How do you construct a 57-story building with 19 atriums, 800 apartments and office space for 4000 people, in just 19 working days1? By building 95% of the parts in a factory and then gathering 1,200 site workers to stack it (albeit not quite like Lego as some headlines would have you believe). Footage of J57 SkyTown being built in Changsha in the Hunan Province became an internet hit. But arguably, most of the work really took place in a factory. This is the world of modularisation where impossible timescales become eminently more achievable.

Increasingly, developers in Australia are turning to advances in technology to drive efficiencies. One particular way in which they're achieving this is by harnessing the ideas that revolutionised the car manufacturing industry and applying them to their own industry for buildings including hotels, apartments, retirement villages and schools. This is known as modular construction, whereby a building is constructed off-site using the same materials and designed to the standards of conventional on-site construction. There are also opportuntities where site constraints are an issue such as constructing over operational rail lines.

This brings about benefits in terms of minimising environmental disruption, improving sustainability outcomes2 and achieving high-end results at a more affordable price. Construction time is significantly reduced but there are, however, certain risks associated with the approach. So where do these considerations lie?

INCREASED USE OF BIM

Whilst it isn't seen on every project in the construction industry at the moment, BIM is increasingly being used as a key tool to improve productivity. As it is built around a three dimensional model, it allows embedding information relating to components like materials, lighting, energy, ventilation or packages of work. This creates opportunities for design and architectural and informs construction optimisation decisions at the outset of a project through to completion. The integrated workflow allows designers, contractors and prefab and modular manufacturers to understand the implications of their design and construction decisions. Site issues such as transportation and assembly and commission of the prefab units or modules can be considered and addressed early. This IKEA like approach with site assembly instructions allows greater efficiency.3 However, given the significant planning involved at the outset, it is important that the modelling is flexible and updated throughout the project to deal with any unforeseen events.

SUPPLY CHAIN LOGISTICS RISKS

While the project site constraints impose an exceptionally long construction schedule, modularization achieves a shorter schedule by substantially reducing the amount of work on-site. It is prudent, however, to understand the supply chain logistics and procurement arrangements with the manufacturers of the prefab and modules.

This requires additional forward planning and coordination of the design and manufacture process off-site and shipment to the site. There is less opportunity for flexible changes in the manufacturing approach once the design has been decided upon. The level of finishes for each individual module should be considered with the potential economies of scale, as well as the need for customisation.

While some structures are very repetitive in nature, other projects such as those used in mining may require fewer individual modules, but each with a higher level of complexity. Contingency plans will need to be put in place to address potential issues such as closure of the manufacturing facilities due to fire or insolvency of the manufacturer.

It is prudent to monitor the financial health of the manufacturers and have alternative suppliers if an unforeseen situation occurs. Some supply contracts require purchasers to provide deposits or advance payment guarantees to secure the set-up of tailored manufacturing lines for the prefab. Part of the contingency plans may require the purchaser to have priority rights to take out completed but not delivered products, perfecting PPSA4 registration and in the case of offshore procurement, managing the risk by staggering the volume of each shipment.

While quality is a major driver for off-site construction, poor quality assurance processes at the manufacturing plant can also have serious consequences for the project delivery. Depending on the process adopted, if the quality issues are only identified during the delivery and installation stages, other parts of the project which are dependent on the manufactured component will be substantially delayed while the defective components are replaced.

MANAGING THE COMMERCIAL AND LEGAL RISKS

An effective investment and procurement strategy requires consideration of the commercial and legal implications in managing such contracts. Key considerations include pricing, technology, fitness for purpose warranties, intellectual property, pre-contract information, limitations of liability, termination rights, workplace health and safety, title, ownership and international supply issues.5

WARRANTIES OF MERCHANTABILITY AND FITNESS FOR PURPOSES

In addition to statutory warranties provided by various sale of goods legislation in each state and territory and the Competition and Consumer Act 2010 (Cth), most supply contracts will require the suppliers and manufacturers to provide fit for purpose warranties. The High Court case of Clark v Macourt6 confirmed that damages for breach of contract must put the owner in the same situation as it would have been had the promise been performed.

INTELLECTUAL PROPERTY

The intellectual property behind the design and manufacture of prefab and modules is important and must be managed properly. It is important to be clear as to who owns the intellectual property rights, and what rights the other parties have to use those rights both inside and outside of the project.

GOOD INDUSTRY PRACTICE

A contractor will generally be required to deliver and maintain the relevant system to the standard of "Good Industry Practice" or "Industry Best Practice". This can be defined in various ways. From an owner's perspective, it can require the contractor to ensure that there are continuous improvements, responses to advances in technology and incorporation of internationally accepted practices. It is common for this standard to demand a degree of skill, care, diligence, efficiency, prudence and foresight which would be expected from a person working on projects of commensurate type, size and value.

