Offsite modular construction typically involves constructing significant parts of a building in modules offsite, usually within a factory, before delivering those parts to site for installation. It is not a new method of construction, but the increase in use of this method for specific types of projects, such as BTR schemes, and indeed the impact of the pandemic, has brought the potential benefits back into sharp focus.

The use of offsite modular construction has also been advocated widely within the public sector, particularly for the housing market, and has been identified as a means of overcoming difficulties in construction in remote and densely populated areas where construction on site is difficult or impractical. A January 2020 report commissioned by the Scottish Government, Scottish Enterprise and the Construction Scotland Innovation Centre found that "when correctly applied, the use of offsite construction can benefit the provision of affordable housing in Scotland".

What are the potential benefits of offsite modular construction?

  • Increased productivity, and efficiency in cost and programming.
  • Better quality construction and increased durability.
  • Improved construction process in remote and densely populated areas.
  • Reduced waste, energy consumption and carbon emissions.
  • Improved health and safety through construction in a quality-controlled factory environment.

How should we provide for offsite modular construction in construction contracts?

It is important to consider the legal implications of using offsite modular construction in projects, the potential risks (particularly to the developer) and the contractual mechanisms which can be put in place to effectively manage the process.

The primary risks to a developer of using offsite modular construction include contractor and sub-contractor insolvency and damage to goods and materials whilst they are being manufactured or held offsite.

Possible ways to manage and protect against such risks are:

Offsite Materials Agreements (OSMAs): OSMAs should be entered into where payment is being made for goods and materials being stored offsite. OSMAs will ensure title vests in the developer upon payment, rather than upon delivery to site and incorporation into the works (which is the Scots Law position).

    OSMAs may be entered into with the main contractor only, or, where materials are being stored further down the contractual chain by sub-contractors, with those particular sub-contractors as well.

    Difficulty can arise where payment is made for 'raw' products and materials that are yet to be assembled into components. In those instances there may be little value to the developer in securing title to such component parts. This should be considered when determining the basis for payment for offsite goods and materials.

    In addition to title transfer, OSMAs will often include provisions dealing with the identification of goods and materials, rights of inspection for the developer, responsibility for risk of damage and destruction to goods and materials while off-site, and insurance.

    Insurance: Typically, the risk of damage and destruction as well as responsibility for the storage and handling of offsite goods and materials would be passed to the contractor and appropriate insurance obligations imposed. Developers should consider requiring that they be named as co-insured on any such insurance policy, so they can claim directly if required in relation to loss of/ damage to such materials.

    Advanced Payment Bonds: An Advanced Payment Bond will protect the payments made to the contractor upfront as opposed to the specific goods and materials, and may be particularly useful in cases where payments are made for 'raw' products and materials, as mentioned above. If the contractor fails to deliver the finished components in accordance with the contract, the developer can recover the payment secured. There will, however, be a cost for obtaining an Advance Payment Bond, which should be considered, and these are currently quite difficult to secure in the market.

      Is offsite modular construction the way forward?

      Offsite modular construction is increasing in popularity for use in a variety of projects across the UK.

      It will be interesting to see how the industry develops over the coming years and if it continues to embrace more innovative methods of construction.

      The current pandemic has provided a moment for reflection and recent successful projects that have incorporated offsite modular construction, such as NHS Nightingale Exeter, may provide the encouragement needed to bring this method of construction to the forefront of the industry in the UK.


      Harriet Rutherford

      Senior Associate