Complex projects are increasingly relying on off-site manufacturing to help deliver schemes on time and budget. But a new kind of supply chain creates new kinds of risks

Steve Williams and MatthewTaylor

Pre-fabrication is increasingly used by the UK construction industry to deliver complex buildings in challenging locations within tight time and cost constraints. The industry has seen significant benefits by reducing accidents, shortening programmes (with associated cost savings) and achieving greater quality control through off-site manufacture. 

The success story of the Shard’s spire, erected in a field in Yorkshire, dismantled and then re-assembled on site, has been well publicised.

As components pre-fabricated off site become more complex and costly, and are increasingly made outside the UK, several legal issues are thrown up for the industry to consider.

Projects with significant prefabrication are likely to require larger payments up front as more work is done off site. It is not unusual for payments to be made in advance for long-lead items manufactured and stored off site such as lifts and cladding, but this is increasingly relevant for off-site manufacture of the structure and building services. It will be important that employers include express provisions in building contracts giving them rights over such valuable off-site materials. 

Protection against supply chain insolvency can be put in place by the use of bonds for off-site materials or the physical separation and identification of materials at off-site facilities. Project insurance policies can also mitigate insolvency risk. Where projects are debt financed, lenders will inevitably want to approve drawdown profiles, contracts (probably down to the first tier of subcontracts), security and insurance arrangements. 

Where projects are at the cutting edge of technology, suppliers will be reluctant to grant intellectual property rights

Greater pre-fabrication could mean an entire off-site facility being given over to one project. To protect materials in those circumstances an employer may consider taking security over the whole site. For sufficiently large projects employers and contractors may consider setting up project-specific fabrication facilities to provide certainty and control over off-site manufacture.

The complexity of components manufactured off site presents its own challenges. Whether product warranties are appropriate for what may be specialised or bespoke products is questionable. If specialised design is carried out further down the supply chain then the prospect of design obligations being taken on and warranted by more parties will increase. It may reach the point that contractors are uncomfortable with the risks associated with proprietary design and become unwilling to take on that design responsibility.

The answer may then lie in the parties adopting a “design, supply and construct” route with the employer directly procuring the design and the product from the manufacturer, and engaging the builder to install and construct. Procurement models would change and single point responsibility may not be possible. This will muddy the waters when things go wrong. Is the M&E defect down to faulty wiring in the factory or bad installation on site?   

When the off-site facility is outside the UK, issues of foreign law arise. For example, a UK contractor may find that a subcontract with a German supplier is governed by German law and subject to arbitration in Zurich. As supply chains spread around the world the risk of having to deal with disputes in different forums and different jurisdictions increases.

This may be further complicated if, for example, the subcontractor is manufacturing parts of the building services and is also installing those components on site. That subcontract could be a construction contract for the purposes of the Construction Act which raises the prospect of a tension between adjudication, and enforcement in the English courts, and a contract subject to the laws of another
country and the jurisdiction of their courts or arbitration. 

Where products are at the cutting edge of technology suppliers will be reluctant to grant intellectual property rights, to protect business.  For owners this presents a challenge for operating and maintaining plant and they may become tied to the manufacturer for years to come.

Given the benefits in terms of health and safety, quality, programme and cost it seems likely that pre-fabrication in the UK will only increase. Although this presents some interesting challenges for those of us advising on these projects, they are challenges that need to be tackled as pre-fabrication is here to stay.

Steven Williams is a partner and Matthew Taylor is a senior associate in Nabarro’s infrastructure, construction and energy team