Continuing our series on new technology, Maeve Gantley explains how offsite manufacturing brings specific risks that need to be covered by the contract

Maeve Gantley BW 2018

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This article is part of a series on new technology

Offsite manufacturing is not a new concept. In 1624, Massachusetts settlers built their homes out of prefabricated materials shipped from England. Today, advances in technology mean offsite manufacturing is increasingly used in construction projects. In 2015, a 57-storey tower was erected in China in just 19 days using 2,736 modules made offsite. 

The House of Lords science and technology select committee defined it in a report published in July 2018 as: 

“Components of the building manufactured off site then brought together on site, including:

  • Elements of buildings sub-assembled offsite, where essentials, such as plant-rooms or bathroom pods, are manufactured in a factory; and
  • Modules manufacturing, where whole segments of the buildings are manufactured three-dimensionally and assembled offsite, then the completed modules are fitted together on site.”

“The risk of damage to goods while offsite should be covered by insurance”

The report acclaimed the benefits of offsite techniques, including for speed, cost and safety. Clearly the approach has great potential in UK construction, particularly with the urgent demand for new housing, and it is increasingly used. 

The concept of “flying factories” shows how offsite is developing. Manufacturing takes place in a temporary facility near the site that can then “fly” to the next location. 

This has been used for the Battersea Power Station project, for which Skanska made steel frame units at an industrial site in Slough under a 12-month lease and then transported the goods down the A4.

Risks of offsite

Although the benefits of offsite manufacturing are clear, there are also risks – in particular, the potential insolvency of any relevant contractor and also potential damage to the materials while offsite.

These risks are particularly relevant where, as is often the case, the employer or main contractor has made payments towards the costs of offsite manufacturing before the relevant goods are delivered to site. 

There are several ways an employer or main contractor can seek to protect itself in such circumstances:

  • Ownership: Contractual provisions that provide that ownership in the offsite goods transfers only upon payment, with a right to enter the manufacturer’s premises to collect the goods on termination of the building contract. This can be supported by an appropriate vesting certificate.
  • Identifying offsite goods: In the event of the offsite manufacturer’s insolvency, the above contractual provisions should entitle the employer or main contractor to demand the goods from the relevant insolvency practitioner. However, the success of such a demand will depend on being able to identify the goods. The contract should therefore require the offsite manufacturer to segregate the employer’s goods on its premises and to mark them specifically as the employer’s property. It is important to check that such requirements are being complied with in practice.
  • Advance payment bond: This will allow an employer or main contractor to recover payments if the offsite manufacturer fails to deliver the finished products in accordance with the building contract. Advance payment bonds have the advantage that they protect the payments made, rather than the goods that are purchased by such payments. The employer can thus avoid any issues with distinguishing ownership of goods, which can be particularly relevant when they cannot be sufficiently identified as belonging to the employer – for example, at an early stage in the manufacturing process where generic materials are being used to manufacture the goods destined for the site. 
  • Offsite materials bond: This is similar to an advance payment bond and allows the employer to claim under the bond should the offsite materials not be delivered to site as required by the building contract.
  • Insurance: The risk of damage to the goods while offsite should be covered by insurance. The employer should be named on the policy so that it can claim under the policy directly.
  • Ability to inspect: The employer should also ensure that they have provisions in the building contract allowing access to the offsite facility in order to inspect the quality of the goods or materials.

Summary

While those Massachusetts settlers may have successfully completed their construction projects using offsite techniques without the need for well-drafted contractual protections, in modern construction these are a must. 

Issues with ownership, payment, storage and quality control should all be carefully considered. Provisions should be made in construction contracts to limit the risks of offsite manufacturing so its clear benefits can be enjoyed by everyone involved in the process.

Maeve Gantley is an associate in the construction, engineering and projects team at Charles Russell Speechlys

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