WHS REQUIREMENTS

The Work Health and Safety legislation imposes duties on a person conducting a business or undertaking to ensure, amongst other things and so far as reasonably practicable, the health and safety of its workers and a safe working environment.7 It also requires people who design plant, substances and structures to ensure, so far as is reasonably practicable, that they are without risks to health and safety8. A designer is considered to be a "person conducting a business or undertaking" (PCBU) if their profession, trade or business involves:

  • preparing sketches, plans or drawings for a structure, including variations to a plan or changes to a structure; and
  • making decisions for incorporation into a design that may affect the health or safety of people who construct, use or carry out other activities in relation to the structure.

This will require manufacturers and suppliers to carefully consider these duties when designing and manufacturing prefab and modules for construction.

TITLE AND RISKS

It is important to clearly identify when both title and risk in goods pass to the owner. Sale of goods legislation in Australia provides that ownership passes when the parties intend it to pass.9 Payment for, delivery of, and ownership of goods are separate legal questions. Title usually passes upon the earlier of payment for or delivery of such items to the site (but this may be varied by the parties' express intention).

Risk and care of the goods usually belong to the supplier until "completion" or a similar concept under the contract. Alternatively, transfer of risk in goods can accompany the transfer of ownership. These issues can have significant impacts upon responsibility for care of the works and reinstatement of damage. It is also prudent to contract out of the Vienna Sales Convention to avoid its application which may alter the terms of the contract.

PPSA

Supply contracts will require consideration of the application of the Personal Property Securities Act 2009 (Cth) (PPSA). Supply contracts often contain security interests such as leases that meet certain threshold time periods and retention of title arrangements. Security interests need to be perfected, which is best done by registration, in order to preserve priority under the PPSA. Recent case law demonstrates the importance of knowing and understanding the PPSA regime. In particular, the importance of registering security interests and the consequences of not doing so.10

CUSTOMS DUTY AND TARIFFS

Importation of goods into Australia is subject to a variety of legislation. The key statutes are the Customs Act 1901 (Cth), which broadly regulates importation, and the Customs Tariff Act 1995 (Cth), which imposes customs duty. If a procurement contract involves the importation of equipment into Australia, the parties will need to consider customs duty. The duty is generally calculated by imposing a percentage rate on an ad valorem basis. In general, the customs value of the goods is assessed as the free-on-board value.

LEGISLATIVE CONSIDERATIONS

Where the modules are used in residential buildings, the relevant contracts will need to take into account the requirements of various legislation. In New South Wales, they include the Home Building Act 1989 (NSW) and related legislation such as the Strata Schemes Management Act 2015 (NSW) dealing with contract requirements, statutory warranties and defects.

Footnotes

1 Developer Broad Sustainable Building spent four and a half months fabricating 2736 modules, before putting up the rectangular structure mostly made of glass and steel, at a rate of three floors a day - https://www.theguardian.com/world/2015/apr/30/chinese-construction-firm-erects-57-storey-skyscraper-in-19-days.

2 Using 20cm thermal insulation for walls, four-paned super white glass windows, 100% filtered fresh air, and a combined cooling, heating and power system, J57 SkyTown is said to be 5 times more energy efficient than its conventional counterparts - https://www.theurbandeveloper.com/57-storeys-19-days-modulars-new-innovation.

3 Chew, A and Riley, M, 'What is going on with BIM? On the way to 6D' [2013] ICLR 253; Neelamkavil, J, 'Automation in the Prefab and Modular Construction Industry', ISARC 2009.

4 Under the Personal Property Securities Act 2009 (Cth).

5 For further information see Chew A, Crouch, G, 'Equipment Procurement Contracts – Managing the Key Drivers', [2014] ICR 355

6 (2013) 253 CLR 1. The same principles of assessing damages was also later confirmed in Chand v Commonwealth Bank of Australia [2015] NSWCA 181.

7 For further details, see the Work Health and Safety Act 2011 (Cth) and the Work Health and Safety Act 2011 (NSW).

8 See section 22 of the Work Health and Safety Act 2011 (NSW).

9 See, for eg, section 22 of the Sale of Goods Act 1923 (NSW).

10 See, for eg, Maiden Civil (P&E) Pty Ltd; Richard Albarran and Blair Alexander Pleash as receivers and managers of Maiden Civil (P&E) Pty Ltd & Ors v Queensland Excavation Services Pty Ltd & Ors [2013] NSWSC 852 where the Supreme Court held that a registered security interest prevailed over unregistered legal title under the PPSA in an equipment hire arrangement.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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