Graham Robinson and Nigel Blundell explore the challenges and opportunities around the procurement, contracting and on-site delivery of infrastructure projects using Modern Methods of Construction.
The UK government is committed to using its position as the single largest construction client to support adoption of a more productive, efficient and sustainable business model within the UK construction sector which is a key aim in reaching the government’s goal of Net Zero by 2050.
The government announced its commitment to Modern Methods of Construction (MMC) in the 2017 Autumn Budget through the adoption of a presumption in favour of offsite construction for relevant departments from 2019. This was followed in December 2017 by the publication of Transforming Infrastructure Performance, setting out a long-term programme to improve the performance and delivery of infrastructure. A Platform Approach to Design for Manufacture and Assembly (P-DfMA) was set out in a call for evidence in November 2018 and in August 2021 the government published Transforming Infrastructure Performance together with its National Infrastructure and Construction Pipeline which sets out the long-term vision for a Platform approach to construction. A total of £78 billion of projects are set out in a 10-year investment pipeline where Modern Methods of Construction could be used. These projects range from the schools and prisons programmes to hospitals and economic infrastructure. The government has said it will mandate P-DfMA within two years.
Significant structural and practical barriers exist to accelerating modern methods of construction and to improving productivity across the construction sector.
Adopting a more productive, efficient and sustainable business model within the UK construction sector can achieve significant benefit to all parties but a different mindset is needed.
Investment appraisals and business cases must consider value
MMC can deliver faster, cheaper and more sustainable construction than traditional approaches. The construction industry is the most wasteful of all sectors producing 62% of all waste produced in the UK. The wider built environment is also accountable for almost 40% of greenhouse gas emissions in the UK and globally. The benefits of using MMC are generally not taken into consideration when procuring construction. A step change is needed, particularly when MMC can demonstrate substantial social value and with the ability to achieve Net Zero on projects. These are increasingly important aspects of construction.
The Value Toolkit can help enable value-based decision making focused on driving better social, environmental and economic outcomes and will allow these wider considerations to be assessed when initiating and procuring construction.
Supply chain and routes to market
There is limited capacity in the market to deliver large turnkey MMC projects. Some smaller MMC contractors are providing turnkey solutions, but the market does not have sufficient maturity to enable that to happen on a large-scale basis.
For many schemes, going via a main contractor route is essential. However, a lack of independent information at the front-end of development projects and sticking to a prescribed procurement process can be problematic. Main contractors, trained in commercial and contract management, often demand standard contracts but MMC and substantial off-site works do not necessarily fit into current standard forms of contract.
A lack of confidence in suppliers and systems is an issue, particularly redundancy of materials and the ability of another supplier to take over delivery if the manufacturer goes out of business. This creates a risk of delay, especially for bespoke systems, as replacement providers may not be able to adapt their process and technologies easily. This may lead to revisions to planning permissions and further delays.
Normally, supply chain default is a main contractor risk but difficulties of finding replacement providers and planning delays may need a reappraisal of risk allocation.
Shift in culture and mindset from builder to service provider
Research by the Cambridge Centre for Housing and Planning Research highlighted that in current construction practices there is resistance to MMC at an individual and organisational level. To be a success, transformation strategies must be simple and repetitive so that MMC practice and culture is instilled.
Organisational development is challenging and requires a wholesale transformation process that includes the adoption of technology and the ability to manage complex supply-chains in the same way that the automotive sector operates.
The contracting process for MMC needs to be improved
The contracting system must be improved to make MMC delivery easier. For example, do you use JCT in its current form or tailor the contract to make it applicable to MMC?
The public sector, driven by a need to deliver housing at speed, is shifting more towards novel JCT drafting than the private sector.
Current delivery models are a concern due to a concentration of value in risk allocation. Often, a large portion of risk can end up sitting with one procurement partner. Specialists will not want to absorb the risk, but neither will those on the ground. In design and build, the main contractor ends up wrapping the risk in circumstances where it has little control or experience of the specialist supplier. Modular suppliers are generally willing to be responsible solely for their product.
In practice, it is often the case that the bases for the modular construction need to be designed and constructed to precise tolerances and the modular contractor will have the ability to reject the quality of bases if this is not adhered to. This creates a potentially significant domestic issue for the main contractor with its supply chain around a key interface which can delay projects.
