Legal

Out of site should not mean out of mind

25 January 2017

As the industry increasingly takes up premanufacture as a route to more efficient construction, increased risks concerning payment and supply need to be addressed, says Assad Maqbool.

Assad Maqbool

One of main themes in last year’s Farmer Review, Modernise or Die, was the need to encourage premanufactured construction.

It is not new that offsite manufacture, modern methods of construction, or prefabrication might be considered to be more efficient, but the impact of the Farmer Review is that premanufacture is likely to become an increasing theme, particularly if the recommendations in the Review to encourage premanufacture are implemented.

We are already seeing the Review’s influence in large-scale public procurements with an increase in clients’ demand for premanufactured solutions. The advantages of premanufacture include health and safety benefits and reduced time on site.

Reducing time on site is both an aim in itself and a cost advantage because construction teams are able to move onto the next project sooner and the reduce site overheads.

The creation of the more sterile environment of a factory within which conditions can be more easily controlled ought to mean that numbers of injuries might resemble those in the manufacturing industry.

According to the Health & Safety Executive’s headline figures, each year in the construction sector 4% of workers suffer from an illness they believe to be work-related and 3% of workers sustain work-related injuries. In the manufacturing sector, those figures are 3% and 2% respectively.

That kind of reduction would be hugely beneficial to the construction sector workforce and might positively impact on insurance costs and recruitment.

Increasing premanufactured approaches does raise an issue, however, in examining health and safety when the project is increasingly being carried out away from site. The CDM Regulations are clearly drafted to deal with onsite issues and the definition of “construction work” explicitly includes onsite assembly and disassembly of prefabricated elements, but does not explicitly include any prefabrication.

We are likely to see increasing contractual rights for the employer to inspect manufacturing plants, but the focus of these rights will more likely be to ensure that work is progressing (particularly in light of payment). 

Payment terms

Payment is generally a key issue with increased premanufacture. In the current environment, there is quite often a requirement for contractors and employers to pay in advance of the manufacture to “secure a slot” in the production line, but this may increasingly be challenged on the basis that suppliers in the construction industry are generally paid for work carried out and costs committed, rather than in advance.

To the extent that there is advance payment, there may be increased requirements for advance payment bonds to mitigate against prefabricated elements not being delivered. One of the reasons for non-delivery might be insolvency of the supplier of the premanufactured element and this is a key risk to deal with contractually.

"One of the reasons for non-delivery might be insolvency of the supplier and this is a key risk to deal with contractually."

We are used to seeing clauses in construction and supply contracts stating that if elements have been manufactured or purchased and stored offsite, these should be segregated from other materials and insured for the benefit of the ultimate client.

These clauses are designed to avoid a situation, on insolvency of a supplier (or a catastrophic fire in a warehouse, for example), where it is impossible to distinguish the property of a certain client. If a client’s property is impossible to distinguish from another’s, it is likely that these will be treated as part of the general assets of an insolvent supplier, and so will fall into the general insolvency pot to be distributed among creditors.

In a fire, if the insured goods are not distinguished, it would be unclear whether they are in fact insured.

This raises a key issue about when “property passes”. Particularly when a supplier becomes insolvent, it will be important to show that ownership has transferred away from that supplier before the insolvency.

Often in construction contracts, there will be drafting to effect that ownership will pass from a contractor to the employer upon delivery to site and payment. This is to ensure that if there is contractor insolvency, the goods will not be taken away by the administrators. Without such drafting, there is a clear risk that goods will fall into the general insolvency pot.

Premanufacture highlights and exacerbates the general issue with such drafting: there may be agreement between the employer and contractor that property will pass between them in that way, but if there is no similar agreement at Tier 2 level, the manufacturer may retain ownership no matter what the contractor and employer have agreed between them.

This is likely to increase the need for vesting certificates whereby suppliers agree directly with the ultimate client the point at which the client takes ownership. 

As with prefab generally, none of these risks are new, but they should be in the forefront of minds when contracts for projects that include premaunufactured solutions are agreed.

Assad Maqbool is a partner at Trowers & Hamlins specialising in projects and construction

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