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A tipping point for modern methods of construction: Key procurement and contractual issues

On 22 February 2023, Minister for Enterprise, Trade and Employment, Simon Coveney TD hosted a construction sector stakeholder event focused on identifying ways to drive innovation and boost productivity in residential construction, including through the adoption of modern methods of construction under Housing for All.

It is understood that feedback from the event will be used to inform the development of a roadmap for MMC adoption in publicly procured residential construction under the Housing for All Action Plan.

The Department of Enterprise, Trade and Employment has established and chairs a MMC Leadership and Integration Group, a cross-departmental and cross agency group tasked with identifying and progressing actions to accelerate innovation and MMC adoption in residential construction. One area of focus is the progression of new procurement approaches in social housing that will promote the use of MMC.

In the midst of a continuing housing crisis, together with an increasing focus on decarbonisation and net zero targets in Climate Action Plan 20231, a means of construction that promises improved speed of delivery, better environmental performance and waste reduction, amongst other benefits, seems like low hanging fruit. However, when one considers the MMC approach and the market itself, it soon becomes apparent that what might be an appropriate procurement and contractual route for traditional construction is not necessarily suitable for MMC. Therefore, work is required to be undertaken to consider the appropriate procurement approach in order to leverage the advantages that MMC could undoubtedly bring as part of the solution to the housing crisis.

What is MMC?

MMC covers different types of construction which involve significant portions or all of the building being manufactured in a factory setting and joined together on site.

This article considers some of the key procurement and contractual issues that make MMC different, which in turn calls for a legal approach that differs from the well-trodden path taken for traditionally procured projects.

Procurement route to secure early contractor/supplier involvement

Unlike traditional methods of construction, MMC requires earlier decision-making associated with the manufactured elements. Engaging the supply chain early could be achieved in various ways from a procurement and contractual point of view. The use of framework agreements, single or multi-supplier, would appear to be the most logical means through which to secure the early involvement of the supply chain, giving manufacturers the benefit of a pipeline to plan and invest in appropriate resources to meet the demand.

The Guidance Note on Modern Methods of Construction, published by the UK Cabinet Office2, suggests several possible procurement routes involving direct engagement with the supply chain manufacturer, which is subsequently novated to a main contractor with single point design responsibility or an integrator-led approach with the ‘integrator’ having responsibility for the overall coordination for the various manufacturing supply packages. Having an umbrella collaboration agreement, such as the FAC-1, could also be used to incentivise and reward the achievement of agreed objectives for a project or portfolio of projects involving multiple contractors, designers and supply chain members.

Intellectual property: Consideration is required as to the ownership of any intellectual property rights in products. In the normal course a manufacturer would seek to retain ownership of any IP rights, but there may be a need for the client to own the IP rights or have a licence to use them for the project or its re-development or extension in the future.

Insurance: Insurers use historical data to quantify and evaluate risk. Research has identified that the limited loss data for MMC3 makes it more difficult for insurers to understand trends and quantify potential risks which has resulted in a cautious, conservative approach to underwriting projects that use MMC, posing a challenge for the adoption of MMC. In addition to considering the overall insurance package, insurance of the loss or damage to products in the manufacturing process or the transportation of completed products is critical.

“We need to step up our collaboration between the public and private sector to develop and implement workable solutions to accelerate the adoption of innovation and modern methods in construction.”
Minister for Enterprise, Trade and Employment, Simon Coveney TD

Long lead items and ownership of off-site materials: There will commonly be a requirement to make advance payments to secure a manufacturing slot and to start production of products off-site. Security for any payments in advance for goods and supplies not yet incorporated into works needs to be carefully considered, including the use, as appropriate, of advance payment bonds or parent company guarantees. Vesting certificates can also be put in place to record that ownership in the goods rests with the client where payment has been made and confirming that the goods must be stored separately and identified as the goods of the client, in order to defeat any retention of title claims.

Changes: Manufacturing requires all elements to be fixed prior to going into production. Late changes by a contracting authority can be costly and lead to delays. Ways to mitigate this risk is to require the contractor to identify critical activities and dates in its programme to support an efficient manufacturing process, the agreement of a design freeze date for the manufacturing-related elements of a project and early warning of any event that is likely to delay the manufacturing process.

Audit and inspection: Contracting authorities may require more detailed inspection, quality assurance and audit rights over manufacturing facilities. The mass production of pre-manufactured components means that defects could be widespread and involve significant time and cost if a large volume of impacted components required replacement. Inspection and auditing processes would be a means to mitigate this risk.

Other: Risks to be considered in any contract may be the shortage of skilled personnel to carry out repairs subsequent to the installation of the manufactured products and completion of a project. Product warranties and performance guarantees may become a feature to minimise such risks. Any delays in the transportation of goods or delays in the incorporation of products held on site into the works, leading to water ingress/damage, is another risk to be considered. Close oversight of the programming of works including the right to require regular updated programmes, early warning systems and collaborative working practices may be a means through which to seek to address such risks.

Lean: Incorporating lean practices into the construction process as a contractual requirement would certainly appear to complement the MMC approach and assist with collaboration and the minimisation of identified risks.4

It appears that we are at a tipping point for the use of modern methods of construction in the development of residential housing in Ireland. Encouragingly, government bodies are seeking to drive the agenda forward, recognising its potential role in solving the country’s housing crisis. New technology and approaches bring new challenges – given the possibilities, it certainly seems worthwhile seeking to address these and find the appropriate path forward.

Angelyn Rowan, Partner,
Projects and Construction

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