Offsite/modular construction for complex projects – risk implications

A brief examination of the perceived benefits of offsite modular construction serves to identify the potential gains achieved by this approach, and enables an assessment of how that might affect legal and contract risk for owners and contractors. 

Advocates of offsite modular construction typically herald how this approach can, for example, deliver:

• Shortened and/or more predictable on-site construction periods – offsite manufacture of modules should allow for quicker installation and construction on site, leading to time gains. This can be particularly important when working in climatic conditions that place severe restrictions on the efficiency of on-site construction. However this switch in emphasis to offsite construction increases the importance of ensuring the expected efficiency of that phase of work, especially since it often involves multiple vendors across multiple and distant locations. This requires an adjusted approach to project management and completion risk. Most obviously, if a project schedule assumes completion and delivery of offsite modules to enable on-site installation, and delays occur, it can be difficult to react to and overcome such delays. There can be the temptation and pressure to deliver incomplete modules requiring ‘carry over’ work on site. This can lead to its own challenges, given the potentially limiting facilities and lack of resources available at site to complete this work, and may lead to the outstanding work being conducted less efficiently and less productively. Further, time savings achieved in the on-site construction phase must be balanced with the time taken to complete design and offsite manufacture, as well as the more challenging transportation and logistics involved with delivering to site the completed (and sometimes very large) modules.
• Reduced demand for skilled on-site labour – sourcing adequate numbers of skilled labour in some countries can be extremely difficult, especially in relation to specialised trades. Offsite manufacturing allows work to be completed away from site in a more suitable/‘skills-rich’ environment. There is an added benefit for projects in countries with restrictive labour and/or immigration laws, or where the bureaucratic burden of securing work permits, residence permits and visas can be significant. There are also significantly reduced costs in terms of the contractor’s site costs, realised by, for example, reduced site infrastructure and camp requirements. The risk of labour unrest in the country where the site is located is also reduced, as much of the work has already been completed by the time the modules arrive on site. However, the switch to offsite manufacture can raise its own challenges. Skilled labour in the countries typically used for offsite modular construction can be more expensive. In addition, the use of offsite modular construction can be seen as incompatible with the (increasing) ambitions that owners (and governments) have to promote employment opportunities and the transfer of skills ‘in country’. This might be addressed by developing, in country, offsite manufacturing facilities, but this does come with its own costs and challenges, and frequently requires joint venture arrangements and the ability to secure repeat work to be sustainable. 
• Improved quality control and reduced risk of defects – the standardised and controlled environment expected to be available in an offsite manufacturing facility should, in theory, result in higher-quality work, increased productivity and reduced amounts of rework. Work is more accessible and can be more easily scrutinised and tested as it is produced. These advantages are easily envisaged, but perhaps more difficult than imagined to achieve in reality. Offsite modular construction is becoming more popular, attracting new market entrants and others who have adapted their experience to new and related areas of expertise. For example, a number of leading shipyards have broadened their business to include offsite modular construction for onshore projects. These vendors and contractors can be unfamiliar with or resistant to the ‘hands on’ and vigilant oversight that owners and their consultants typically deploy to monitor both the progress and the quality of the works. Owners are, perhaps understandably, reluctant to wait for their module (product) to arrive at site before undertaking detailed checks and testing – unless it is a simple and/or frequently repeated item. Further, for more challenging projects, and as addressed above, it is imperative that employers have a good awareness of the progress of the works and any delay issues arising which might impact timely delivery. Project and quality management therefore needs, in effect, to shift (in part at least) from on-site to offsite. This requires a real investment by owners and real accommodation by offsite vendors and contractors. The level of oversight and the level of interfacing and integration needed become even more important, and challenging, where several offsite facilities are being used to create significant inter-related elements of a project. The approach to and level of project management needed for this kind of offsite modular construction can be ignored, or certainly underestimated, in the face of the promises and assumptions often made concerning the ability to achieve a consistently high quality of work offsite.
• Reduced on-site logistics and wastage of materials – offsite modular construction can allow contractors to reduce everyday logistics and material or equipment deliveries to site. A contractor can, in theory, then optimise deliveries and be less reliant on a day-to-day local supply chain. This can be a particular advantage when projects are being undertaken in remote or otherwise challenging locations that have limited access to important construction materials and equipment. Offsite (and repeat) manufacture of project elements or modules should also ensure the minimum wastage of materials used in their construction. However, the switch to extensive offsite modular construction raises its own challenges and risks. It is perhaps true that regular deliveries are reduced, but delivery of completed elements or modules may require specialist (and expensive) transportation and the creation or adaptation of local access and infrastructure, and might limit or reduce access options at, for example, ports and terminals. It is also important to review the customs regime that might influence the ability and cost (including taxes and duties) of importing completed modules. In addition, the criticality of deliveries is heightened – a failed or late delivery of a completed element or module may well threaten completion of the project as a whole. With that level of risk comes the need to carefully manage and ensure release of work by offsite vendors and contractors and thereafter its delivery into owner control for use in the project. The fact that works are being completed offsite and remain in possession of the offsite vendors and contractors is an advantage that can be exploited in terms of negotiating positions on payments and claims. Significant on-account or advance payments will typically be required by offsite vendors and contractors, and there is a risk, rightly or wrongly, that the resolution of claims can become linked to the release of work.

How to realise the benefits of offsite/modular construction

There are clear potential benefits from employing offsite modular construction. However, this brief alert seeks to suggest that for those benefits to be realised, the changed risk and challenges involved in adopting such construction techniques need to be recognised and addressed, in both the approach to project management and in the contracts used by the parties. In our second alert, we will examine those implications for project management (by both owners and contractors) and discuss if the standard forms of construction contract can and do adequately address the changed risks.

Client Alert 2019-204