delay and prolongation costs) where there are overlapping delays between different contractors;

  • set out a process for the determination of disputes (perhaps by arbitration clauses permitting for multi-party arbitrations so that all potentially liable contractors are “roped in”); and

  • provide for the coordination and rectification of defects, and further remedies in the event of a recalcitrant contractor.

The location of the manufacturer is also an issue for consideration - enforcement of obligations to effect defeats where the manufacturer is outside Western Australia or overseas will have its difficulties.

Lavan Legal comment

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