Instead of a main contractor-designer relationship, a team-based approach working to an output specification could work. A shift to P-DfMA where designers work with manufacturers and where onsite construction is seen as an assembly process is needed to drive efficiency.
The advantage of modular construction is in large scale developments where the same products can be used. In those circumstances, a framework agreement could be an option, taking into consideration the following:
- A dedicated project board focused on improving the use of MMC
- Factory turnaround times
- Project management schedule
- Provisions around minimum throughput
Another alternative is to utilise a construction management structure, where each contractor is responsible for its own works. With fewer key interfaces between trades, this risk may be reduced for clients.
Payment Terms and Security
In MMC processes, construction takes place both at the factory and development site but there are integrated materials and added value. Where MMC products are supplied from a different country, it is important to understand how the law works in that jurisdiction.
Security packages tend to be in the form of parent company guarantees (PCGs) or security bonds. If you pay up front in a contract, an advance payment bond is required unless for something substantial which would amortise against valuations as the project progresses.
The payment process needs to be considered carefully to understand what is being paid for, when and who has title to the off-site materials at each stage of the process. There may need to be a chain of vesting so that materials vest in the main contractor and in turn in the client. Knowing who owns the materials is fundamental if there is the need to retrieve them in the event of default. Safeguarding the project by using step-in rights may also be taken into consideration.
Acquiring working capital bridge finance in the UK from the main banks can be difficult, but ensuring this finance is lined up and certain is essential.
How can we accelerate use of MMC in the procurement process?
Having well informed design and a good understanding of what type of MMC process will deliver the most benefit is essential. Using an open protocol design allows for flexibility in the supply chain route. Scope, definition and interface are crucial. There must be adequate definitions, a proper sign-off and handover process to ensure that everything is installed on site correctly.
Data and the role that MMC can play
Data is increasingly important in procurement, particularly in relation to the Building Safety Bill. For traditional design and build, it is difficult to know exactly what products and materials have gone into the build. Off-site construction largely solves this issue as there is more information available on the products and more certainty as to the materials used.
Digital twins are essential in disclosing the carbon content of a development before construction and constructing more efficiently and profitably.
By using smart-building tools, each individual layer of construction can be tracked using sensor technology. Data can be used to demonstrate how a building performs to ESG standards over time. It also enables any issues to be identified early and rectified.
The Golden Thread in construction procurement and delivery should also cover environmental information as well as building safety.
Construction Insurance and risk
For MMC, insurance is still required to cover risks on site such as works insurance, public liability cover and professional indemnity. Additionally, there are also insurance risks at various stages prior to materials arriving at site. Insurance is required for transportation, especially if products are shipped. Materials held in separate storage also need to be insured. At each stage, parties will need to assess who bears the risk and who should insure.
The nature and responsibility for design of modular products must be explored. As a manufactured product, fitness for purpose is foremost. Housebuilding lends itself to MMC techniques.
There is the potential for a bespoke MMC insurance product but collaboration between the insurance and construction industries is essential. A greater awareness of MMC processes within the insurance industry is needed.
Conclusions
- Cultural change – Transformation strategies can help to instil a cultural change and overcome resistance to MMC within organisations.
- Costs and accounting for social value – there is a lack of understanding about the non-costed benefits of MMC, including environmental, social and governance benefits.
- Data is an increasingly important aspect of procurement – to comply with building safety and fire safety regulation, it is important to understand what products and materials have gone into the build. With off-site construction, more information is available on the products and certainty as to the materials used.
- Contractual models must evolve to meet the needs of MMC – contracts need to become more flexible to recognise cost and risk allocation – particularly in view of the “golden thread” initiative envisaged by the Building Safety Bill.
- The public sector leads the way in take-up of MMC – the public sector, driven by a need to deliver housing at speed, utilises MMC to a greater extent than the private sector. Showcasing the benefits of using MMC could encourage further innovation within the private sector.
Graham Robinson is Global Business Consultant at International Law Firm, Pinsent Masons and Global Infrastructure and Construction Lead at Oxford Economics.
Nigel Blundell is Infrastructure Partner at International Law Firm, Pinsent Masons.