Modern methods of construction - contractual considerations
Following our last two articles in our series regarding “modern methods of construction” (MMC), this article will focus on contractual issues to be considered when drafting contracts related to projects using MMC and in particular, off-site construction.
Off-site construction involves part of a project being manufactured in a factory, before being transported to its eventual destination. Due to the different risks and considerations involved, the nature of off-site construction projects is not always compatible with traditional construction contracts, and therefore certain elements should be considered when negotiating contractual arrangements. These considerations are likely to become increasingly commonplace as the use of off-site construction continues to rise.
Ownership and risk
Due to the nature of off-site construction projects, it will be crucial to ensure that the relevant contractual provisions specify the owner of the off-site goods at each point within the project, such as manufacture, transport and construction, and ensure that the client is entitled to the goods once complete. The contract must also not provide the manufacturer with any retention of title over the goods once ownership has transferred to the client.
As it is likely that ownership, and the associated risks, will pass to the client before it has any physical control over either the goods themselves, or their storage location, the contract terms will need to be clear as to when the risk passes, such as whether it will pass on payment or delivery. It may also be necessary to include adequate insurance provisions in respect of this.
A provision providing ownership in the off-site goods upon payment should be considered, which could also be supported by a vesting certificate providing written assurance. Ownership provisions will need to consider every eventuality – including insolvency of involved parties or other risks.
It will also be important to include a provision allowing the client or their representatives to access, test and inspect the goods or materials whilst off-site, in transit and during construction. This would also assist with mitigating any defects in design and production at an earlier stage and reduce the likelihood of wasted costs, time and materials.
Once complete, the off-site goods will need to be transported to their eventual destination; provisions setting out obligations to transport them safely and suitably should therefore be considered. Subject to transport arrangements, the client may require a contractual right to enter the manufacturer’s premises to collect the goods on termination of the contract.
As damage to the products during transit is a possibility, provisions should be included to identify which party will be responsible for any risk or damage during storage, transit and construction. In turn, the contract should ensure that the responsible party at each stage is required to have appropriate insurance cover.
The manufactured parts and units once delivered are usually too large to be stored on site before installation, so the timing of delivery is also important. This will require co-operation between parties and forward planning.
Liquidated damages or the associated costs of any delays (resulting from damage, delivery or otherwise) may look very different than on a traditional build, and it is important to have a realistic expectation of what those costs might be when negotiating contracts.
Parties to contracts for MMC projects are likely to consider using milestone payments rather than standard monthly payments, due to the nature of concerns about security over and payment for off-site materials. However, as always, when drafting changes to a contract, the implications have to be carefully considered.
In the case of Bennett (Construction) Ltd v CIMC MBS Ltd (formerly Verbus Systems Ltd) , the sub-contract incorporated the JCT standard form, but used some bespoke terms. This included inserting milestone payments which would be triggered by sign-off.
The contract and its amendments were not sufficiently clear and much of the payment clause was replaced in court with the standard Construction Act payment terms. There are many lessons from this case, but the most relevant for this topic is that if you amend a standard form contract, all amendments must be clear and consistent.
At the moment, no standard form contract accounts for MMC projects and all the relevant considerations as outlined above. Contracts will need to be amended from the standard form or fully bespoke to deal with the nature of offsite construction. Those changes need to be considered holistically with the rest of the contract terms to ensure continuity and clarity.
However, this should not put parties off using MMC or using offsite construction for all or part of a project. There are many benefits to MMC, and in time, contracts dealing with MMC will become commonplace.