Contracts for Offsite Construction

CONTRACTS FOR OFFSITECONSTRUCTION

A look at the main contractual differences emerging with the increasing use of modular design.

Where project critical components are sourced offsite, care must be taken to protect the project stakeholders from unexpected losses which arise from not providing for the increased risk profile.

Historically, construction contracts in canvassing the various issues associated with contract risk relied heavily on clauses allowing considerable supervision through onsite quality control processes. With the emergence and adoption of offsite construction however, we now see a requirement for the offsite construction contract to evolve to protect the interests of all interested parties given a vitally different risk profile.

RISK PROFILES

Compare the traditional position where a builder in 1920 employed a bricklayer to erect a façade against a modern builder sourcing an aluminium and glass façade from China.

More “traditional” building practices allowed for clients to exercise a substantial degree of control over the project; from inspecting the mortar mix, checking tolerances and allowed much flexibility in requesting ad hoc plan changes.

This approach also allowed the client to manage and mitigate their risk exposure accordingly. Enter the modular disruptor, who typically accepts an order from the client, manufactures the component in isolation from the construction site and delivers to the site a finished product, with very little room for error.

In order to ensure sufficient protection is provided to the client, contracts should include clauses covering title, intellectual property, fitness for purpose warranties, damages, insurance and dispute resolution at a minimum.

PROCUREMENT

The supply chain logistics usually associated with construction contracts allow for extended schedules, predicting delayed stakeholder engagement, approval processes and flexibility regarding variations and EOT claims (notably for variations, latent conditions, industrial action and inclement weather).

Offsite construction goes a fair way in relieving the pressure of potential delays by locating production in an enclosed location, usually a factory, thus less prone to the whims of nature and uncertainty.

But there is a price for this efficiency: precision and time. In the early stages of planning, firm decisions are required to proceed with the offsite build and there is limited scope for a protracted approvals process. Thus, it is imperative that engineers, designers and builders work together from the outset towards the same outcome to ensure everyone is on the same page – and constructing the same project.

DESIGN

Planning becomes a paramount consideration, with design taking a front seat in offsite construction. Designs need to be approved well in advance of production, and there may be little to no room for change once manufacturing has begun, locking in the buyer to the finished product. When compared to traditional construction, which inherently carried a high degree of flexibility in design – changes could be carried out onsite ad hoc – modular design requires exceptional project and stakeholder management in order to manage expectations and deliver quality to a tight cost and time schedule.

OWNERSHIP

An important question for buyers of offsite construction is when do they own the offsite manufactured product? Is it when they accept/approve/provide designs to the manufacturer, secure raw material, once the product is made or when it is delivered?

This issue overlaps with insurance which we will discuss further below, but with regards to title drafters must ensure that the contract captures the appropriate contingences in order that their client is protected.

Typically, ownership vests with passing of possession unless a contrary intention is expressly noted in the contract. It is considered best practice however to ensure ownership is clearly specified to pass much earlier.

Critically if the product is a standard item produced by the manufacturer with a long lead time then redirection to another customer of the manufacturer is a matter of concern.

INSURANCE

Closely linked to the risk profile discussed earlier, the contract should also address relevant risks of the loss of manufactured components, with each covered under an appropriate insurance policy to be held by the builder or owner.

If the manufacturer or intermediaries become insolvent prior to completing production and delivery, the contract should provide adequate protection to protect the client’s interests in the components particularly when payments have been made.

ARBITRATION

The contract with the 1920 bricklayer would be easily resolved in the Local Magistrates Court, but offsite production is often overseas and the only effective resolution scheme requires an international arbitration clause. If well considered, the arbitration process leads to effective enforcement in a foreign country as well as expedited procedures and reduced costs.

CONCLUSION

Where project critical components are sourced offsite, care must be taken to protect the project stakeholders from unexpected losses which arise from not providing for the increased risk profile.

This article has been provided by Doyles Construction Laywers. www.doylesconstructionlawyers.com

THE BUILDING ECONOMIST - MARCH 2019 - 11