The Housing Corporation's Kickstart programme was set up in 2001 to encourage prefabrication methods, but £35m of the £80m fund remains unused.
The corporation admits that it has been a struggle to hand out funds for the programme, which was originally due to end next year.
Clive Clowes, head of housing procurement practice and development at the Housing Corporation, said: "There was a lot of client ignorance of off-site manufacturing. Housing associations had not grasped how it works. It is still difficult." Clowes added that some associations were put off by the cost of initial schemes.
The Kickstart programme will now continue for a further two years in order to encourage more associations to take part.
Clowes said that the government's insistence that the corporation awards grants annually was also making it difficult for housing associations and manufacturers to establish the continuity to make production-line methods work.
In September, the government announced further funding for off-site manufacture of affordable housing through the Challenge Fund, which is to provide at least 1000 homes using off-site manufacturing methods in London and the South-east in 2003/4.
"Part of the government is pushing for off-site manufacturing, but we are still stuck with producing units in a given time," said Clowes.
"We are hoping that we can deliver the Challenge Fund, and that the government will then give us a longer timeframe."
Yorkon and Westbury say they are increasing production of off-site units, despite these difficulties. Yorkon said it would double production capacity for living accommodation modules at its plant in York. This will mean Yorkon will have the capacity to manufacture 600 apartments a year.
Westbury said it plans to nearly triple production to 2000 units at the factory next year, of which 500 will be sold to other firms.