By Ir Dr Eddy W T LAU
Contractual issues of using modular integrated construction
In a previous article on modular integrated construction (MiC), the technical details and challenges of adopting this modern construction techniques were discussed. In brief, this technique allows the industry to transit from traditional construction to factory-based manufacturing. It will unlock the benefits from standard, repeatable processes that are typically used in a factory.
The MiC technique has a number of obvious advantages. However, there are two fundamental contractual issues that need to be taken into account when adopting this method of procurement.
Pros and cons of MiC
MiC is used to describe a kind of construction technique where the structure, finishes, E&M equipment and sometimes furniture of an occupied unit are assembled off site before they are transported to a site for installation. Due to its versatility, MiC can be used for a large range of projects including:
- Residential buildings, hostels and quarters, which form some of the pilot projects being carried out in Hong Kong;
- Schools, health care facilities and prisons involving classrooms, wards or cells;
- Retail units such as festival booths and cooked food stalls; and
- Industrial works involving modules of plants such as power generation cubicles.
The advantages of MiC include:
- Shortened construction period for the superstructure and therefore reduction in supervision cost, interest cost, and so forth;
- Environmental benefits of reduced dust, noise and waste generation on site; and fewer accidents due to less construction work taking place at heights; and
- Enhanced quality due to factory manufacturing.
The challenges of MiC include:
- Programming is critical because once the modules are made, the supplier would want them to be delivered to site as soon as possible. There is some pressure on the main contractor in the sense that it has to deal with the temporary storage of modules and subsequent installation in an orderly manner;
- An installed module may be damaged whilst construction works are carried out in adjacent areas; and
- Module manufacturers typically would demand a down payment on placement of order. To mitigate against the risk of default, it is necessary to arrange an advance payment bond. However, this is procured at an expense, which can undermine the cost-reduction potentials mentioned above.
The two fundamental contractual issues of MiC are discussed below.
Module manufacturers of MiC typically wish to be paid before the units are delivered to the construction site or transfer of title takes place. However, a developer will be reluctant to release a substantial amount of money for items made off site unless the contractor can arrange title transfer immediately after payment.
The industry needs to know how this problem can be dealt with. For example, the building supervisor may mark items manufactured off site as the property of the developer, and an activity schedule may denote an activity as complete (thus ready for payment) once an offsite unit has been fabricated. Nevertheless, in reality, the supervisor may only arrange for title to be transferred to the developer if the main contractor has received title from the goods supplier, but this would require the main contractor to have paid the manufacturer - which is unlikely.
To solve this dilemma, the contract conditions may be amended to provide for direct payment by the developer to the manufacturer. To protect the developer against non-performance risk, there is a need to obtain a bond to cover the period between payment and title transfer. The contractor will have to recover the cost of the bond in its tender price. Alternatively, the module manufacturer may be employed under a direct contract with the developer, but this will weaken the single point of responsibility borne by the main contractor and may not be desirable.
When MiC is used, design freeze has to take place much earlier than traditional construction to allow sufficient time for the modular units to be manufactured off site. A problem for developers is that, in order to keep up with programme, significant up-front design costs have to be incurred to produce a level of detail adequate for module manufacturing. However, such costs may turn out to be abortive if there is a design change down the road in the property development process. For example, there may be a change to the intended flat mix or even proportions of different uses in the case of mixed-use development. Waiting until finalisation of development intents would mean that a longer lead time is required to kick start the site assembly. This will erode any time savings that MiC is supposed to bring.
When the traditional procurement approach is used, design changes may also occur when the contractor proposes an alternative design (which is different from the conforming design) before the commencement of construction. This is particularly true for MiC as design details could vary from one company to another. To eliminate this problem, a design-and-build contract may be used. The drawback of this method is that the degree of developer control over the design details would be lower as one has to rely on the attitude and ability of the design-and-build contractor to achieve the desired outcome.
Last but not least, variation orders are inevitable in any construction contracts. These will be more difficult to implement if the variations are initiated after mass manufacture or site assembly of the units has started. Clear indication of factory labour rates and site labour rates in the tender stage would be useful if future variation orders are to be priced fairly.
When MiC is used, early adoption of correct procurement and contract approach is highly important. Contractual issues should be identified and resolved at the beginning, including agreeing a critical point of time for design freeze, as well as any necessary changes to standard forms of contract particularly in the area of interim payments.
About the author: Ir Dr Eddy W T Lau is a Fellow of the HKIE. He works as the Head of Green Labelling at the Hong Kong Green Building Council and has a research interest in sustainable construction.